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United States v. Kiamie

decided: September 3, 1958.

UNITED STATES OF AMERICA, APPELLEE,
v.
FAREED N. KIAMIE AND KIAMIE MANUFACTURING CO., INC., DEFENDANTS-APPELLANTS. UNITED STATES OF AMERICA, APPELLEE, V. FAREED N. KIAMIE AND KIAMIE FABRICS CO., INC., DEFENDANTS-APPELLANTS.



Author: Waterman

Before HINCKS and WATERMAN, Circuit Judges, and RYAN, District Judge.

WATERMAN, Circuit Judge.

The appellants, Fareed N. Kiamie, Kiamie Manufacturing Co., Inc., and Kiamie Fabrics Co., Inc., were convicted after a nine-week jury trial upon two indictments charging them with corporate income tax evasion in violation of § 145(b) of the Internal Revenue Code of 1939, 26 U.S.C. § 145(b). The first indictment contained one count charging that Kiamie Manufacturing Co., Inc. and Kiamie, as president, filed a false return understating the corporation's income and tax for its fiscal year ending January 31, 1946. The second indictment, containing three counts, charged that Kiamie Fabrics Co., Inc. and Kiamie, as president, filed false returns understating that corporation's income and taxes for each of its three fiscal years ending April 30, 1945, 1946 and 1947. Kiamie was sentenced to imprisonment for four years on each of the four counts, the prison sentences to run concurrently, and a total fine of $80,000 was imposed by levying $10,000 upon each defendant on each count.

Appellants contend (1) that they were deprived of their constitutional right to be informed of the charges against them and were required to carry the burden of proof by a radical change in the Government's theory of the case which was permitted by the trial court in the midst of the trial; (2) that the evidence under any theory was insufficient to warrant the jury's verdict finding them guilty of wilful evasion of corporate income taxes; (3) that the trial court committed reversible error in rulings on evidence; and (4) that the conduct of the prosecutor was improper and so prejudicial as to require reversal. Although these issues arise in a factual setting of unusual complexity, we do not think they are of great difficulty. For the reasons hereinafter stated, we hold that appellants' contentions are without substantial merit and that their convictions must be affirmed.

1. Alleged Change of Theory by the Prosecution

The indictments charged generally that appellants had violated 26 U.S.C. § 145(b) by wilfully understating corporate income and income taxes for specified fiscal years. Bills of particulars narrowed the charge by stating that appellants had evaded corporate income taxes by wilfully failing to report specified corporate sales in their income tax returns for those fiscal years. The proceeds of these unreported sales, each of which was set forth in the bills by name and address of customer and by invoice amount, were claimed to be net taxable income. Appellants contend that the Government, with the approval of the trial court, departed in mid-trial from this theory of guilt, a theory resting on proof of unreported sales, and made an entirely novel charge that appellants evaded income taxes by applying an improper and dishonest gross profit percentage to the sales that were reported in the tax returns of the defendant corporations for the indictment years. This change in the theory of guilt, appellants contend, was a fatal variance depriving them of their constitutional right to be informed of the charges against them and, in addition, operated to shift the burden of proof from the Government to them.

Evaluation of this contention requires a fuller statement of the positions taken by the parties at various times. From the outset the Government's position was that appellants had wilfully evaded corporate income taxes by concealing unrecorded sales of merchandise. This charge was made known to appellants as early as 1947 and was detailed in the bills of particulars filed in 1951. The Government's case in chief sought to establish this charge by evidence proving that sales had been made which had not been recorded on the corporate books or reported on the tax returns of the defendant corporations, and that these omissions were wilful.

