The trials of Al Capone and CJ Corona

If Senator Miriam Santiago had been the defense lawyer of Al Capone in his tax evasion trial in 1931, she would have argued for the exclusion of all evidence of unexplained wealth as she warned her Philippine Senate colleagues this week that exposing the dollar bank accounts of Chief Justice Renato Corona in the Senate Impeachment Trial would have a “devastating effect” on the Philippine economy and “would drive away the capital market for our country.”

Al Capone’s lawyers employed similar apocalyptic hyperbole when they exhorted a Chicago jury to “stand as a bulwark against an oppressive government that was using the tax law as a means to stow Al Capone away.” One Capone defense lawyer implored the all-male jury: “You, gentlemen, are the last barrier between the defendant and the encroachment and perversion of the government and the law in this case.”

Unfortunately for Capone, he faced a judge who was not at all like the Philippine Supreme Court justices who issued a Temporary Restraining Order (TRO) preventing the disclosure of the dollar accounts of their Chief Justice to comply, they said, with the strict disclosure rules of the Foreign Currency Deposit Act of the Philippines (Republic Act No. 6426) on dollar accounts.

The problem with their argument, as Justice Antonio Carpio explained in his dissent, is that RA 6426 was specifically intended to protect foreign depositors and not Filipinos. If Ferdinand Marcos had deposited his hundreds of millions of US dollars in foreign currency accounts with local banks – instead of in Swiss banks – under RA 6426, “he would have gotten away with his loot under this ruling of the majority,” Justice Carpio wrote.

US government prosecutors faced a more difficult task in accumulating evidence of tax evasion against Capone because he had no bank deposits in his name unlike CJ Corona who kept his funds in his own name in the Bank of the Philippine Islands (BPI) and in the Philippine Savings Bank (PSBank). In two of his peso accounts in the PSB, Corona had P12 million pesos while a BPI Branch Manager stated under oath that Corona had a 2010 end of the year balance of 12 million pesos in his BPI account.

In the PSBank, Corona owned 10 accounts – 5 in peso accounts and 5 in dollar accounts, one of which had an initial deposit of $700,000. Before the PSBank could disclose the amounts of the four other dollar accounts of CJ Corona, it sought and obtained a TRO.

In investigating Capone, the Internal Revenue Service (IRS) noted that Capone failed to pay taxes on any of his earnings from bootlegging, prostitution, embezzlement, gambling, and other illegal activities. Capone scoffed at the IRS investigation and said: “The government can’t collect legal taxes from illegal money.”

But Capone was wrong. The US Supreme Court, in the 1927 case of United States v. Sullivan had ruled that the Fifth Amendment’s privilege against self-incrimination did not protect Manley Sullivan, a bootlegger convicted of failing to file a return showing the profits from his illegal businesses.

The forensic accounting method used by the IRS to nail Capone was called the “net-worth method” where IRS investigators examine a combination of the subject’s assets and liabilities in relation to all sources of income. If a taxpayer’s net worth, taking into account assets offset by liabilities, increased during a taxation year, the receipt of money or property to cause that increase would be considered taxable sources, the failure to pay taxes would constitute the crime of tax evasion.

The IRS also employed an “expenditures method” where expenses are matched against reported income. If there is a gap that cannot be explained, that may indicate unreported income.

House prosecutors had presented evidence that CJ Corona owned 26 pieces of real property including a Bellagio penthouse condominium that he purchased for P14 million pesos, about P12 million below its market value.

CJ Corona declared under oath in his 2010 Statement of Assets, Liabilities and Net Worth (SALN) that his cash assets amounted to just P3.5 million pesos. According to the tax records of Corona, as disclosed at the senate trial, in 2010, he paid only P176,577.32 pesos in taxes based on a gross income of P657, 755.57. In 2009, he only paid P155,556.20 in taxes on a gross income of P621, 528.62.

How did Corona get to purchase 26 pieces of real property and deposit P31 million pesos in peso accounts and $700,000 in dollar accounts on an annual salary of P657,755?

In building the tax evasion case against Capone, the IRS had to examine department store, jewelry store, car dealership, and hotel records for evidence of Capone’s expenditures, uncovering purchases of high-end furniture, custom-made shirts, diamond-studded belt buckles, gold-plated dinner service, hotel suites, and a Lincoln limousine.

The federal trial of Al Capone began on October 5, 1931 at the federal courthouse in downtown Chicago with the prosecution presenting evidence that Capone owned gambling halls and derived substantial profits from those businesses. Other prosecution witnesses presented evidence of Capone’s lavish lifestyle. A clerk at Chicago’s Metropole Hotel testified that Capone rented the hotel’s most expensive suites and hosted expensive parties paying cash “in hundred dollar bills, sometimes five hundred dollar bills.”

Capone’s lawyers presented their case in one day claiming that Capone was a “horse-racing addict” who had lost as much money as he earned, neglecting to point out that gambling losses are only deductible against gambling winnings so Capone would still have been required to pay taxes on his income, even if the sources were undeclared.

In his summation, US Attorney George Johnson said, “This is a case that future generations will remember….They will remember it because it will establish whether a man can so conduct his affairs such that he is above the government and above the law.”

On October 18, 1931, a Chicago jury deliberated for eight hours before returning a verdict of “guilty” on the charge of tax evasion. Capone was sentenced to 11 years in the federal penitentiary, most of which he spent in Alcatraz.

The Philippine Supreme Court majority, in supporting their CJ to prevent the disclosure of his dollar accounts, has basically declared that Corona “can conduct his affairs such that he is above the government and above the law.”

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