31.00 NET WORTH

Updated June 2001

31.01 GENERALLY

31.02 DESCRIPTION OF NET WORTH METHOD

31.03 USE OF NET WORTH METHOD

31.03[1] Inadequate Books and Records

31.03[2] Adequate Books and Records

31.03[3] Use With Other Methods

31.04 PROOF OF NET WORTH -- GENERALLY

31.05 OPENING NET WORTH

31.05[1] Proof -- "Reasonable Certainty"

31.05[2] Thorough Investigation a Necessity

31.05[3] Evidence Establishing Opening Net Worth

31.05[4] Opening Net Worth Not Established

31.06 CASH ON HAND

31.06[1] Definition -- Need to Establish

31.06[2] Jury Question -- Burden of Proof

31.06[3] Amount of Cash on Hand

31.07 EVIDENCE OF CASH ON HAND

31.07[1] Evidence of Financial Deprivation

31.07[2] Admissions of Defendant

   31.07[2][a] Pre-Offense Admissions

   31.07[2][b] Post-Offense Admissions

31.07[3] Tax Returns As Admissions

31.07[4] Statements Given to Financial Institutions

31.07[5] Defendant's Books and Records

31.07[6] Statements of Accountants and Attorneys

31.07[7] Accountant's Workpapers

31.07[8] Source and Application of Funds Analysis

31.08 NET WORTH ASSETS

31.08[1] Reflected at Cost -- Generally

31.08[2] Across the Board Assets

31.08[3] Bank Accounts and Nominee Accounts

31.08[4] Assets and Liabilities of Husband and Wife or Children

31.08[5] Real Property

31.08[6] Partnership Interest

31.08[7] Errors in Net Worth Computation

31.09 LIABILITIES

31.10 NONDEDUCTIBLE EXPENDITURES

31.10[1] Added to Net Worth Increase

31.10[2] Burden on Government

31.10[3] Nondeductible Expenditures -- Examples

31.11 REDUCTIONS IN NET WORTH

31.12 ATTRIBUTING NET WORTH INCREASES TO TAXABLE INCOME

31.12[1] Generally

31.12[3] Illegal Sources of Income

31.12[4] Negating Nontaxable Sources of Income

31.13 REASONABLE LEADS DOCTRINE

31.13[1] Duty to Investigate Reasonable Leads

31.13[2] Leads Must Be Reasonable and Timely

31.14 NET WORTH SCHEDULES

31.15 JURY INSTRUCTIONS

31.16 SAMPLE NET WORTH SCHEDULE

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                        31.01  GENERALLY

      The net worth method of proof is a long-established indirect method of 

proof regularly used in establishing taxable income in criminal tax cases.  

This method of proof is useful in reconstructing taxable income when the 

government is unable to establish income through direct evidence.  

See, e.g., United States v. Johnson, 319 U.S. 503, 517 

(1943), involving gambling transactions where all records had been 

destroyed. The net worth method produces an approximation.  Holland v. 

United States, 348 U.S. 121, 129 (1954); United States v. 

Giacalone, 574 F.2d 328, 332 (6th Cir. 1978).  See also 

United States v. Gomez- Soto, 723 F.2d 649, 655 (9th Cir. 1983); 

United States v. Schafer, 580 F.2d 774, 777 (5th Cir. 1978).   This 

method operates on the concept that if a taxpayer has more wealth at the end 

of a given year than at the beginning of that year, and the increase does 

not result from nontaxable sources such as gifts, loans, and inheritances, 

then the increase is a measure of taxable income for that year.  Because 

nondeductible expenditures are added to any net worth increase, the method 

is sometimes referred to as the net worth and expenditures method.

      It is important when constructing a net worth computation to include 

only items or transactions which reflect tax consequences.  For this reason, 

nontaxable items received during a prosecution year must be eliminated from 

the computation of additional taxable income under the net worth method. 

      A net worth computation  reveals not only that the defendant had 

income but how that income was spent.  In essence, the computation depicts 

the financial life of a taxpayer, both prior to and during the prosecution 

period. Holland, 348 U.S. at 132; United States v. 

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

       Although endorsing the net worth method, the Supreme Court has 

cautioned that "it is so fraught with danger for the innocent that the 

courts must closely scrutinize its use."  Holland, 348 U.S. at 125.  

Despite the possible pitfalls inherent in the method, the Supreme Court has 

approved its use a number of times.  See, e.g., Massei v. 

United States, 355 U.S. 595 (1958); United States v. Calderon, 

348 U.S. 160 (1954); Smith v. United States, 348 U.S. 147 (1954); 

Friedberg v. United States, 348 U.S. 142 (1954); Holland, 348 

U.S. 121; Johnson, 319 U.S. 503. 

      For an example of a net worth computation, see Section 31.16, 

infra.

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              31.02 DESCRIPTION OF NET WORTH METHOD

      The First Circuit described the net worth method as follows:

      The Government makes out a prima facie case under the net worth method 

      of proof if it establishes the defendant's opening net worth (computed 

      as assets at cost basis less liabilities) with reasonable certainty 

      and then shows increases in his net worth for each year in question 

      which, added to his nondeductible expenditures and excluding his known 

      nontaxable receipts for the year, exceed his reported taxable income 

      by a substantial amount. The jury may infer that the defendant's 

      excess net worth increases represent unreported taxable income if the 

      Government either shows a likely source, or negates all possible 

      nontaxable sources. 

      [T]he jury may further infer willfulness from the fact of 

      underreporting coupled with evidence of conduct by the defendant 

      tending to mislead or conceal.

United States v. Sorrentino, 726 F.2d 876, 879-80 (1st Cir. 1984) 

(citations omitted).  See also Holland v. United 

States, 348 U.S. 121, 125 (1954); United States v. Terrell, 754 

F.2d 1139, 1144 (5th Cir. 1985); United States v. Wirsing, 719 F.2d 

859, 871 (6th Cir. 1983); United States v. Greene, 698 F.2d 1364, 

1370 (9th Cir. 1983); United States v. Goldstein, 685 F.2d 179, 182 

(7th Cir. 1982); United States v. Goichman, 547 F.2d 778, 781 (3d 

Cir. 1976); United States v. O'Connor, 273 F.2d 358, 361 (2d Cir. 

1959).

      The Fifth Circuit summarized the steps necessary to establish income 

when applying the net worth method of proof: 

      The government established its case through the "net worth" approach, 

      a method of circumstantial proof which basically consists of five 

      steps: (1) calculation of net worth at the end of a taxable year, (2) 

      subtraction of net worth at the beginning of the same taxable year, 

      (3) addition of non-deductible expenditures for personal, including 

      living, expenditures, (4) subtraction of receipts from income sources 

      that are non-taxable, and (5) comparison of the resultant figure with 

      the amount of taxable income reported by the taxpayer to determine the 

      amount, if any, of underreporting.

United States v. Schafer, 580 F.2d 774, 775 (5th Cir. 1978).

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                  31.03 USE OF NET WORTH METHOD

31.03[1] Inadequate Books and Records

      The net worth method of proof frequently is used when it would be 

difficult or impossible to establish the defendant's taxable income by 

direct evidence. United States v. Dwoskin, 644 F.2d 418, 423 (5th 

Cir. 1981);  Often, the defendant's books and records are inadequate, false, 

or not available to the government.  See, e.g., United States v. 

