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7203: Willful Failure to File Return, Supply Information, or Pay Tax: Evidence: Bank Records and Net Worth Increases

 

Part 1

   

[2005-1 USTC ¶50,166] United States of America , Plaintiff-Appellee v. Wade Vincent Shang, Defendant-Appellant.

U.S. Court of Appeals, 9th Circuit; 04-10063, November 22, 2004.

Unpublished opinion affirming in part, reversing in part and remanding an unreported DC-Calif. decision.

[ Code Sec. 7203]

Willful failure to file return or pay tax: Evidence: Net worth method. --

In a criminal tax evasion case, the government proved a reasonably certain opening net worth and a sufficiently thorough investigation for two tax years. However, for a subsequent tax year, the government's efforts resulted in a net worth calculation that was in error by at least 40 percent and, thus, lacked the required thoroughness and particularity. The government admitted that its net-worth calculation for that subsequent tax year was in error by a substantial amount. It failed to discover a credit line and missed seven checks that did not clear before the end of the tax year but should have been counted to adjust the year-end bank balance.

Before: Canby, Rymer and Hawkins, Circuit Judges.

¬ Caution: The court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.®

MEMORANDUM ^*

In this tax evasion case, the government chose to employ the net worth method, a circumstantial method of proof requiring "the exercise of great care and restraint," Holland v. United States [ 54-2 USTC ¶9714], 348 U.S. 121, 129 (1954), and as to which the government "assumes a special responsibility of thoroughness and particularity" in its investigation. United States v. Hall [ 81-1 USTC ¶9209], 650 F.2d 994, 999 (9th Cir. 1981).

Because the government proved a reasonably certain opening net worth and a sufficiently thorough investigation for tax years 1996 and 1998, we affirm the denial of Shang's motion for acquittal as to these two counts.

However, we reverse the conviction on the 1999 count because the government's efforts resulted in a net worth calculation lacking the required "thoroughness and particularity." Hall [ 81-1 USTC ¶9209], 650 F.2d at 999. The government admitted that its net-worth calculation for tax year 1999 was off by some $47,000 in two respects: (1) making a "substantial understatement" of Shang's 1999 tax liabilities by failing to discover a $34,000 credit line; and (2) missing seven checks totaling approximately $13,000 that did not clear before the end of 1999, even though they should have been counted to adjust the year-end bank balance. Compare United States v. Keller [ 75-2 USTC ¶9729], 523 F.2d 1009, 1012 (9th Cir. 1975), where we affirmed a conviction with a 10% computational error. Here, the computational error is 75% or 40%, depending on whether Shang's client trust accounts are included. While the government need not prove its calculation to a "mathematical certainty," these errors stray far from that level of accuracy into the realm of downright inaccuracy.

AFFIRMED IN PART, REVERSED IN PART, AND REMANDED FOR RESENTENCING.

[Concurring and Dissenting Opinion]

RYMER, Circuit Judge: concurring in part and dissenting in part: I agree that Shang's motion for acquittal was properly denied for tax years 1996 and 1998, but disagree that the government's efforts resulted in a net worth calculation lacking the required "thoroughness and particularity" for 1999 under United States v. Hall [ 81-1 USTC ¶9209], 650 F.2d 994, 999 (9th Cir. 1981) (per curiam). Shang offered no leads and no reasonable explanation that the government failed to pursue which would establish his innocence. See Holland v. United States [ 54-2 USTC ¶9714], 348 U.S. 121, 135-36 (observing that evidence may be insufficient to go to the jury when "the Government does not track down relevant leads furnished by the taxpayer --leads reasonably susceptible of being checked, which, if true, would establish the taxpayer's innocence."); United States v. Greene [ 83-1 USTC ¶9175], 698 F.2d 1364, 1371 (9th Cir. 1983) (same).

United States v. Keller [ 75-2 USTC ¶9729], 523 F.3d [F.2d] 1009 (9th Cir. 1975), is inapposite because there (as in Hall), the taxpayer did offer leads that the government did fail to pursue. Certainly here, the $34,000 line of credit problem cannot be laid at the government's doorstep; the government "failed to discover" the increase because Shang's mortgage company failed to provide complete records in response to a subpoena. Even if the government should not have "missed" the seven checks that didn't clear before year end, that error neither undermines the thoroughness of its overall investigation nor casts any doubt on Shang's innocence. In total the checks amounted to only $13,052, well within the margin of error approved in Keller [ 75-2 USTC ¶9729], 523 F.2d at 1012 (affirming conviction with ten percent computational error). In any event, at the end of the day there was still a substantial under-reporting of income, by anywhere from $20,000 (construing possible errors entirely in Shang's favor) to $47,000 (construing errors in the light most favorable to the government). As Hall itself states, when "it is shown arithmetically that even under the [taxpayers'] version there would be a substantial amount of unreported income, the error would be inconsequential and the Government relieved of the need to pursue the matter." [ 81-1 USTC ¶9209], 650 F.2d at 1000. I would, therefore, affirm across the board.

^* This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by Ninth Circuit Rule 36-3.

 

[2000-1 USTC ¶50,256] United States of America , Plaintiff-Appellee v. William L. Mounkes and Correen Kay Mounkes, Defendants-Appellants

(CA-10), U.S. Court of Appeals, 10th Circuit, 99-3096, 99-3098, 2/22/2000, 204 F3d 1024. Affirming an unreported District Court decision

[Code Sec. 7203 ]

Crimes: Tax evasion: Failure to report income: Reconstruction of income: Bank deposits and expenditures method: Pre-reconstruction income cash-on-hand.--Married owners of an educational materials corporation were properly convicted of willfully attempting to evade personal and corporate income taxes after the IRS used the bank deposits and cash expenditures to reconstruct their unreported income. Evidence establishing the amount of their pre-reconstruction cash on hand was sufficient to support the verdict; the figures were provided in a written statement by the taxpayers and corroborated by corporate balance sheets and tax returns.

[Code Sec. 7203 ]

Crimes: Tax evasion: U.S. Sentencing Commission Guidelines: Enhanced sentence: Obstruction of justice: Perjury: Testimony: Materiality: Willfulness: Constitutional safeguards: Right to testify.--A corporate owner convicted of tax evasion properly received an enhanced sentence under the 1992 U.S. Sentencing Commission Guidelines for obstruction of justice predicated on his perjury at trial. The trial court expressly concluded that his testimony was false, material, and intended to affect the outcome of the trial. His contention that the trial court failed to evaluate his testimony in a light most favorable to him was meritless. Moreover, his constitutional right to testify on his own behalf did not include the right to commit perjury; thus, enhancement of his sentence for perjury did not impinge on constitutional safeguards.

[Code Sec. 7203 ]

Crimes: Tax evasion: U.S. Sentencing Commission Guidelines: Enhanced sentence: Downward departure: Jurisdiction, lacking: Court of Appeals.--Jurisdiction was lacking over the trial court's decision not to grant a downward departure of a corporate owner's sentence for tax evasion on the basis of circumstances not contemplated by the 1992 U.S. Sentencing Commission Guidelines. While the trial court took the taxpayer's circumstances into consideration for sentencing purposes, it did not indicate that it lacked authority to depart from the sentencing guideline range.

Thomas D. Haney, Fairchild, Haney & Buck, P.A., Topeka , Kansas , for Defendants-Appellants. Meghan S. Skelton (Alan Hechtkopf, with her on the brief), Department of Justice, Washington , D.C. 20530 , for Plaintiff-Appellee.

Before: TACHA, MCWILLIAMS and KELLY, Circuit Judges.

TACHA, Circuit Judge:

Defendants William L. and Correen Kay Mounkes appeal from the district court's order denying their motions for judgment of acquittal and for a new trial. Defendants also appeal the district court's two point enhancement of Mr. Mounkes's sentence and the district court's failure to rule upon their motion for a one point reduction of Mrs. Mounkes's sentence. We exercise jurisdiction pursuant to 28 U.S.C. §1291 and 18 U.S.C. §3742, and affirm.

I.

Mr. and Mrs. Mounkes owned and operated Bill Mounkes, Inc. (BMI). BMI purchased used educational materials from professors and colleges and at government auctions, then sold the materials to distributors. One distributor, Amtext, sometimes sent defendants multiple checks to pay for a single shipment. Mr. Mounkes testified that somebody at Amtext advised him to request payment by multiple checks for sums over $10,000 in order to avoid IRS paperwork. Amtext's financial officer, Paula Blanche, testified that Amtext would break up payments only upon a payee's request. Ms. Blanche did not recall having spoken personally to Mr. Mounkes about multiple check payments.

