32.00 EXPENDITURES

Updated June 2001

32.01 GENERALLY

32.02 REQUIREMENTS FOR ESTABLISHING AN EXPENDITURES CASE

32.03 CONCEPTS APPLICABLE TO EXPENDITURES CASES

      32.03[1] Opening Net Worth

      32.03[2] Cash on Hand

      32.03[3] Cash Hoard Defense

      32.03[4] Duplication of Expenditures

      32.03[5] Likely Source of Income

      32.03[6] Summary Exhibits

32.04 JURY INSTRUCTIONS

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                        32.01  GENERALLY

      The expenditures method of proof and the net worth method of proof are 

essentially the same.  The two computations are merely accounting variations 

of the same basic approach, with the expenditures method being an outgrowth 

of the net worth method.  

United States

 v. Breger, 616 F.2d 634, 635 

(2d Cir. 1980); Taglianetti v. 

United States

, 398 F.2d 558, 562 (1st 

Cir. 1968), aff'd, 394 U.S. 316 (1969); 

United States

 v. 

Caserta

, 199 F.2d 905, 906 (3d Cir. 1952).  Accordingly, in considering 

an expenditures case, reference should be made to Section 31.00, 

supra, which examines the net worth method of proof.

      The use of the expenditures method of proof to establish unreported 

income was approved as early as 1943 in United States v. Johnson, 319 

U.S.

 503, 517 (1943).  Subsequently, in 

Caserta

, Judge Goodrich 

defined the expenditures method of proof as follows:

       It starts with an appraisal of the taxpayer's net worth situation at 

       the beginning of a period.  He may have much or he may have nothing. 

       If, during that period, his expenditures have exceeded the amount he 

       has reported as income and his net worth at the end of the period is 

       the same as it was at the beginning (or any difference accounted 

       for), then it may be concluded that his income tax return shows less 

       income than he has in fact received. Of course it is necessary, so 

       far as possible, to negative nontaxable receipts by the taxpayer 

       during the period in question.

Caserta

, 199 F.2d at 907.

      The expenditures method of proof  tracks a taxpayer's expenditures for 

consumable goods and services (i.e., items which do not increase 

one's net worth), as opposed to any acquisition of assets (i.e., 

items such as stocks, bonds, or real estate which increase one's net worth).  

The expenditures method is designed to account for the taxpayer who spends 

his income on consumable items, such as food, vacations, travel, or gifts to 

third parties, which do not increase net worth.  The expenditure method is 

distinct from the use of expenditures in an analysis of bank deposits.  

See, e.g., United States v. Conaway,  11 F.3d 40, 43  

(5th Cir. 1993); 

United States

 v. Abodeely, 801 F.2d 1020, 1024 (8th 

Cir. 1986);.

      One advantage of using the expenditures method of proof, rather than 

the net worth method, is well summarized by the Taglianetti court:

       The government proceeded on a "cash expenditure" theory. This is a 

       variant of the net worth method of establishing unreported taxable 

       income.  Both proceed by indirection to overcome the absence of 

       direct proof.  The net worth method involves the ascertaining of a 

       taxpayer's net worth positions at the beginning and end of a tax 

       period, and deriving that part of any increase not attributable to 

       reported income.  This method, while effective against taxpayers who 

       channel their income into investment or durable property, is 

       unavailing against the taxpayer who consumes his self-determined tax 

       free dollars during the year and winds up no wealthier than before. 

       The cash expenditure method is devised to reach such a taxpayer by 

       establishing the amount of his purchases of goods and services which 

       are not attributable to the resources at hand at the beginning of the 

       year or to non-taxable receipts during the year. 

Taglianetti, 398 F.2d at 562 (footnotes omitted).

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        32.02 REQUIREMENTS FOR ESTABLISHING AN EXPENDITURES CASE

        The requirements for establishing an expenditures case are virtually

identical to those required for establishing a net worth case.  Thus, in an

expenditures case, the government must:

        1.    Establish an opening net worth with reasonable certainty and 

              demonstrate that the taxpayer's expenditures did not result 

              from cash on hand, or the conversion of assets on hand at the 

              beginning of the period;

        2.    Establish through independent evidence that the expenditures 

              charged to the taxpayer are non-deductible;

        3.    Establish a likely source of income from which the 

              expenditures sprang, or negate nontaxable sources of income; 

              and

        4.    Investigate all relevant, reasonable leads which are 

              reasonably susceptible of being checked.