Shetty, 130 F.3d 1324 (9th Cir. 1997);  United States v. Notch, 

939 F.2d 895, 897-98 (10th Cir. 1991); United States v. Stone, 531 

F.2d 939, 940  n.1 (8th Cir.1976); United States v. Hom Ming Dong, 

436 F.2d 1237, 1240 (9th Cir. 1971).   Although a defendant's books and 

records can be helpful, they are not essential. "[I]n a typical net worth 

prosecution, the Government, having concluded that the taxpayer's records 

are inadequate as a basis for determining income tax liability," seeks to 

establish taxable income by the net worth method. United States v. 

Schafer, 580 F.2d 774, 775 (5th Cir.1978). See also 

Holland v. United States, 348 U.S. 121, 125 (1954); accord 

United States v. Terrell, 754 F.2d 1139, 1144 (5th Cir. 1985).

      Similarly, the net worth method can be used when the defendant has no 

books and records.  In such a case, "willfulness may be inferred by the jury 

from that fact coupled with proof of an understatement of income."  

Holland, 348 U.S. at 128.  See also Campodonico v. 

United States, 222 F.2d 310, 313 (9th Cir. 1955).

31.03[2] Adequate Books and Records

      Although early cases held that the government could not use the net 

worth method in situations in which the defendant had "adequate" books and 

records, the Supreme Court rejected this view in 1954, stating:

      The net worth technique, as used in this case, is not a method of 

      accounting different from the one employed by defendants.  It is not a 

      method of accounting at all, except insofar as it calls upon taxpayers 

      to account for their unexplained income.  Petitioners' accounting 

      system was appropriate for their business purposes; and admittedly, 

      the Government did not detect any specific false entries therein.  

      Nevertheless, if we believe the Government's evidence, as the jury 

      did, we must conclude that the defendants' books were more consistent 

      than truthful, and that many items of income had disappeared before 

      they had ever reached the recording stage. . . . To protect the 

      revenue from those who do not `render true accounts,' the Government 

      must be free to use all legal evidence available to it in determining 

      whether the story told by the taxpayer's books accurately reflects his 

      financial history.

 Holland v. United States, 348 U.S. 121, 131-32 (1954). Thus, the 

state of the defendant's records has no bearing on whether the net worth 

method of proof may be used.

      In the wake of Holland, the Fifth Circuit rejected a 

defendant's claim that the government's use of the net worth method of proof 

was improper because the government did not make a preliminary showing 

regarding the state of the defendant's records.  McGrew v. United 

States, 222 F.2d 458, 459 (5th Cir. 1955); [FN1] accord United 

States v. Vanderburgh, 473 F.2d 1313, 1314 (9th Cir. 1973) (government 

may use the net worth method of proof even where the defendant contends that 

he maintained an allegedly complete and adequate set of books of account); 

United States v. De Lucia, 262 F.2d 610, 614 (7th Cir. 1958). 

31.03[3]  Use With Other Methods

      The government is not limited to a single method of proof and may use 

the net worth method in conjunction with other methods of proof.  

See, e.g., United States v. Abodeely, 801 F.2d 1020, 

1023 (8th Cir. 1986).  In Abodeely, a tax evasion prosecution in 

which the defendant received unreported income from gambling and 

prostitution, the Eighth Circuit discussed the net worth, cash expenditures, 

and bank deposits methods of proof:

      The government may choose to proceed under any single theory of proof 

      or a combination method, including a combination of circumstantial and 

      direct proofs.

Abodeely, 801 F.2d at 1023.  See also United States 

v. Smith, 890 F.2d 711, 713 (5th Cir.1989) (net worth and specific items 

methods of proof combined in a section 7201 prosecution).

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              31.04 PROOF OF NET WORTH -- GENERALLY

      In using the net worth method, the government must:

      1.    Establish an opening net worth with reasonable certainty, 

            i.e., the defendant's net worth at the beginning of the 

            prosecution year.

      2.    Establish the defendant's net worth at the end of the 

            prosecution year, with any excess over opening net worth 

            representing the net worth increase.

      3.    Establish a likely source of taxable income from which the jury 

            could find the net worth increase sprang; or, in the 

            alternative, negate nontaxable sources of income.

      4.    Negate "reasonable explanations" by the taxpayer inconsistent 

            with guilt.

Holland v. United States, 348 U.S. 121 (1954).  See 

also United States v. Massei, 355 U.S. 595 (1958); United 

States v. Notch, 939 F.2d 895, 898 (10th Cir. 1991); United 

States v. Blandina, 895 F.2d 293, 301 (7th Cir. 1989); United States 

v. Koskerides, 877 F.2d 1129, 1137 (2d Cir. 1989); United States v. 

Scrima, 819 F.2d 996, 999 (11th Cir. 1987); United States v. 

Tracey, 675 F.2d 433, 435 (1st Cir. 1982); United States v. 

Scott, 660 F.2d 1145, 1147 (7th Cir. 1981); United States v. 

Dwoskin, 644 F.2d 418, 420, 422 (5th Cir. 1981); United States v. 

Grasso, 629 F.2d 805, 807 (2d Cir. 1980); United States v. 

Hamilton, 620 F. 2d 712, 714 (9th Cir. 1980); United States v. 

Goichman, 547 F.2d 778, 781 (3d Cir. 1976); United States v. 

Bethea, 537 F.2d 1187, 1188-89 (4th Cir. 1976).

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                     31.05 OPENING NET WORTH

31.05[1] Proof -- "Reasonable Certainty"

      Net worth increases are determined by establishing a taxpayer's net 

worth (assets minus liabilities) at the beginning of a given year and then 

comparing this beginning net worth with the taxpayer's net worth at the end 

of the year. December 31 of the year preceding the first prosecution year 

(the opening net worth) is the point from which net worth increases are 

measured.  For example, if the first prosecution year, or the year to be 

measured, is 1993, then the defendant's net worth as of December 31, 1992, 

would be the opening net worth from which to determine whether the 

defendant's net worth increased or decreased in 1993.  The defendant's 1993 

ending net worth would in turn become the opening net worth for 1994, and so 

on.

      Establishing an opening net worth can be equated to the process 

followed when a person goes on a diet.  One of the first things that a 

doctor does is weigh the patient to have a starting point from which to 

determine whether the patient has gained or lost weight.  The patient is 

thereafter weighed at intervals, and comparisons are made with the weight at 

the previous weighing to determine whether or not the diet is working.  The 

same process basically is followed in a net worth computation, except that 

the "weighing" is of the defendant's net worth or wealth on an annual basis.

      The Supreme Court described the need to establish an opening net 

worth, and the standard of proof required to do so: 

      Establishing a Definite Opening Net Worth.  We agree with petitioners 

      that an 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. The importance of accuracy in this figure is 

      immediately apparent, as the correctness of the result depends 

      entirely upon the inclusion in this sum of all assets on hand at the 

      outset.

Holland v. United States, 348 U.S. 121, 132 (1954).

      While every effort should be made to obtain all of the assets and 

liabilities of the defendant at the starting point, the government does not 

have to establish the starting point, or opening net worth, "to a 

mathematical certainty and each case presents its own peculiar 

difficulties."  Smith v. United States, 236 F.2d 260, 266-67 (8th 

Cir. 1956); United States v. Gardner, 611 F.2d 770, 775 (9th Cir. 

1980).  It is sufficient if the government establishes the defendant's 

opening net worth with reasonable certainty -- more than this is not 

required.  Holland, 348 U.S. at 132;  United States v. 

Terrell, 754 F.2d 1139, 1145 (5th Cir. 1985); United States v. 

Sorrentino, 726 F.2d 876, 879 (1st Cir. 1984); United States v. 

Greene, 698 F.2d 1364, 1372 (9th Cir. 1983); United States v. 

