The opinion of the court was delivered by: CLARY
This is a net worth prosecution under 26 U.S.C. § 7201 for willful attempt to evade or defeat payment of income tax. The defendant, William A. Goichman, a cash basis taxpayer, is an attorney who formerly practiced law in Philadelphia. He now resides in Beverly Hills, California.
On September 10, 1974, the grand jury handed up a two-count indictment charging the defendant with attempting to evade payment of income taxes in the taxable years 1968 and 1969. The case was transferred to my calendar by the Honorable Clifford Scott Green of this District on May 14, 1975. The case was specially listed for trial on June 16, 1975. On June 26, 1975, the jury returned a verdict of guilty on both counts. The defendant filed post-trial motions for judgment of acquittal and for a new trial. On October 29, 1975, I heard oral argument on the motions. For the reasons which follow, the motions are denied.
To sustain a conviction under § 7201, the Government must prove three elements: the existence of a tax deficiency, willfulness, and some affirmative act constituting an evasion or an attempted evasion of income taxes. Sansone v. United States, 380 U.S. 343, 85 S. Ct. 1004, 13 L. Ed. 2d 882 (1965), Lawn v. United States, 355 U.S. 339, 78 S. Ct. 311, 2 L. Ed. 2d 321 (1958), Holland v. United States, 348 U.S. 121, 75 S. Ct. 127, 99 L. Ed. 150 (1954).
In a net worth case, the Government first attempts to establish an "opening net worth" -- the total value of all the taxpayer's assets for the last year preceding the years under prosecution. In this case that year was 1967. The government then proves increases in the taxpayer's net worth at the end of each of the prosecution years. Here, those years were 1968 and 1969. The Government then adds nondeductible living expenditures. If the resulting figure is substantially greater than the taxable income reported by the taxpayer for any one of the prosecution years, the Government claims the excess is taxable income which was not reported. Holland, supra, 348 U.S. at 125, 75 S. Ct. 127, United States v. Massei, 355 U.S. 595, 78 S. Ct. 495, 2 L. Ed. 2d 517 (1958).
The Government has the burden of proving the opening net worth figure with "reasonable certainty." Holland, supra, 348 U.S. at 132, 75 S. Ct. 127. In this case, the Government used a source and application of funds analysis to show the amount of money available to the defendant from 1956, the year he graduated from law school, to 1967. The Government next computed the defendant's net worth by adding the total value of all assets owned by him on December 31, 1967. Because of the great disparity between the defendant's actual net worth on that date, and the total funds available to him as calculated by the Government agent he was credited with no cash on hand for the net worth computation.
The Government next showed increases in net worth in the years 1968 and 1969. These increases were primarily in three classes of assets: stocks, bank accounts, and real estate investments. According to the Government, the defendants net worth increased about $50,000 in 1968 and about $75,000 in 1969. These increases exceeded by a substantial margin the taxable income the defendant reported in those years.
Having shown net worth increases in excess of reported taxable income, the Government must either negate all possible non-taxable sources of income to explain the increases, or it must prove a likely source of taxable income which was not reported. The Government need not prove both. United States v. Massei, 355 U.S. 595, 78 S. Ct. 495, 2 L. Ed. 2d 517 (1958), United States v. Calles, 482 F.2d 1155, 1159 (5th Cir. 1973). In this case, the Government showed a likely source, the defendant's law practice, but it also introduced extensive evidence tending to negate the possibility of non-taxable sources.
Where the case rests on circumstantial evidence, as this one does, the Government must also investigate any leads furnished by the defendant, but in the absence of leads it need not negate every hypothetical explanation for the bulge in net worth. Holland v. United States, supra, 348 U.S. at 138, 78 S. Ct. 127; United States v. Procario, 356 F.2d 614, 617 (2d Cir. 1966), cert. denied, 384 U.S. 1002, 86 S. Ct. 1923, 16 L. Ed. 2d 1015 (1966).
"Willfulness" in the tax offenses set forth in 26 U.S.C. §§ 7201-7207 refers to a bad purpose or evil motive to do the thing which the law forbids. Negligence, even gross negligence, is not sufficient to establish willfulness for purposes of these statutes. This bad purpose of evading payment of income tax can be shown by the deliberate filing of false returns which the defendant knew did not accurately reflect his taxable income. United States v. Bishop, 412 U.S. 346, 359-61, 93 S. Ct. 2008, 36 L. Ed. 2d 941 (1973); Holland v. United States, supra, 348 U.S. at 139, 78 S. Ct. 127; Spies v. United States, 317 U.S. 492, 498-99, 63 S. Ct. 364, 87 L. Ed. 418 (1943); United States v. Vitiello, 363 F.2d 240, 242 (3rd Cir. 1966); United States v. Greenlee, 517 F.2d 899, 904 (3rd Cir. 1975). Here, the evidence showed a pattern of diverting settlement checks the defendant received in his law practice in such a way that they did not come to the attention of the accountant who prepared the defendant's tax returns. There was other circumstantial evidence including, of course, the defendant's background and education. See, United States v. Rischard, 471 F.2d 105, 108 (8th Cir. 1973).