On at least one occasion, Mr. Mounkes cashed multiple payment checks for a single shipment of BMI materials at different bank branches on the same day. On at least one other occasion, Mr. Mounkes cashed multiple checks at the same bank branch on different days. Mr. Mounkes testified that he knew about the IRS's $10,000 transaction reporting requirement but did not comply because he was concerned that filling out the reports would lengthen his already lengthy workdays.

Mr. and Mrs. Mounkes maintained both business and personal bank accounts. Stanley Buss, the Mounkeses' accountant, testified that he instructed the Mounkeses to keep their business and personal accounts separate. Mr. Mounkes testified that he did not recall being so advised.

The IRS audited the Mounkeses' personal income tax returns for 1989 and their personal and corporate income tax returns for 1991 and 1992. In the 1989 audit, IRS Agent Rob ert Tice found that the Mounkeses had deducted $10,000 in corporate expenses on their personal return. Tice testified that he explained to Mr. Mounkes that personal and corporate expenses must be kept separate and that the Mounkeses could properly receive payments from the corporation only in the form of wages or dividends. Mr. Mounkes testified that he had never heard of a dividend until trial.

In the 1991 and 1992 audits, IRS Agent Maria Espinoza employed the "bank deposits" method of determining unreported income. This method required that she compare the Mounkeses' bank deposits and nondeductible personal expenditures to the income reported on their tax returns for each audited year. Espinoza therefore had to establish a "cash on hand balance" for the beginning of each of those years. In BMI's 1991 corporate tax return, Mr. Mounkes reported that BMI's cash on hand was $1000 at the beginning and $296 at the end of the year. Mr. Mounkes also gave Espinoza a handwritten statement of personal cash on hand repeating what he had reported for BMI. He further testified that he did not keep any additional cash at home or in his desk.

Espinoza ultimately found that the Mounkeses' bank deposits and personal expenditures significantly exceeded the amount of income they reported on their personal returns for 1991 and 1992. She testified that Mr. Mounkes blamed the discrepancies on Buss. Mr. Mounkes testified that he had told Buss that certain land and jewelry he purchased were corporate assets. Evidence at trial indicated otherwise, and Buss testified that he believed the assets to be personal on the basis of information that Mr. Mounkes had provided him.

A grand jury indicted the Mounkeses on four counts of attempting to evade personal and corporate income taxes in violation of 26 U.S.C. §7201. A jury convicted both defendants on all four counts. The Mounkeses moved for a judgment of acquittal and a new trial, and the district court denied both motions. In sentencing the defendants, the trial court applied a two point enhancement to Mr. Mounkes's sentence for obstruction of justice pursuant to U.S. Sentencing Guidelines Manual §3C1.1 (1998). Under 18 U.S.C. §3553(b), the court did not rule upon the Mounkeses' motion for a one point reduction of Mrs. Mounkes's sentence on the basis of circumstances not contemplated by the sentencing guidelines.

II.

The Mounkeses challenge the denial of their motions for judgment of acquittal and for a new trial, arguing that the evidence of beginning on-hand cash balances was insufficient to support a guilty verdict. In determining the sufficiency of evidence, we review the record de novo. United States v. Urena, 27 F.3d. 1487, 1489 (10th Cir. 1994). We review the evidence to determine whether, if taken in the light most favorable to the prosecution, it is sufficient for a reasonable jury to find the defendants guilty beyond a reasonable doubt. United States v. Jenkins, 175 F.3d 1208, 1215 (10th Cir.), cert. denied, 120 S.Ct. 263 (1999). "The evidence supporting the conviction must be substantial and do more than raise a suspicion of guilt." United States v. Anderson, 189 F.3d 1201, 1205 (10th Cir. 1999) (internal quotation marks and citation omitted).

We review the district court's refusal to grant a new trial for abuse of discretion. United States v. Quintanilla, 193 F.3d 1139, 1146 (10th Cir. 1999). The trial court may grant a new trial if the interests of justice so require. Fed.R.Crim.P. 33. Motions for new trial are disfavored, however, and granted only with great caution. Quintanilla, 193 F.3d at 1146.

A jury convicted the Mounkeses of willfully attempting to evade personal and corporate income taxes in violation of 26 U.S.C. §7201. To establish that offense, the government must prove 1) the existence of a substantial tax liability, 2) willfulness, and 3) an affirmative act constituting evasion or attempted evasion. United States v. Meek [93-2 USTC ¶50,409], 998 F.2d 776, 779 (10th Cir. 1993) (citing Sansone v. United States [65-1 USTC ¶9307], 380 U.S. 343 (1965)). The Mounkeses argue that there was insufficient evidence to prove the first element.

To establish the first element, the government employed the bank deposit method of proof. The government's evidence showed that the Mounkeses' bank deposits and cash expenditures exceeded their reported income after adjustments for applicable exemptions and deductions. Such evidence supports an inference that defendants had unreported income. See United States v. Conaway [94-1 USTC ¶50,009], 11 F.3d 40, 43 (5th Cir. 1993); United States v. Ludwig [90-1 USTC ¶50,152], 897 F.2d 875, 878 (7th Cir. 1990); United States v. Abodeely [86-2 USTC ¶9713], 801 F.2d 1020, 1023 (8th Cir. 1986). This "indirect" method of proof is permitted because "direct methods of proof . . . depend on the taxpayer's voluntary retention of records," rendering "[p]roof of unreported taxable income by direct means . . . extremely difficult and often impossible." Abodeely [86-2 USTC ¶9713], 801 F.2d at 1023. However, to distinguish between unreported, taxable income and those deposits and expenditures not derived from taxable income, the government still must establish the defendants' pre-income "cash on hand" with reasonable certainty, while negating other sources of nontaxable income during the same period. Conaway [94-1 USTC ¶50,009], 11 F.3d at 44. On the other hand, the government need not establish the "cash on hand" figure with mathematical exactitude. Id.; see also Ludwig, 897 F.2d at 880-81; United States v. Boulet [78-2 USTC ¶9628], 577 F.2d 1165, 1170 (5th Cir. 1978).

Agent Espinoza testified at trial that she defined "cash on hand" for Mr. Mounkes when she sought his beginning cash balances. The record indicates that Mr. Mounkes then gave Espinoza a written statement of his cash on hand, and that statement was admitted into evidence. Mr. Mounkes testified at trial that he did not keep unreported cash at home or in his desk. Finally, BMI's corporate balance sheets and tax returns, which were admitted into evidence, precisely corroborated the figures that Mr. Mounkes gave to Espinoza. Under these circumstances, the jury could quantify the Mounkeses' beginning cash on hand with reasonable certainty for 1991 and 1992. Thus the evidence, when taken in the light most favorable to the prosecution, was sufficient for a reasonable jury to find the Mounkeses guilty beyond a reasonable doubt. We therefore affirm the district court's denial of the Mounkes's motion for judgment of acquittal.

Because the Mounkeses based their motion for a new trial on the same claim as their motion for judgment of acquittal, we also conclude that the trial court did not abuse its discretion in denying their motion for a new trial. Nothing in the record indicates that the interests of justice required a new trial be granted.

III.

The Mounkeses also claim that the trial court erred in enhancing Mr. Mounkes's sentence by two points for obstruction of justice pursuant to U.S. Sentencing Guidelines Manual §3C1.1 (1998). The district court must enhance the defendant's base offense by two levels if it finds that

the defendant willfully obstructed or impeded, or attempted to obstruct or impede, the admin istration of justice during the course of the investigation, prosecution, or sentencing of the instant offense.

Id. The obstruction of justice enhancement may be predicated upon a defendant's "committing, suborning, or attempting to suborn perjury." Id. cmt. 4(b). The court sentenced the Mounkeses under the 1992 version of the sentencing guidelines and thus was required to evaluate Mr. Mounkes's statements "in a light most favorable to the defendant" in making its perjury determination. U.S. Sentencing Guidelines Manual §3C1.1 cmt. 1 (1992), amended by U.S. Sentencing Guidelines Manual App. C. amend. 566 (1997).

