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United States v. Sclafani

decided: March 30, 1959.


Before Medina, Lumbard and Burger,*fn* Circuit Judges.

Author: Lumbard

LUMBARD, Circuit Judge.

The appellant, Sclafani, was convicted on seven counts of an eight count information*fn1 charging evasion of corporate and personal income taxes under § 145 (b) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 145(b), for the years 1945-49, and was sentenced to concurrent terms of 15 months on each count and to fines of $5,000 on the first and sixth. Six counts were submitted to the jury on the circumstantial net worth theory and the seventh, charging evasion of personal income tax in 1948, was submitted on the failure to report a specific item of personal income. The appellant has raised seven objections here, which fall into five classes, as follows: (1) that the government failed to prove its net worth case by failing to establish opening net worth and by failing to demonstrate the source of income during the contested years; (2) that his several motions to suppress certain evidence should have been granted since it was obtained from him in the course of an illegal search and seizure; (3) that he was rendered immune from prosecution by virtue of having been ordered to give certain testimony before a Grand Jury investigating his corporations after he was subject to the instant information; (4) that he was prejudicially denied a bill of particulars; (5) that counts four and five, which charged the making of false and fraudulent statements of financial condition to the Treasury Department in an attempt to evade taxes, were time barred. We find that the government's evidence amply supported the submission of the net worth case to the jury; and that appellant's rights before and during trial were not prejudiced.Because the conviction and sentence are sustainable whether or not counts four and five were proper, we need not and do not pass on whether they were time barred. We affirm the conviction.

I - Proof of the government's net worth case: Sclafani claims that the government failed in two essential elements of the proof of its case, in that it (A) failed to prove the lack of a "possible source" of funds in addition to those allowed by the government in the net worth statement it used for the opening date of January 1, 1945, and (B) that it failed to show that such increases in net worth as may have been proved were the result of unreported income to the taxpayer. We find that the government's proof was sufficient as to both aspects of its case. In so doing we have borne "constantly in mind the difficulties that arise when circumstantial evidence as to guilt is the chief weapon of a method that is itself only an approximation." Holland v. United States, 1954, 348 U.S. 121, 129, 75 S. Ct. 127, 132, 99 L. Ed. 150.

(A) Sclafani's claim that the government failed to prove the lack of a possible source of additional funds held by him on January 1, 1945 is based solely on the government's alleged failure to rebut his uncorroborated claim that he had received a secret cash gift of $125,000 from his father-in-law, Rinelli, in 1938. Sclafani has not previously and does not now claim that the government excluded from opening net worth funds which he had received from any other source; he does not claim that the government failed to pursue relevant leads advanced by him.

Sclafani first claimed that he had such a secret hoard when he was questioned by Agent Sonkin, who, in 1950 in the course of a routine audit of the 1947 corporate return of Joseph L. Sclafani, Inc. discovered $149,000 of payments by check either directly to Sclafani or to cash. Since the corporate books stated that the payments had been made not to Sclafani but to creditors, Sonkin asked Sclafani for an explanation of the discrepancy. Sclafani claimed that the payments were made to him in repayment for equal sums advanced to the creditors on behalf of the corporation by him personally from a large secret cash hoard in 1946. Against this background he supplied Sonkin with a personal net worth statement for the years 1945-1949 which he subsequently twice amended and which the government claimed, and the jury might have found, was false in almost every material respect. In this statement he included $100,000 of the alleged Rinelli gift of $125,000 as of 1945.

In satisfaction of its burden to establish opening net worth "with reasonable certainty," Holland v. United States, supra, 348 U.S. at page 132, 75 S. Ct. at page 134, the government rebutted the alleged gift with two related lines of proof. It introduced evidence tending to show that Rinelli, who died in 1939, was financially unable to have made such a gift in 1938, and that Sclafani's conduct had been inconsistent with the possession of such a hoard of cash.

Thus the government showed that neither Rinelli nor Sclafani ever filed a gift tax return for the gift and that although Rinelli died in 1939 within a year of the alleged gift, it was not included in his estate tax return; that although in the 1920's Rinelli concededly had considerable wealth, his annual income from 1928 onward was nominal or offset by losses; that the two Rinelli bank accounts found by the government showed small balances and no significant withdrawals from 1934 through 1939; that when Rinelli's once prosperous ship cleaning business was liquidated in 1933 its assets were practically worthless; that his real estate holdings were disposed of partly by gift prior to the alleged gift to Sclafani; that valuable property operated by Rinelli and held by him subject to a mortgage was taken by foreclosure proceedings in 1935, and that, prior to those proceedings, when the bank offered a low interest rate to allow Rinelli to continue the operation of the property, his reply was to the effect that his financial position prevented him from accepting the offer; that Rinelli mortgaged his home in 1932 for $15,000 at 6% interest and that the mortgage was not paid off at the time of his death; that other property was sold at foreclosure proceedings in 1936; that Rinelli was subject to large deficiency judgments; that a $200,000 insurance trust, which by law was not subject to the claims of his deficiency judgment creditors, was revoked by Rinelli in 1933 "to pay taxes on my different properties" and that substantial loans and interest were first deducted; that Rinelli lived "well" during the depression though he had no apparent source of income after 1929; that Rinelli died less than one year after the alleged gift leaving his widow apparently without substantial funds.

As to Sclafani the evidence showed that he had never claimed to have received such a gift prior to the investigation; that between 1938 and 1945 he borrowed small amounts from banks on several occasions although he claims the alleged gift was then in his possession and through most of the period was uninvested; that, although he said that he had not used the gift in his business because it was a condition of the gift that it not be so used, the only use he now claims to have made of it was in his business after allegedly not having made any substantial use of it at all for about seven years; that he discounted his customers' acceptances at 6% and rediscounted them with banks for 5% to make a 1% profit despite his alleged possession of sufficient cash to handle the discount himself and retain the full 6%; that in summaries of his financial position made to banks for the purpose of securing loans in 1946, 1947 and 1949 the highest amount of cash claimed by Sclafani was under $3,000; that Rinelli did not make similar gifts to other relatives; that the gift was allegedly made secretly and in cash; that it was never at any time banked or invested but was allegedly retained in a closet safe. Moreover no witness was produced to confirm the existence of the money in Sclafani's possession. Indeed the only evidence in support of the gift is that of Sclafani himself.

This evidence is sufficient to sustain the government's burden of establishing opening net worth with reasonable certainty. The only lead furnished the government as a possible source of additional net worth on the opening date was the alleged Rinelli gift, and this was exhaustively investigated. Although standing alone it may have constituted a reasonable explanation by the taxpayer inconsistent with his guilt, see Holland v. United States, supra 348 U.S. at page 135, 75 S. Ct. at page 135, on this evidence the jury was justified in finding that the gift was never made.

Moreover, the government's evidence was sufficient to prove the crimes even if, as he claimed, Sclafani held a secret hoard of $100,000 in 1945. The increases in net worth independently proved by the government for the subject years were:

1945 $84,228.42

1946 39,835.08

1947 ...

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