APPEAL FROM THE ORDERS OF JUDGMENT AND COMMITMENT DATED NOVEMBER 11, 1976 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY
Before Seitz, Chief Judge, and Biggs and Hunter, Circuit Judges.
The appellants, defendants below, Genser and Forman, appeal from their convictions by a jury for violations of 18 U.S.C. §§ 2, 371, and 26 U.S.C. §§ 7201, 7206(1). The indictment charged both appellants with conspiracy to evade personal and corporate income taxes, and with the substantive crimes of evading corporate and personal income taxes, and subscribing to corporate tax returns which understated their adjusted gross income. The appeals were consolidated pursuant to the rules of this court and are properly before us pursuant to 28 U.S.C. § 1291.
The appellants assert (1) that there is insufficient evidence to support their convictions on the personal income tax charges; (2) that the trial court erred in permitting an agent of the Internal Revenue Service to testify as to the results of an audit of their corporation's books, which audit the agent did not conduct or supervise and which was not introduced into evidence; and (3) that the United States procured some of its evidence illegally by administrative summonses pursuant to 26 U.S.C. § 7602, and that the district court erred in not granting an evidentiary hearing. They contend that such a hearing would have demonstrated that the administrative summonses were issued after the United States had formed an intention to prosecute the appellants for income tax evasion and fraud, and that therefore the evidence procured by the summonses was tainted and should have been suppressed, and a new trial granted.
Lawrence Forman and Lester Genser were, respectively, the president and vice president of Genser-Forman, Inc. (Corporation) from 1957 until early 1973. The Corporation was the sole distributor in the northeastern United States of Triumph cars and parts for British Leyland Motors, Inc. (British Leyland) until the Corporation was dissolved in 1973. The Corporation bought cars and parts from British Leyland and resold them to a network of automobile dealers located in its exclusive area of distribution. From 1969 to 1973, the years encompassed by the indictment, the Corporation purchased and imported approximately 6000 cars per year from British Leyland.
By contractual agreement between the Corporation and British Leyland, British Leyland bore all of the expenses of repair to "marine damage" to the cars occurring during their transportation from England to the United States. Although initially British Leyland reimbursed the Corporation for its actual repair expenses in accordance with an appraiser's estimate, after 1966 it followed a policy of paying the Corporation a fixed marine damage reimbursement of $36.00 for every Triumph delivered to the Corporation. In addition, British Leyland reimbursed the Corporation for repairs done by the Corporation under warranty, for obsolete parts returned to British Leyland by the Corporation, for discontinued models of automobiles remaining in inventory, for one-third of the Corporation's advertising costs, and for part of the rental expenses of a New York City showroom. Dealers to whom the Corporation distributed Triumph cars reimbursed the Corporation for its transportation expenses.
The charges brought against appellants stem from their handling of these funds. From 1967 until early 1973, the moneys received from British Leyland and the Triumph dealers were deposited, pursuant to the directions of Genser and Forman, in a corporate account maintained in the name of Genser-Forman, Inc., in the City National Bank of Hackensack (Hackensack Account). These funds were kept separately from other funds of the Corporation, which were kept in the First National State Bank, Millburn-Short Hills Branch. Genser and Forman were the only signatories on the Hackensack Account.
From 1969 to 1973, the period encompassed by the indictment, nearly $2,200,000, representing sums paid to the Corporation from British Leyland and the dealers, was diverted to the Hackensack Account. None of the Corporation's books and records, and none of its tax returns, reflected any of these funds. Nor were the Corporation's accountants aware that the Corporation had such funds, either as income or as offsets to deducted expenses; the accountants did not perform audits of the Corporation's expense accounts and ledgers, but merely assembled books and records prepared by the Corporation from which the Corporation's tax returns were prepared. Had the accountants been aware of the funds and the sources thereof, the funds would have either increased the Corporation's cash account or decreased an expense account, with the result that the Corporation's profits would have been greater and its federal income tax liability larger. The government calculated that for the years 1970 to 1973, inclusive, the Corporation had an additional tax liability of $884,487.02 and additional gross profits of $1,830,267.76.*fn1
The funds deposited in the Hackensack Account were used by the appellants to purchase a variety of tax-exempt municipal bearer bonds through third party nominees. From 1969 to 1973, a total of $2,084,975.34 representing more than 100 bond transactions was withdrawn from the Hackensack Account to effectuate the purchase of the bonds, which were kept in corporate safe deposit boxes in the Millburn-Short Hills branch of the First National State Bank. The books, records, and tax returns of the Corporation never reflected the acquisition of the bonds, and the Corporation's accountants were never informed that the bonds were purchased. On the theory that the appellants had appropriated the corporate moneys in the Hackensack account to their own use by purchasing bonds for their own benefit, and that these moneys thus represented unreported income to the appellants, the government calculated that from 1969 to 1972, inclusive, Genser had additional personal taxable income of $1,108,438.81 and additional tax liability of $777,777.64, while Forman had additional personal taxable income of $914,107.36 and additional tax liability of $645,355.69.*fn2
In early 1973 British Leyland abandoned its distributorship arrangement and bought out the Corporation. Following the acquisition, the Corporation, pursuant to § 337 of the Internal Revenue Code, liquidated and distributed all of its assets. As a result of the liquidation all assets of the Corporation became the sole and exclusive property of Genser and Forman and came under their personal dominion and control between October 1972 and October 1973.
Appellants argue that the evidence was insufficient to support their convictions on personal income tax evasion in that the government failed to prove beyond a reasonable doubt that they exercised personal dominion and control over the funds in the Hackensack Account and the proceeds thereof (the bonds) prior to the liquidation of the Corporation. Specifically, they contend that the bulk of the government's proofs establish only that appellants exercised personal dominion and control over the bonds After the Corporation was liquidated (at which point, they stress, the Corporation's assets were rightfully theirs),*fn3 and that the government on the whole failed to show by documentary evidence any exercise of personal dominion and control prior to the Corporation's liquidation.
Viewing the evidence, as we must, in the light most favorable to the government, Glasser v. United States, 315 U.S. 60, 80, 62 S. Ct. 457, 86 L. Ed. 680 (1942), we think that the evidence is sufficient to secure appellants' convictions. Rather than detail all the evidence presented on this issue, we think it sufficient to cite the following in support of our conclusion:
(1) More than 100 bond purchase transactions were paid for with funds from the Hackensack Account. Virtually all these purchases were tied back to the Hackensack bank statements by the amount appearing on the bond purchase documentations, which also indicated the types of bonds acquired and the serial numbers. The government also introduced coupon collection letters (Exhibit G-26), which recorded bond coupon negotiations by the appellants prior to liquidation of the Corporation. More than one-half of the transactions were further linked to appellants by interest coupons cashed or otherwise used by them or their relatives bearing the same serial numbers as the bonds purchased with the Hackensack moneys. Although, as appellants stress, the coupons actually introduced at trial by the government were dated and cashed at various times After liquidation, testimony established that within one year after coupons have been negotiated, they are destroyed by the paying agent, bank, or issuing authority. We ...