Because the trial judge observed defendant's testimony, we give deference in reviewing the trial court's finding of perjury. United States v. Yost, 24 F.3d 99, 106 (10th Cir. 1995). However, "[w]hile we review the factual findings of the district court under the clearly erroneous standard, and while we give due deference to the district court's application of the guidelines to the facts, when that application involves contested issues of law, we review de novo." United States v. Medina-Estrada, 81 F.3d 981, 986 (10th Cir. 1996) (internal quotation marks and citation omitted).

A §3C1.1 enhancement predicated upon perjury is appropriate when the sentencing court finds that the defendant has given "[i] false testimony [ii] concerning a material matter [iii] with the willful intent to provide false testimony, rather than as a result of confusion, mistake, or faulty memory." United States v. Dunnigan, 507 U.S. 87, 94 (1993) (citing 18 U.S.C. §1621, the federal criminal perjury statute); accord Anderson, 189 F.3d at 1213. The sentencing court must "review the evidence and make independent findings necessary to establish [the elements of perjury]." Dunnigan, 507 U.S. at 95; see also Anderson, 189 F.3d at 1213 ("[I]n order to apply the §3C1.1 enhancement, it is well-settled that a sentencing court must make a specific finding--that is, one which is independent of the jury verdict--that the defendant perjured herself." (internal quotation marks and citation omitted)). The court need not recite the perjured testimony verbatim, however. Medina-Estrada, 81 F.3d at 987. Rather, "[t]he district court may generally identify the testimony at issue . . . so that when we review the transcript we can evaluate the Dunnigan findings of the elements of perjury . . . without having simply to speculate on what the district court might have believed was the perjurious testimony." United States v. Massey, 48 F.3d 1560, 1574 (10th Cir. 1995).

A.

The Mounkeses raise two objections to the district court's perjury enhancement. First, they contend that the district court did not follow the 1992 Sentencing Guidelines' requirement that testimony be evaluated in a light most favorable to the defendant. Rather, defendants imply that the district court followed the 1997 revision to this requirement, under which "the court should be cognizant that inaccurate testimony or statements sometimes may result from confusion, mistake, or faulty memory." See U.S. Sentencing Guidelines Manual App. C. amend. 566 (1997). We find no merit in this contention. The district court specifically noted that in enhancing Mr. Mounkes's sentence it had viewed his statements "in the most favorable light." (Appellants' Supp. App. Vol. 5 at 13.) Nothing in the record casts doubt upon this statement.

B.

The Mounkeses' second claim is that the sentencing court did not make independent Dunnigan findings. We disagree. Under Dunnigan, the sentencing court must find defendant's testimony false, material, and intended to affect the outcome of trial rather than a product of confusion, mistake or faulty memory. See Dunnigan, 507 U.S. at 94. The district court specifically cited two examples of Mr. Mounkes's testimony which in its judgment contradicted other persuasive trial testimony: (1) Mr. Mounkes's statements regarding personal use of corporate funds, which contradicted the testimony of Buss, the Mounkeses' accountant, and (2) Mr. Mounkes's testimony regarding why Amtext broke payments into increments smaller than $10,000, which the court found to contradict the testimony of Blanche, Amtext's financial officer. Contradictions in testimony support findings of falsehood. See Anderson, 189 F.3d at 1213-14; United States v. Lowder, 5 F.3d 467, 47172 (10th Cir. 1993). While Mr. Mounkes's testimony does not appear to contradict Blanche's testimony directly, ¹ his testimony does directly contradict Buss's testimony. The district court therefore could conclude that Mr. Mounkes testified falsely.

The district court also expressly found that Mr. Mounkes's testimony was material and willful. Both the diversion of corporate funds to personal use and the structuring of payments to avoid IRS reporting requirements are "affirmative act[s] constituting evasion or attempted evasion" of income taxes. See Meek [93-2 USTC ¶50,409], 998 F.2d at 779. False testimony about such acts therefore would be material to the Mounkeses' prosecution for tax evasion. Finally, while there appear to be some indications of confusion as opposed to willfulness on Mr. Mounkes's part, these do not displace the deference we give to the trial judge, who was able to observe the defendant at trial and was best situated to determine whether Mr. Mounkes was merely confused or was being willfully evasive in order to avoid conviction. See Yost, 24 F.3d at 106.

In sum, we find that the sentencing court identified Mr. Mounkes's perjurious testimony and expressly evaluated this testimony in light of the three Dunnigan elements. Our de novo review of the district court's application of these elements reveals no misunderstanding of the law of perjury. Thus, we find no error in the sentencing court's enhancement decision under §3C1.1. ²

IV.

Finally, the Mounkeses claim that the district court erred in failing to rule upon their motion for a one point reduction of Mrs. Mounkes's sentence on the basis of circumstances not contemplated by the Sentencing Guidelines. Under 18 U.S.C. §3553(b), a sentencing court may depart from the Guidelines if it "finds that there exists an aggravating or mitigating circumstance of a kind, or to a degree, not adequately taken into consideration by the Sentencing Commission in formulating the guidelines that should result in a sentence different from that described." The Mounkeses argued below that there were mitigating circumstances which warranted a downward departure in Mrs. Mounkes's sentence. The district court stated that it took Mrs. Mounkes's circumstances into consideration when it sentenced her, but did not explicitly rule on the motion for downward departure.

We "cannot exercise jurisdiction to review a sentencing court's refusal to depart from the sentencing guidelines except in the very rare circumstance that the district court states that it does not have any authority to depart from the sentencing guideline range for the entire class of circumstances proffered by the defendant." United States v. Castillo, 140 F.3d 874, 887 (10th Cir. 1998). The district court did not indicate that it lacked authority to depart from the sentencing guideline range in sentencing Mrs. Mounkes. We therefore lack jurisdiction to review the district court's decision not to grant the departure.

AFFIRMED.

¹ Mr. Mounkes testified that he asked Amtext to break up checks in payment of amounts exceeding $10,000 on the advice of an Amtext representative. Blanche testified that Amtext generally broke up payments only upon a payee's request. These assertions are not inconsistent. An Amtext employee could have advised Mr. Mounkes as to why he might prefer to have his payments broken up, and Mr. Mounkes could then have requested that the payments be broken up. However, Mr. Mounkes could not identify the Amtext employee who he claimed had given him the advice, and Blanche was not aware of any Amtext employee who did.

² The Mounkeses also object to the perjury enhancement on the ground that there is insufficient contrary testimony in the record to warrant the sentencing court's determination. The Mounkeses argue that such an inadequately supported determination will have a chilling effect on future defendants who would otherwise testify in their own defense at trial. The Supreme Court addressed a similar argument in Dunnigan, and concluded that a defendant's right to testify simply does not include the right to commit perjury. See 507 U.S. at 96. While a routine finding of untruthfulness based upon the verdict alone would impinge upon Mr. Mounkes's constitutional right to testify on his own behalf, Anderson, 189 F.3d at 1213, specific and independent findings of perjury which comply with the Dunnigan safeguards do not. See 507 U.S. at 96-97.

 

 

[87-2 USTC ¶9452] United States of America, Appellee v. John Joseph Caswell, a/k/a Don Dawson, John J. Dawson, Jack Quinn, Richard Quinn, Bill Burns, and "Sam," Appellant

(CA-8), U.S. Court of Appeals, 8th Circuit, 86-2201, 7/31/87, 825 F2d 1228, Affirming an unreported District Court decision

[Code Sec. 7201 --Result unchanged by the Tax Reform Act of 1986 ]

Criminal penalties: Evasion of tax: Evidence: Cash expenditures method: Miscellaneous trial errors.--The court affirmed the taxpayer's conviction of tax evasion for the 1979-1982 tax years. The government introduced sufficient evidence to meet its burden of proof under the cash expenditures method of proving tax evasion. The evidence showed that the likely source of his unreported income was from gambling activities. Also, the government introduced sufficient evidence to allow the jury to infer that large cash expenditures by the taxpayer and his relatives were attributable to his unreported income. The district court did not abuse its discretion in allowing summary charts of unreported income into evidence. Miscellaneous assertions of trial error were without merit.

Frederick Dana, Assistant United States Attorney, St. Louis, Mo. 63101, for appellee. Charles M. Shaw, Shaw, Howlett, & Schartz, 255 S. Meramec St., St. Louis, Mo. 63105, for appellant.

