31.08 NET WORTH ASSETS

31.08[1] Reflected at Cost -- Generally

      As a general rule, when establishing the net worth of a taxpayer, 

assets are reflected at cost and not at fair market value.  Thus, if a 

taxpayer buys a house for $50,000, the house is reflected as a net worth 

asset at $50,000, even though the house may be worth $100,000 in the year 

for which the taxpayer's net worth is being determined.

      Assets are generally reflected in a net worth statement at cost 

because the net worth method is concerned not with value (which may result 

from appreciation rather than the receipt of taxable income) but only with 

actual costs and expenditures.  

United States

 v. O'Connor, 237 F.2d 

466, 473 n.6 (2d Cir. 1956).  See 

United States

 v. Terrell, 

754 F.2d 1139, 1145 (5th Cir. 1985) (using a cost basis to determine net 

worth means that assets preexisting the indictment period are a source of 

nontaxable funds only to the extent of  basis); Hayes v. United 

States, 407 F.2d 189 (5th Cir. 1969) (cost of partially constructed 

apartments taken from defendant's income tax return, and cost of land based 

on information furnished by the defendant's accountant).

      As an exception to this general rule, cost is not used when the 

Internal Revenue Code dictates that a basis other than cost be used in 

determining tax consequences.  For example, if services are paid for in 

property, then the fair market value of the property is included as 

compensation in gross income.  Treas. Reg. § 1.61-2(d) (26 C.F.R.).  In 

this situation, property received in exchange for services would be 

reflected at its fair market value in the net worth computation.  For other 

examples of situations where an asset would be reflected at a figure other 

than cost, see 26 U.S.C. § 1014(a) (basis of property acquired 

from a decedent is the fair market value of the property at the date of the 

decedent's death); 26 U.S.C. § 1015 (basis of property acquired by 

gifts and transfers in trust).

31.08[2] Across the Board Assets

      An across the board asset is an asset which the taxpayer owned in the 

opening year and  continued to own throughout the prosecution years, with no 

increase or decrease in the cost of the asset.  Since a net worth 

computation measures changes, an across the board asset does not affect a 

taxpayer's net worth.  For example, assume that the prosecution years are 

1995 through 1998, and the defendant purchased stock for $10,000.00 in 1994 

and still owned the same stock at the end of 1998.  There would be no change 

in the basis of the stock, and the effect on the defendant's net worth would 

be zero.  Because an across the board asset does not affect the net worth 

computation, it has been held that it is not error to leave such an asset 

out of the net worth computation. 

United States

 v. Mackey, 345 F.2d 

499, 505 (7th Cir. 1965).

       It is not necessary for the government to establish the basis for 

every asset the taxpayer owns.  

United States

 v. Schafer, 580 F.2d 

774, 778 (5th Cir. 1978).  It is sufficient for the government to identify 

with reasonable specificity the basis in every asset, including cash, in 

which a purchase or sales transaction occurred in the tax years in question. 

Schafer, 580 F.2d at 778.  Note, however, that in Schafer, the 

court assumed that possible omitted assets were across the board assets.

      In 

United States

 v. Tolbert, 406 F.2d 81, 84 (7th Cir. 1969), 

the government's net worth computation reflected the defendant's accounts 

receivable as an across the board asset for all of the years in question.  

The government figure was based on a statement the defendant had given the 

agents. There was testimony at the trial that the accounts receivable had 

increased during the prosecution years.  The court rejected the defendant's 

argument that it was reversible error not to reflect the alleged increase,  

observing that if the accounts receivable did increase during the 

prosecution years, the error in failing to reflect the increase was in the 

defendant's favor and did not prejudice him.  The court found that there 

would be prejudice only if the evidence showed that the accounts receivable 

had decreased during the prosecution years.  Tolbert, 406 F.2d at 84.  

See also United States v. Scrima, 819 F.2d 996, 999 

(11th Cir. 1987) ("government employed the floating cash or dash formula 

where cash is an unknown but constant factor throughout the net worth 

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

1985); 

United States

 v. Dwoskin, 644 F.2d 418, 421 (5th Cir. 1981).

31.08[3] Bank Accounts and Nominee Accounts

      Money in the bank represents an asset in a net worth computation.  In 

the usual situation, it is a relatively simple matter to determine how much 

money the defendant had in the bank at the end of each year, with the 

balance being reflected in the net worth statement.  However, all 

outstanding checks should be subtracted from the end of the year bank 

statement balance otherwise the  balance would be inflated.  United 

States v. Vardine, 305 F.2d 60, 65 (2d Cir. 1962).  Similarly, deposits 

in transit are added to the end of the year statement balance.

      In a number of instances, the taxpayer will have maintained bank 

accounts in the names of family members or in the names of third-party 

nominees.  It must then be determined whether the money in the account was 

supplied by the defendant.  If so, the bank balances are included in the 

defendant's net worth. This was the case in 

United States

 v. 

Balistrieri, 403 F.2d 472, 479 (7th Cir. 1968), vacated and remanded 

on other grounds, 395 U.S. 710 (1969), aff'd after remand, 436 

F.2d 1212 (7th Cir. 1971).  There, the defendant attacked the propriety of 

including cash that had been deposited in the bank in his name and the name 

of his nineteen-year old son in the defendant's net worth computation.  

Rejecting the defendant's argument, the court found that the jury had ample 

grounds to believe that the money was in fact the defendant's, since the 

government proved that the defendant controlled the account and withdrew a 

substantial amount from it.  Balistrieri, 403 F.2d at 479.  

See also Talik v. United States, 340 F.2d 138, 141 (9th 

Cir. 1965) (attributing entire balance in account to defendant was justified 

because either the account belonged to defendant or any money belonging to 

the daughter was a gift from her parents).

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

      In determining a defendant's opening net worth, consideration must be 

given to assets and liabilities of a non-defendant spouse and children.  

Such assets and liabilities need not be included in the government's 

computation where the net effect of inclusion would be de minimis.  The 

government, however, must have investigated  a spouse's and/or child's 

assets and liabilities before deciding not to include  them in the 

computation.  

United States

 v. Goichman, 407 F. Supp. 980, 995-96 

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

      A failure to conduct such an investigation of the defendant's spouse 

resulted in a reversal in United States v. Meriwether, 440 F.2d 753 

(5th Cir. 1971).  The court held that the government failed to establish 

with reasonable certainty a definite opening net worth of the joint income 

of Meriwether and his wife, saying that the government "came near ignoring 

Mrs. Meriwether."  Meriwether, 440 F.2d at 755.

      The Ninth Circuit appears to disagree with the Fifth Circuit, however, 

holding that the government is not required to establish the net worth of 

the defendant's spouse as part of its prima facie case.  

United States

 v. 

Hallman, 594 F.2d 198, 200 (9th Cir. 1979).  Instead, the government's 

duty to investigate spousal assets only arises under its obligation to 

negate reasonable explanations or leads furnished by the defendant. 

Hallman, 594 F.2d at 200.  However, unless merited by the particular 

circumstances of a given case, consideration always should be given to the 

assets and liabilities of a spouse.