Taglianetti v. 

United States

, 398 F.2d 558, 562 (1st Cir. 1968), 

aff'd, 394 U.S. 316 (1969) (cited in 

United States

 v. 

Sutherland, 929 F.2d 765, 780 (1st Cir. 1991)); 

United States

 v. 

Caswell, 825 F.2d 1228, 1231 (8th Cir. 1987); 

United States

 v. 

Mastropieri, 685 F.2d 776, 778 n.2 (2d Cir. 1982); 

United States

 v. 

Breger, 616 F.2d 634, 635 (2d Cir. 1980); 

United States

 v. Gay, 

567 F.2d 1206, 1207 (2d Cir. 1978); 
United States
 v. 

Marshall

, 557 

F.2d 527, 529 (5th Cir. 1977); 

United States

 v. Bianco, 534 F.2d 501, 

504 (2d Cir. 1976); 

United States

 v. Fisher, 518 F.2d 836, 841-42 (2d 

Cir. 1975); 

United States

 v. Newman, 468 F.2d 791, 793 (5th Cir. 

1972); 

United States

 v. Penosi, 452 F.2d 217, 220 (5th Cir. 1971); 

McFee v. United States, 206 F.2d 872, 874 (9th Cir. 1953), vacated 

and remanded, 348 

U.S.

 905, aff'd upon reconsideration per 

curiam, 221 F.2d 807 (9th Cir.1955); United States v. Caserta, 

199 F.2d 905, 907 (3d Cir. 1952); see also 

United States

 v. 

Pinto, 838 F.2d 426, 431-32 (10th Cir. 1988); 

United States

 v. 

Marrinson, 832 F.2d 1465, 1469-70 (7th Cir. 1987); 

United States

 v. 

Citron, 783 F.2d 307, 315 (2d Cir.1986),  rev'd on other grounds, 853 

F.2d 1055 (2d Cir.1988); 

United States

 v. Radseck, 718 F.2d 233, 

237-38 (7th Cir. 1983).

      Reference should be made to Section 31.00, supra, in which the 

net worth method of proof is discussed.

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         32.03 CONCEPTS APPLICABLE TO EXPENDITURES CASES

      As noted above, the government has essentially the same burden in an 

expenditures case that it has in a net worth case.  There are, however, a 

few wrinkles which should be mentioned.

32.03[1] Opening Net Worth

      The requirement that the government must establish the defendant's 

opening net worth with reasonable certainty is derived from 

Holland

 v. 

United States
, 348 

U.S.

 121, 132, (1954).  However, the government's 

method of proving an expenditures case is slightly different from the net 

worth method employed in 

Holland

.  This distinction was examined by 

the Taglianetti court:

       In a typical net worth case, as 

Holland

, precise figures would 

       have to be attached to opening and closing net worth positions for 

       each of the taxable years to provide a basis for the critical 

       subtraction.  In a cash expenditures case reasonable certainty may be 

       established without such a presentation, as long as the proof . . . 

       makes clear the extent of any contribution which beginning resources 

       or a diminution of resources over time could have made to 

       expenditures.

Taglianetti, 398 F.2d 558, 565 (1st Cir. 1968), aff'd, 394 

U.S.

 316 (1969).

      Thus, the government must prove not only that yearly expenditures 

exceeded reported income, but also, either directly or inferentially, that 

those expenditures were made with currently taxable income.  Unless both 

requirements are met, a conviction cannot stand.  See, e.g., 

United States
 v. 

Marshall

, 557 F.2d 527, 529 (5th Cir. 1977).  Thus, 

the government must present evidence indicating that the defendant did not 

liquidate assets acquired in a previous year or deplete a cash hoard to make 

the expenditures in issue.

