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United States v. Chu

December 9, 1985


Appeal from the United States District Court for the Northern District of Indiana, South Bend Division. No. S CR 84-10 -- Allen Sharp, Judge.

Author: Coffey

Before Coffey, FLAUM, Circuit Judges, and GIBSON, Senior Circuit Judge.*fn*

COFFEY, Circuit Judge.

The defendant, Johnson C.S. Chu, appeals his

convictions on two counts of income tax evasion for the years 1977 and 1978 in violation of 26 U.S.C. § 7201. We affirm.


Dr. Johnson C.S. Chu, M.D. ("Chu") and Dr. Sylvia Cheng Chu, M.D. ("Cheng"), his wife, immigrated to the United States from mainland China in 1948. Following their arrival, Chu and Cheng both engaged in the practice of medicine, doing psychiatric work in state hospitals, initially in West Virginia, and since 1956, at Logansport State Hospital in Logansport, Indiana. In addition to their psychiatric practice at the state hospitals, Chu and Cheng also engaged in the general practice of medicine at their own clinic, the Southeastern Medical Center in Walton, Indiana. In September 1978, agents from the Drug Enforcement Administration (DEA) obtained a search warrant and searched a cottage on the Logansport State Hospital grounds used by Chu and Cheng, "looking for records related to distribution and receipt of controlled substances." As a result of the search, DEA Compliance Inspector Joel Fries discovered $21,873 in cash found in three sealed envelopes in a safe on the premises and seized the envelopes and cash along with records of controlled substance purchases. In September or October 1978, the DEA informed the Internal Revenue Service (IRS) of the seizure of the currency. The IRS believed the information received from the DEA warranted a criminal investigation and initially assigned agent James P. Hinkle to investigate Drs. Chu and Cheng. Before commencing his investigation, Hinkle ascertained whether the DEA was intending to seek an indictment of the Doctors on the controlled substance charges pursuant to a Department of Justice policy to avoid "dual prosecution" of individuals. In early 1979 a federal grand jury in the Northern District of Indiana indicted Chu and Cheng on five counts of improper distribution of controlled substances and improper record keeping in violation of 21 U.S.C. §§ 841(a)(1), 843(a)(4) and 18 U.S.C. § 2. In July 1979, the United States District Court for the Northern District of Indiana dismissed without prejudice all counts of the indictment against Chu and Cheng as being "vague and ambiguous [and suffering] from duplicity." Shortly thereafter, DEA Inspector Fries informed Agent Hinkle of the IRS that "the charges had been dropped."

Hinkle activated the IRS investigation of Chu and Cheng, telephoned Chu, and arranged to meet Chu and his wife at the Southeastern Medical Center in Walton, Indiana, on September 12, 1979. On that date Agent Hinkle and IRS Agent Stephen Platt met with Chu and Cheng. Hinkle identified himself as "a Special Agent for the [IRS] assigned to the Criminal Investigation Division," and informed Chu and Cheng that he "had been assigned the investigation of their federal tax liability." Before asking any questions, Hinkle recited the following statement from a card given by the IRS to its agents:

"As a Special Agent one of my functions is to investigate the possibility of criminal violations of the Internal Revenue laws and related offenses. In connection with my investigation of tax liability i would like to ask you some questions. However, first I advise you that under the Fifth Amendment to the Constitution of the United States I cannot compel you to answer any questions or to submit any information if such answers or information might tend to incriminate you in any manner. I also advise you anything which you say and any documents you submit may be used against you in any criminal proceeding which may be undertaken. I advise you further that you may, if you wish, seek the assistance of an attorney before responding."

Hinkle then asked Chu and Cheng individually if they understood their rights; both answered, "Yes." Hinkle then asked each of them individually whether they wished to continue the interview, and after Chu and Cheng discussed among themselves in Hinkle's presence the advisability of obtaining a lawyer, they told Hinkle they wished to continue with the interview without the presence of a lawyer.

Hinkle began questioning Chu and Cheng about their financial affairs. The defendants advised Hinkle that none of the loans they previously made to friends or relatives were currently outstanding, that they had not borrowed any money against life insurance policies, that they had not borrowed any money from individuals, and that any loans they received were reflected on their tax returns. The defendants discussed their purchases of stocks and bonds, gave Hinkle the name of their stockbroker in Indianapolis, and disclosed their real estate purchases, including the location and purchase price. Hinkle then asked the defendants about their "cash on hand", explaining that by that term he meant "currency and coins which they had on their person or at any other location or being held by anyone for them. . . . I expressly told them I was not referring to bank accounts." The defendants told Hinkle that "they had never had a practice of accumulating large sums of currency except for some money which had been obtained from them by the [DEA]." According to the defendants, the $21,000 seized by the DEA "represented money which they had received from loans and also from the sale of a house in China." Chu estimated that the most cash he had on hand at the end of the years 1975 through 1978 was between $150 and $200, and Cheng estimated that she had between $200 and $300 cash on hand at the end of the same four years.