      A somewhat different issue is whether the government can use a joint 

net worth statement for both husband and wife.  The Fifth and Sixth Circuits 

have answered in the affirmative.  In 

United States

 v. Brown, 667 

F.2d 566 (6th Cir. 1982), both husband and wife were tried and convicted of 

income tax evasion.  The court concluded that the government's use of a 

joint net worth statement was "justified," even though the wife was the 

nominal owner of the business that was the source of the unreported income, 

because "the financial affairs of the two defendants were so intertwined as 

to justify a joint reconstruction of their income."  Brown, 667 F.2d 

at 568.

      In a non-defendant spouse case, United States v. Giacalone, 574 

F.2d 328 (6th Cir.1978), the government's evidence showed that the 

defendant's wife earned no income prior to and during the prosecution years, 

that she made some nondeductible expenditures with funds furnished by her 

husband, and that she and her husband filed joint returns.  Because the 

defendant was charged with attempting to evade taxes owed by both him and 

his wife, and "her financial transactions were intertwined with those of her 

husband," the court approved the government's use of a joint net worth 

statement.  Giacalone, 574 F.2d at 333.

      In 

United States

 v. Smith, 890 F.2d 711, 714 (5th Cir. 1989), 

the Fifth Circuit relied on Brown and Giacalone in rejecting a 

defendant's claim that the government was required to exclude assets of the 

defendant's spouse and child to ensure the accuracy of the net worth 

analysis.  In Smith, the government excluded both the income of the 

defendant's daughter and gifts to the defendant's wife and daughter before 

arriving at a final net worth determination of the defendant and his spouse.  

The court stated that the "fabric of the financial blanket is so closely 

woven that a computation of net worth on the joint income of the spouses is 

clearly permissible."  Smith, 890 F.2d at 714.

31.08[5] Real Property

      Real property is reflected in the net worth computation at cost, 

unless the realty falls within one of the exceptions, such as realty 

received as an inheritance.  Where cost cannot be established by direct 

evidence, a determination should be made whether the realty was purchased or 

sold at a time when revenue stamps were affixed to deeds pursuant to a 

federal statute which imposed a tax on deeds.  26 U.S.C. § 4361, 

repealed.  If the realty was purchased or sold at a time when the tax on 

deeds was in effect, the revenue stamps can be used to compute the sales 

price of the realty.  

United States

 v. 18.46 Acres Of Land, Etc., 312 

F.2d 287, 289 (2d Cir. 1963); 
Dickinson
 v. 

United States

, 154 F.2d 

642, 643 (4th Cir. 1946); Ramming Real Estate Co. v. 

United States

, 

122 F.2d 892, 895 (8th Cir. 1941).  On occasion, state stamps can also be 

used to compute the sales price.

      Jointly owned property is especially common in the case of a husband 

and wife.  For an example of a jointly owned asset properly included in full 

in the defendant's net worth, see O'Connor v. 

United States

, 

203 F.2d 301, 303 (4th Cir. 1953).  See also 

United States

 

v. Costello, 221 F.2d 668, 672 (2d Cir. 1955), aff'd, 350 

U.S.

 

359 (1956); United States v. Johnson, 319 

U.S.

 503, 516 (1943) (jury 

could find that a string of gambling houses ostensibly conducted as separate 

enterprises by co-defendants was in fact a single, unified gambling 

enterprise owned by one defendant).

      Finally, note that records of documents affecting an interest in 

property and statements in documents  affecting an interest in property may 

be admissible as exceptions to the hearsay rule.  Fed. R. Evid. Rules 

803(14) and (15).

31.08[6] Partnership Interest

      When the taxpayer has invested money in a partnership, the taxpayer's 

share of the partnership capital is reflected as an asset.  

United States

 

v. Mancuso, 378 F.2d 612, 614-15 (4th Cir.), amended, 387 F.2d 

376 (4th Cir. 1967).  In Mancuso, the government had little direct 

evidence to establish the percentage interest the defendant had in the 

partnership.  Therefore, the government allocated an equal share of the 

partnership capital to all the partners, including the defendant, which 

corresponded to the distribution of profits as reported on the partnership 

tax returns.  The government agent testified that this "conformed to the 

ordinary legal presumption that in absence of evidence of an agreement to 

the contrary the partners' interests are equal."  Mancuso, 378 F.2d 

at 616.

31.08[7] Errors in Net Worth Computation

      If there is an error in the net worth computation for one of the 

prosecution years, the error will not necessarily affect other prosecution 

years. 

United States

 v. Keller, 523 F.2d 1009, 1012 (9th Cir. 1975) 

(error did not carry over to a subsequent year since the asset was disposed 

of in the prior prosecution year).  Moreover, even if an error does affect 

all of the prosecution years, the government is not required to prove its 

case to a mathematical certainty.  If a substantial understatement remains 

after accounting for the error, then a guilty verdict will be upheld.  

Keller, 523 F.2d at 1012.

---

                        31.09 LIABILITIES

      The government must present evidence of a defendant's liabilities.  

These liabilities are subtracted from assets in arriving at a taxpayer's net 

worth. As with assets, the defendant's liabilities must be established with 

reasonable certainty. 

      For examples of evidence establishing liabilities, see 

United States

 v. Schafer, 580 F.2d 774, 780 (5th Cir. 1978); Beard 

v. 

United States

, 222 F.2d 84, 89 (4th Cir. 1955)..  Testimony by the 

investigating agent as to the amount of a liability, without independent 

documentation or third-party testimony, is inadmissible hearsay.  See 

United States v. Morse, 491 F.2d 149, 153-55 (1st Cir. 1974) (a bank 

deposits case, but the principle is applicable to a net worth case).  

      On the other hand, when the agent's investigation reveals that there 

were no liabilities, the agent can testify to the negative finding.  It is 

not hearsay.  

United States

 v. Dwoskin, 644 F.2d 418, 423 (5th Cir. 

1981); Morse, 491 F.2d at 154 n.8;.  Otherwise stated, a witness may 

testify as to his or her failure to find records after a search. United 

States v. Lanier, 578 F.2d 1246, 1255 (8th Cir. 1978); 

United States

 

v. Robinson, 544 F.2d 110, 114-15 (2d Cir. 1976); 

United States

 v. 

Jewett, 438 F.2d 495, 497-98 (8th Cir. 1971); 

United States

 v. 

DeGeorgia, 420 F.2d 889, 891-92 (9th Cir. 1969); Charron v. United 

States, 412 F.2d 657, 660 (9th Cir. 1969); McClanahan v. United 

States, 292 F.2d 630, 637 (5th Cir. 1961) ("[t]his, in fact, is 

frequently the only way in which a negative fact can be proved").See 

also Fed. R. Evid. Rules 803(7) and 803 (10).

      As a general rule, when the defendant is a cash basis taxpayer, the 

net worth computation does not include accrued liabilities.  United 

States v. Balistrieri, 403 F.2d 472, 479 (7th Cir. 1968), vacated and 

remanded, 395 U.S. 710 (1969), aff'd after remand, 436 F.2d 1212 

(7th Cir. 1971).  On the other hand, if the defendant has received cash or 

property in exchange for a liability, then the asset and liability are both 

included in the net worth computation whether the defendant is on a cash or 

accrual basis.  For example, if the defendant buys a house in exchange for a 

mortgage, the house would be shown as an asset and the mortgage as a 

liability.