Goldstein, 685 F.2d 179, 181 (7th Cir. 1982); United States v. 

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

Carriger, 592 F.2d 312, 313 (6th Cir. 1979); United States v. 

Honea, 556 F.2d 906, 908 (8th Cir. 1977); United States v. 

Goichman, 547 F.2d 778, 781 (3d Cir. 1976);.

      Once the government has established the defendant's opening net worth 

with reasonable certainty, the defendant remains silent "at his peril."  

United States v. Stone, 531 F.2d 939, 942 (8th Cir.1976); see 

also Holland, 348 U.S. at 138-39.  For more information 

concerning the defendant's burden to come forward with reasonable leads, 

see Section 31.13, infra, regarding the "reasonable leads 

doctrine."

      Finally, the government is not required to prove every item in a net 

worth statement submitted in a bill of particulars.  Items included in the 

starting point prior to trial may vary somewhat from the evidence admitted 

at trial.  The Seventh Circuit stated that: 

      This net worth statement, which was introduced into evidence as 

      Government's Exhibit 8, was, in essence, a bill of particulars.  There 

      is no merit in defendant's assertion that these items must be included 

      in the starting point.  There were several items contained in this 

      statement, some of which favored defendant and some Government, which 

      were not substantiated during the trial by admissible evidence.  

      Government's starting point must be based upon items which are 

      supported by evidence introduced during trial.  It is certainly not 

      unusual in cases of this type for the starting point as proved during 

      the trial to vary from the bill of particulars or indictment which are 

      prepared prior to trial.

United States v. Mackey, 345 F.2d 499, 505 (7th Cir. 1965).

31.05[2] Thorough Investigation a Necessity

      An extremely thorough investigation is crucial in proving that the 

government established the defendant's opening net worth with reasonable 

certainty.  As the Ninth Circuit noted, when the government chooses to 

proceed against a defendant using the net worth method of proof, "the 

Government assumes a special responsibility of thoroughness and 

particularity in its investigation and presentation."  United States v. 

Hall, 650 F.2d 994, 999 (9th Cir. 1981).  The burden on the government 

has been described as follows:

      The Government must affirmatively prove an initial amount available to 

      the taxpayer, with evidence that excludes the possibility that the 

      defendant relied on previously accumulated  assets rather than 

      unreported taxable income, United States v.  Marshall, 557 F.2d 

      527, 530 (5th Cir. 1977), without refuting all possible speculation as 

      to sources of funds, however.

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

and remanded, 348 U.S. 905 (1955), aff'd, 221 F.2d 807 (9th 

Cir.1955).

      In United States v. Smith, 890 F.2d 711, 713 (5th Cir. 1989), 

the Fifth Circuit stated that "[w]e join the Seventh Circuit in observing 

that sloppy or mediocre financial and accounting evaluation upon which a 

conviction is obtained can be the genesis for reversal."   See 

also United States v. Terrell, 754 F.2d 1139, 1145 (5th Cir. 

1985) (the government must conduct a meticulous investigation, and the 

investigation techniques and figures are subject to close scrutiny); 

United States v. Breger, 616 F.2d 634, 635-36 (2d Cir.1980).

      A good example of a thorough and detailed investigation is found in 

United States v. Terrell, 754 F.2d 1139 (5th Cir.1985), in which the 

defendant was convicted of evasion for the years 1976 through 1979, and the 

government began its investigation of Terrell's funds with the year 1967.  

Noting that "we can only be surprised by appellant's attack on the 

thoroughness of the Government's investigation", the court described the 

investigation as follows:

      The investigation consumed three and one-half  years.  Approximately 

      20 agents canvassed public records to determine the extent of 

      appellant's holdings.  Thirty banks were contacted, and 20 banks 

      produced documents or witnesses.  Nearly 300 potential witnesses were 

      interviewed, many of them several times.  IRS agents identified in 

      excess of 70 assets purchased and sold by Terrell, and questioned 

      third parties involved in these transactions.  Additionally, every 

      expenditure made by Terrell was traced including all cashier's checks 

      traced back to their sources to determine how they were purchased.

Terrell, 754 F.2d at 1147-48.  For another example of the detailed 

steps required to conduct a net worth investigation, see United 

States v. Sorrentino, 726 F.2d 876, 880 (1st Cir. 1984).

      When using the net worth method, the scope of the investigation and 

the evidence developed must be carefully examined with the goal of 

ascertaining whether the evidence establishes to a reasonable certainty all 

of the defendant's assets and liabilities.  If  the investigation failed to 

establish an opening net worth with reasonable certainty,  the investigation 

must be continued until sufficient additional evidence has been developed.

31.05[3] Evidence Establishing Opening Net Worth

      A legally sufficient opening net worth computation requires an 

extensive and thorough investigation by the Internal Revenue Service agent.  

The opening net worth must include all of the defendant's assets that are 

reasonably discoverable, including assets derived from nontaxable sources of 

income, such as gifts, loans, and inheritances, as well as assets derived 

from taxable income. It would distort taxable income for the year in which 

taxable income is being computed if assets derived from nontaxable sources 

were omitted from the starting point.

      For example, assume that the prosecution year is 1995 and in 1994 the 

taxpayer inherited or borrowed $100,000, which is not accounted for in the 

opening net worth.  If the defendant purchases a house with the $100,000 in 

1995, which is reflected on the defendant's 1995 net worth as an asset, the 

net worth computation would  incorrectly attribute a net worth increase of 

$100,000 to the defendant in 1995.  The effect of this error would be to 

overstate the defendant's income for 1995 because  he had the $100,000 at 

the beginning of the year.   It is important that gifts, inheritances, and 

other nontaxable sources of income acquired during the year for which 

taxable income is being computed are subtracted from the calculated net 

worth increase in order to correctly compute the taxable income under the 

net worth method.

      In United States v. Breger, 616 F.2d 634 (2d Cir.1980), the 

defendant was convicted of evasion and filing false income tax returns for 

the years 1972 through 1974.  In upholding the starting point established by 

the government at trial, the court commented:

      We think the Government met its burden here.  It used information 

      gleaned from a 1969 mortgage application, traced a real estate and 

      cash inheritance from appellant's mother in 1968, and investigated 

      bond statements and checking accounts in order to ascertain 

      appellant's access to funds as of January 1, 1972.  We note that 

      appellant adduced no specific evidence, such as a cash hoard, to 

      suggest that the starting point was inaccurate or misleading.

Breger, 616 F.2d at 634.

      Prior income tax returns of a defendant are relevant and can play a 

significant role in developing a defendant's opening net worth.  Thus, in 

United States v. Mackey, 345 F.2d 499, 504 (7th Cir. 1965), the 

starting point of the net worth computation was December 31, 1955, and the 

court upheld the use by the government of "the income tax returns of 

defendant and his wife from 1929 through December 31, 1955, as a guide in 

determining defendant's net worth at the starting point."  Additionally,  

net worth statements submitted by the defendant either to the government or 

to financial institutions can be particularly helpful in establishing an 

opening net worth.  See, e.g., Smith v. United States, 

348 U.S. 147, 149 (1954); United States v. Honea, 556 F.2d 906, 908 

(8th Cir. 1977); United States v. Balistrieri, 403 F.2d 472, 479 (7th 

Cir. 1968), vacated on other grounds, 395 U.S. 710 (1969).

