Before GOODRICH, KALODNER and HASTIE, Circuit Judges.
The defendant was found guilty and sentenced for violation of Section 145 (b)*fn1 of the Internal Revenue Code of 1939. He prosecutes this appeal upon the grounds that the evidence is insufficient to support the jury's verdict, that the District Court was without jurisdiction, that the trial judge erred in certain rulings on the admission of evidence and in certain instructions to the jury. Each of these issues was appropriately raised by the defendant in the District Court, and each was ruled upon by the trial judge.
We are of the opinion that the evidence does not support the verdict, and that the defendant must be acquitted.
The defendant was charged with wilfully and knowingly attempting to evade and defeat a large part of the taxes due and owing by the Colonial Products Company, a corporation of which he was president, in connection with its tax returns filed for its fiscal years ending July 31, 1948, July 31, 1949, and July 31, 1950. The substance of the evidence, tax-wise, is that the income of the corporation for each taxable year was understated in its returns for the taxable years involved through the device of treating capital expenditures as operating expenses, the full amount of which were deducted in the taxable years in which payment was made. Thus, the government contended that the corporation's expenses were incorrectly increased and its net income correspondingly decreased by charging off in a single year expenditures which should have been charged off over a period of years through depreciation.
The defendant does not contend that the corporation's accounts and its tax returns were correct. He does contend that there did not exist on his part a wilful and knowing attempt to evade taxes due, and that the government did not succeed in adducing evidence of this statutory requirement, or evidence from which its presence could be inferred.
The corporation, which was on the accrual basis, maintained a double entry system of bookkeeping in which all of its business transactions were recorded. The books were kept consistently since September, 1946, by one Kehr, who became bookkeeper following the death of his predecessor. Kehr either made the entries or caused them to be made. He determined how the various expenditures should be entered on the books, and, in general, followed the same system throughout. The same certified public accountant, one Goldberg, since about 1940 or 1941, quarterly audited the corporation's books and annually prepared its income tax returns including those involved in this case. He did not, however, examine invoices, albeit a substantial amount of expenditures appeared unexplained in the "Purchases Sundry" column of the purchase journal. Apparently the accountant did not regard it to be within his duties to go behind the ledgers, and there is a dispute in the evidence as to whether his original employment was with the understanding that he would make only a "limited audit".
When, in 1951, the Internal Revenue Service investigated the corporation's returns, the defendant instructed the accountant to make available all of the corporation's records. When it became evident that there were errors, he engaged other accountants and had the corporation's income taxes recomputed by them. The defendant at all times cooperated, both during the investigation and the trial of the case, with the various governmental agents.
The gravamen of the offense created by Section 145(b) is the wilful attempt to evade or defeat the tax. As stated by the Supreme Court in United States v. Ragen, 1942, 314 U.S. 513, 515, 62 S. Ct. 374, 86 L. Ed. 383:
"In a prosecution for a wilful attempt to defeat and evade taxes, it is not sufficient to show merely that a lesser tax was paid than was due. It is essential to prove that the acts complained of were wilfully done in bad faith and with intent to evade and defeat the tax." (Emphasis supplied.)
And in Spies v. United States, 1943, 317 U.S. 492, 499, 63 S. Ct. 364, 87 L. Ed. 418, that Court indicated in a general way various forms of deceitful practices, such as dual sets of books, false entries or alterations, destruction of books and records, concealment of assets or income, and the like, which bespeak the necessary evil intent. The conscious purpose to defraud proscribed by the statute does not include negligence, carelessness, misunderstanding or unintentional understatement of income. Holland v. United States, 1954, 348 U.S. 121, 139, 75 S. Ct. 127, 99 L. Ed. 150; United States v. Murdock, 1933, 290 U.S. 389, 54 S. Ct. 223, 78 L. Ed. 381. As was said in the latter case (290 U.S. at page 396, 54 S. Ct. at page 226):
"Congress did not intend that a person, by reason of a bona fide misunderstanding as to his liability for the tax, * * * or as to the adequacy of the records he maintained, should become a criminal by his mere failure to measure up to the prescribed standard of conduct."
Despite the efforts of the government, the record fails to reveal probative evidence linking the defendant with the erroneous books and tax returns in any manner which should result in his conviction of the offense charged.
The defendant, notwithstanding the business experience attributed to him, left the books, bookkeeping and preparation of tax returns to the bookkeeper and the accountant. There is a dispute on the record between the bookkeeper and the accountant as to whether the accountant showed the bookkeeper how to go about his job. There is no evidence that the defendant interfered with either of them or with the books. On the contrary, the invoices and payments were taken care of by the bookkeeper in the ordinary course of business and he made the decisions as to classification of expenditures according to his own best judgment. The bookkeeper testified that the defendant did not give him directions to charge an expense to one item of account rather than to another. The accountant prepared the corporation's tax returns from the books of the corporation, and defendant caused them to be filed. He did not ...