Before FAGG, Circuit Judge, BRIGHT, Senior Circuit Judge, and MAGILL, Circuit Judge.

MAGILL, Circuit Judge:

John Joseph Caswell appeals from a district court ¹ judgment entered upon a jury conviction of four counts of income tax evasion. Caswell was found guilty of willfully evading income taxes during the years 1979, 1980, 1981 and 1982, in violation of 26 U.S.C. §7201 . For reversal, Caswell contends that the government failed to meet its burden of proof under three essential elements of the "cash expenditures" method of proving tax evasion, that the district court erred in admitting into evidence summary charts prepared by a government witness, and that the court erred in other trial and post-trial rulings. We affirm.

I. BACKGROUND.

During November and December of 1982, IRS agents used pen registers (recording devices) to track telephone calls from an apartment rented by Caswell located in Creve Coeur, Missouri to the Caswell farm in O'Fallon, Missouri. The registers showed that numerous calls were forwarded to the farm, and that during a period of flooding near the farm in early December, calls were switched to Caswell's residence in Chesterfield, Missouri. The registers also showed an increase in calls in late November of 1982, when the NFL football strike ended and play resumed.

After receiving search warrants, the IRS, on December 12, 1982, conducted simultaneous raids on the farm and the Creve Coeur apartment. As a result of an analysis of the pen registers and the evidence seized from the raids, IRS agents concluded that a sports bookmaking operation was and had been in operation on the Caswell farm, and that Caswell was behind the operation. Further investigation revealed that Caswell had been making sports-related bets with various persons for several years.

This information prompted the IRS to investigate Caswell's finances to determine whether he had evaded income taxes by underreporting his income. After an extensive investigation of those finances, the IRS set out to prove through use of the "cash expenditures" method ² that Caswell had underreported income for the years 1979, 1980, 1981, and 1982.

At trial the government introduced into evidence Caswell's filed tax returns for the years 1975 through 1982. In 1975 and 1976, Caswell filed joint returns with his first wife, Joan. They were divorced in 1977, and Caswell filed individual returns for 1977 and 1978. From 1975 through 1978, Caswell's reported taxable income never exceeded $13,000.

In 1979, Caswell filed a joint return with his second wife, Jean, reporting taxable income of $12,801. In 1980, 1981, and 1982, Caswell filed individual tax returns, reporting taxable income of $17,018, $18,745, and $18,179, respectively. These figures largely represented Caswell's W-2 income from his job as a truck driver; he did not report any gambling income. Later at trial, the government introduced evidence showing that Caswell's cash expenditures far exceeded his reported income in the years 1979, 1980, 1981, and 1982.

As part of its investigation, the government also examined the financial records and dealings of several of Caswell's close relatives. At trial the government introduced into evidence the tax returns of these relatives, which showed that none of them reported significant amounts of income during the investigative period. ³ As with Caswell, the government later introduced evidence of the relatives' cash expenditures during this period, which showed that like Caswell, they made large cash expenditures far exceeding their reported incomes.

In computing Caswell's tax deficiency under the expenditures method, government witnesses explained that they attributed to Caswell not only his expenditures but also the large cash expenditures of his close relatives. The government did so based on its theory that the only likely source of Caswell's expenditures and those of his relatives was Caswell's income from his gambling activity and bookmaking operation. ⁴

After the presentation of the above evidence, a government summary witness testified that for the years 1979 through 1982, Caswell's expenditures were $84,118, $143,188, $191,655, and $82,228; that under the "cash expenditures" method, his corrected taxable income was $80,803, $130,926, $170,963, and $80,973; and that Caswell therefore had taxes due and owing of $17,039, $47,737, $75,100, and $24,096.

II. DISCUSSION.

A. Essential Elements Under the "Cash Expenditures" Method. Caswell contends that the government failed to establish (1) a likely source of income for the years 1979, 1980, and 1981; (2) his "cash on hand" or "net worth" at the beginning of each year; and (3) the "net worth" of each Caswell relative whose expenditures were attributed to him.

1. Likely Source of Income. Under the "cash expenditures" method of proof, the government is required to show either a "likely source" of the allegedly unreported income or that it has negated all reasonably possible nontaxable sources of income. United States v. Mastropieri [82-2 USTC ¶9484 ], 685 F.2d 776, 784-85 (2d Cir.), cert. denied, 459 U.S. 945 (1982); see United States v. Bianco [76-1 USTC ¶9351 ], 534 F.2d 501, 506-07 (2d Cir.), cert. denied, 429 U.S. 822 (1976). Caswell admits that the December 1982 gambling raids produced evidence of a "likely source" of income for 1982, and thus, he does not challenge (under this argument) his conviction for that year. ⁵ Rather, he contends that this evidence could not be used by the jury to make a "quantum leap" and infer that the bookmaking operation was also his "unlikely source" of income in 1979, 1980, and 1981. Caswell therefore maintains that the three counts corresponding to those years must fail as a matter of law.

The government's response is two-fold. First, relying on United States v. Heyward [84-1 USTC ¶9380 ], 729 F.2d 297 (4th Cir. 1984), cert. denied, 469 U.S. 1105 (1985), and Beard v. United States [55-1 USTC ¶9400 ], 222 F.2d 84 (4th Cir.), cert. denied, 350 U.S. 846 (1955), the government asserts that the evidence from the 1982 gambling raids was admissible to allow the jury to infer that Caswell had a gambling income in the previous three years. In both cases, the Fourth Circuit held that discovery of certain evidence of unreported income in one year did not render the evidence inadmissible to substantiate the government's claims of tax evasion in previous years. Heyward, 729 F.2d at 301 (drug laden plane discovered in 1980 admissible to prove defendant's "net worth" in 1978 and 1979); Beard, 222 F.2d at 92 (bookmaking evidence found in 1945 relevant to 1944 tax evasion charge). Instead, the time difference was "simply a matter to be considered by the jury." Heyward, 729 F.2d at 301 (citing United States v. Wright, 667 F.2d 793, 800 (9th Cir. 1982)). Second, the government maintains that there was other evidence of Caswell's betting activities in 1979, 1980, and 1981 which allowed the jury to infer that appellant's likely source of income for those years was from gambling.

Although we are inclined to agree with the Fourth Circuit's analysis of the issue, we do not have to reach this question as the record clearly indicates that the government introduced sufficient other evidence of Caswell's gambling activity in 1979, 1980, and 1981 to show that the likely source of his unreported income was from gambling. For example, there was evidence from which the jury could infer that Caswell acted though the alias "Don Dawson" in purchasing sports information from two different services in 1981. Additionally, Stephen Geist, a convicted gambler, testified that he had made bets with Caswell since 1976. Further, Iven Mullenix testified that from 1980 through 1982, he rented Caswell, under the alias "Frank or Richard Quinn", the apartment from which bets were transferred to the Caswell farm. Mullenix also testified that he made weekly bets with Caswell on NFL games during 1979 and 1980.

In summary, the evidence of Caswell's bookmaking and gambling was not limited to the year 1982. Accordingly, we hold that the evidence of Caswell's betting activities was sufficient to allow the jury to conclude that this was a "likely source" of Caswell's unreported income for the years 1979, 1980 and 1981.

2. Beginning "Net Worth" or "Cash on Hand." In a "cash expenditures" case, the government must also prove to a reasonable certainty "(i) expenditures during the period in question and (ii) the opening net worth of the taxpayer, including cash on hand." Citron, 783 F.2d at 315 (citing Bianco, 534 F.2d at 504). In contrast to a tax evasion case prosecuted under the "net worth" method, however, the government need not prepare a formal net worth statement. Id. at 315, 316. "Rather, accurate inclusion of diminution of resources serves the function of enabling the jurors to determine if expenditures were financed by liquidation of assets, depletion of cash hoard, or unreported income." Id. at 315 (citation omitted); see Taglianetti v. United States [68-2 USTC ¶9479 ], 398 F.2d 558, 565 (1st Cir. 1968), aff'd [69-1 USTC ¶9295 ], 394 U.S. 316 (1969). ⁶

The government has this burden whether it is prosecuting an individual for tax evasion for one year or successive years. In the latter case, however, the government has the duty only to establish the opening cash on hand balance for the beginning year; the income received less disbursements paid during that year will establish the opening funds for the next year, and so on. United States v. Marshall [77-2 USTC ¶9581 ], 557 F.2d 527, 530 (5th Cir. 1977). Furthermore, when an individual is charged with tax evasion in successive years, the government has the added responsibility of showing dimunition of resources for each year under investigation in order to prove that the expenditures in each year were not made from other nontaxable sources of income such as gifts, loans, or bequests. Id.