---

                31.10 NONDEDUCTIBLE EXPENDITURES

31.10[1] Added to Net Worth Increase

      After subtracting the ending net worth from the starting point, the 

resulting net worth increase is further adjusted by adding to the increase 

the taxpayer's nondeductible expenditures during the year, including living 

expenses, for items which are not reflected as assets on the net worth 

statement. 
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. Hamilton, 620 F.2d 712, 714 n.1 (9th Cir. 

1980);

United States

 v. Skalicky, 615 F.2d 1117, 1119 (5th Cir. 1980); 

United States v. Hiett, 581 F.2d 1199, 1200 n.1 (5th Cir. 1978); 

United States v. O'Connor, 237 F.2d 466, 473 n.7 (2d Cir. 1956).  "The 

taxpayer's nondeductible expenditures are added to the adjusted net values 

of the defendant's assets at the end of the subject year and, consequently, 

increase the figure to be compared with the opening net worth."  

Hamilton

, 620 F.2d at 716.  See also, 

United States

 

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

31.10[2] Burden on Government

      The government has the burden of establishing that the expenditures 

added to the net worth increase are nondeductible expenditures, as opposed 

to deductible expenses such as business expenses. Any addition to the net 

worth increase must be limited to nondeductible expenditures.  Fowler v. 

United States

, 352 F.2d 100, 103 (8th Cir. 1965).  The government must 

establish the nature of an expenditure by independent documentary or 

testimonial evidence. Greenberg v. 

United States

, 280 F.2d 472 (1st 

Cir. 1960) (agent's testimony regarding expenses insufficient to establish 

nature of expenditure). 

      It is improper to designate an expenditure as personal based solely on 

a review of the taxpayer's checks by the investigating agent and the agent's 

testimony that a check is either for a personal or business purpose.  The 

agent's testimony is hearsay.  See Siravo v. 

United States

, 

377 F.2d 469, 474 (1st Cir. 1967) (third parties testified and the court 

"was careful to exclude testimony by the special agent as to conversations 

with others"); Johnson v. United States, 325 F.2d 709, 711 (1st Cir. 

1963).

      Admissions by the defendant may establish whether expenditures are 

personal or business.  Checks with a notation of "personal" written on them 

constitute a pre-offense admission.   Fowler, 352 F.2d at 103.   

See also United States v. Altruda, 224 F.2d 935, 939 

(2d Cir. 1955) (admitted personal living expenses were added to the net 

worth increases).

      Finally, a nondeductible expenditure made by or on behalf of a spouse, 

children, or any third party can be added to the defendant's net worth 

increase where it can be shown that the defendant furnished the funds for 

the expenditure. 

United States

 v. Giacalone, 574 F.2d 328, 333 (6th 

Cir. 1978) (government proof traced a number of nondeductible expenditures 

by the wife to funds furnished by the defendant); Ford v. United 

States, 210 F.2d 313, 317 (5th Cir. 1954); .  Cf. United 

States v. Lawhon, 499 F.2d 352, 355-56 (5th Cir. 1974) (citrus groves 

and certificates of deposit in the names of children); 

United States

 v. 

Balistrieri, 403 F.2d 472, 479 (7th Cir. 1968), vacated and remanded 

on other grounds, 395 U.S. 710 (1969), aff'd after remand, 436 

F.2d 1212 (7th Cir. 1971) (bank account in name of defendant and his minor 

son).

31.10[3] Nondeductible Expenditures -- Examples

      Proof of  non-deductible expenditures -- such as food, clothing, 

      shelter and gifts -- is one factor in the net worth and expenditures 

      method of proof. . . . Government tax experts routinely add living 

      expenses to their net worth schedules.

United States

 v. Scott, 660 F.2d 1145, 1173 (7th Cir. 1981). 

See 
United States
 v. 

Hamilton

, 620 F.2d 712, 716 (9th Cir. 

1980).

      In Scott, the only daily living expense the government included 

in its net worth calculation was food.  As Attorney General of the State of 

Illinois

, Scott traveled on state business and his travel vouchers were used 

as a basis for arriving at his unreimbursed food expenditures. Scott, 

660 F.2d at 1151.  In addition to food expenses, the government's net worth 

computation included cash travel expenses for personal trips that the 

government was able to document and the purchase of a stamp collection and a 

diamond ring.  Scott, 660 F.2d at 1150-51.

      Living expenses can be based on estimates provided by the taxpayer.  

In United States v. Burdick, 214 F.2d 768, 770 n.6 (3d Cir. 1954), 

vacated, 348 U.S. 905 (1955), aff'd on remand, 221 F.2d 932 

(3d Cir. 1955), the government estimated the defendant's living expenses at 

$2,000 a year on the basis of the defendant's admission that he spent $20 to 

$25 a week for  household expenses alone.  See also United 

States v. Doyle, 234 F.2d 788, 794 (7th Cir. 1956) (expenditures for 

living expenses arrived at largely from defendant's own statements).

      Another method of establishing living expenses is to rely on  

"independent estimates from the Bureau of Labor on what a person with (the 

taxpayer's) reported income and family and financial obligations would be 

expected to spend on non-deductible items."  

Hamilton

, 620 F.2d at 

716.  Caution must be exercised, however, in using Bureau of Labor 

statistics estimates.  The estimates are broken down into categories, such 

as food, clothing, household operations, alcohol, tobacco, gifts, and 

contributions, etc.  The items selected for net worth purposes should be 

limited to necessities such as food, household operations, and clothing.  

Estimates of expenditures subject to greater variation, such as for 

recreation, transportation, and similar items, should not be used. Personal 

insurance premiums and federal income taxes paid by a taxpayer may also  be 

added to the net worth increase.  Dawley v. 

United States

, 186 F.2d 

978, 980 (4th Cir. 1951).  In Armstrong v. 

United States

, 327 F.2d 

189, 192 (9th Cir. 1964), nondeductible expenditures included living 

expenses, payment of insurance premiums, fees paid to an attorney, bond 

premiums, and other nondeductible expenditures.  Automobiles, antiques, and 

travel were added to the net worth increase as nondeductible expenditures in 

United States

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

Gifts, vacation trips, payments for a maid, and gifts for a spouse and third 

parties are further examples of nondeductible expenditures. 

United States

 

v. Goichman, 407 F. Supp. 980, 989 (E.D. Pa.), aff'd, 547 F.2d 

778 (3d Cir. 1976).

      Where the government is unable to trace expenditures for household 

goods or services, personal entertainment, or personal care items, the jury 

can properly conclude that the defendant must have incurred some expenses 

for these items and that these expenses would have added to the defendant's 

net worth increase and expenditures, beyond what the government proved. 

Scott, 660 F.2d at 1151.  Omitting personal expenditures for food and 

clothing does not permit the jury to improperly speculate as to the 

defendant's personal expenses.  

