Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

United States v. Costello

decided: April 5, 1955.


Author: Hand

Before CLARK, Chief Judge, and L. HAND and FRANK, Circuit Judges.

L. HAND, Circuit Judge.

The defendant, Costello, appeals from a judgment entered upon the verdict of a jury, finding him guilty upon three of four counts in an indictment under § 145 (b) of the Internal Revenue Code, Title 26, U.S.Code: i. e., of wilful attempts "to evade or defeat a large part of the income tax" for the years 1947, 1948 and 1949, "due and owing by him and his wife," by understating their joint net income tax. (The jury acquitted him on the first count - 1946 -, which was for understating his separate net income tax.) Judge McGohey imposed a sentence of five years upon each of the three counts for 1947, 1948 and 1949 (to be served concurrently), and a fine of $10,000 on each count cumulatively, together with the costs of the prosecution - $4,111.38. On the appeal Costello raises six points, which we shall consider seriatim. First, he challenges the sufficiency of the evidence to prove that he and his wife had received more taxable income in the three years in question than he included in their joint tax returns for those years.Second, he asserts that it was error to refuse his offer in evidence of tax assessments against him for the years 1941-1945, which showed a higher net income received by him than the prosecution computed as his gross income for those years; and which were therefore relevant to show that he might have laid up a cash reserve on January 1, 1946. Third, that it was error to include his wife's expenditures as part of his own. Fourth, that the court erred in the admission of various pieces of evidence offered by the prosecution. Fifth, that the judge's charge to the jury was insufficient. Sixth, that the indictment should have been dismissed because no competent evidence was before the grand jury at the inquest.

The first question is the most important. The prosecution built up its case upon what has come to be known as the "net-worth method," which the Supreme Court has very recently accepted as permissible, though it must be applied with the greatest caution.*fn1 This method presupposes that the prosecution first proves what property the taxpayer had at the beginning of the year in question and what he had at the end of it. To the remainder obtained by subtracting the first from the second it adds whatever sums it can prove that he spent in the year in question. That is the putative gross income for the year; and the remainder, after deducting the amount of gross income reported, is by hypothesis the unreported gross income. However, this is not enough, for it does not follow that all that the taxpayer expended was necessarily taxable income, or indeed income of any kind. Conceding something for the difficulty of establishing by impregnable proof how much was income, the Court is satisfied with "proof of a likely source, from which the jury could reasonably find that the net worth increases sprang". True, a "likely source" may not be the true source, so that it is necessary in addition to exclude the possibility that what he received did not come from gifts, inheritances or loans. Here too the Court does not exact precision, for, "where relevant leads are not forthcoming, the Government is not required to negate every possible source of nontaxable income, a matter peculiarly within the knowledge of the defendant." Nevertheless, in the end the prosecution must "prove every element of the offense beyond a reasonable doubt though not to a mathematical certainty." "The settled standards of the criminal law are applicable to net worth cases just as to prosecutions for other crimes. Once the Government has established its case, the defendant remains quiet at his peril. * * * The practical disadvantages to the taxpayer are lessened by the pressures on the Government to check and negate relevant leads." Finally, it should be remembered that, as in all criminal prosecutions, the prosecution makes out a sufficient case to go to the jury, if the evidence would have been enough in a civil action; the only difference between the two is that in the end the evidence must satisfy the jury beyond any reasonable doubt.*fn2