Caswell contends that the government failed to meet this burden because it did not present any "solid" evidence of his cash on hand or dimunition of resources for the years under investigation. A close examination of the record in view of the applicable law convinces us otherwise.

In Taglianetti [68-2 USTC ¶9479 ], 398 F.2d 558, the government prosecuted the defendant for successive years of tax evasion, basing its case on the "cash expenditures" method of proof. There, the First Circuit held that the government's evidence at trial "was sufficient to allow the jury an intelligent determination of the single relevant issue: whether any expenditures found to be in excess of reported income can be accounted for by assets available at the outset of the prosecution period or non-taxable receipts during the period." Taglianetti, 398 F.2d at 565-66 (citing United States v. Johnson [43-1 USTC ¶9470 ], 319 U.S. 503 (1943)). Although the government did not inform the jury of the dollar value of the defendant's assets comprising his opening net worth, the government did present evidence of his opening cash on hand and assets acquired or disposed of during the years in question. Id. at 565.

Similarly, the government here, while not presenting formal net worth statements, did inform the jury of the currency available to Caswell at the beginning of each year. ⁷ Through the testimony of IRS Agent Fox, the government also informed the jury of Caswell's non-liquid assets, such as automobiles, which were either bought or sold during the years in question. Finally, Fox testified that the government's extensive investigation of bank records, prior years' tax returns, and the like revealed no other possible nontaxable sources of income, other than a cash gift that it included in Caswell's opening cash balance, to explain Caswell's large cash expenditures during the period under investigation. We believe that this evidence, strikingly similar to the type found sufficient in Taglianetti, was sufficient to prove Caswell's "net worth" and "cash on hand" and to allow the jury to infer that there were no other possible sources of income to explain Caswell's expenditures.

Further, although Caswell asserts that this evidence was insufficient, he did not introduce any evidence to rebut the government's findings in this area. ⁸ It is well-settled that "once the government has introduced evidence from which the jury could conclude with reasonable certainty that no [nontaxable] assets existed, the defendant remains silent at his own peril." Bianco, 534 F.2d at 506 (citing, among other cases, Holland v. United States [54-2 USTC ¶9714 ], 348 U.S. 121, 138-39 (1954)).

3. "Cash on hand" or "Net Worth" for Each Relative. Caswell further contends that the government failed to establish that he was the "only likely source" of cash for his relatives' expenditures, and thus, that the government's attribution to him of those expenditures in computing his tax deficiency must be deemed error as a matter of law. In a case like this, where the government has not alleged nor proven the existence of a conspiratorial or agency relationship, Caswell maintains that the only way he can be held liable for his relatives' expenditures is if the government establishes the "net worth" and "cash on hand" balance for each relative. He asserts that this is the only way the government can prove that the relatives had no other possible nontaxable sources of income for their expenditures other than himself.

Before analyzing this contention, it is essential to a full understanding of this case to point out the basic assumption the government impliedly relied upon in attributing to Caswell the large cash expenditures of his relatives--the basic principle of income tax law that income is taxed to the person who earns it, regardless of attempts to divert the income elsewhere. Lucas v. Earl [2 USTC ¶496 ], 281 U.S. 111 (1930). Because its investigation revealed that Caswell's relatives' expenditures far exceeded their reported incomes and further revealed that none of them had any possible nontaxable sources of income to explain their expenditures, the government theorized that the unreported income was derived from Caswell's gambling activities, and thus, under the principle just enunciated, he was the one responsible for the taxes due and owing. Moreover, because it was Caswell's income that was purportedly being diverted, the government obviously could not have proceeded against each or any of the relatives for tax evasion. Thus, the government indicted only Caswell for willfully evading taxes in violation of 26 U.S.C. §7201 .

With this in mind, it becomes apparent that Caswell's contention that the government must show the "net worth" of each relative is actually an assault on the sufficiency of the government's evidence in this case. This conclusion finds support in many other tax evasion cases where courts have held a defendant liable for the expenditures of others, despite the absence of a conspiracy charge. E.g., United States v. Tempesta, [78-2 USTC ¶9844 ], 587 F.2d 931, 933 (8th Cir. 1978) (father's expenditure attributed to defendant-son), cert. denied, 441 U.S. 910 (1979); United States v. Giacolone [78-1 USTC ¶9350 ], 574 F.2d 328, 333 (6th Cir.) (wife's expenditures treated as made with defendant-husband's money), cert. denied, 439 U.S. 834 (1978); Marshall, 557 F.2d at 531 (capital contributions made by partner to partnership attributed to defendant-partner); Taglianetti, 398 F.2d at 567 (brother-in-law and wife's expenditures may be attributed to defendant); see Citron, 783 F.2d at 318 (jury entitled to conclude that stock in parent's account and income derived therefrom belonged to defendant-son); United States v. Pack [85-2 USTC ¶9718 ], 773 F.2d 261, 264 (10th Cir. 1985) (defendant attempted to conceal income by placing ownership titles of purchases in names of others). These cases indicate that the real question is whether the government introduced sufficient evidence to allow the jury to infer that the other individual's expenditures were made with the defendant's income. See, e.g., Tempesta, 587 F.2d at 933. ⁹ Thus, the specific question becomes: what amount of evidence is sufficient?

Our examination of the relevant cases convinces us that the government is not required to establish the other individual's "net worth" or "cash on hand" as if that person was under investigation. Rather, the government can meet its burden of proof if it conducts a reasonable investigation into the finances of those individuals and introduces evidence to negate the possibility that the income came from a source other than the defendant. See id.; see also United States v. Grasso [80-2 USTC ¶9593 ], 629 F.2d 805, 807 (2d Cir. 1980) (per curiam) (under "net worth" theory, government must separate spouses' finances to justify inference that wife's expenditures made with husband's funds). To meet this burden, we believe the government is obligated to show that it has investigated all leads provided by the defendant into other possible sources of nontaxable income such as gifts, inheritances, or cash hoards. See Bianco, 534 F.2d at 506. After a careful review of the evidence presented in this case, we believe that the government met this burden.

The IRS agents, as a part of their investigation of the Caswell family finances, subpoenaed and examined numerous cashier checks, statements, and other documents from banks, savings and loan institutions, and commercial lending institutions, in addition to examining court records. This investigation revealed that Caswell's relatives made several large cash expenditures during the years under investigation. At trial, the government introduced this evidence along with the tax returns of these relatives to show that none of them had the reported incomes to account for the expenditures. In addition, the government's investigation turned up no inheritances, gifts, cash hoards, or other sources of nontaxable income to explain the expenditures. We believe that this evidence along with that of Caswell's gambling income, was sufficient to allow the jury to conclude that Caswell was the only likely source of his relatives' large cash expenditures during 1979, 1980, 1981, and 1982, and that Caswell gave them these funds or opened accounts in their names in order to conceal his illegally-unreported income.

Moreover, although there was some evidence of a $40,000 "cash hoard" found by Caswell's grandfather in 1984 after his wife died, and a $30,000 "death bed gift" given to Caswell's first wife by his mother in 1979 while she was in the hospital just before her death, the jury was fully justified in disregarding these alleged funds as other possible sources of income. First, the government's extensive investigation and discussions with the Caswell family did not uncover these sources. In fact, they were apparently made known to the government only shortly before trial commenced. Cf. Bianco, 534 F.2d at 506 (post hoc suggestions of other possible nontaxable sources of income do not render government's search insufficient). Second, the alleged "cash hoard" was found in 1984. This by itself does not explain the cash expenditures made in 1979, 1980, 1981, and 1982, and indeed, there was no evidence showing that the hoard existed during this time. Under these circumstances, and in light of the fact that the persons testifying to the funds were Caswell's own relatives, we hold that the jury was "under no duty to accord face value to this self-serving, undocumented testimony." United States v. Goldstein [82-2 USTC ¶9507 ], 685 F.2d 179, 182 (7th Cir. 1982).