United States

 v. Notch, 939 F.2d 895, 

900 (10th Cir. 1991).  In Notch, the Tenth Circuit recognized that 

"[t]his conservative approach to the net worth computation made the analysis 

appear more credible" and can be viewed "as showing that the jury need not 

consider personal expenses in order to conclude that defendant understated 

his income."  Notch, 939 F.2d at 900.

      Note that there is a difference in the net worth treatment when living 

expenses are to be used in determining cash on hand in the opening net worth 

as opposed to expenditures for living expenses made in a prosecution year.  

When the purpose is to determine the opening cash on hand of the taxpayer, 

living expenses and other expenditures are subtracted from the available 

resources of the taxpayer in determining whether the taxpayer expended all 

or part of what might otherwise constitute cash on hand.  When the purpose 

is to reflect the increase in wealth of the taxpayer, living expenses and 

other nondeductible expenditures in a prosecution year are added to the net 

worth increase,. 

---

                  31.11 REDUCTIONS IN NET WORTH

      The purpose of the net worth computation is to arrive at taxable 

income, and the computation therefore must reflect taxable consequences.  

Therefore, nontaxable items received by the taxpayer during the prosecution 

period must be eliminated or accounted for in the net worth computation.  

The following types of nontaxable items must be subtracted from the total 

reflecting the net worth increase and nondeductible expenditures:  gifts 

received, inheritances, nontaxable pensions, the nontaxable portion of 

capital gains, veterans benefits, dividend exclusions, tax-exempt interest, 

proceeds from life insurance, and any other nontaxable items.  

      An example of the treatment of such an item is found in United 

States v. Holovachka, 314 F.2d 345, 355 (7th Cir. 1963).  In that case, 

the defendant had purchased bonds for investment purposes and received 

monies during the prosecution year representing the repayment of principal 

and nontaxable interest:

      Government treated the principal repayments as a tax free return of 

      capital which correspondingly decreased defendant's investments in 

      such bonds for those years.  The yearly interest payments received on 

      these bonds were considered to be tax free and were accordingly 

      deducted from defendant's net worth.  The trial court properly 

      instructed the jury that the repayments of principal and the earned 

      interest constituted non-taxable income.

Holovachka, 314 F.2d at 355.  

      Technical items and items that are clearly not fraudulent are also 

deducted from the taxpayer's computed net worth.  Thus, the underreporting 

of an income item as the result of an inadvertent error of the defendant or 

his accountant should not be charged to the defendant.  Any such item is 

subtracted, or otherwise accounted for, in arriving at taxable income.  

      In 

United States

 v. Altruda, 224 F.2d 935, 940 (2d Cir. 1955), 

the defendant's accountant explained to the examining agent prior to trial 

that the defendant had made "errors" in underreporting income from realty 

holdings, and the defendant was given credit for these amounts in the 

government's net worth computation.  In 

United States

 v. Allen, 522 

F.2d 1229, 1231 (6th Cir. 1976), a technical adjustment was made, reducing 

the net worth computation to allow for an error discovered in one of the 

adding machine tapes used in preparing the defendant's return.  The net 

effect was that the adjustment allowed the entire deduction claimed by the 

defendant on his return, and the defendant was not charged with the error in 

the net worth computation.

---

     31.12 ATTRIBUTING NET WORTH INCREASES TO TAXABLE INCOME

31.12[1] Generally

       The net worth method of proof requires evidence supporting "the 

inference that the defendant's net worth increases are attributable to 

currently taxable income."  
Holland
 v. 
United States
, 348 

U.S.

 121, 

137 (1954); 

United States

 v. Dwoskin, 644 F.2d 418, 422 (5th Cir. 

1981); 

United States

 v. Hom Ming Dong, 436 F.2d 1237, 1241 (9th Cir. 

1971); 

United States

 v. Mackey, 345 F.2d 499, 506 (7th Cir. 

1965); . Increases in net worth, standing alone, cannot be assumed to be 

attributable to currently taxable income.

      There are two ways of supporting an inference that net worth  

increases are attributable to currently taxable income:

      1.    Proof of a likely source of taxable income.  

Holland

, 348 

            

U.S.

 at 137-38.

      2.    Negating non-taxable sources of income.  

United States

 

            v. Massei, 355 

U.S.

 595 (1958).

Either method is sufficient.  See also 

United States

 v. 

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

United States

 v. 

Scott, 660 F.2d 1145, 1151 (7th Cir. 1981); Dwoskin, 644 F.2d at 

422; 

United States

 v. Grasso, 629 F.2d 805, 807-08 (2d Cir. 1980); 

United States

 v. Hiett, 581 F.2d 1199, 1201 (5th Cir. 1978).

31.12[2] Proof of Likely Source of Taxable Income

      The government can establish a likely source of taxable income through 

direct or circumstantial evidence.  The applicable rule requires "proof of a 

likely source, from which the jury could reasonably find that the net worth 

increases sprang."  
Holland
 v. 
United States
, 348 

U.S.

 121, 138 

(1954).  It is not necessary for the government to prove by direct evidence 

that the unreported income reflected by the net worth computation, in fact, 

came from the likely source established.  

United States

 v. Mackey, 

345 F.2d 499, 506-07 (7th Cir. 1965).  See also United 

States v. Smith, 890 F.2d 711, 714 (5th Cir. 1989) (likely source of 

income could be indicated by business operations, mineral interests, real 

estate, stocks, bonds, commodities, and gambling); 

United States

 v. 

Greene, 698 F.2d 1364, 1373 (9th Cir. 1983) (the government need not 

prove a  specific source, but only a likely source, and evidence established 

real estate sales, interest income on loans, and unreported securities 

transactions as likely sources of taxable income); 

United States

 v. Hom 

Ming Dong, 436 F.2d 1237, 1241-42 (9th Cir. 1971) (grocery store 

ownership provided likely source); United States v. Costello, 221 

F.2d 668, 671-72 (2d Cir.), aff'd, 350 U.S. 359 (1956) (the evidence 

established that the defendant was a gambler and "gambling is an occupation 

with indeterminate possibilities").

      Likewise, the government does not have to show that the likely source 

was capable of generating the entire amount of unreported income charged in 

the indictment.  

United States

 v. Costanzo, 581 F.2d 28, 33 (2d Cir. 

1978).  The court found that extensive proof supported the inference that 

the defendant's bakery was a likely source of  unreported taxable income 

because the bakery was large enough to generate substantial amounts of 

unreported cash receipts.  Costanzo, 581 F.2d at 33.  Evidence of 

specific items of unreported income is admissible to show a likely source 

from which the net worth increases may have come.  
Holland
, 348 

U.S.

 

at 138; United States v. Schafer, 580 F.2d 774, 777 n.5 (5th Cir. 

1978). See also 
United States
 v. 

Hagen

, 470 F.2d 110, 111 

(10th Cir. 1972), in which the defendant claimed surprise and argued that 

the government introduced evidence as to specific items of unreported income 

to an extent that the specific items proof "changed the theory of the case 

or in any event overshadowed the net worth proof."  The court noted that the 

specific items evidence assumed such a large role at the trial that "at the 

end it became difficult to say whether it still was a net worth case."  