On at least eight subsequent occasions through August 1980, Agent Hinkle, and later IRS Agent William Schroer, the agent to whom the investigation was later reassigned, met with the defendants and discussed their financial affairs. The agents examined and inventoried the contents of the defendants' safety deposit boxes, microfilmed documents, made a list of the defendants' savings bonds, collected records regarding the patients' accounts at the Southeastern Medical Center, and obtained their bank records.

The defendants eventually retained counsel, and on July 29, 1982 the defendants' attorneys provided Agents Hinkle and Schroer with letters written in Chinese, dated in 1979, 1980 and 1981, allegedly referring to the existence of loan transactions between the defendants and other family members. Agent Hinkle requested that the defendants provide the originals of the letters in order that a lab analysis might be conducted to determine the authenticity of the letters. The originals were never delivered. The IRS translated the copies of the letters, and inquired of the State Department whether any information in the letters could be investigated in mainland China. Agent Hinkle testified that after his superiors contacted the State Department, they informed him that the leads in the letters could not be investigated in mainland China and further that the IRS was unable to obtain any other pertinent information on the leads. The government requested production of the original letters, as well as any documentation the defendants might have in support of their purported family loan transactions. Neither the original letters nor any documentation has been produced.

After the thorough investigation of Agents Hinkle and Schroer, Chu and Cheng were indicted and tried in the Northern District of Indiana on two counts of evading federal income taxes in violation of 21 U.S.C. § 7201.*fn1 At the conclusion of the defendants' joint trial, the jury returned guilty verdicts against each of the defendants on both counts. The court sentenced each of the defendants to two years of imprisonment, suspended their sentences, placed each one of them on probation, and fined them $20,000 individually. The defendants appealed. On appeal Chu*fn2 contends: 1) that the evidence was insufficient to prove him guilty of willful tax evasion; 2) that the trial court erred in admitting certain statements made by the defendants to IRS agents; and 3) that he was denied a fair trial by the suggestion in the government's closing argument that the defendants engaged in uncharged criminal conduct.


In reviewing Chu's claims regarding the sufficiency of the evidence supporting his conviction, we must determine "whether, after reviewing the evidence in the light most favorable to the government, any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt." Jackson v. Virginia, 443 U.S. 307, 319, 61 L. Ed. 2d 560, 99 S. Ct. 2781 (1979) (emphasis in original); United States v. Welsh, 721 F.2d 1142, 1145 (7th Cir. 1983); United States v. Moya, 721 F.2d 606, 610 (7th Cir. 1983), cert. denied, 465 U.S. 1037, 104 S. Ct. 1312, 79 L. Ed. 2d 709 (1984). In the case before us, the government prosecuted the defendants employing the net worth method of proving willful tax evasion.

"In a typical net worth prosecution, the Government, having concluded that the taxpayer's records are inadequate as a basis for determining income tax liability, attempts to establish an 'opening net worth' or total net value of the taxpayer's assets at the beginning of a given year. It then proves increases in the taxpayer's net worth for each succeeding year during the period under examination and calculates the difference between the adjusted net values of the taxpayer's assets at the beginning and end of each of the years involved. The taxpayer's nondeductible expenditures, including living expenses, are added to these increases, and if the resulting figure for any year is substantially greater than the taxable income reported by the taxpayer for that year, the government claims the excess represents unreported taxable income."

Holland v. United States, 348 U.S. 121, 125, 99 L. Ed. 150, 75 S. Ct. 127 (1954).

A. Opening Net Worth

"[A]n essential condition in cases of this type is the establishment, with reasonable certainty, of an opening net worth, to serve as a starting point from which to calculate future increases in the taxpayer's assets." Holland, 348 U.S. at 132. Chu asserts that the government "totally failed to prove a reasonably certain opening net worth" in two respects. Initially, Chu states that there was no evidence introduced to establish that the assets listed in the government's summary for December 31, 1976 were a complete listing of all of the defendants' assets. According to Chu, the only evidence regarding opening net worth presented by the government was the testimony of the government's summary witness, IRS Agent Robin Zeldin.*fn3 Chu contends that Aeldin's testimony revealed that the government's opening net worth statement did not include all of the assets in their (defendants') possession on December 31, 1976:

"Q. Now, Mr. Zeldin, you have a figure for Series E savings bonds listed here on your assets computation. Isn't it, in fact, true there are more Series E savings bonds than you listed here? . . . Isn't true that ...

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