      In United States v. Mastropieri, 685 F.2d 776, 785 (2d 

Cir.1982), the court noted that less stringent standards with respect both 

to establishing opening net worth and to negating non-taxable income sources 

are justified in a case where the defendants were shown to have gone to 

great lengths to conceal their unreported increases in wealth.  While the 

court observed that the investigation in that case should not be regarded as 

a model, the case does furnish an example of a number of the steps that must 

be taken to establish an opening net worth.  Mastropieri, 685 F.2d at 

779, 783. [FN2]

      For additional cases holding that the government's evidence was 

sufficient to establish the defendant's opening net worth with reasonable 

certainty, see United States v. Greene, 698 F.2d 1364, 1372 

(9th Cir. 1983) (jury could draw adverse inferences from the late stage at 

which defense evidence was disclosed in spite of a motion for reciprocal 

discovery); United States v. Goldstein, 685 F.2d 179, 181 (7th Cir. 

1982) (evasion charged for three years, conviction on only one year, 

sufficient if opening net worth established for year of conviction); 

United States v. Dwoskin, 644 F.2d 418, 420 (5th Cir. 1981) (opening 

net worth based on a financial statement signed by the defendant and 

submitted to a bank); United States v. Schafer, 580 F.2d 774, 

778 (5th Cir.1978); United States v. Giacalone, 574 F.2d 328, 331 

(6th Cir. 1978); United States v. Honea, 556 F.2d 906, 908 (8th Cir. 

1977); United States v. Mancuso, 378 F.2d 612 (4th Cir. 1967), 

amended, 387 F.2d 376 (4th Cir. 1967); United States v. 

Goichman, 407 F.Supp. 980, 986 (E.D. Pa. 1976), aff'd, 547 F.2d 

778 (3d Cir. 1976).

31.05[4] Opening Net Worth Not Established

      In a relatively small number of cases, the courts have found the 

government's proof of the defendant's opening net worth insufficient to 

support a conviction.  For the most part, these are earlier cases, but they 

furnish examples of pitfalls that must be avoided if the opening net worth 

is to be established with reasonable certainty.

      For an example of an erroneous opening net worth computation,  

see United States v. Achilli, 234 F.2d 797, 804 (7th Cir. 

1956), aff'd on other grounds, 353 U.S. 373 (1957).  In 

Achilli, one count of a three-count conviction was reversed because 

the value of a residence sold by the defendant in the first prosecution year 

(1946) was erroneously omitted from the opening net worth computation and 

the error accounted for almost 80 percent of the deficit shown by the 

government's computation.  The error seems to have resulted from an 

oversight by the government, because the sale of the residence omitted from 

the defendant's opening net worth was reported in the capital gains schedule 

of the defendant's 1946 return.  Since the tax return was the only evidence 

with respect to the time when the defendant acquired the property, the 

government conceded that the property should have been included as an asset 

in the computation of the defendant's net worth as of December 31, 1945.  

Achilli, 234 F. 2d at 804.  See also United States 

v. Keller, 523 F.2d 1009, 1011 (9th Cir. 1975) (because the government 

failed to pursue leads (regarding home improvements and furnishings) which 

were reasonably susceptible of being checked, the opening net worth for 1967 

was not reasonably certain and the evidence as to the 1967 count was 

insufficient to go to the jury).

      The importance of the testimony given by the agent who presents the 

government net worth computation and the necessity for testifying fully is 

illustrated in Merritt v. United States, 327 F.2d 820, 821 (5th Cir. 

1964).  The Merritt court reversed a tax evasion conviction because 

the government failed in its burden of identifying which of the defendant's  

assets had not been included in the opening net worth statement. The court 

based its decision on the following testimony of the special agent who drew 

up the net worth schedule:

      Q.    As a matter of fact don't you know that . . . this taxpayer 

            owned assets and had assets that you didn't even take into 

            account in this case?  Don't you know that of your own personal 

            investigation?

      A.    He has some other assets, yes, sir.

      Q.    And this doesn't include all those assets does it?

      A.    No, sir.

            . . . .

      Q.    Are you willing to swear under oath that these  assets 

            represented in your net worth schedule are all and  complete the 

            assets of this taxpayer and all and complete the liabilities of 

            this taxpayer?

      A.    I know there are other assets of the taxpayer.

            . . . .

      A.    My investigation disclosed that the taxpayer would have  other 

            assets.  I know of no other liabilities.

Merritt, 327 F.2d at 821.  The appellate court observed that 

"[n]either counsel asked the Special Agent what these other assets were, and 

his testimony does not reveal what he had in mind."  Merritt, 327 

F.2d at 821.  Thus, the appellate court was unable to "determine whether 

these assets were realty or personalty, or whether they were disposed of 

during the years in question."  Merritt, 327 F.2d at 822.  

      The Merritt case clearly demonstrates the requirement to review 

the net worth computation  in depth with the special agent and to establish 

through testimony that the starting point includes, to a reasonable 

certainty, all of the defendant's assets and liabilities.  On occasion, the 

agent will  omit items from the net worth schedules for good reason.   In 

that event, the agent should questioned on direct examination regarding what 

these items were and why he made the determination to omit those particular 

items.

---

                       31.06 CASH ON HAND

31.06[1] Definition -- Need to Establish

      As one court observed, "the most frequent challenge to the 

government's computations in a net worth case is the opening cash balance."  

United States v. Schafer, 580 F.2d 774, 779 (5th Cir. 1978).  A 

defendant's claim of cash on hand is commonly referred to as a cash hoard 

defense.  A typical cash hoard defense asserts that the defendant in earlier 

years received money from such sources as gifts from family members or 

friends, or an inheritance, which he then spent during the prosecution 

period.  The Supreme Court described the cash hoard defense as follows:

      Among the defenses often asserted is the taxpayer's claim that the net 

      worth increase shown by the Government's statement is in reality not 

      an increase at all because of the existence of substantial cash on 

      hand at the starting point.  This favorite defense asserts that the 

      cache is made up of many years' savings which for various reasons were 

      hidden and not expended until the prosecution period.  Obviously, the 

      Government has great difficulty in refuting such a contention.

Holland v. United States, 348 U.S. 121, 127 (1954).

      While it is often difficult to disprove the existence of a cash hoard, 

the government must establish with reasonable certainty the amount of cash 

that the defendant had in his possession at the beginning of the tax period.  

United States v. Wilson, 647 F.2d 534, 536 n.1 (5th Cir. 1981).  The 

necessity for establishing cash on hand "with reasonable certainty" is well 

summarized in United States v. Terrell, 754 F.2d 1139, 1146-47 (5th 

Cir.1985):

      The question of whether a defendant has a substantial amount of 

      cash-on-hand at the beginning of the indictment period must be 

      carefully investigated because the existence of a cash hoard could 

      greatly distort the net worth evaluation.  Unaccounted for funds that 

      surface during the course of the net worth evaluation might be 

      explained by the fact that a defendant accumulated large sums of cash 

      which he kept on hand and began to spend during the indictment period.

See also United States v. Pinto, 838 F.2d 426, 431 

(10th Cir. 1988).

      A cash hoard defense often can be refuted by circumstantial evidence 

establishing that the defendant either had no cash hoard or spent it before 

the prosecution period. United States v. Ford, 237 F.2d 57 (2d Cir. 

1956), vacated as moot, 355 U.S. 38 (1957).  One way to defeat such a 

claim is to show that the family member or friend alleged to be the source 

of the cash did not have sufficient resources to give the defendant the 

amount claimed. See United States v. Breger, 616 F.2d 634, 636 

(2d Cir.1980); McGarry v. United States, 388 F.2d 862, 865 (1st Cir. 