The prosecution's proof started with a supposed "net worth" at the beginning of the year 1946, made up of four items which, less liabilities, aggregate $250,000,*fn3 and among which there is no item of cash on hand. Concededly the "net worth" at the beginning of each year would be falsified to the extent that any such sum was omitted; and with it would fall the computations for later years. However, we will disregard this possibility for the time being; and proceed on the assumption that the figure for "net worth" was accurate. Next, the prosecution proved that either Costello or his wife made large purchases in each of the four "indictment years," varying from nearly $60,000 in 1948 to over $90,000 in 1949. Then it proved the "net worth" at the beginning of 1947, and subtracted it from that at the beginning of 1946, which resulted in a minus quantity ($8500).This it deducted from the sum of the purchases; and the difference between what remained and the amount returned as gross income by Costello it asserted to have been fraudulently concealed. He raises a number of objections to this computation in addition to the omission of a concealed cash reserve. One of these is the failure to show a "likely source, from which the jury could reasonably find that the net worth increases sprang." There was no difficulty in the case at bar in pointing to such a source. By his own admission Costello was a gambler, though he had no other occupation. He had substantial interests in "slot machines" and "juke boxes" in Louisiana companies; and these were not his only ventures, for he gambled in "horses, cards and fights"; and there was evidence that he received $30,000 for keeping bookmakers away from a race tract for two years; which of itself showed him to have been a man of powerful undisclosed influence. Gambling is an occupation with indeterminate possibilities that might well have brought in more than $100,000 in a single year - the highest with which he was charged in the four "indictment years." If there were no accumulated reserve and no loans, gifts or inheritances, gambling and such payments as the $30,000 we have mentioned, were a "likely source" of the money that he spent during the year. To exclude the possibility that loans, gifts and inheritances might have contributed, the prosecution searched all likely records for inheritances and for gifts and found none. Similarly, it found no credits on the returns of either Costello or his wife for the payment of interest on loans. The same method was followed for each of the "indictment years", and it fulfilled the tests laid down in Holland v. United States, supra.Upon any issue it is nearly always true that the party having the affirmative does not, and cannot, shut the door against every possible exception; and it would be idle to deny that there were no possible exceptions on the present occasion; but we cannot see how it can be doubted that a man, having no resources in loans, gifts or inheritances, could have spent what Costello did in these four years, unless it was out of his income or his wife's, or unless he had a cash reserve accumulated from past years. As to his wife's income, the evidence justified a finding that the money had not come out of it, except in 1946 when she was credited with about $16,000 gross income, which she separately returned. In 1937 Costello had sworn that she had no income; in 1939 that, whatever money went into her bank account, he gave her; and in 1943 he told his lawyer that in 1941 she bought a motor car with his money, as well as "all the living expenses." In applying for insurance in 1940 she stated that she was supported by her husband. Furthermore, the prosecution traced many cheques received by him into her bank account and in 1943 two payments of Costello's estimated income tax were paid out of her account. From all this it was a permissible inference that in the four "indictment years" she had no separate income beyond what was credited to her in 1946.

Thus, the issue is narrowed to whether Costello had an accumulated cash reserve at the beginning of 1946, out of which the purchases might have come that were shown to have been made, and not declared. Since the aggregate of the net income omitted during the "indictment years," when computed as we have described, came to more than $100,000, perhaps it might have been fair to start with an assumption that no such hypothetical reserve covered the unreported income for at least the year 1949. However, the prosecution did not rely on such an assumption; it undertook to establish that Costello had no reserve whatever on January 1, 1946. It started with a statement of his "net worth" on October 18, 1937, the day of a sworn statement made by him to an official of the Tax Bureau. On that day he said that he had a cash reserve of between $25,000 and $30,000 which he kept in currency. His bank deposits, investments and receivables, when added to this, made $45,600, from which was deducted loans of $6,000. Thus, he started with a "net worth" on that day of substantially $40,000. As we have said, on January 1, 1946, a little over eight years later, this figure had become $240,000, making a gain of $200,000. To this the prosecution added purchases of $312,000, making $512,000; and, after deducting $6,400 of non-taxable receipts and $302,500 of gross income declared, it asserted an unreported difference of $203,000. In addition it proved, as it had for the four "indictment years," that there was no record of any loans, gifts and inheritances.

In order to meet the possibility that Costello might have laid aside out of this a substantial cash reserve, it proved that he had allowed three judgments to remain unpaid, that he left a mortgage outstanding on his house; that he had allowed a loan on his life insurance to remain unpaid until 1946 when he paid less than half of it, and that he had borrowed $25,000 of a friend in 1946 and the same amount again in 1947. Finally, it proved that on February 21, 1947, he paid over $21,000 as penalty and interest upon taxes that had remained unpaid since 1930 and earlier. It must be owned that the combination of these facts makes it unlikely that there was any reserve left on January 1, 1946; and we should not hesitate so to assume, were it proper to make any inference against an accused from his failure to answer. Nevertheless, a man in Costello's position, whose affairs, as we can see, varied greatly up and down, might have allowed interest to run up, confident that in the end a turn would come; and have kept on hand a substantial cash reserve, prepared for a run of bad luck that would demand immediate calls for large payments. His situation was far from ordinary; and, as we have said, in the past he had always kept such reserves in large amounts. Considering the admonition with which the Supreme Court has hedged about the "net worth method," we cannot therefore agree that the evidence, taken as a whole, justifies the inference that he had no reserve on January 1, 1946.

