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United States v. Freidin

decided: June 8, 1988.


Appeal from conviction in the United States District Court for the Southern District of New York, John F. Keenan, Judge, for tax evasion and making false statements to the internal Revenue Service. Held, employee's memorandum improperly admitted in evidence under Fed. R. Evid. 803(6) where it was not the "regular practice" of employee or business to make such a record. Judgment reversed and case remanded for new trial.

Oakes, Newman and Miner, Circuit Judges.

Author: Oakes

OAKES, Circuit Judge:

This appeal involves a challenged application of the business record exception to the hearsay evidence rule. Fed. R. Evid, 803(6). Richard G. Freidin appeals from convictions on two counts in a four-count indictment, the first charging him with the filing of a false income tax return for the year 1979, in violation of 26 U.S.C. § 7201 (1982), and the second, with causing the submission of false statements to the Internal Revenue Service during an examination of that return, in violation of 18 U.S.C. §§ 1001 and 2 (1982). He was acquitted on two other counts charging income tax evasion in calendar years 1980 and 1981. After a jury trial before Judge John F. Keenan, in the United States District Court for the Southern District of New York, Freidin was sentenced to three years' imprisonment, with execution of the sentence suspended. Freidin was placed on probation with fines of $10,000 on each of the two counts and on condition that he serve 300 hours in community service. The principal claim on appeal is that a certain memorandum found in his employer's files should not have been admitted as a business record pursuant to Fed. R. Evid. 803(6), although the memorandum's admission is also objected to on Confrontation Clause (Sixth Amendment) grounds. Friedin urges that if the memorandum is excluded, insufficient evidence remains to support a verdict of guilt beyond a reasonable doubt and a judgment of acquittal should be entered. We do not reach appellant's Sixth Amendment claim because we agree, although not without hesitation, that the memorandum should not have been admitted under Rule 803(6). We do, however, reverse and remand for a new trial.

Appellant Freidin is a lawyer and certified public accountant who, after a brief period practicing law privately, in 1979 rejoined the "Big Eight" accounting firm Touche Ross & Co. as a senior tax partner. During that year, Freidin began serving on the advisory board of E. A. Sanford & Co. ("Sanford"), a holding company that had recently acquired a chain of retail department stores known as Cohoes Specialty Stores. Sanford's principal stockholder was a long time friend and client of Freidin, and while Freidin was involved in developing Sanford's Cohoes acquisition, Sanford hired Touche Ross to do some of the necessary tax and accounting work. Freidin spent a substantial amount of time, both individually and as a partner of Touche Ross, working on this acquisition and in August of 1979 Touche Ross billed Sanford a total of $18,700 for work in connection with it.

In December 1979 Freidin discussed the question of fees with Irwin Cohen, the audit partner of Touche Ross assigned to the Sanford account. Freidin advised Cohen that he felt Touche Ross was entitled to a more substantial fee than had been billed and that he would try to collect more money from Sanford. This, according to Cohen, Freidin tried unsuccessfully to do. Sanford was agreeable, however, to paying Freidin himself an additional fee for past and anticipated services on Sanford's advisory board. Freidin told Cohen that since much of his work for Sanford was done after he had rejoined Touche Ross, he would turn over whatever money he collected to the firm. Subsequently, Freidin did obtain $22,000 from Sanford for his services.

On December 26, 1979, Freidin deposited the check, which was made out to him, in his personal checking account at Manufacturers Hanover Trust Company. On the following day, he drew a personal check for $22,000 payable to Touche Ross which he delivered or caused to be delivered to Touche Ross.

During the course of an IRS examination of the Freidins' 1979 tax return in the spring of 1982, the investigating revenue agent asked Albert Krupnick, a Touche Ross accountant who was attorney-in-fact for the Freidins' on the audit, to explain why Freidin had not reported the $22,000 Sanford fee. After consulting with Freidin, Krupnick informed the revenue agent that the $22,000 check had been paid over to Touche Ross and reported in Touche Ross's receipts as its income. It was this statement that furnished the basis for Freidin's conviction on Count Two.

In fact, the $22,000 had not been treated as income by Touche Ross but had been deposited in two capital accounts of Freidin, against one of which he subsequently drew. An internal office memorandum at Touche Ross memorializing Freidin's directive to place the $22,000 in those capital accounts is the critical piece of evidence objected to by Freidin.

Touche Ross maintained both mandatory capital accounts to which partners were required to make contributions and voluntary "capital loan" accounts into and from which partners could freely make deposits and withdrawals as they chose. The funds in the capital accounts are, however, the personal property of the individual partners and earn interest at one-half percent above the prime interest rate. There are three types of capital accounts. The first type is for paid-in, or required, capital, a figure determined annually by the partner's compensation level and which cannot be withdrawn until the partner leaves the firm. The second is a voluntary capital account into which a partner can put money on a temporary basis and withdraw it at any time. The third type is a mandatory "rollover" or "supplemental" capital account requiring payments equal to the tax benefits received by partners as a result of Touche Ross's reporting its income for tax purposes on a cash basis but distributing its profits to partners on an accrual basis.

Bertha Chinn, who was the manager of the partners' affairs offices, had principal responsibility at Touche Ross in connection with capital contributions by partners. In 1979 she was assisted by Parbatie Laloo Bisram and, occasionally, by Annette Colasanti, the secretary to the controller. Although Colasanti did not work in the partners' affairs office, she would help Bertha Chinn in that office when Parbatie Laloo Bisram was not available. On such occasions, Colasanti would keep track of the cash coming in for daily borrowings or investing and would be told the amounts collected and the total of any checks issued on a given day.

On the day that the Freidin check was delivered to the offices of Touche Ross, Bertha Chinn was on vacation and Annette Colasanti, who died several years before the trial in the case, was on duty. The critical memorandum is on a Touche Ross & Co. "Inter-Office Communication" form and reads as follows:

Touche Ross & Co.


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