Hagen

, 470 F.2d at 112.  But the court continued:

      In any event the Government followed and met the requirements of 

      
Holland
 v. 

United States

.  The evidence of specific items was 

      proper as indicated to show wilfulness, but it was also proper to show 

      a likely source under Smith v. United States, 348 

U.S.

 147, 75 

      S.Ct. 194, 99 L.Ed. 192 and 
United States
 v. Calderon, 348 

U.S.

 

      160, 75 S.Ct. 186, 99 L.Ed. 202.

470 F.2d at 113.  

      In a situation such as that in 

Hagen

, problems as to the 

government's method of proof can be avoided by clearly designating in a 

response to a motion for a bill of particulars the method of proof to be 

relied upon by the government, such as, net worth method and specific items 

method, or net worth method corroborated by specific items of unreported 

income.

      Once the government has introduced evidence of a likely source of 

taxable income, the government has no burden to negate all possible 

nontaxable sources of the unreported income.  While the government does have 

a duty to check out reasonable leads, when the defendant furnishes no leads, 

"the Government is not required to negate every possible source of 

nontaxable income, a matter peculiarly within the knowledge of the 

defendant."  
Holland
 v. 
United States
, 348 

U.S.

 121, 138 (1954).  

Caution must be exercised in following this principle, however, because the 

government has an obligation in net worth cases to conduct a thorough 

investigation, which would include searching for nontaxable sources of 

income.  

      Once a likely source is established,  the government does not have to 

show that it has investigated "the many possible nontaxable sources of 

income, each of which is as unlikely as it is difficult to disprove."  

Holland
, 348 

U.S.

 at 138.  The government is not limited to showing a 

single likely source of taxable income but can introduce evidence of as many 

possible sources of taxable income as the investigation has developed. 

See, e.g., Feichtmeir v. United States, 389 F.2d 498, 

502 (9th Cir. 1968) (evidence showed the defendant had interests in eight 

operating businesses, investments in real estate, a trust deed, a joint 

venture, stocks and bonds, and an undisclosed Mexican source of income).

31.12[3] Illegal Sources of Income

      There is no requirement that the likely source of income be a legal 

source. James v. 
United States
, 366 

U.S.

 213 (1961).  "[G]ross income 

means all income from whatever source derived . . . ."  26 U.S.C. § 61. 

      Due to the possibility of undue prejudice, courts closely examine 

evidence of an illegal source of income.  See, e.g., United 

States v. Tunnell, 481 F.2d 149, 151 (5th Cir. 1973) (likely source of 

the defendant's net worth increases could have been income from prostitution 

activities at a motel the defendant operated).  When the likely source of 

income is illegal, the evidence must present more than suspicion and 

innuendo. See Ford v. 

United States

, 210 F.2d 313, 317 (5th 

Cir. 1954) (reversing a police chief's tax evasion conviction because 

testimony as to payoffs by prostitutes was not connected to the defendant).  

But see 
United States
 v. 

Windham

, 489 F.2d 1389, 1391 

(5th Cir. 1974) (stating that Ford conviction was reversed because of 

the speculative, hearsay nature of the testimony, not because of its 

content). 

      Likewise, it must be clear that the purpose of introducing evidence of 

illegal activities is to establish a likely source of income, and the 

evidence must not be introduced or alluded to in a manner calculated to 

inflame the jury. In 

United States

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

Cir. 1986), the government presented evidence that the defendant derived his 

unreported income from illegal prostitution and from legal gambling 

activities.  After a lengthy discussion of the Rule 403 probative/prejudice 

balancing test, the court concluded that it had:

      [N]o conceptual difficulty with the evidence concerning prostitution. 

      While it is certainly prejudicial, it is highly probative of 

      unreported taxable income.  The gambling evidence, while having less 

      direct probative value, is much less prejudicial, and indeed if its 

      admission was error (which this court does not conclude), the error 

      was harmless beyond a reasonable doubt.  After all, having been shown 

      that Abodeely ran a bar and a brothel, even the most straitlaced 

Iowa

 

      jury would hardly have been adversely affected by a showing of his 

      participation in the legal, though perhaps sinful and worldly in the 

      eyes of a midwestern jury, activity of gambling in 

Nevada

.

Abodeely, 801 F.2d at 1026.  See also 

United States

 

v. Smith, 890 F.2d 771, 716 (5th Cir. 1989) (defendant not prejudiced by 

introduction of evidence concerning his gambling activities); United 

States v. Tafoya, 757 F.2d 1522, 1526-28 (5th Cir. 1985) (income from 

payments for attempted assassinations; bank deposits case); 

United States

 

v. Vannelli, 595 F.2d 402, 405-06 (8th Cir. 1979) (evidence of 

defendant's prior misdemeanor convictions of misappropriation of funds held 

admissible to show intent, opportunity, scheme, or plan from which 

unreported income could be derived and to show potential source of 

unreported income; bank deposits case); 

Windham

, 489 F.2d at 1391;.  

The illegal sources for generating income are virtually limitless. 

See 

United States

 v. Dall, 918 F.2d 52 (8th Cir. 1990)  

(illegal importation of veterinary drugs);  Clinkscale v. United 

States, 729 F.2d 940, 942 (8th Cir. 1984) (prostitutes turned over 

income to defendant, which he failed to report); 

United States

 v. 

Chapman, 168 F.2d 997, 1000-01 (7th Cir. 1948) (black market sales of 

meat likely source of income).

      Skimming is another example of a likely source of taxable income which 

a jury could conclude accounts for the defendant's increase in net worth. 

See 

United States

 v. Koskerides, 877 F.2d 1129, 1138 (2d 

Cir. 1989) (two diners operated as cash businesses may be likely source of 

unreported income where previous owner had much higher revenue than 

defendant and testimony indicated the possibility of skimming); United 

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

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

found that the likely source of taxable funds was the illegal diversion of 

money from slot machine revenues); [FN4] .

      Drug sales frequently provide a possible source of income. See 

United States

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

United States

 v. Palmer, 809 F.2d 1504, 1505 (11th Cir. 1987); United 

States v. Lewis, 759 F.2d 1316, 1328, 1336 (8th Cir. 1985); United 

States v. Horvath, 731 F.2d 557, 563 (8th Cir. 1984); 

United States

 

v. Heyward, 729 F.2d 297 (4th Cir. 1984); [FN5] United States v. 

Enstam, 622 F.2d 857, 860 (5th Cir. 1980);  

United States

 v. 

Browning, 723 F.2d 1544, 1547 (11th Cir. 1984).

      The government should make sure that the jury instructions make it 

clear that the defendant is on trial for tax evasion and for no other 

crimes. See Windham, 489 F.2d at 1389 (commenting that this 

was done in United States v. Tunnell, 481 F.2d 149 (5th Cir. 1973)). 

Limiting instructions are also advisable.  Palmer, 809 F.2d at 1505 

(11th Cir. 1987) (trial court properly maintained jury's focus on tax issues 

and properly minimized any possible prejudice by giving clear limiting and 

final instructions).