1967);  United States v. Holovachka, 314 F.2d 345, 354-55 (7th 

Cir.1963) (gifts and loan defense).  See also  

United States v. Calderon, 348 U.S. 160, 165 (1954); Friedberg v. 

United States, 348 U.S. 142, 143 (1954).

      While cash on hand does include the  money that a defendant habitually 

carries in his pocket, Calderon, 348 U.S. at 162, the concept of cash 

on hand is more expansive.  It includes all monies or cash readily available 

to the defendant which are not deposited in a bank or other institution.  

Thus, cash on hand can include:  monies that the defendant had in his safe 

or his business, Calderon, 348 U.S. at 162, and cash kept in a safe 

deposit box and money buried in the defendant's backyard.  United States 

v. Bethea, 537 F.2d 1187, 1190 (4th Cir. 1976); United States v. 

Carter, 462 F.2d 1252, 1255-56 (6th Cir.1972).

      Whenever the defendant claims  a cash hoard prior to indictment, the 

prosecutor should attempt to learn the amount of this cash hoard, its 

source, when it was received, where it was kept, and when and for what 

purpose it was used.  Sometimes, the transactions giving rise to the cash 

hoard occurred long before the prosecution period.  Holland, 348 U.S. 

at 127.  Although the government must eliminate the possibility of a cash 

hoard when determining the defendant's cash on hand, not every far fetched 

explanation offered by a defendant must be accepted at face value.  

See United States v. Smith, 890 F.2d 711 (5th Cir. 1989) 

(defendant never disclosed the existence and source of cash transactions to 

the Special Agent during the investigation but at trial the defendant's 

spouse claimed to have $23,000 in cash in a flower vase and to have saved 

large cash gifts from her parents).  For a cash hoard to have any bearing on 

a net worth computation, the defendant must have spent all or part of it 

during the prosecution years on assets or expenditures that appear in the 

government's net worth statement.  If the cash hoard remains the same 

throughout the prosecution period, this money has no effect on the 

defendant's net worth.  United States v. Giacalone, 574 F.2d 328, 

331-33 (6th Cir. 1978). The failure to use the cash hoard during the 

prosecution years means that any assets acquired during those years were 

acquired with other funds.  See Section 31.08[2], infra.    

       As a practical matter, once the evidence establishes that the 

defendant had cash available at the beginning of the prosecution period, the 

government must produce evidence from which an inference can be drawn that 

the cash was not utilized during the indictment period.  Otherwise, any 

available cash on hand must be subtracted from the computation reflecting 

the net worth increase and nondeductible expenditures.  If it cannot be 

established that the cash hoard remained constant throughout the prosecution 

period, then it must be assumed that any computed net worth increase and 

nondeductible expenditures may be the result of the spending of the 

pre-existing cash.  See McGarry, 388 F.2d at 866.

31.06[2] Jury Question -- Burden of Proof

      The existence of cash on hand at the beginning of the prosecution 

period presents a factual issue for determination by the jury.  Holland 

v. United States, 348 U.S. 121, 134 (1954);  United States v. 

Calderon, 348 U.S. 160, 162-63 (1954); United States v. Breger, 

616 F.2d 634, 635 (2d Cir. 1980); United States v. Carter, 462 F.2d 

1252, 1256 (6th Cir. 1972); Hayes v. United States, 407 F.2d 189, 193 

(5th Cir.1969); McGarry v. United States, 388 F.2d 862, 868 (1st Cir. 

1967); United States v. Vardine, 305 F. 2d 60, 64-65 (2d Cir. 1962) 

(conflicting testimony left to the jury and government properly based its 

net worth summary on its version of the facts); Fowler v. United 

States, 352 F.2d 100, 107 (8th Cir. 1965).

      The foregoing cases demonstrate that as long as there is evidence from 

which a jury can conclude that the government has established the amount of 

cash on hand with reasonable certainty, the defendant is not entitled to a 

judgment of acquittal on this issue.  See, e.g., United 

States v. Blandina, 895 F.2d 293, 302 (7th Cir. 1989); United States 

v. Wilson, 647 F.2d 534, 536 n.1 (5th Cir. 1981); Breger, 616 

F.2d at 635.

      Once  the government has established that a thorough investigation 

failed to uncover evidence of cash on hand, the burden shifts to the 

defendant to come forward with evidence of cash and he remains silent at his 

peril.  United States v. Mackey, 345 F.2d 499, 506 (7th Cir. 1965).  

This burden arises because "[w]hether defendant had substantial sums of cash 

at the starting point is a matter within defendant's knowledge."  

Mackey, 345 F.2d at 506.  See also Holland, 348 

U.S. at 138-39; United States v. Mastropieri, 685 F.2d 776, 785 (2d 

Cir. 1982); Fowler, 352 F.2d at 107; United States v. 

Holovachka, 314 F.2d 345, 354 (7th Cir. 1963).

31.06[3] Amount of Cash on Hand

      The net worth computation must reflect the amount of the defendant's 

cash on hand for each year.  However, once the government has established 

the initial cash on hand, it becomes a matter of showing for a subsequent 

year the amount of any prior cash that the defendant still had on hand plus 

any cash on hand acquired during the year under consideration.  Any cash on 

hand acquired during a prosecution year, which is still on hand at the end 

of the year, will increase the defendant's net worth unless the cash on hand 

was derived from a nontaxable source, such as a gift or inheritance.

      The amount of cash on hand reflected in the defendant's opening net 

worth will depend on the evidence established by the investigation.  In 

United States v. Goldstein, 685 F.2d 179 (7th Cir. 1982), the 

defendant was charged with evasion and was acquitted for the tax years 1974 

and 1975, but convicted for the tax year 1976.  The government established 

the defendant's opening net worth as of 1973 and thereafter introduced 

evidence of the defendant's net worth for each of the years 1974, 1975, and 

1976.  With regard to the defendant's argument that cash on hand was 

underestimated by the government, the court pointed out that the government 

could establish a 1976 opening net worth by establishing a net worth in an 

earlier year and then calculating the effect of income and disbursements.  

The court concluded that the government need not prove the cash on hand at 

the beginning of each year with evidence independent of the other years.  

Goldstein, 685 F.2d at 181.  Accord United States v. 

Pinto, 838 F.2d 426, 431-32 (10th Cir. 1988).  Thus, the government's 

calculations of income and disbursements based on a starting point were 

adequate to prove the opening net worth for 1976.

      In some instances, cash on hand may be appropriately reflected as 

zero. See, e.g., United States v. Mastropieri, 685 F.2d 

776, 779 (2d Cir.1982); United States v. Goichman, 407 F. Supp. 980, 

986 (E.D. Pa.), aff'd, 547 F.2d 778 (3d Cir. 1976).  In other 

instances, the evidence may be such that cash on hand can be reflected as a 

nominal amount.  See, e.g., United States v. Carriger, 

592 F.2d 312, 314 (6th Cir. 1979) ($500); Goldstein, 685 F.2d at 181 

($100).  In Carriger, cash on hand had no effect on the defendant's 

net worth because the evidence established that the defendant had $500 in 

cash on hand at the beginning of the prosecution period and $500 on hand at 

the end of the prosecution period.  Thus, there was no increase or decrease 

in the defendant's net worth arising from cash on hand.

      There are also instances where the government investigation indicates 

a negative cash position, i.e., that an analysis of the defendant's 

financial transactions in years prior to the prosecution period indicates 

that the defendant spent more than was available on the basis of his prior 

returns. 