B. Introduction into Evidence of Summary Charts. Caswell next contends that the district court erred in allowing into evidence the summary charts prepared and testified to by IRS Agent Grass. Caswell asserts that the charts were not tied to specific items of evidence and were not fair summaries of the evidence. Accordingly, relying heavily on Citron [86-1 USTC ¶9228 ], 783 F.2d 307, he maintains that a new trial must be granted.

In United States v. King [80-1 USTC ¶9251 ], 616 F.2d 1034 (8th Cir.), cert. denied, 446 U.S. 969 (1980), we held that a summary witness' testimony may be received as long as that testimony is based on the evidence in the case and the witness is available for cross-examination. Id. at 1041 (citing United States v. Esser [75-2 USTC ¶9654 ], 520 F.2d 213 (7th Cir. 1975), cert. denied, 426 U.S. 947 (1976)). Additionally, we stated that the use of summary charts is proper where the charts aid in understanding the testimony already introduced and the preparing witness is subject to cross-examination with all documents used to prepare the summary. Id. (citing Gordon v. United States, 438 F.2d 858 (5th Cir.), cert. denied, 404 U.S. 828 (1971)). Finally, we noted that the evidentiary use of summary charts rests with the sound discretion of the trial judge. Id. (citing United States v. Smallwood, 443 F.2d 535, 540 (8th Cir.), cert. denied, 404 U.S. 853 (1970)).

Agent Grass, an accountant and the government's summary witness in this case, has had specialized training in tax matters and has testified as an expert witness in many tax cases. He testified that the summary charts were based on the testimony offered at trial, the documents and exhibits presented to the court, and the stipulations of counsel. Further, he explained the mechanics of the expenditures method and how he used the method in making his calculations. He then testified as to the exhibits representing Caswell's expenditures (Exhibits 469-472), currency available (Exhibits 473-476), and business expenses (Exhibit 477) for each year under investigation. For each exhibit, he explained that the totals were made up of the listed component parts, which were referenced to documents presented by the government. He further testified as to the summary charts denoting the excess expenditures over funds available--equalling unreported income. Grass stated that he used these charts to compute Caswell's corrected taxable income and tax deficiency for each year.

We believe this method of explaining and offering into evidence summary charts fully complies with the standards outlined in King, and that the district court did not abuse its discretion in allowing them into evidence. Caswell's counsel had full opportunity to and did cross-examine Grass, testimony which the jury was entitled to weigh in making its determination as to the accuracy of the numbers.

Additionally, Citron is inapposite to the case at bar. There, the Second Circuit held that the government's summary chart of the defendant's cash on hand was improperly admitted because the government did not lay a proper foundation. Citron, 783 F.2d at 316-17. Specifically, the court noted that the government failed to explain either through testimony or otherwise how the totals listed on the chart were calculated from the exhibits cross-referenced on the chart. Id. In marked contrast, here, Agents Fox and Grass both testified about the expenditures method and the relevant expenditures in this case. Moreover, Grass testified about the specific expenditures used in his calculations, noting that they were cross-referenced on the exhibits. He further explained how the expenditures figured into the totals for each year. Thus, the government clearly laid a proper foundation, through the testimony of both Fox and Grass, for admission of the charts into evidence.

C. Other Trial and Post-Trial Rulings. Caswell's other contentions do not detain us long. First, Caswell contends that the district court erred in failing to conditionally receive certain disputed evidence and in allowing Agents Fox and Grass to opine on ultimate issues. As to the former contention, the record supports Caswell's point that the district court initially had some questions on the relevancy of the evidence of Caswell's gambling and the relatives' expenditures, as evidenced by its admonition to the government at one point in the trial to "connect it up." After receiving citations of "cash expenditures" cases and further testimony, however, the court later denied Caswell's motions for a directed verdict and acquittal. We believe this clearly indicates that the court received the disputed evidence conditionally, until such time as it had to rule on the matter.

Similarly, Caswell's challenge under Fed. R. Evid. 704 to the testimony of Agents Grass and Fox is unavailing. Both were qualified as experts on tax evasion matters and had substantial experience with the "cash expenditures" method of proof. They did not give opinions on ultimate issues of the case, but explained the expenditures method and made conclusions under the method based on the evidence in the case. Clearly, there was no violation of Rule 704.

Second, Caswell contends that the court erred in refusing his proffered jury instruction which would have allowed the jury to consider lesser included offenses under 26 U.S.C. §§ 7206 and 7207 . Under the facts of this case, however, the court properly denied the instructions. See Sansone v. United States [65-1 USTC ¶9307 ], 380 U.S. 343, 349-50 (1964); accord King, 616 F.2d at 1042-43.

Finally, Caswell contends that the district court erred in not directing a mistrial when, on re-cross, the government asked Agent Fox whether Caswell granted an interview to IRS agents. Although Caswell argues that his fifth amendment right to remain silent was violated, it is clear that this claim is groundless. The question was not directed at Caswell's absence from testifying at trial, but was asked after his counsel, on cross-examination, asked questions of Fox which implied that the government had not exhausted all of its investigative leads. Clearly, this is not a situation necessitating reversal.

III. CONCLUSION.

Based on the foregoing analysis, we affirm Caswell's conviction of tax evasion under 26 U.S.C. §7201 on all four counts.

¹ The Honorable James H. Meredith, United States District Judge for the Eastern District of Missouri.

² Like the "net worth" and "bank deposits" methods, the "cash expenditures" method is an indirect method of proof designed to uncover unreported income in tax evasion cases where direct methods of proof are unavailing or non-existent. See United States v. Abodeely [86-2 USTC ¶9713 ], 801 F.2d 1020, 1023 (8th Cir. 1986) ("bank deposits" tax evasion case). Under the "cash expenditures" method,

after taking into account the amount of resources the taxpayer had on hand at the beginning of a period, the income received by the taxpayer for the same period is compared with his expenditures that are not attributable to his resources on hand or non-taxable receipts during the period. A substantial excess of expenditures over the combination of reported income, non-taxable receipts, and cash on hand may establish the existence of unreported income. [Footnote omitted.]

United States v. Citron [86-1 USTC ¶9228 ], 783 F.2d 307, 310 (2d Cir. 1986).

³ Appellant's first wife, Joan, subsequently married Frank Williford. They reported taxable income in 1980, 1981, and 1982, respectively, in the amount of $19,375, $15,347, and $10,748, essentially composed of W-2 income. In 1980, 1981, and 1982, Jean, appellant's second wife, filed individual returns showing taxable income of $3,088, $6,576, and $4,089, respectively, mainly from "self-employment" income. Appellant's parents, Joseph H. and Kay T. Caswell reported taxable income in the years 1977 and 1978 of $14,078 and $7,908. Kay died in 1979. Joseph filed individual returns in the years 1979, 1980, 1981, and 1982, respectively, reporting income in the amount of $4,047, $3,118, $2,911, and $7,585, consisting mainly of W-2 and pension income. In 1978, 1981, and 1982, appellant's son, Jack, Jr. or sometimes called John, reported gross income of $2,805, $10,250, and $25,937, respectively, representing mainly W-2 income. In 1979 and 1980, Jack, Jr. and his wife Elaine filed joint returns reporting adjusted gross income of $4,569 and $11,223. Filed tax returns during this period also showed that appellant's other two sons, Tim and Frank, and his daughter, Catherine, reported insignificant amounts of income. Later on at trial, the government introduced evidence showing that appellant's grandfather, Frank Sargent, had only social security income during the years under investigation.

⁴ In its opening statement at trial, the government explained its theory:

This is a criminal tax evasion case. * * * [This is] an expenditures tax case and the evidence will show that the expenditures of the defendant * * * exceeded his available wage income for the years charged here in the indictment. * * *

* * *

* * * The evidence will further show that the only likely source of cash in this particular case among the defendant and his relatives was [defendant; t]hat [defendant,] in addition to being a Grey Eagle driver with W-2 wage income[,] was a bookmaker * * * and the evidence will show * * * that a bookmaker accepts wagers from other individuals, while betting money on various sports contests, basketball, baseball, football--NFL football in this occasion.

The evidence will * * * show that bookmakers normally deal in currency. The evidence will further show that the defendant and his relatives made significant cash expenditures but did not in any [remote way] have the resources, the income or the job to allow them to do that. They did not have * * * the capability to make the currency expenditures that were in this case.