31.12[4] Negating Nontaxable Sources of Income

      It is well established that "[s]hould all possible sources of 

nontaxable income be negated, there would be no necessity for proof of a 

likely source." 
United States
 v. Massei, 355 

U.S.

 595 (1958).  The 

Fifth Circuit summarized the government's burden where the defendant has 

failed to provide any leads as to nontaxable sources of income:

      We therefore hold that in an income tax evasion case based on the net 

      worth method of proof, when the taxpayer gives no leads as to 

      nontaxable sources, the government satisfies its burden of negating 

      all possible nontaxable sources within the meaning of Massei by 

      showing that it conducted a thorough investigation that failed to 

      reveal any nontaxable source.

United States

 v. Hiett, 581 F.2d 1199, 1202 (5th Cir. 1978).  In 

response to the defendant's argument that the government must negate every 

possible source of nontaxable income, the court in Hiett noted that 

this would be an impossible task because:

      [It] would require the government to exhaust the inexhaustible -- to 

      conduct an absolutely limitless investigation.  It would cast the 

      government in the role of a conjurer, forcing it to pull nontaxable 

      sources out of a hat.  Appellant would require the government to 

      embark on a Magellan-like expedition in order to prove that the 

      unreported income was taxable.  Not only would the Government have to 

      circle the globe in its search, it would also have extraorbital 

      responsibility, since appellant's position requires it to prove a 

      cosmic negative.  To state appellant's position is to establish its 

      absurdity.  If Massei and 

Holland

 are to have viability 

      in our jurisprudence, they cannot be read to sanction such a result.

Hiett, 581 F.2d at 1201.  Accord 

United States

 v. 

Notch, 939 F.2d 895 (10th Cir. 1991); 

United States

 v. Schipani, 

362 F.2d 825, 830 (2d Cir.), vacated and remanded on other grounds, 

385 U.S. 372 (1966) (government can meet its burden under 

United States

 

v. Massei, by negating all reasonably possible sources of 

nontaxable income).  The investigating agent may testify that his 

investigation failed to uncover any sources of nontaxable income.  United 

States v. Dwoskin, 644 F.2d 418, 423 (5th Cir. 1981); 

United States

 

v. Penosi, 452 F.2d 217, 219 (5th Cir. 1971).

      In short, it is sufficient if the government's evidence establishes 

that there was a thorough investigation, "which removes any reasonable doubt 

that the defendant's unreported income came from non-taxable sources."  

United States

 v. Hiett, 581 F.2d 1199, 1202 (5th Cir. 1978).  

See also United States v. Smith, 890 F.2d 711, 714 (5th 

Cir. 1989). [FN6] 

---

                 31.13 REASONABLE LEADS DOCTRINE

31.13[1] Duty to Investigate Reasonable Leads

      Taxpayers frequently give the government's agents leads indicating the 

specific sources from which claimed cash on hand was derived, such as prior 

earnings, stock transactions, real estate profits, inheritances, gifts, etc. 

Holland
 v. 
United States
, 348 

U.S.

 121, 127 (1954).  The 

Holland

 reasonable leads doctrine places on the government the duty 

of "effective negation of reasonable explanations by the taxpayer 

inconsistent with guilt" -- a duty limited to the investigation of "leads 

reasonably susceptible of being checked, which, if true, would establish the 

taxpayer's innocence."  
Holland
, 348 

U.S.

 at 135-36.  

      Thus, the government's duty to investigate leads provided by the 

taxpayer hinges on the presence of two factors: (1) the taxpayer's 

explanation must be relevant and reasonable; and (2) the explanation must be 

reasonably susceptible of being checked.  
Holland
, 348 

U.S.

 at 

135-36; 
United States
 v. 

Anderson

, 642 F.2d 281, 285 (9th Cir. 1981) 

(loan from acquaintance in 

Nigeria

 not a reasonable lead and not reasonably 

susceptible of being checked).

      The government meets its burden when it "investigates reasonably 

possible sources of non-taxable income, and explores whatever leads the 

taxpayers or others may proffer."  

United States

 v. Mastropieri, 685 

F.2d 776, 785 (2d Cir. 1982).  The government is not required to do the 

impossible. 

United States

 v. Greene, 698 F.2d 1364, 1371 (9th Cir. 

1983).  Once the government establishes a prima facie case, the taxpayer 

"remains quiet at his peril."  Mastropieri, 685 F.2d at 785.  

Accord 

United States

 v. Goldstein, 685 F.2d 179, 182 (7th 

Cir.1982) (information on nontaxable income should be supplied by the 

taxpayer).  Although the burden of proof never shifts from the government, 

the defendant has the burden of production regarding any reasonable 

leads.  

United States

 v. Vardine, 305 F.2d 60, 63 (2d Cir. 1962).  It 

is up to the taxpayer to furnish the reasonable leads. 

United States

 v. 

Notch, 939 F.2d 895, 899 (10th Cir. 1991); 

United States

 v. 

Caswell, 825 F.2d 1228, 1234 (8th Cir. 1987);.  The government is not 

required to pursue "phantom clues as to some mysterious sources and assets."  

United States
 v. 

Hamilton

, 620 F.2d 712, 715 (9th Cir. 1980).

      For cases in which the court found that the defendant's explanations 

were not reasonable or reasonably capable of being checked, see 

United States v. Londe, 587 F.2d 18, 20 (8th Cir. 1978) (lead found 

to be completely lacking in credibility and did not warrant follow-up beyond 

the production of the individual as a government witness, which did 

occur); United States v. Potts, 459 F.2d 412, 414 (7th Cir. 1972) 

(the government's failure to investigate leads from witnesses whose 

credibility was tenuous did not require a reversal); 

United States

 v. Hom 

Ming Dong, 436 F.2d 1237, 1242-43 (9th Cir. 1971) (when leads are 

"sketchy" and the defendant furnishes little useful information, there is 

less of a burden on the government); United States v. Ford, 237 F.2d 

57, 64 (2d Cir. 1956), vacated as moot, 355 U.S. 38 (1957) (claims of 

gifts so vague that they were not susceptible of further investigation); 

Smith v. 

United States

, 236 F.2d 260, 267 (8th Cir. 1956) 

(explanation that his funds came from old mailbags and old iron pots not 

reasonably susceptible of being checked).  

      Moreover, there is "at least a minimal burden upon the taxpayer, once 

he chooses to furnish leads to the government, to aid in the investigation 

of the purported nontaxable source."  Hom Ming Dong, 436 F.2d at 

1242-43. See 

United States

 v. Terrell, 754 F.2d 1139, 1146 

(5th Cir. 1985) (taxpayer has a burden to furnish leads, and the government 

cannot be faulted for failure to identify any possible basis in cattle where 

the government was diligent in following up on all leads relating to the 

cattle, despite the fact that defendant was uncooperative in providing 

leads); United States v. Blandina, 895 F.2d 293, 302-03 (7th Cir. 

1989) (scope of government's investigation of reasonable leads does not 

require government to subpoena records which defendant refused to turn 

over).