      Once the government establishes a starting point for the first 

prosecution year, it should then proceed to compute the total taxable and 

nontaxable receipts for each of the following consecutive years to prove its 

case. 

Marshall

, 557 F.2d at 530.  In 

United States

 v. Bianco, 

534 F.2d 501, 504 (2d Cir. 1976), the government attempted to show that 

Bianco's beginning resources were nonexistent, and thus, could not have 

contributed at all to his expenditures during the tax years.  The court 

described the extensive investigation by the government into Bianco's 

financial background, and concluded that the "totality of this evidence 

clearly was sufficient for the jury to have concluded that Bianco had 

insufficient assets at the beginning of the prosecution period to have 

supported his expenditures in any of those years." Bianco, 534 F.2d 

at 505.  See also United States v. Fisher, 518 F.2d 836, 

841-42 (2d Cir. 1975) (government introduced evidence that Fisher had 

$30,000 in bank accounts and that this constituted all of the assets that 

Fisher and his wife possessed). 

      It is not necessary in an expenditures case, as it is in a net worth 

analysis, to reflect the opening and closing net worth position of the 

taxpayer in a formal net worth statement.  Thus, reasonable certainty may be 

established without such a presentation, as long as the expenditures 

analysis takes into account the extent of any contribution, which beginning 

resources or a diminution of resources over time, could have made to the 

expenditures during the prosecution years.  Taglianetti, 398 F.2d at 

565.  In a footnote, the Taglianetti court discussed various 

expenditures cases and the absence of any requirement of a formal net worth 

statement. Taglianetti, 398 F.2d at 565 n.7.

32.03[2] Cash on Hand

      Formal proof of a net worth is not required in an expenditures case. 

See 

United States

 v. Conaway, 11 F.3d 40, 43  (5th Cir. 1993).   

Establishment of cash on hand, however, is essential and recognized to be 

the most difficult component of proof in such tax prosecutions. See 

United States v. Citron, 783 F.2d 307, 316 (2d Cir. 1986), rev'd 

on other grounds, 853 F 2d. 1055 (2d Cir. 1988) (an agent's 

investigation into the truth of a cash hoard defense was sufficient in 

establishing cash on hand).  In Citron, however, the Second Circuit 

reversed the convictions because the District Court admitted into evidence a 

summary chart containing figures not demonstrably supported by the evidence. 

Citron, 783 F.2d at 317.

32.03[3] Cash Hoard Defense

      Similar to net worth cases, a cash hoard defense is frequently raised 

in expenditures cases.  To assert a cash hoard defense, the taxpayer 

contends that expenditures during the relevant years were made with 

previously accumulated funds (cash on hand) and not with currently taxable 

receipts.  See Sections 31.06 and 31.07, supra.

      In 

United States

 v. Radseck, 718 F.2d 233, 239 (7th Cir. 1983), 

the government rebutted a cash hoard defense with testimony from the special 

agent "that in his experience in investigating thirty-five to forty 

attempted income tax evasion cases, people who have five bank accounts, 

thirteen savings and loan accounts and two brokerage accounts do not keep 

substantial amounts of cash on hand."  The court found that the inference 

that the defendant did not keep cash at home was a permissible one.  

      In 

United States

 v. Gay, 567 F.2d 1206, 1207 (2d. Cir. 1978), 

the defendant testified at trial that he had a cash hoard of more than 

$100,000 in spite of the fact that he had told the investigating agents that 

he and his wife had no more than $13,000.  The $13,000 figure was used in 

the opening net worth computation.  The court stated that "the jury was 

entitled to infer, as it apparently did, that appellant's 'cash hoard' 

testimony was a belated and blatant concoction which was not entitled to any 

credit."  Gay, 567 F.2d at 1207.

32.03[4] Duplication of Expenditures

      In establishing a taxpayer's expenditures, care must be taken to 

insure against a duplication of expenditures.  In 

United States

 v. 

