United States District Court, Northern District of Illinois, E.D
June 6, 1972
UNITED STATES OF AMERICA, PLAINTIFF,
JOSEPH DIVARCO AND JOSEPH ARNOLD, DEFENDANTS.
The opinion of the court was delivered by: Will, District Judge.
The government is prosecuting the defendants in this case
pursuant to an indictment which charges each of them with having
made "a false statement as to a material matter on their
respective 1965 United States Individual Income Tax Return," in
violation of 26 U.S.C. § 7206(1), in that each reported income
from commissions paid them by Chemical Mortgage & Investment
Corporation never having received any income from such a source,
thereby falsely stating the source of their reported income. In
addition, they are charged with conspiring with Irwin J. Davis
and other persons unknown to the government falsely to state a
material matter, the source of their income, on their tax
returns. The defendants have moved to dismiss
the indictment on the ground that the source of one's income as
distinguished from the amount of one's income is not a material
matter which can be falsely stated within the meaning of
26 U.S.C. § 7206(1). Defendants' motion is denied inasmuch as we
find the source of income to be such a material matter.
That statute provides in pertinent part:
§ 7206. Fraud and false statements Any person who —
(1) Declaration under penalties of perjury. —
Willfully makes and subscribes any return,
statement, or other document, which contains or is
verified by a written declaration that it is made
under the penalties of perjury, and which he does
not believe to be true and correct as to every
shall be guilty of a felony and, upon conviction
thereof, shall be fined not more than $5,000, or
imprisoned not more than 3 years, or both, together
with the costs of prosecution.
Defendants' essential argument is that the source of one's
income is not a material matter within the meaning of
26 U.S.C. § 7206(1), and that a false statement of the source of income on
one's tax return is not an indictable offense. They contend that
the only material matter on a tax return that is indictable is
the amount of one's taxable income. They continue that, since an
overstatement of taxable income is not an indictable offense,
citing Poonian v. United States, 294 F.2d 74 (9th Cir. 1961), no
valid prosecution can be maintained under 26 U.S.C. § 7206(1)
without a showing of understatement of the defendants' taxable
The question whether misstatement of the source of one's income
alone without a misstatement of the amount of one's income is
indictable under 26 U.S.C. § 7206(1) is one of first impression.
The government has cited a number of cases in support of their
position that an indictment for the misstatement of source of
income alone is valid. See United States v. Jernigan,
411 F.2d 471 (5th Cir. 1969), cert. denied 396 U.S. 927, 90 S.Ct. 262, 24
L.Ed.2d 225; Gaunt v. United States, 184 F.2d 284 (1st Cir.
1950), cert. denied 340 U.S. 917, 71 S.Ct. 350, 95 L.Ed. 662
(1951); United States v. Null, 415 F.2d 1178 (4th Cir. 1969);
United States v. Lodwick, 410 F.2d 1202 (8th Cir. 1969); Schepps
v. United States, 395 F.2d 749 (5th Cir. 1969); Siravo v. United
States, 377 F.2d 469 (1st Cir. 1967); Silverstein v. United
States, 377 F.2d 269 (1st Cir. 1967); Hartman v. United States,
245 F.2d 349 (8th Cir. 1957); United States v. Tadio,
223 F.2d 759 (2d Cir. 1955); United States v. Rayor, 204 F. Supp. 486
(S.D.Cal. 1962). The defendants have correctly noted that none of
these cases involved an indictment solely for the false statement
of the source of income. Technically, not one of the cases
proffered by the government holds that a false statement as to
the source of income alone in an indictable offense under
26 U.S.C. § 7206(1). Most of the government cases involved
prosecution for the understatement of taxable income. Gaunt,
Null, Siravo, Silverstein, Hartman, Tadio and Rayor. In a few of
the cases, it is unclear what material matter was falsely
misstated. Jernigan, Lodwick and Schepps.
The mere fact that the government cases are not strict
precedents for the indictment in the instant case does not,
however, render them useless in our analysis. Defendants'
historical position that there have been no reported prosecutions
under § 7206(1) for false statement as to source of income alone
is not dispositive of the issue whether source of income is a
material matter under the statute, the false statement of which
is indictable. The reported cases, while involving fact patterns
where there had been understatement of the amount of income, did
not focus on the particular material matter which had been
misstated. Rather, these courts found a more general rationale
underlying the section.
One of the more basic tenents running through all the cases is
that the purpose behind the statute is to prosecute those who
intentionally falsify their tax returns regardless of the precise
ultimate effect that such falsification may have. In the early
and oft-cited Gaunt case, it was stated:
It seems to us clear that the latter subsection
[§ 145(c) of the 1939 Code, which is virtually
identical to its successor § 7206(1)] makes it a
felony merely to make and subscribe a tax return
without believing it to be true and correct as to
every material matter, whether or not the purpose in
so doing was to evade or defeat the payment of taxes.
That is to say, it seems to us that the subsection's
purpose is to impose the penalties for perjury upon
those who willfully falsify their returns regardless
of the tax consequences of the falsehood. 184 F.2d at
The Gaunt case has been followed and cited for this particular
point in numerous subsequent cases. See Jernigan, Lodwick,
Hartman and Tadio.
Another basic rationale for prohibiting any falsity on the
return is that without truthful representation as to all matters
it becomes administratively more difficult, if not impossible,
for the Internal Revenue Service (IRS) to compute the amount of
tax due or to check on the accuracy of returns. In Rayor, the
court borrowed a test for materiality from the D.C. Circuit in
Weinstock v. United States, 97 U.S.App.D.C. 365, 231 F.2d 699
(1956), a prosecution under the federal false statement statute,
18 U.S.C. § 1001, for submitting an allegedly false affidavit to
the Subversive Activities Control Board, where the D.C. Circuit
The test [for materiality] is whether the false
statement has a natural tendency to influence, or was
capable of influencing, the decision of the tribunal
in making a determination required to be made. 231
F.2d at 701-702.
The idea that a matter is material under § 7206(1) if it would
have a tendency to influence the IRS in its normal processing of
tax returns was reiterated in Null, supra.
Each of these analyses of the statute and its purpose argues
for validating the indictment in the instant case. It is alleged
in the indictment that the defendants wilfully falsified their
tax returns. So under Gaunt and its progeny, the indictment is
valid. In addition, the indictment envisions no mere oversight or
mistake. The W-2 forms defendants attached to their tax returns
were allegedly fabricated. Certainly, such a scheme would impede
the IRS in its quite proper role of auditing and investigating
returns and would be material under Rayor and Null.
Even defendants' argument that there can be no prosecution
except for understatement of income reflects the importance and
materiality of the source of one's income as reported on the tax
return. Without truthful representation of the source of income,
it is impossible for the government to determine whether the
amount paid is in fact understated, overstated, or correct.
Surely, save the amount, there is no more material matter on the
tax return than the source of income.
Moreover, the consequence of accepting defendants' position
would be to open one of the widest loopholes in the tax
structure. To allow taxpayers to wilfully misstate and fabricate
the source of their income would thereby render virtually
impossible the task of ascertaining whether the amount of income
as reported is accurate. Evasion of income tax would become much
easier. It is inconceivable that Congress could have intended
that this statute be construed in a manner that would make it
impossible for the IRS to verify and check the accuracy of the
In summary, we hold that the source of one's income as stated
on the federal income tax return is a material matter within the
26 U.S.C. § 7206(1), and that, as such, the government may properly
prosecute a taxpayer for falsely stating the source of his income
on his federal income tax return. Accordingly, defendants' motion
to dismiss the indictment is denied.
An appropriate order will enter.
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