      For examples of adequate government investigation of taxpayer leads 

which were susceptible to investigation, see 

United States

 v. 

Smith, 890 F.2d 711, 714-15 (5th Cir. 1989) (court rejected a 

"reasonable leads" challenge regarding gifts to the defendant); United 

States v. Koskerides, 877 F.2d 1129 (2d. Cir. 1989) (government negated 

defendant's claim that he had received non-taxable funds from family and 

friends in 

Greece

). 

      In situations where a taxpayer furnishes leads which might reasonably 

explain his net worth bulge in a manner inconsistent with guilt and the 

government fails to investigate these leads, the trial judge should consider 

the taxpayer's explanations as true.  Vardine, 305 F.2d at 63. 

However, when the defendant advances a specific explanation of the source of 

funds expended and that explanation is proved false, the government need not 

pursue possible nontaxable sources.  Feichtmeier v. 

United States

, 

389 F.2d 498, 503 (9th Cir. 1968); 

United States

 v. Holovachka, 314 

F.2d 345, 357 (7th Cir. 1963).   

      Failure of the government to investigate reasonable leads provided by 

the defendant can result in a severe remedy.  The trial judge can consider 

such leads as true and find the case insufficient to go to the jury.  

Holland
, 348 

U.S.

 at 135.  The court can direct a verdict on any 

count where there would not be a substantial tax deficiency if the lead is 

assumed to be true. 

United States

 v. Keller, 523 F.2d 1009, 1011 (9th 

Cir. 1975) (because the government failed to pursue leads 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 failure to track down reasonable leads, however, is not always 

fatal to the government's case.  If the uninvestigated lead is assumed to be 

true and there remains a substantial, unexplained tax deficiency, then 

reversal of a conviction (or a directed verdict) is not warranted.  

See Scanlon v. 

United States

, 223 F.2d 382, 388-89 (1st Cir. 

1955) (government's failure to investigate this lead would require acquittal 

of the defendant if the government's case turned on that evidence but even 

assuming this lead to be true, the government's evidence was sufficient to 

convict); Anderson, 642 F.2d at 285 (9th Cir. 1981)  (even if the 

defendant's explanation were true, there would be more than $100,000 of 

unexplained income, and this difference would be sufficient to support the 

conviction).

      At least one circuit has held that, if there is a challenge to the 

sufficiency of the government's investigation, it becomes a jury question 

whether or not the government was unreasonable in its failure to investigate 

alleged leads.  Greene, 698 F.2d at 1371.

      The government's failure to investigate leads by the defendant has 

also been challenged unsuccessfully in the grand jury context.  One court 

refused to dismiss an indictment, finding the defendant's contention that 

the government failed to exhaust leads during the grand jury investigation 

insufficient to warrant dismissal of the indictment.  

United States

 v. 

Todaro, 610 F. Supp. 923, 925 (W.D.N.Y. 1985).  In Todaro, the 

court held that the pre-trial motion to dismiss was premature because this 

was a matter for trial, citing 
Holland
, 348 

U.S.

 121, and United 

States v. Scott, 660 F.2d 1145, 1167 n.42 (7th Cir. 1981).

31.13[2] Leads Must Be Reasonable and Timely

      In addition to furnishing leads that are reasonable and reasonably 

susceptible of being checked, the taxpayer must furnish any leads in a 

timely manner.  Therefore, leads must be provided to the government a 

sufficient amount of time before trial to permit investigation.  United 

States v. Sorrentino, 726 F.2d 876, 881 n.2 (1st Cir. 1984).  Where 

there is no evidence that the defendant gave leads to the government before 

trial and the defendant testifies at trial that the net worth increase was 

due to the receipt of nontaxable income, the issue is one for the jury.  

United States

 v. Vardine, 305 F.2d 60, 65 (2d Cir. 1962).

      The underlying principle is that "the taxpayer has a burden to furnish 

'leads'. . . so that the government can investigate and perhaps clear the 

taxpayer prior to trial."  

United States

 v. Schafer, 580 F.2d 774, 

779 (5th Cir. 1978). See 

United States

 v. Terrell, 754 F.2d 

1139, 1146 (5th Cir. 1985).  See 

United States

 v. Dwoskin, 644 

F.2d 418, 423 n.4 (5th Cir. 1981) (had leads been provided during the 

investigative process, the government would have had an obligation to pursue 

them to the extent that they were relevant and reasonably susceptible of 

being checked).

      In short, leads must be furnished well in advance of trial.  Smith 

v. 

United States

, 236 F.2d 260, 263-64 (8th Cir. 1956).  A lead 

furnished "on the eve of indictment" is too late.  

United States

 v. 

Procario, 356 F.2d 614, 617 (2d Cir. 1966) (a bank deposits case, but 

the same principle applies in a net worth case).

---

                    31.14 NET WORTH SCHEDULES

      At the close of its case, the government typically calls  a summary 

expert witness who  summarizes the evidence and introduces schedules 

reflecting the government's net worth computation.  It is well established 

that a government agent can summarize the evidence and introduce into 

evidence computations and schedules reflecting the defendant's net worth.  

Costello v. 
United States
, 350 
U.S.
 359 (1956); 

United States

 v. 

Johnson, 319 
U.S.
 503, 519 (1943); 

United States

 v. Lewis, 759 

F.2d 1316, 1329 n.6 (8th Cir. 1985) (summary exhibit used to verify the net 

worth theory); United States v. Sorrentino, 726 F.2d 876, 884 (1st 

Cir. 1984); 

United States

 v. Skalicky, 615 F.2d 1117, 1120 (5th Cir. 

1980); 
United States
 v. 

Gardner

, 611 F.2d 770, 776 (9th Cir. 1980); 

United States

 v. Allen, 522 F.2d 1229, 1234 (6th Cir. 1975); 

United States

 v. O'Connor, 237 F.2d 466, 475 (2d Cir. 1956); Fed. R. 

Evid. Rule 1006.

      The net worth schedules must be based upon evidence in the record; 

otherwise, the schedules are not admissible.  See, e.g., 

Sorrentino, 726 F.2d at 884;  Allen, 522 F.2d at 1234; 

United States

 v. Diez, 515 F.2d 892, 905 (5th Cir. 1975); 

O'Connor, 237 F.2d at 475;  see also 

United States

 v. 

Citron, 783 F.2d 307, 316 (2d Cir. 1986) (cash expenditures method).

      The government's net worth computation is not required to give effect 

to contentions of the defendant.  Rather, the government's summary or net 

worth computation is based on a selection of that evidence which supports 

the government's contentions.  It is a summary of evidence tending to prove 

guilt, and it reflects the government's version of the facts.  United 

States v. Diez, 515 F.2d at 905; 

United  States

 v. Lawhon, 499 

F.2d 352, 357 (5th Cir. 1974) (jury was instructed that the summary chart 

presented only the government's view of the case); 

Holland

 v. United 

States, 209 F.2d 516, 523-24 (10th Cir.), aff'd, 348 

U.S.

 121 

(1954) (charts purporting to graphically show the government's case based 

upon the government's version of the evidence used in closing argument to 

the jury). 