Caserta

, 199 F.2d 905, 907 (3d Cir. 1952), a new trial was ordered 

because a duplication resulted from the defendant being charged with both 

cash withdrawals from a bank account and expenditures for individual items 

since the evidence did not establish that the cash withdrawals were not 

applied to the cash purchases.  For an excellent and detailed explanation of 

such an error, see the opinion of Judge Goodrich in 

Caserta

, 

199 F.2d at 906-08.  Cf. 

United States

 v. Radseck, 718 F.2d 

233, 238 (7th Cir. 1988) (the duplication of $2,766 as both a personal 

expenditure and an increase in assets did not render the government summary 

exhibits inadmissible because this error and others were revealed to the 

jury during cross-examination of the government's summary witness and 

acknowledged by the government during closing argument).

32.03[5] Likely Source of Income

      In an expenditures case, as in a net worth case, the government must 

establish a likely source of taxable income, or eliminate the possibility 

that the cash expenditures were made with nontaxable sources of income.  

See, e.g., United States v. Marrinson, 832 F.2d 1465, 

1472 (7th Cir. 1987); 

United States

 v. Bianco, 534 F.2d 501, 506-07 

(2d. Cir. 1976).  Therefore, from a purely legal standpoint, the government 

need not negate nontaxable sources when it has already established a likely 

source of taxable income.  However, as a matter of trial strategy, it is 

advisable not only to establish a likely source of taxable income, but also 

to eliminate any nontaxable sources for the funds.  Such an approach makes a 

good impression on both judge and jury.  This does not mean that 

unreasonable efforts need to be expended, however, since "once expenditures 

are established, the government cannot be expected to conduct an exhaustive 

nationwide investigation when the defendant supplies no relevant leads as to 

where he got the money he admittedly spent."  

United States

 v. 

Penosi, 452 F.2d 217, 220 (5th Cir. 1971).  See also Section 

31.12, supra.  Yet, if the investigation can include both approaches, 

the government's case will be that much stronger.

32.03[6] Summary Exhibits

      In an expenditures case, the government is not required to include the 

defendant's version of the facts in its summary exhibits.  

United States

 

v. Radseck, 718 F.2d 233, 239 (7th Cir. 1983).  This is also true in net 

worth cases.  See Section 31.14, supra.

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                     32.04 JURY INSTRUCTIONS

      In an expenditures case, as in a net worth case, it is essential that 

the charge to the jury "should be especially clear, including, in addition 

to the formal instructions, a summary of the nature of the net worth 

[expenditures] method and the assumptions on which it rests, and the 

inferences available both for and against the accused."  

Holland

 v. 

United States
, 348 

U.S.

 121, 129 (1954).  Accord 

United States

 

v. Hall, 650 F.2d 994, 998 (9th Cir. 1981); 

United States

 v. 

Tolbert, 367 F.2d 778, 780-81 (7th Cir. 1966); 

United States

 v. 

O'Connor, 237 F.2d 466, 472-73 (2d Cir. 1956).  See also 

United States

 v. Meriwether, 440 F.2d 753, 756-57 (5th Cir. 1971) 

(reversing section 7201 conviction because trial court failed to instruct 

jury on method of proof).

      A conviction on one count was reversed in 

United States

 v. 

Carter, 721 F.2d 1514 (11th Cir. 1984), where the court held that it was 

plain error to fail to instruct the jury on the expenditures method of 

proof:

       We find that the omission of the required explanatory instructions 

       concerning the cash expenditures method of proof in this case "goes 

       to the very basis of the jury's ability to evaluate the evidence," 

       Hall, 650 F.2d at 999 [

United States

 v. Hall, 650 F.2d 

       994 (9th Cir. 1981)], and to the very core of the deliberative 

       process necessary to guarantee the fairness of the proceedings.  We 

       therefore hold that the omission of the explanatory instructions 

       required by 

Holland

 concerning the cash expenditure method of 

       proof constituted plain error affecting appellant's substantial 

       rights.

Carter, 721 F.2d at 1539 (citations omitted).

   therefore hold that the omission of the explanatory instructions 

       required by 

Holland

 concerning the cash expenditure method of 

       proof constituted plain error affecting appellant's substantial 

       rights.

Carter, 721 F.2d at 1539 (citations omitted).