      The facts of a case may be such that the evidence justifies an 

assumption that any cash on hand that did exist remained constant, though 

unknown, throughout the period covered.  This situation arose in United 

States v. Giacalone, 574 F.2d 328 (6th Cir. 1978).  In Giacalone, 

the defendant was a professional gambler, and the net worth statement 

assumed the existence of  a bank roll of cash which remained approximately 

the same throughout the period covered.  The government in its computation 

used a dash rather than a dollar amount to represent the cash on hand.  The 

dashes symbolized an unknown, presumably constant, amount.  The court 

concluded that the use of dashes did not invalidate the net worth statement 

and that "[t]he effect of using the dashes is no different from the use of 

zeroes approved in United States v. Goichman, [407 F. Supp. 980 (E.D. 

Pa. 1976), aff'd, 547 F.2d 778 (3d Cir. 1976)]."  Giacalone, 

574 F.2d at 331-33.  Reflecting cash on hand with dashes was a practical 

solution because it avoided "the untenable assumption that a professional 

gambler could operate without any cash." Giacalone, 574 F.2d at 333.  

Accord, United States v. Scrima, 819 F.2d 996 (11th Cir. 1987) 

(floating cash or "dash" method approved in prosecution of a marijuana 

smuggler).

---

                 31.07 EVIDENCE OF CASH ON HAND

31.07[1] Evidence of Financial Deprivation

      In establishing cash on hand and disproving a claim of a cash hoard, 

the government may use circumstantial evidence.  In Holland v. United 

States, 348 U.S. 121, 132 (1954), the defendants claimed opening cash on 

hand of $113,000 and the government allowed $2,153.09.  The government did 

not introduce any direct evidence to dispute the defendant's claim.  

Instead, the government relied on the inference that anyone who had the cash 

the defendants claimed to have would not have "undergone the hardship and 

privation endured by the Hollands all during the late 20's and throughout 

the 30's." Holland, 348 U.S. at 133.  The case provides an excellent 

example of a thorough investigation, which traced the financial picture of 

the Hollands as far back as 1913 (the first prosecution year was 1948), and 

serves as a model for the type of circumstantial evidence that is admissible 

to refute a cash hoard defense.  Another example of the government defeating 

a cash hoard defense by "painstakingly" tracing the defendant's finances 

over a period of  years can be found in Friedberg v. United States, 

348 U.S. 142, 143 (1954) (decided the same day  Holland).  See 

also United States v. Carter, 462 F.2d 1252 (6th Cir. 1972).  

See also United States v. Ford, 237 F.2d 57, 59, 63 (2d 

Cir. 1956), vacated as moot, 355 U.S. 38 (1957); Gariepy v. United 

States, 189 F.2d 459, 461 (6th Cir. 1951).  

      On the other hand,  the government must introduce evidence which 

demonstrates more than the fact that the defendant was poor at an early 

point in his life.  The evidence must trace the defendant's financial 

history up to the starting point.  "Proof that the taxpayer was impoverished 

by the depression, that he was working for his meals at $8 a week in 1935, 

is too remote, absent proof of the taxpayer's financial circumstances in the 

intervening years." United States v. Calderon, 348 U.S. 160, 164 

(1954) (first prosecution year was 1946). 

31.07[2] Admissions of Defendant

      In establishing an opening net worth, the government will often rely 

on statements made by the defendant to investigating agents, as well as to 

third parties.  See, e.g., Holland v. United States, 

348 U.S. 121, 128 (1954) (statements made to agents); United States v. 

Goldstein, 685 F.2d 179, 182 (7th Cir. 1982) (admissions in the form of 

financial statements).  Statements made by a defendant are admissible as 

admissions.  Fed. R. Evid. Rule 802(d)(2)(A).

      Admissions are a fertile source of information, useful both in 

establishing cash on hand and in refuting cash hoard defenses.  A 

distinction must be made, however, between admissions made by a defendant 

prior to the crime (pre-offense admissions) and admissions made after the 

crime (post-offense admissions).

      31.07[2][a] Pre-Offense Admissions  

      Admissions made by a defendant prior to the crime do not have to be 

corroborated.  Warszower v. United States, 312 U.S. 342, 347 (1941); 

United States v. Soulard, 730 F.2d 1292, 1298 (9th Cir. 1984); 

United States v. Hallman, 594 F.2d 198, 200-01 (9th Cir. 1979) 

(corroboration not required of admission in financial statement filed by the 

defendant with a bank prior to the investigation conducted by the Internal 

Revenue Service); Fowler v. United States, 352 F.2d 100 (8th Cir. 

1965) (loan application was filed before crimes in controversy occurred, and 

admissions made on application need not be corroborated).

      31.07[2][b] Post-Offense Admissions 

      As a general rule, post-offense admissions must be corroborated. 

United States v. Calderon, 348 U.S. 160 (1954); Smith v. United 

States, 348 U.S. 147, 152-53 (1954).  Generally speaking, in a criminal 

tax case, a post-offense admission would be a statement made after the 

filing of a false return or, if no return is filed, after the return was 

due.

      In Smith, 348 U.S. 147, the defendant's opening net worth was 

based on a signed net worth statement given to the investigating agents by 

the defendant, as well as other extrajudicial admissions made by the 

defendant. Smith, 348 U.S. at 152.  The Court found that the 

government could corroborate the defendant's statement in one of two ways: 

(1) either by substantiating the opening net worth directly; or (2) by 

independent evidence as to the defendant's conduct during the prosecution 

years, "which tends to establish the crime of tax evasion without resort to 

the net worth computation." Smith, 348 U.S. at 157-58.        The 

government successfully relied on the second method to corroborate the 

defendant's post-offense admissions in Calderon, by showing a 

substantial increase in the defendant's assets that were sufficiently at 

variance with his reported income to support an inference of tax evasion. 

Calderon, 348 U.S. at 166- 67.   

      Corroborative evidence of post-offense statements by a defendant 

regarding cash on hand is sufficient if it shows a substantial income 

deficiency for the overall prosecution period.  It is not necessary for the 

corroborative evidence, as opposed to the evidence as a whole, to establish 

that there was a deficiency for each of the years in issue.  

Calderon, 348 U.S. at 168. Accord United States v. 

Vardine, 305 F.2d 60, 65 (2d Cir. 1962) (evidence that defendant 

periodically borrowed money to meet payrolls and other indebtedness, and 

that there were frequently judgments outstanding against him tended to 

corroborate figures defendant gave to agents). [FN3]

      The Fifth Circuit, however, has held that it is not always necessary 

to corroborate post-offense admissions as to cash on hand.  In United 

States v. Normile, 587 F.2d 784, 786 (5th Cir. 1979), proof of cash on 

hand was based on the defendant's statement to the agent that "he kept no 

more than $100 in cash because he did not feel safe having larger amounts 

around."  In response to the defendant's claim that the government failed to 

corroborate this statement, the court stated that it "was not necessary for 

the government to seek to corroborate the taxpayer's statement; indeed the 

inherent secrecy of the cash hoard makes it impossible for any but the 

keeper to know even of its existence, let alone the amount."  

Normile, 587 F.2d at 786.  Nevertheless, the court found that 

independent evidence of substantial bank accounts did "tend to corroborate" 

the defendant's admission, even though the government introduced no evidence 

to corroborate the admission directly.  Normile, 587 F.2d at 786-87.  

See United States v. Terrell, 754 F.2d 1139, 1147 (5th Cir. 

1985) (corroboration requirement does not necessarily extend to admissions 

relating to cash-on-hand); United States v. Wilson, 647 F.2d 534, 536 

n.1 (5th Cir. 1981).  But see United States v. 