On the other hand, the jury was warranted in setting a limit upon its possible size; and it is quite likely that this is exactly what they did do, when they voted to acquit on the first count. Costello's net income unreported for 1946 was only $1,541, if we allow no cash reserve; that for 1947 was $36,730; and, if the jury assumed a reserve of $30,000 (the figure he gave in 1937), it would still be true that he would have understated the joint income for 1947. On the other hand, since his understatement of the joint income for 1948 was $35,245, and the aggregate understatement for 1946, 1947 and 1948 was therefore $73,524, it would have taken a reserve on January 1, 1946 of that size to deprive the verdict on the third count of all support in the record. Nothing suggests any reason why on January 1, 1946, he should have nearly doubled the maximum of $40,000 which had been enough six years earlier, especially when we remember the heavy liabilities that were rolling up in interest and penalties. In deference to the limitations imposed upon any use of the "net worth" method, we feel obliged to say that the evidence did not justify a verdict based upon the assumption that on January 1, 1946, there had not been a reserve of more than $30,000; or indeed of more than $40,000. On the other hand we also hold that, taking the evidence as a whole, it would be quixotic for a jury to assume that on that day Costello had had a reserve of over $73,000. It follows that while there was not enough evidence to support a verdict on the second count there was enough to do so on the third and fourth counts.

In view of what we have just said about the reserve, it is hardly necessary to discuss whether it was before or after October 18, that Costello received $66,000 which he returned as received in 1937 from Kastel's share in the Bayou Novelty Company; but in any event there was evidence enough to find that he did receive it before October 18. The Bayou company was a partnership between one, Kastel, and another man who died on June 19, 1937; and Costello had a half interest in Kastel's share, which turned out to be about $132,000. Although Costello's return does not show whether he received his half before or after October 18, all of Kastel's share was in Kastel's hands by June 26, because that was the balance of his account on that day after deducting that sum; and Costello testified that Kastel remitted to him "weekly, sometimes monthly." This established, prima facie, that Costello had received before October 18 the share that he entered in his income tax return.

The second point raised is the judge's refusal to allow Costello to put in evidence assessments by the Tax Bureau of deficiencies in his net income tax as reported for the years 1941-1945. These he offered to meet the prosecution's evidence that he had no concealed cash reserve on January 1, 1946. They showed, he argues, that his "net income," as "corrected," had been larger by $292,000 than what he had reported, which was $90,000 more of unreported net income in the five years, 1941-1945, than, according to the prosecution's computation, he had had of unreported gross income in the eight years, 1938-1945. From this, he argues, the jury might have found that he had had, or at least might have had, a concealed cash reserve on January 1, 1946, which would have been enough to meet the purchases during the "indictment years." Judge McGohey heard prolonged argument as to the relevancy of these assessments, and finally excluded them because he thought that, unaccompanied as they were by any explanation, they were more likely to mislead than to enlighten the jury. Costello did not suggest that he meant to supplement the assessments by showing how much of the alleged unreported net income had been spent for consumable purchases, or how much remained, or might have remained, as a concealed cash reserve on January 1, 1946. He stood upon their admissibility as they read.