The evidence will show that after a review of each relative's tax returns, bank accounts, Social Security accounts, retirement income, and third party documents, * * * [defendant] was the only likely source of the currency used for the expenditures in this case.

⁵ At oral argument, Caswell's counsel conceded that the government established the existence of a bookmaking operation, but then asserted, without any explication, that the government failed to prove that Caswell ran the operation. This claim is without merit.

The district court record shows that the government introduced many pieces of evidence to support its theory that Caswell was behind the operation. For example, there was evidence that (1) Caswell was the lessee of the Creve Coeur apartment from which bets were transferred, (2) calls from the apartment were transferred at one point to Caswell's residence, (3) Caswell (along with his father and son) was present at the Caswell farm when the raid occurred, and (4) IRS agents answering the phone at the farm during the raid received bets from persons who often asked for a "Jack" or "Jackie"--Caswell's nicknames. This is but a brief sample of the evidence introduced by the government. We believe this evidence was more than sufficient to allow the jury to infer that Caswell was behind the bookmaking operation.

⁶ Although courts sometime blur the distinction between the "net worth" and "cash expenditures" methods of proof, the expenditures method is a variant of the "net worth" method, e.g., Citron, 783 F.2d at 310, and encompasses different elements of proof. See Taglianetti, 398 F.2d at 562-63. One example of these differing elements is the requirement related to the presentation of the defendant's net worth.

⁷ IRS Agent Grass testified that he calculated the currency available to Caswell for the years 1979, 1980, 1981, and 1982 as $9,004, $20,619, $17,450, and $3,378, respectively. For each year, Grass prepared an exhibit showing these totals and the component parts of the totals.

⁸ Although there was some evidence of a "cash hoard" and a "death-bed gift", this evidence was brought in by Caswell's relatives in an attempt to show that they had other possible sources of nontaxable income. Rather than address this defense here, we believe it is more logical to address it under Caswell's next contention, which specifically relates to the problems of proof associated with attributing to him his relatives' expenditures.

⁹ In this brief, Caswell also contended that the government failed to state a cause of action in its opening statement and that the evidence presented at trial was a material variance from the indictment. Similar to the "net worth" argument, he claimed that the only basis for holding him liable for his relatives' expenditures would have been if the government showed, under an agency or conspiracy cause of action, that the relatives made the expenditures for or on behalf of Caswell. Because the government presented no direct evidence linking him to those expenditures, he claimed that the government's case failed as a matter of law. In view of the above analysis, however, it is clear that these two contentions, like Caswell's "net worth" contention, are assaults on the sufficiency of the government's evidence. Accordingly, our above examination of the issue implicitly subsumes these other two arguments.

 

 

[84-1 USTC ¶9309]United States of America, Plaintiff-Appellee v. William O. Radseck, Defendant-Appellant

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 82-2390, 718 F2d 233, 9/28/83, Aff'g an unreported DC decision

[Code Secs. 446 and 7201]

Crimes: Tax evasion: Reconstruction of income: Expenditures method: Evidence.--An individual's conviction for attempted tax evasion was affirmed and the admission of government exhibits containing summaries of evidence by which the government had concluded that the individual had unpaid tax liability was proper. The summaries were based on other evidence before the court and were accompanied by the testimony of the person who prepared them, and such person was available for cross examination. The agent's conclusions as determined under the expenditures method of income reconstruction and as to the amount of cash on hand were based on the evidence and did not render government exhibits inadmissible.

Lloyd B. Monroe, Assistant United States Attorney, Indianapolis, Indiana, 46204, for Plaintiff-Appellee. Daniel E. Nabke, Ehlenbach & Nabke, 14199 W. Greenfield Ave., New Berlin, Wisconsin, 53151, for Defendant-Appellant.

Before ESCHBACH and COFFEY, Circuit Judges, and CAMPBELL, Senior District Judge. ^*

ESCHBACH, Circuit Judge.

Appellant William O. Radseck was charged with five counts of mail fraud, 18 U. S. C. §1341, three counts of conspiracy to commit mail fraud, 18 U. S. C. §371, four counts of affecting interstate commerce by extortion, 18 U. S. C. §1951, and three counts of attempted income tax evasion, 26 U. S. C. §7201. After a jury trial, he was acquitted of two of the mail fraud charges, and convicted of the rest of the charges. Radseck was fined $5,000 and sentenced to four six-year sentences for his extortion convictions, and nine two-year sentences for his other convictions. All sentences are to run concurrently. He takes this appeal pursuant to 28 U. S. C. §1291. The appellant claims as error the admission of hearsay testimony of a co-conspirator, the admission of testimony concerning earlier fraud attempts, and the admission of certain government exhibits concerning the tax evasion charges.

For the reasons given below, we find no merit to these claims and affirm the convictions.

I.

A. The Co-conspirator Testimony. Radseck was the Indiana claims manager for the Milwaukee Mutual Insurance Company ("Milwaukee Mutual"). In 1978, Radseck met with Larry Hiner, a partner in the Round Construction Company ("Round"), and promised Hiner insurance work in exchange for a fifteen-percent kickback of the gross amount realized on Milwaukee Mutual work. After discussing the proposal with his partner, William Casassa, Hiner agreed to pay the kickbacks and Round began receiving work from Radseck. Hiner and Casassa continued their arrangement with Radseck until March 1979. Both Hiner and Casassa testified for the government as unindicted co-conspirators.

Hiner testified extensively about the kickback arrangement between Round and Radseck. The government then called Casassa, who testified that Hiner had related to him the details of Radseck's original proposal. Casassa's testimony concerning those initial discussions, to which he was not a party, was admitted pursuant to Fed. R. Evid. 801(d)(2)(E), the co-conspirator exception to the hearsay rule. "A statement is admissible under this rule only when the government has established by a preponderance of the evidence, independent of the statement itself, that (1) a conspiracy existed, (2) that the defendants and the declarant were members of the conspiracy, and (3) that the statement was made in the course of the conspiracy." United States v. Xheka, 704 F. 2d 974, 985 (7th Cir. 1983); United States v. Santiago, 582 F. 2d 1128 (7th Cir. 1978). The preliminary determination that that government has in fact established a conspiracy is made by the trial judge pursuant to Fed. R. Evid. 104(a). Santiago, supra, 582 F. 2d at 1130-31, 1133.

The admission of Casassa's testimony was preceded by an extended colloquy between the court and the attorneys for both sides. The discussion, which covers twelve pages of the trial transcript, concerns the requirements of Santiago, and the testimony already in evidence that could support an independent finding of conspiracy. All the parties to this discussion correctly identified the burden of proof applicable to the preliminary conspiracy determination as a showing by the preponderance of the evidence. In response to the objection to the hearsay testimony, the trial judge stated, "The Court must determine if by a preponderance of the evidence the declarant and the Defendant were members of a conspiracy when the hearsay statement was made and that the statement was in furtherance of the conspiracy." More discussion followed, during which both attorneys also referred to the preponderance-of-the-evidence standard. However, in deciding to admit the testimony, the trial judge concluded that he was "convinced certainly to the extent of a prima facie case having been established, that there was a conspiracy . . .." The appellant now complains of this isolated reference to a prima facie standard.

Because the trial judge discussed Santiago at length, and because the judge and the attorneys referred to the preponderance-of-the-evidence standard at all times except this one instance, we are convinced that the trial judge understood and used the correct standard to evaluate the evidence of a conspiracy. Hiner's testimony is sufficient to establish a conspiracy, and although the appellant attacks Hiner's credibility, we must defer to the trial judge's decision crediting Hiner's testimony.

B. Prior Similar Acts. The government introduced evidence that Radseck had also attempted to make a percentage kickback deal with Vernon Ayers, an insurance adjuster. Radseck approached Ayers in 1971, 1972, and again in 1976 with proposals similar to the one he offered Round Construction. The last proposal was made in the presence of Ted Biberstine, Ayers' employee. Both Ayers and Biberstine testified for the government. The appellant contends that the admission of their testimony was erroneous, because the testimony concerned acts that were both dissimilar to, and remote in time from, the conspiracies charged.