The Government has the burden of proving every element of the offense, though not to a mathematical certainty. However, once the Government shows that the defendant's net worth increased substantially more than the taxable income he reported and that the defendant's way of doing business permitted the non-disclosure of income, and where the defendant supplied the Government with no leads to a source of non-taxable funds to explain these increases, and where the increases themselves had every appearance of coming from taxable income, the defendant remains quiet at his peril. Holland v. United States, supra, 348 U.S. at 138-39, 78 S. Ct. 127, United States v. Slutsky, 487 F.2d 832, 842 (2d Cir. 1973), cert. denied, 416 U.S. 937, 94 S. Ct. 1937, 40 L. Ed. 2d 287, reh. denied, 416 U.S. 1000, 94 S. Ct. 2414, 40 L. Ed. 2d 777 (1974).
With these considerations in mind, I now pass to the evidence adduced at trial.
The evidence upon which the jury could have based a verdict of guilty was as follows:
The Government credited the defendant with an opening net worth on December 31, 1967, of $173,643.52. The net worth figure represented the total of cash in banks, business assets, stocks on hand, and the purchase price of his residence which was fully paid for, less liabilities. This figure, when added to accumulated depreciation, exceeded the actual funds available as of December 31, 1967 by more than $15,000.00. The actual funds figure was based on an exhaustive analysis of the defendant's financial history from 1956, the year he graduated from law school, to the end of 1967, the last pre-prosecution year.
To arrive at the actual funds figure, the defendant was credited with having $10,000 in 1956, the starting point of the Government's calculations. This was based on sworn testimony by the defendant in a support proceeding in Common Pleas Court in Montgomery County in 1970, in which he stated that he did not think his assets exceeded $10,000 at that time. The $10,000 starting point figure was corroborated by the fact that the defendant graduated from law school in 1955, that he and his wife lived in an apartment for a year after their marriage in 1957 and by the fact that when they first purchased a home in 1958, they paid $11,400 and placed about $1,000 down.
It was further corroborated by defendant's testimony in Montgomery County that he received no gifts exceeding $1,000 in wedding gifts, that he inherited no money, and that he does not gamble.
He was next credited with a total adjusted gross income for the years 1956 to 1959 of $30,746.60. This figure represents four times $7,687.40, which was the adjusted gross reported by the defendant in 1960. No tax returns were available for the years preceding 1960. The figure was based on the defendant's testimony in Montgomery County that his income gradually rose over the years with no significant jumps. This was corroborated by certificates of assessment containing code numbers which indicated joint returns were filed by the Goichmans showing an adjusted gross income of less than $10,000, by an application for employment with the Pennsylvania Public Utilities Commission dated October 24, 1957, showing a salary of $4,500 a year as a law clerk, P.U.C. pay records showing defendant's salary was $7,173.50 in 1958 and $7,168.00 in 1959, by Pennsylvania mercantile license tax records for defendant's law firm dated May 26, 1959, indicating gross receipts of $2,603.00 and Philadelphia net profits tax records showing that no return was filed for the firm in 1958 and that on June 1, 1960, a return was filed which indicated a net profit of $7,788.00.
Finally, the adjusted gross income as reported on the defendant's Form 1040 joint tax returns for the years 1960 to 1967, totalled $183,681.25. The 1964 joint return showed that Beverly Goichman realized $883.50 in income from a business partnership.
To these figures were added depreciation, dividend exclusions, and 50% excess capital gain, as reported on the 1960 to 1967 returns. From the gross figure were deducted itemized deductions, Federal taxes paid and other expenditures per the 1960 to 1967 returns. The actual funds available was calculated to be $157,419.52 as of December 31, 1967. As we have seen, this figure was exceeded by the defendant's net worth as of that date by more than $15,000. Accordingly, for the defendant to have $1.00 cash in hand not accounted for by the Government's analysis, he would have to have at least $15,000 as well.