We shall assume, arguendo, that the assessments were competent evidence on this trial that Costello had received the net income that they charged him with failing to report. We do not indeed agree that they were "judgments" which estopped the prosecution, for they were not.*fn4 It has been recognized practice for centuries to levy on tax assessments;*fn5 but the taxpayer has always been allowed to challenge their validity in one way or another, or to recover his money from the collector. Nevertheless, the assessments rested upon findings of the Tax Bureau made under its statutory authority, and we will assume, again arguendo, that as such, they were competent as admissions against the prosecution in a criminal trial, although the point is not free from doubt. If they were competent, they were relevant to show that Costello had received $90,000 of unreported net income more than the prosecution had succeeded in proving that he had received of unreported gross income during the eight years before January 1, 1946. That could, indeed, have been one link in a chain of reasoning to prove that he might have had a cash reserve in his hands on January 1, 1946; but it would be only a link, and it proved nothing, unless accompanied by evidence as to what had been done with the income so received. So far as Costello or his wife might have spent it for consumable goods, or have otherwise disposed of it, it could not be part of a cash reserve; and there was no presumption that they had not so spent it. It is hornbook law that, although a party may offer evidence rationally relevant to the issue, that does not inevitably make it admissible. It may, just as Judge McGohey thought in this instance, tend rather to mislead than to enlighten the jury.*fn6 When the prosecution showed the amount of his gross income during the eight years, it did so by proving in detail the purposes for which he spent his money, and thus supplied just the element that was missing from the assessments. It was certainly within the judge's discretion to decide whether to admit them until this omission was supplied; and we are in entire accord with his ruling.

The third point is that it was error to allow the jury to include Mrs. Costello's purchases as having been made out of Costello's money. We have already stated the evidence that supports such an inference; and we think that it was sufficient, standing uncontradicted as it did. In this connection the question arises whether it was an added ground for this conclusion that she was not called as a witness for the defence, a wife now being a competent witness in her husband's favor.*fn7 In a case where the wife was not herself concerned in the transaction that was being prosecuted as a crime, we held that it was permissible to infer from the husband's failure to call her that her evidence would not be favorable;*fn8 but when, as here, she was a party to the transaction and might believe herself to be subject to prosecution, the inference becomes much weaker, if indeed it does not altogether disappear. In that situation she might wish to claim a personal privilege against self-incrimination, even though she were not in fact criminally involved. On the whole it appears to us therefore that no such inference should be drawn in the case at bar; and it is not necessary to decide the point, for there was evidence enough without it, as we have said; and the question was not raised at the trial.

The fourth point is that the judge admitted some evidence that was not adequately connected with Costello, and did not confine the prosecution to the same amounts of unreported gross income that it had alleged in a bill of particulars. The evidence whose admission is complained of consisted of five items appearing in the prosecution's computation for the "indictment years"; their aggregate is about $29,000, about $20,000 of which was entered as spent in the year 1949. For that year the prosecution computed an unreported net income of $32,500, and as has already appeared, even a cash reserve of $73,000 on January 1, 1946, would have been exhausted by January 1, 1949. Thus, it would make no difference as to the fourth count even though these items of income had been omitted. We do not mean by this that they were not adequately proved; but it is not necessary to discuss them. The $9,000 entered in the earlier years was for about $1,500 for travel expenses, $4,400 for a Cadillac motor, and $3,000, the initial payment on a mausoleum. The travel expenses were proved by testimony of the railway fares to and from places that Costello had visited; and the objection is frivolous. Judge McGohey heard extended argument about the motor car, and, although the proof did not amount to demonstration, it is apparent that every reasonable inference pointed to its purchase for Mrs. Costello. As to the payment on the mausoleum, the testimony of Festa, who signed the contract, was that he called up some one whom he supposed to be Costello and said that the payment was necessary. His interlocutor agreed and soon thereafter he received $3,000 in $100 bills with which he made the payment. The mausoleum was for Costello, and the suggestion that some one else might have paid for it, does not deserve serious answer. Finally, although it is true that the prosecution proved about $44,000 more of unreported gross income than the total - $244,000 - which it had alleged in the bill of particulars, that was a variance that could not have prejudiced the defence.Indeed, that was not suggested at the trial. We have long since passed the time when a trial has to be conducted with the formality of the code duello; § 52(a) of the Rules of Criminal Procedure, 18 U.S.C., directs us to "disregard" any "variance" that "does not affect substantial rights".*fn9

The fifth point is that the judge's charge was inadequate. In Holland v. United States [348 U.S. 121, 75 S. Ct. 132] the Supreme Court said that in "net worth" prosecutions "charges should be especially clear, including, in addition to the formal instructions, a summary of the nature of the net worth method, the assumptions on which it rests, and the inferences available both for and against the accused." In the margin we have put those portions of Judge McGohey's charge that cover this feature of the case,*fn10 and we can find nothing omitted that would have added to the enlightenment of the jury. It is unnecessary to discuss the refusals to charge. We understand the defence also to raise the point that the acquittal on the first count was inconsistent with the ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.