      Essentially, the government's net worth computation is not intended to 

be a summary of all of  the evidence introduced by the government.  Nor does 

the summary purport to include theories of the defense brought out either on 

the direct or cross-examination of a government witness.  As a matter of 

tactics, however, there are situations where the evidence is in conflict and 

the government computation will reflect the view that is more favorable to 

the defendant, i.e., not all evidence favorable to the defendant 

should necessarily be disregarded.

      Note the distinction made in Flemister v. United States, 260 

F.2d 513, 517 (5th Cir. 1958), in which the court observed that a government 

summary need not give effect to the contentions of the accused, but if the 

summary purports to be a statement of all of the evidence then it must be a 

summary of all of the evidence.  The summary must be what it purports to be.  

In Flemister, the court found that the government summaries failed to 

show that they represented only the testimony of government witnesses and 

were not a summary of all of the relevant testimony.  Flemister, 260 

F.2d at 517.  To avoid this problem, the agent should testify clearly that 

the government's net worth computation is a summary only of government 

contentions and not a summary of all of the evidence in the record.

---

                     31.15 JURY INSTRUCTIONS

      In a net worth case, detailed, comprehensive jury instructions on the 

method of proof are essential.  "Charges should be especially clear, 

including, in addition to the formal instructions, a summary of  the nature 

of the net worth method, 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); 

United States

 v. Carter, 

721 F.2d 1514, 1538 (11th Cir. 1984); 

United States

 v. Wirsing, 719 

F.2d 859, 861-62 n.4 (6th Cir. 1983).

      Convictions have been reversed when the trial judge failed to give 

full explanatory instructions on the net worth method.  

United States

 v. 

Hall, 650 F.2d 994, 999 (9th Cir. 1981); 

United States

 v. 

Tolbert, 367 F.2d 778, 781 (7th Cir. 1966); 

United States

 v. 

O'Connor, 237 F.2d 466, 472 (2d Cir. 1956).  "[T]he complete lack of any 

instruction on the nature of the [net worth] method and its concomitant 

assumptions and inferences affects a substantial right of the accused and 

constitutes plain error. . . and requires a reversal despite the lack of an 

objection by the defendant to such omission."  Tolbert, 367 F.2d at 

781.

      For a sample net worth jury instruction, see the section on 

jury instructions, infra.

---

                 31.16 SAMPLE NET WORTH SCHEDULE

      On the next page is a reproduction of the net worth computation 

admitted into evidence in United States v. Carter, 462 F.2d 1252, 

1253 (6th Cir. 1972).

---

RUSSELL L. CARTER

Computation of Unreported Taxable Income Based On

Net Worth and Personal Living Expenses

                          12-31        12-31        12-31         12-31

 ASSETS                   1962         1963         1964          1965

 Cash on Hand          $ 1,000.00   $ 1,000.00    $ 1,000.00   $ 1,000.00

 Cash in Banks

 Checking Accounts       2,556.79       167.56        356.06       264.57

 Bonds -- Series E      90,897.58   121,770.04    122,001.00   131,601.17

 Stocks and

 Notes Receivable        2,983.72     1,983.72        983.72    13,487.50

 Real Estate             9,386.92     9,386.92      9,386.92    51,886.92

 Business Equipment      5,700.00     5,700.00      5,700.00     5,700.00

 Automobiles             9,428.49     4,950.00      6,854.70     8,554.70

 TOTAL ASSETS         $136,953.50  $159,958.24   $176,282.40  $242,494.86

 LIABILITIES

 Mortgages and

 Loans Payable           $ 402.88      $ 49.93      $ -0-     $ 22,260.00

 Allowance for

 Depreciation            7,059.11     5,105.90      4,089.00     6,040.85

 TOTAL LIABILITIES    $  7,461.99  $  5,155.83   $  4,089.00  $ 28,300.85

 NET WORTH            $129,491.51  $154,802.41   $172,193.40  $214,194.01

 Beginning Net Worth               (129,491.51)  (154,802.41) (172,193.40)

 Increase in

 Net Worth                         $ 25,310.90   $ 17,390.99  $ 42,000.61

 Personal Living

 Expenses                            12,646.61     22,303.34    16,283.63

 Adjustments to

 Net Worth                          (1,144.97)     (861.14)    (1,039.21)

 Adjusted Gross

 Income                            $ 36,182.54   $ 38,833.19  $ 57,245.03

 Deductions                         (2,394.66)   (2,461.99)    (3,738.75)

 Exemptions                         (2,400.00)   (2,400.00)    (2,400.00)

 Taxable Income

 Corrected                         $ 32,017.88   $ 33,971.20  $ 51,106.28

 Taxable Income

 Reported                           (7,527.33)  (18,765.49)    (9,610.33)

 Unreported Taxable

 Income                            $ 24,490.55   $ 15,205.71  $ 41,495.95

---

FN 1. The defendant contended that the use of the net worth method was not 

proper because the government did not make the necessary preliminary proof 

that (1) the taxpayer had no books; or (2) refused to produce them; or (3) 

the books did not clearly reflect his income; and (4) the circumstances were 

such that the net worth method did reflect his income with reasonable 

accuracy and certainty.  McGrew v. 

United States

, 222 F.2d 458, 459 

(5th Cir. 1955).

FN 2. As an evidentiary matter, the Mastropieri court criticized the 

fact that the record did not contain the "form of letter or letters" which 

the special agent sent to the banks, brokerage firms, and lending 

institutions that he canvassed as a part of the investigation.  

Mastropieri, 685 F.2d at 779 n.3.  This concern suggests that care 

should be taken in drafting such letters, because they may be used later to 

demonstrate the effort made to locate the defendant's assets and 

liabilities.

FN 3. Where corroboration is required, the jury should be instructed on that 

requirement. See 
United States
 v. 

Marshall

, 863 F.2d 1285, 

1288 (6th Cir. 1988) (reversing a jury verdict because the jury was not 

instructed that a defendant's extrajudicial statements must be corroborated 

with independent evidence). 

FN 4. It is interesting to note that in 

Hamilton

, 620 F.2d 712 (9th 

Cir. 1980), the court upheld as admissible, and found most convincing, the 

testimony of a statistical expert who had examined the slot machines, 

reviewed their reported performance, compared their performance with similar 

machines at other casinos and with the manufacturer's built-in 

specifications, and concluded that the odds against the machine performing 

as poorly as the records indicated were greater than two billion to one.  

Hamilton

, 620 F.2d at 715.

FN 5. This case is of particular interest because the court admitted 

evidence that the defendant's plane was found in 

Georgia

 in 1980 loaded with 

over 4,000 pounds of marijuana and the prosecution years were 1978 and 1979.  

FN 6. The Second Circuit suggested that in rare situations less stringent 

standards might apply with respect to both establishing opening net worth 

and to negating nontaxable income sources. These standards "are justified in 

a case like this where defendants were shown to have gone to such lengths to 

conceal their unreported increases in wealth." 

United States

 v. 

Mastropieri, 685 F.2d 776, 785 (2d Cir. 1982).