An alternative actual funds analysis used 1963 as a starting point. This was based on a mortgage application for purchase of a property located in Abington Township, Montgomery County which listed assets including $15,000 in cash and $4,500 in stocks and other investments. This computation yielded an actual net funds available figure as of December 31, 1967, of $145,128.67. The negative cash position of the defendant using this analysis is, therefore, even larger.
In making the net worth calculation, the Government included numerous bank accounts maintained by the defendant, and his wife either in their own names or in trust for their children. The total figure at the end of 1967 was $72,863.01. The full amount was charged to the defendant, based on testimony in the Montgomery County support proceeding that he supplied all the funds for such accounts and that his wife never worked, on a complaint in equity also filed in Montgomery County in 1969, in which the defendant again claimed that he supplied all funds for such accounts, and on a "history of children's assets" in which the defendant in the support proceeding claimed to have purchased a number of certificates in the children's name. This "history" was a certified and exemplified exhibit from the support proceeding.
The Government also charged the defendant with the full cost value of stocks on hand of $50,357.36. A number of these accounts were in the name of Beverly Goichman. The basis for charging the full value of these holdings to the defendant was his testimony in the support proceeding, the complaint in equity in which he claimed to have provided funds for numerous specific stocks and mutual funds in his wife's name, and a series of letters to Goodbody & Co. on the defendant's stationery transferring funds and stock to two accounts in Beverly Goichman's name.
The next step in the Government's case was to show an increase in net worth in the prosecution years. In 1968, the defendant's net worth (assets less liabilities) increased to $219,208.37. In 1969, it increased to $294,047.20. The cash in banks total increased from $72,863.01 in 1967 to $85,257.07 in 1968 and to $99,659.73 in 1969. The cash in banks figure included $18,869.85 in a Western Savings Fund Society account opened in 1969. There was testimony that this account may have been, at least in part, an escrow account for holding client's funds at interest.
There was a small increase in non-cash business assets.
The heart of the government's case, however, was a series of real estate partnership investments in 1968 and 1969. The value of these investments grew from zero in 1967 to $24,192.00 in 1968 and to $84,313.00 in 1969. These figures represented capital account balances from a total initial investment in four partnerships of $100,000 in the prosecution years. These investments are shown on four Form 1065 Partnership returns filed in 1968 and 1969 on which the defendant is listed as a partner. The first was Peoria Towers Associates, formed on October 4, 1968. The second was Allegheny Industrial Associates, formed on January 31, 1969. The third was Triester Riviera Oaks Associates, formed on July 17, 1969. The last was Triester Coach and Four Associates, formed on September 4, 1969. The defendant invested $25,000 in each of these partnerships. These investments are in the defendant's name alone, and in the support proceeding, he testified that his wife had nothing to do with them.
The total increase in the defendant's net worth in 1968 was $53,743.82. In 1969 it increased again by $74,838.83. In 1968, the defendant reported taxable income of $27,791.17. In 1969, he reported taxable income of $17,895.70.
The Government's expert next attempted to show what his true income must have been and what the tax liability would be. To the increases in net worth for each prosecution year were added adjustments to reflect itemized deductions claimed in those years, federal tax payments, gifts to the children, and, for 1969 only, a list of other personal living expenses enumerated in a list of family expenditures for that year in an exhibit from the Montgomery County proceedings. Deductions were made for capital gain and dividend exclusions and for cash available shown on the children's returns. The adjustments totalled $32,356.75 for 1968 and $30,120.58 for 1969.
The adjustments to net worth did not attempt to reflect other evidence in the case, again from the defendant's testimony in the support proceeding, regarding the defendant's life-style during this period. This evidence indicated that he owned several cars, including a Cadillac, that he and his wife made several trips to places like Acapulco, Jamaica, London and Aruba, that he employed a full-time maid for several years, and that he purchased a number of expensive gifts for his wife.
These figures yield an adjusted gross income of $86,100.57 in 1968 and $104,956.41 in 1969. After allowing for itemized deductions and personal exemptions, the taxable income that emerges is $77,300.51 in 1968 and $95,573.81 in 1969. The tax liability on these taxable incomes was $33,971.72 in 1968 (instead of $7,504.95 reported by the defendant) and $46,595.81 in 1969 (instead of $4,169.87 as reported). The tax liability was calculated from the tax tables for joint returns and includes the tax surcharge applicable in the years 1968 and 1969. The alternate tax computation yields slightly different results.
The Government next showed that the defendant had a source of income which could have provided funds for these investments without being reported on his tax returns. That source was his law practice.