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United States v. Phillips

December 2, 1954


Author: Major

Before MAJOR, SWAIM and SCHNACKENBERG, Circuit Judges.

MAJOR, Circuit Judge.

A six-count indictment was returned against defendant, George E. Phillips, on March 2, 1951. Each count charged that defendant "did wilfully and knowingly attempt to defeat and evade" taxes, in violation of Section 145(b) of the Internal Revenue Code, 26 U.S.C.A. ยง 145(b). Count 1 charged a violation for the year 1944; count 2, for the year 1945; count 3, for the year 1946; count 4, for the year 1947; count 5 charged that defendant as president of a corporation, Phillips Company, Inc., wholly owned by defendant except for qualifying shares, caused the evasion of taxes due by the corporation for the year 1944, and count 6, that the defendant caused evasion of taxes of the same corporation for the period of January and February, 1945. On April 10, 1951, defendant entered a plea of not guilty and there followed a series of legal maneuvers between counsel for the respective parties. The trial commenced October 22, 1953, to a jury which returned a general verdict finding defendant guilty as charged. Upon such verdict the court, on November 16, 1953, entered judgment providing for defendant's imprisonment for a period of five years and imposing a fine in the sum of $10,000. From this judgment defendant appeals to this court.

Many issues are raised and argued here as grounds for reversal but, in our view, the only questions which need be given serious consideration are those which relate to the giving and refusal of certain instructions, and the admission and exclusion of evidence.

The conclusion which we have reached after a lengthy study and investigation of the record makes it unnecessary to relate more than a brief outline of the factual situation. Particularly is this so in view of the fact that there is no denial by the defendant, in fact it is tacitly conceded that there were large deficiencies in gross income as reported for the taxable years in question. More than that, it is hardly open to question that the proof was sufficient to justify a submission of the case to the jury. A statement by this court in United States v. Raub, 7 Cir., 177 F.2d 312, in which we reversed a judgment of conviction on the same charge as is made here, is appropriate. We stated, at page 314:

"We conclude that if the only question here were as to the sufficiency of the evidence we would have no difficulty in affirming the judgment of conviction. However, a much more serious and difficult question is presented with respect to the instructions under which the case was submitted to the jury."

And so here we are presented with the problem as to whether the defendant had a fair and impartial trial, that is, a trial free from prejudicial error, and this we must decide irrespective of what we might otherwise think of the case.

During the years in question and prior thereto, defendant was engaged in the manufacture of jams, preserves and syrups, some of the time in his individual capacity and at other times by a corporation of which he was the owner and manager.Sales were made to restaurants in Chicago and its suburbs by truck driver-salesmen and to wholesale and retail customers throughout the midwest. Among his employees were William Freitag, his bookkeeper, and Blanche O'Donnell, an assistant bookkeeper, both of whom were called as government witnesses. The defendant also employed at intervals outside accountants and tax experts who made or assisted in making his returns for the years in question, including John Bertrand and Nels Tessem, also called as government witnesses.

The government relied upon two theories in proving its case, (1) that the defendant received a large amount of money from the sale of his products which was not included in his gross income as reported in his returns, and (2) the socalled net worth theory. The employees of defendant as government witnesses testified that acting under his instructions, a certain portion of income was not shown on the books from which the tax returns were prepared but that it was recorded in a special accounts receivable ledger, with the amount so recorded deposited in a special account in the bank, either in the name of defendant individually or in that of his corporation. The monies thus received and handled are referred to throughout the record as segregated business receipts. These so-called segregated receipts which were not reported resulted in the deficiency in gross income as reported. This segregated income was invested by defendant in real estate, the rental income from which was shown in his returns.

It was and is defendant's contention that this course was pursued in good faith on the advice of his attorney, George S. Porikos. Defendant did not testify and offered no evidence other than that of character witnesses. Thus, defendant relies upon evidence elicited from government witnesses, either on direct or cross-examination. Defendant does not claim, of course, that the asserted fact that he acted on the advice of counsel is a bar to the charge, but it is strenuously urged that it was a circumstance to be taken into consideration by the jury on the issue of defendant's good faith or, more accurately, that it was a circumstance which the jury was entitled to consider on the charge that he "did wilfully and knowingly attempt to defeat and evade" taxes. Notwithstanding, the court refused to instruct on the advice of counsel issue, which is here urged as prejudicial error.

In view of the concessions contained in the government's brief we think there is no occasion to relate in detail the evidence under discussion. Typical is the testimony of defendant's bookkeeper, Freitag, called as a government witness, who stated that the segregated business receipts were recorded in a special accounts receivable ledger kept by O'Donnell and that they were not reflected in the general ledger from which the tax returns were prepared. On direct examination, questions were asked and answered as follows:

"Q. Did you have a conversation with Mr. Phillips, Mr. Freitag, just about the time this practice of separating orders into these two categories began? A. Yes, I did.

"Q. Now, would you please state what Mr. Phillips told you about this practice? A. He said he was acting on the authority of his attorney and following his advice.

"Q. What else did he say? A. He said he was acting in his - that he had the authority, I mean he was acting on the attorney's statement that he could put that money in a special account and use it for the purpose of buying buildings.

"Q. What else did he say about it? A. He said that all of the money that was recorded in the special ledger would be picked up and deposited, and it would be reflected in his personal income tax.

"Q. Did he mention the name of the lawyer? A. Yes, he did.

"Q. What was the name? A. Mr. Porikos."

That government's counsel recognized this testimony as important is evidenced by the fact that at that point a request was made that the jury and the witness be excused. Thereupon, government's counsel represented that the testimony came as a surprise, that the witness was hostile and requested that the court call the witness as its own, with permission to the government to cross-examine. The record does not disclose any ruling by the court on this request but it is inferable that it was denied because the government proceeded with the examination of the witness as its own. On cross-examination the witness testified that the defendant said to him in substance that at about the time the special account and special ledger were segregated, he (defendant) was acting on ...

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