Appellants' position before and during the trial was more complicated. The existence of unrecorded sales was concealed until discovered in 1947 by a revenue agent during an investigation of Kiamie and his corporations. When the first evidence of unrecorded sales was found, Kiamie falsely told his accountant Gellin, who previously did not know of their existence, that the amount was "very, very little." When Gellin found that over $25,000 of unrecorded sales checks had been cashed at the Manufacturers Trust Company, Kiamie stated: "It can't be. It must be a mistake." Later, after the revenue agent had confronted Kiamie's representatives, Lothstein and Gellin, with the secret accounts and unrecorded sales, Lothstein immediately called Kiamie to tell him that the Treasury agents "know everything." Only then did Kiamie admit he had made unrecorded sales and had opened secret bank accounts through Lothstein.

Kiamie then claimed that the unrecorded sales were used to create a cash fund from which black market purchases of goods, similarly unrecorded, had been made. In July 1948 a schedule of alleged cash payments to some twenty-nine vendors (Exhibit MQ), totaling $1,405,157.05 was delivered to the investigating agents as Kiamie's explanation for the unrecorded sales. At the same time a schedule of unrecorded sales (Exhibit 229) totaling $1,323,334.42 was made available to them.

If no further claims had been made, this would have been a relatively simple case. The Government would have attempted to prove wilful concealment of unrecorded sales and appellants would have attempted to prove that the unrecorded sales were matched by a similar amount of unrecorded black market purchases. However, the entire complexion of the case was radically changed in late 1950 when Kiamie for the first time advanced the claim that the unrecorded sales had in fact been recorded, albeit in an unorthodox fashion.

This new defense was that various intercorporate transactions entered on the books of the Kiamie corporations reflected the unrecorded sales. Thus, while it was claimed that unrecorded sales of merchandise had been made to create a cash fund for black market purchases, it was also claimed that fictitious sales in approximately the same total amounts were entered on the corporate books as having occurred among the various Kiamie enterprises. Appellants contended that these fictitious "intercorporate sales," as they are called, were reported on the income tax returns of the defendant corporations in substitution for the unrecorded actual sales, with the result that the Government received all the taxes due it. Indeed, if appellants' assertions were believed, these procedures resulted in a substantial overpayment of tax.

The intercorporate sale defense went through a considerable evolution. When first advanced by Kiamie in late 1950 to his accountant Solomon and a revenue agent, Kiamie's explanation was that the intercorporate sales matched the unrecorded sales "dollar for dollar and sale for sale." When Solomon analyzed the intercorporate sales, however, he found that they did not match the unrecorded sales in this fashion. In fact, not even one of the thousands of unrecorded sales was matched by an intercorporate sale of an identical amount. When Kiamie was informed of this, he advanced a new explanation, stating that the intercorporate sales were entered from tape totals of the unrecorded sales. Solomon then made another analysis and found that the total unrecorded sales likewise differed substantially from the total of intercorporate sales.

In September 1951 Kiamie hired Batzer, an experienced accountant who had had no previous connection with Kiamie's enterprises, to attempt a further analysis of the intercorporate sales. By excluding certain of the intercorporate sales and varying the period of analysis Batzer was able to state that the overall totals - not totals month by month or year by year, but the overall totals for the entire three-year period involved in the indictments - of unrecorded sales and intercorporate sales were both in the vicinity of $1,400,000.It was this explanation that appellants advanced at the trial.

It is at this point that the issue of the use and validity of a "gross profit percentage," the issue which appellants claim the Government injected into the case in mid-trial, is encountered. The defense, it will be remembered, claimed that the intercorporate sales of the Kiamie corporations provided a substitute record for the unrecorded sales.For every intercorporate sale, however, there would be of course a corresponding intercorporate purchase. Under orthodox accounting techniques intercorporate transactions could not result in additional overall income being reported, since the amount added to gross sales of one corporation would be offset by an identical amount added to the cost of goods sold of another corporation. To escape this dilemma, appellants contended that the defendant corporations did not obtain the gross profit figure used on their tax returns by subtracting their cost of goods sold from their gross sales. Instead, they claimed that their gross profit - and hence their income tax - had not been understated because their gross profit had been determined by multiplying their gross sales (recorded sales to customers plus intercorporate sales in substitution ...


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