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

also United States v. Scrima, 819 F.2d 996 (11th Cir. 1987) in 

which a marijuana smuggler told agents during the investigation that he 

maintained only $500 in cash on hand but claimed at trial that he had an 

undisclosed cash hoard of $375,000 at the beginning of the indictment 

period. The court found that "the government is not required to corroborate 

the taxpayer's statement with respect to his cash on hand at the beginning 

of the tax period.  After everything possible is done to verify the opening 

net worth, the issue of the amount of the defendant's cash hoard is properly 

submitted to the jury." Scrima, 819 F.2d 996 n.3

31.07[3] Tax Returns As Admissions

      "Statements made in an income tax return constitute admissions." 

United States v. Dinnell, 428 F. Supp. 205, 208 (D. Az. 1977), 

aff'd without published opinion, 568 F.2d 779 (9th Cir. 1978). See 

United States v. Hornstein, 176 F.2d 217, 220 (7th Cir. 1949) (cost 

of goods sold).  Items reported on returns that are the subject of the 

prosecution, as well as earlier filed returns, are pre-offense admissions 

which do not have to be corroborated.  United States v. Burkhart, 501 

F.2d 993, 995 (6th Cir. 1974) (citing cases).  The government may take the 

taxpayer's reported income as an admitted amount earned from designated 

sources. As to the admissibility of a defendant's tax returns, see 

also Fed. R. Evid. Rule 801(d)(2)(A).

      The defendant's income tax returns are frequently used in a net worth 

case as a guide in determining the defendant's net worth at the starting 

point. See, e.g., United States v. Mackey, 345 F.2d 

499, 504 (7th Cir. 1965).  Admissions found in the defendant's tax returns 

for earlier years can be particularly helpful in negating a cash hoard 

defense when the returns show that reported income in previous years was 

insufficient to enable the defendant to save any appreciable amount of 

money.  Friedberg v. United States, 348 U.S. 142, 143-44 (1954); 

Holland v. United States, 348 U.S. 121, 134 (1954); United States 

v. Terrell, 754 F.2d 1139, 1147 (5th Cir. 1985); United States v. 

Hamilton, 620 F.2d 712, 715 (9th Cir. 1980) United States v. 

Bush, 512 F.2d 771, 772 (5th Cir. 1975) (defendant's tax return 

reflecting zero cash on hand supported government position); United 

States v. Ross, 511 F.2d 757, 761 (5th Cir. 1975); United States v. 

Carter, 462 F.2d 1252, 1255 (6th Cir. 1972); United States v. 

Northern, 329 F.2d 794, 795 (6th Cir. 1964) (value of machines in 

inventory taken from defendant's tax return); Leeby v. United States, 

192 F.2d 331, 333 (8th Cir. 1951);.

31.07[4] Statements Given to Financial Institutions

      Statements given to financial institutions are another fruitful source 

of evidence regarding a taxpayer's cash on hand, as well as other assets and 

liabilities.  Friedberg v. United States, 348 U.S. 142, 144 (1954) 

(loan application); United States v. Dwoskin, 644 F.2d 418, 420 (5th 

Cir. 1981) (financial  statement); United States v. Hallman, 594 F.2d 

198, 200 (9th Cir. 1979) (financial statement); Fowler v. United 

States, 352 F.2d 100, 107 (8th Cir. 1965) (loan applications); United 

States v. Norris, 205 F.2d 828, 829 (2d Cir. 1953) (loan application).

      In Dwoskin, 644 F.2d at 420, the defendant's opening net worth, 

including cash on hand and cash unrestricted in banks, was based on a signed 

financial statement the defendant had submitted to a bank.  The government 

did not include in its cash on hand figure $11,000 in an account on which 

the defendant held as a trustee for his children because there was no 

evidence that the defendant used the funds; indeed, the account had a higher 

balance subsequent to the prosecution years.  

      Financial statements also can be used to impeach a defendant 

testifying at trial.  Thus, in Bateman v. United States, 212 F.2d 61, 

67 (9th Cir. 1954), the defendant testified that he had $13,000 in cash and 

the government introduced, "as competent impeaching evidence," a financial 

statement that the defendant had given a bank showing cash of only $100.

31.07[5] Defendant's Books and Records

      The defendant's business books and records are admissible, as records 

of a regularly conducted business activity, Fed. R. Evid. Rule  803(6), and 

as admissions.  United States v. Hornstein, 176 F.2d 217, 220 (7th 

Cir. 1949).  See Paschen v. United States, 70 F.2d 491, 501 

(7th Cir. 1934) (not necessary for government to prove the books and records 

are correct).  In some instances, the defendant's books and records can 

establish the starting point.  See, e.g., United States v. 

Chapman, 168 F.2d 997, 1002 (7th Cir. 1948) (government entitled to 

expect that books furnished for examination by taxpayer would be correct, 

and a verification of their accuracy cannot be called an 'uncorroborated 

admission').

      The defendant's books and records also can be used to refute an attack 

on the computation of cash on hand.  In United States v. Mackey, 345 

F.2d 499, 505 (7th Cir. 1965), an annual statement of the defendant's 

corporation revealed that the corporation had less cash than the amount 

claimed by the defendant.

      Finally, it should be noted that entries in the books and records of 

the defendant are valuable in establishing the financial history of the 

defendant in early years, the defendant's business activities during the 

prosecution years, and the defendant's assets and liabilities.

31.07[6] Statements of Accountants and Attorneys

      When the defendant directs the investigating agents to his accountant 

or bookkeeper for questions relating to taxes, any statements made by the 

accountant or bookkeeper are admissions, and agents can testify as to these 

statements. United States v. Diez, 515 F.2d 892, 896 n.4 (5th Cir. 

1975); Hayes v. United States, 407 F.2d 189, 192 (5th Cir. 1969).  

Rule 801(d)(2)(D), Fed. R. Evid., provides that a statement by the 

defendant's agent (e.g., bookkeeper) "concerning a matter within the 

scope of his agency or employment made during the existence of the 

relationship" is an admission, whether the defendant has authorized the 

making of the particular statement or not.  See United States v. 

Parks, 489 F.2d 89, 90 (5th Cir. 1974).  Statements of the defendant's 

bookkeeper or accountant concerning matters within the scope of their 

activity or employment are admissible against the defendant as admissions.  

Fed. R. Evid. Rule 801(d)(2)(C) or (D); United States v. Parks, 489 

F.2d 89, 90 (5th Cir. 1974).

      These cases relied upon the absence of an  accountant-client privilege 

because the defendant,  knowing that mandatory disclosure of much of the 

information therein is required on an income tax return,  had no expectation 

of privacy in documents and information provided to return preparers.  

Couch v. United States, 409 U.S. 322 (1973). The Court in 

Couch also noted that no confidential accountant-client privilege 

exists under federal law, and no state-created privilege has been recognized 

in federal cases. Couch, 409 U.S. at 335 (citations omitted).   

      Note that the cases discussed above were decided prior to the 

Internal Revenue Service Restructuring and Reform Act of  1998 (the Act). 

Section 7525 of the Internal Revenue Code provides: 

Confidentiality privileges relating to taxpayer communications

(a) Uniform application to taxpayer communication with federally authorized  

practitioners.

(1)  General rule.  With respect to tax advice, the same common law 

protections of confidentiality which apply to a communication between a 

taxpayer and an attorney shall also apply to a communication between a 

taxpayer and any federally authorized tax practitioner to the extent the 

communication would be considered a privileged communication if it were 

between a taxpayer and an attorney.  

