United States v. Joseph Divarco and Joseph Arnold
484 F.2d 670 (1973)
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Rule of Law:
Willfully falsifying the source of one's income on a federal tax return constitutes a false statement as to a "material matter" and is a felony under 26 U.S.C. § 7206(1), regardless of whether the total income amount reported is accurate or results in a tax deficiency.
Facts:
- Joseph DiVarco and Joseph Arnold filed their 1965 federal income tax returns.
- On their respective returns, they falsely stated that a portion of their income was from Chemical Mortgage & Investment Corporation.
- This false information was part of a conspiracy with Irwin Davis, an agent of the corporation.
- The purpose of the conspiracy was to conceal the true source of their income from the Internal Revenue Service (IRS).
- Both defendants signed their tax returns under a written declaration that they were made under penalties of perjury.
- The government did not allege or prove that the defendants had understated the total amount of their taxable income on the returns.
Procedural Posture:
- The U.S. Government indicted Joseph DiVarco and Joseph Arnold in the United States District Court for the Northern District of Illinois.
- They were charged with making false statements on their tax returns in violation of 26 U.S.C. § 7206(1) and with conspiracy.
- The defendants argued that the charge was improper because the government did not show an understatement of income.
- The district court issued a memorandum opinion holding that the source of income is a "material matter" under the statute.
- Following a trial, a jury found both defendants guilty on all counts.
- The defendants, as appellants, appealed their convictions to the United States Court of Appeals for the Seventh Circuit.
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Issue:
Does willfully misstating the source of one's income on a federal tax return constitute a false statement as to a "material matter" under 26 U.S.C. § 7206(1), even if the total income amount reported is accurate?
Opinions:
Majority - Pell, Circuit Judge.
Yes, willfully misstating the source of income on a tax return is a false statement as to a "material matter" under 26 U.S.C. § 7206(1). The court reasoned that the statute's purpose is to prosecute those who intentionally falsify tax returns, regardless of the ultimate effect on tax liability. The plain language of the statute does not limit "material matter" to just the final tax calculation. The IRS needs accurate information about the source of income to police and verify returns, making the source a material element for the tax system's proper functioning. The court also held that the willfulness element requires proof of a bad purpose or evil motive, but that motive does not have to be tax evasion; here, the jury could infer an evil motive from the defendants' deliberate actions to conceal the true source of their income.
Analysis:
This decision clarifies that the scope of felony tax fraud under § 7206(1) extends beyond simple tax evasion. By defining the source of income as a "material matter," the court affirmed that the integrity of the self-reporting tax system itself is protected by the statute. This precedent empowers the government to prosecute individuals who use tax returns to launder money or conceal the origins of illicit income, even if they pay the correct amount of tax. The ruling emphasizes that any willful, false statement that could hinder the IRS's ability to verify a return's accuracy can be the basis for a felony conviction.