(2)  Limitations.  Paragraph (1) may only be asserted in

(A) any noncriminal tax matter before the Internal Revenue Service; and

(B) any noncriminal tax proceeding in Federal court brought by or against 

the United        States.

(3)  Definitions.  For purposes of this subsection

(A) Federally authorized tax practitioner.  The term "federally authorized 

tax practitioner" means any individual who is authorized under Federal law 

to practice before the Internal Revenue Service if such practice is subject 

to Federal regulation under section 330 of title 31, United States Code. 

(B)  Tax Advice.  The term "tax advice" means advice given by an individual 

with respect to a matter which is within the scope of the individual's 

authority to practice described in subparagraph (A).

      Thus, by its own terms, the Act does not create an unlimited 

accountant- client privilege.  The Act provides that the privilege may only 

be asserted in (A) any non-criminal tax matter before the Internal Revenue 

Service; and (B) any noncriminal tax proceeding in Federal court brought by 

or against the United States.  Section 7525 (2)(A) and (B).  Furthermore, it 

only applies to communications between a taxpayer and a federally authorized 

practitioner.  Thus, the privilege is not available in a criminal 

investigation or criminal court proceeding, but would apply in the context 

of a civil audit.      

      Additionally, the Act specifically excludes from the  privilege  any 

written communications regarding corporate tax shelters.  26 U.S.C. § 

7572(b).  That Section provides:

(b) Section not to apply to communications regarding corporate tax shelters.  

The privilege under subsection (a) shall not apply to any written 

communication between a federally authorized tax practitioner and a 

director, shareholder, officer, or employee, agent, or representative of a 

corporation in connection with the promotion of the direct or indirect 

participation of such corporation in any tax shelter (as defined in section 

6662(d)(2)(C)(iii)).

Thus,  written communications with a representative of a corporation 

in connection with efforts to persuade the corporation to participate in a 

tax shelter are excluded from the privilege.  Note that tax shelters are 

defined as: 

(iii) Tax shelter.  For purposes of this subparagraph, the term "tax 

shelter" means

      (I)  a partnership or other entity,

      (II) any investment plan or arrangement, or

      (III) any other plan or arrangement,

if a significant purpose of such partnership, entity, plan, or arrangement 

is the avoidance or evasion of Federal income tax.

      Additionally, in cases in which the accountant  has been employed by 

the defendant's attorney to assist the attorney in communicating with the 

client and rendering legal advice, statements of the accountant may fall 

within the attorney-client privilege.  United States v. Gurtner, 474 

F.2d 297 (9th Cir. 1973); United States v. Mierzwicki, 500 F. Supp. 

1331, 1335 (D.Md. 1980).  The most familiar situation occurs when the 

attorney hires an accountant to assist the attorney's representation of the 

taxpayer. See United States v. Kovel, 296 F.2d 918 (2d 1961).  

A Kovel accountant is protected by an extension of the attorney- 

client privilege.

      In the case of attorneys, statements made by a taxpayer's attorney may 

be admissible as admissions of a party-opponent pursuant to Fed. R. Evid. 

801(d)(2) if it is shown that the statements are not barred by the 

attorney-client privilege.  A statement by a taxpayer's attorney attorney is 

not privileged if it was authorized by the client and concerned the subject 

authorized. United States v. Ojala, 544 F.2d 940, 945-46 (8th Cir. 

1976).  The court in Ojala admitted into evidence the attorney's 

statement that the taxpayer's failure to file was not the result of his 

political beliefs.  The court found that the "statements were made in an 

unequivocal manner by one who was acting as the appellant's attorney at the 

time, and that they referred to a matter within the scope of the attorney's 

authority."  Ojala, 544 F.2d at 946.  The court also noted that the 

taxpayer was present when the statement was made and voiced no objection.  

Id.  

      Another court admitted into evidence a statement by  a taxpayer's 

attorney which contradicted the taxpayer's assertion that he had filed his 

tax returns. United States v. O'Connor, 433 F.2d 752, 755-56 (1st 

Cir. 1970). The O'Connor court observed that the attorney's statement 

did not exceed scope of attorney's  actual authority.   The court further 

observed that it might rule otherwise if there had been evidence that the 

taxpayer told his attorney not to make the statement or to "confine himself 

to the position adoped by the defendant."  Id. at 756.  The court 

found that it was "clearly within the power and duty of the attorney to do 

what he could, in his own best judgment, [to aid the taxpayer]."  Id. 

       Note, however, that courts have generally held that the preparation 

of tax returns does not constitute legal advice within the scope of the 

attorney-client privilege.  In Re Grand Jury Investigation 

(Schroeder), 842 F.2d 1223, 1224 (11th Cir. 1987); United States v. 

Lawless, 709 F.2d 485, 487-88 (7th Cir. 1983); United States v. El 

Paso, 682 F.2d 530, 539 (5th Cir. 1982); United States v. 

Gurtner, 474 F.2d 297, 298-99 (7th Cir. 1973).  But see Colton 

v. United States, 306 F.2d 633, 637 (2d  Cir. 1962) ("There can, of 

course be no question that the giving of tax advice and the preparation of 

tax returns . . . are basically matters ssufficiently within the 

professional competence of an attorney to make them prima facie subject to 

the attorney-client privilege.").

31.07[7] Accountant's Workpapers

      An accountant's workpapers can be useful in establishing opening net 

worth figures, including cash on hand, as well as in establishing assets and 

liabilities during the prosecution period.  Prior to the Act, the workpapers 

could be obtained, because there was  no accountant-client privilege, 

Couch v. United States, 409 U.S. 322, 335 (1973), nor  a work-product 

privilege with respect to workpapers.  United States v. Arthur Young & 

Co., 465 U.S. 805, 817 (1984).  The Internal Revenue Service 

Restructuring and Reform Act of 1998, discussed above, by its plain 

language, applies only to communications between a taxpayer and his 

accountant. It does not create a work- product privilege.  Presumably, both 

the communications and the workpapers can be acquired in criminal cases.   

An accountant's workpapers are records which the accountant kept in the 

ordinary course of business and may, with a proper foundation, be admissible 

as exceptions to the hearsay rule pursuant to  Fed. R. Evid. Rule 803(6).  

Of course, it would be necessary to demonstrate that the information relied 

upon by the accountant was provided by the taxpayer or an individual 

authorized by the taxpayer to provide such information to the accountant.

31.07[8] Source and Application of Funds Analysis

      Another method of establishing starting point cash on hand is to 

analyze the defendant's available finances for the years leading up to the 

starting point.  This method is known as a source and application of funds.  

Using this method, the government determines the amount of money available 

to the defendant during the earlier years, and the amount that the defendant 

spent.   

      For example, if the evidence demonstrates that the defendant had 

$100,000 available from all sources, both taxable and nontaxable, and that 

the defendant spent $90,000, this would leave only $10,000 as cash on hand.  

This was the approach taken in United States v. Terrell, 754 F.2d 

1139, 1143 (5th Cir. 1985), in which the defendant was not credited with any 

cash on hand on the basis of a source and application of funds analysis 

showing that the defendant's expenditures in prior years exceeded his 

reported income plus nontaxable gifts by $229,000.  As in the case of 

establishing opening net worth, a thorough investigation is required to 

support a source and application of funds analysis sufficient to establish 

cash on hand with reasonable certainty. Terrell, 754 F.2d at 1146-47.  

See also United States v. Goichman, 407 F. Supp. 980, 

994-95 (E.D. Pa.), aff'd, 547 F.2d 778 (3d Cir. 1976).