Under Fed. R. Evid. 404(b), "evidence of prior similar crimes or acts [is] admissible if such acts have a 'substantial relevance' to an issue other than a general criminal character and propensity to commit crime." United States v. O'Brien, 618 F. 2d 1234, 1238 (7th Cir.), cert. denied, 449 U. S. 858 (1980); United States v. McPartlin, 595 F. 2d 1321 (7th Cir.), cert. denied, 444 U. S. 833 (1979). Evidence of other crimes or misconduct is relevant if it bears upon intent, knowledge, or absence of mistake or accident. United States v. Peskin, 527 F. 2d 71 (7th Cir.), cert. denied, 429 U. S. 818 (1975); United States v. Jones, 438 F. 2d 461 (7th Cir. 1971). Here, the testimony of Ayers and Biberstine was admitted solely for the purpose of showing intent and plan, and the jury was so instructed. Where such evidence is introduced to show intent, "the degree of similarity is relevant only insofar as the acts are sufficiently alike to support an inference of criminal intent." United States v. O'Brien, supra, 618 F. 2d at 1238; United States v. Weiler, 385 F. 2d 63 (3d Cir. 1967). The testimony of Ayers, corroborated by Biberstine, was that Radseck had solicited kickbacks in return for the receipt of Milwaukee Mutual's business. With Ayers, as with others Radseck solicited, Radseck also spoke of cheating the insurance company by inflating bills. These similarities are enough to support admissibility on the issue of intent. The prior acts need not be duplicates of the ones for which the defendant is now being tried. United States v. O'Brien, 618 F. 2d 1234 (7th Cir.), cert. denied, 449 U. S. 858 (1980); United States v. McPartlin, 595 F. 2d 1321 (7th Cir.), cert. denied, 444 U. S. 833 (1979).

Further, we do not agree that the acts testified to by Ayers and Biberstine were too temporally remote to be admissible. Radseck, whose solications of Ayers ended in 1976, was charged with conspiracies that began in 1976 and 1977. In United States v. Lea, 618 F. 2d 426 (7th Cir.), cert. denied, 449 U. S. 823 (1980), we held admissible testimony that implicated the defendant in a kickback scheme that had occurred some ten to twelve years earlier than the one for which he was then on trial. See also O'Brien, supra, 618 F. 2d 1234 (events testified to occurred two years earlier); McPartlin, supra, 595 F. 2d 1321 (events testified to occurred four years prior to those charged). In the instant case, the solicitations of Ayers ended in the very year a conspiracy with one Loren Rosander, an insurance adjuster, began. We therefore hold that the admission of the prior-acts testimony of Ayers and Biberstine was not erroneous.

C. The Tax Exhibits. In its presentation of the attempted income tax evasion charges, the government relied on several exhibits which it offered in connection with the testimony of an Internal Revenue Service Agent, Arthur Young. The exhibits consisted of summaries of the evidence by which the government had concluded that Radseck had unpaid tax liabilities for the years 1977, 1978, and 1979, and computations by Agent Young using the "expenditures" method of income reconstruction--an accounting method. These exhibits purported to show how the government arrived at its conclusion that Radseck had attempted to evade payment of his taxes.

The exhibits used in this case are a hybrid form of evidence. On the one hand, they are comprised in part of the kind of tabulations contemplated by Fed. R. Evid. 1006, as when they summarize numerous independent financial transactions already in evidence through previous testimony and other exhibits. On the other hand, they are accompanied by the testimony of an expert, an agent of the Internal Revenue Service, who has prepared the exhibits and drawn certain conclusions, through the use of one or several income reconstruction methods, about the defendant's liability for unreported income.

We have approved the use of exhibits such as the ones admitted here where the government witness who prepared the exhibit was available for cross-examination, and the jury was instructed that the exhibits have no independent evidentiary weight and are to be disregarded insofar as they do not comport with other evidence. United States v. Esser [75-2 USTC ¶9654], 520 F. 2d 213 (7th Cir.), cert. denied, 426 U. S. 947 (1975); United States v. Dana [72-1 USTC ¶9227], 457 F. 2d 205 (7th Cir. 1972); United States v. Tolbert [69-1 USTC ¶9173], 406 F. 2d 81 (7th Cir. 1969); United States v. Bernard [61-1 USTC ¶9221], 287 F. 2d 715 (7th Cir. 1961); United States v. Doyle [56-1 USTC ¶9553], 234 F. 2d 788 (7th Cir. 1956.) We have also required that the exhibits be organized so the jury might easily correlate the parts that purport to be summaries with the evidence underlying those summaries. Dana, supra, 457 F. 2d at 208; Tolbert, supra, 406 F. 2d at 85.

Notwithstanding these requirements, the appellant states that the government's "expenditures" exhibits should not have been admitted. First, he claims the exhibits were inaccurate because they did not incorporate certain evidence, available to the government through its other exhibits and files, that would have negated some of the claimed tax liability. Second, he claims the exhibits were conclusory because they reflect the assumption that Radseck had no cash on hand, a fact which the appellant contends was not in evidence. We will discuss these concerns seriatim.

In the "expenditures" method of income reconstruction, IRS agents attempt to match the defendant's available sources of funds (salary, sales of assets, etc.) with expenditures and savings during a fiscal year. If expenditures and savings grossly exceed funds, agents conclude that the defendant had available unreported sources of income. During cross-examination of Agent Young, it was established that the government should have credited Radseck with income from a $250 inheritance and a $2,356 tax refund in 1977, a $1,700 tax refund in 1978, and a $6,000 return from the sale of a boat in 1979. It was also disclosed that the 1978 exhibit incorrectly included $2,766 as both a personal expenditure and an increase in assets. ¹ The appellant's contention that these inaccuracies rendered the exhibits inadmissible, however, reveals a misapprehension of our requirements. While some courts have specified that the trial judge conduct a hearing to determine the accuracy of the exhibits, see e.g., United States v. Conlin [77-1 USTC ¶9291], 551 F. 2d 534 (2d Cir.), cert. denied, 434 U. S. 831 (1977), we require only that the defendant be allowed to thoroughly test the exhibits through cross-examination of the witness who prepared them, and that the jury be instructed as to their proper use. These requirements are checks against the prejudicial use of erroneous summary charts. ² In the instant case, the trial court was advised before the exhibits were admitted that they were based on evidence already before the jury. All of the inaccuracies of which the appellant complains were disclosed during the extensive cross-examination of Agent Young, and acceded to by the government in its closing argument. Further, the jury was repeatedly cautioned by the court that a summary "does not constitute evidence," that "it is for the jury to determine whether the evidence supports the summary," and that the exhibits were "admitted to assist [the jury] in evaluating the other evidence." The admission of exhibits containing summaries under these circumstances complies with the decisions of this court, and we find no error. ³

Finally, the appellant states the exhibits were inadmissible because they contained assumptions by Agent Young that rendered the exhibits conclusory. Specifically, he complains that the assumption that he had no increase in cash on hand, reflected in line one of each of the exhibits in question, was not based on facts in evidence. Radseck and his wife both testified that they had accumulated, through savings over the years, a large amount of cash in a dresser drawer in their home.

We note initially that the zero figure under "increase in cash on hand" is actually heldpful to the appellant. Under the "expenditures" method, increases in assets are added to personal expenditures. The total is then compared with the defendant's source of funds. It is, therefore, helpful to a defendant if the figures in the "increase in assets" section is low, in order that all increases, coupled with expenditures, do not exceed the defendant's source of funds. We will assume, therefore, that the appellant's real objection is to line eighteen, entitled "decreases in cash on hand," which also shows a zero figure.

Agent Young testified that his conclusion that Radseck had no increase in cash on hand (and therefore no decrease was shown) was based on "all the evidence and oral testimony and from the exhibits from the trial." Further, Special Agent Clelland, who supervised the preparation of the exhibits, testified that in his experience in investigating thirty-five to forty attempted income tax evasion cases, people who have five bank accounts, thirteen savings and loan accounts and two brokerage accounts do not keep substantial amounts of cash on hand. The inference that Radseck did not keep such cash in his home was a permisible one. Agent Young's and Agent Clelland's qualifications to draw conclusions based upon the evidence were amply established at trial and are not questioned here. As we have noted before, "[t]he nature of a summary witness's testimony requires that he draw conclusions based upon the evidence presented at trial." United States v. Esser [75-2 USTC ¶9654], 520 F. 2d 213, 218 (7th Cir.), cert. denied, 426 U. S. 947 (1975).

That Radseck later testified he kept large amounts of cash in his home is of no import in the context of whether the exhibits were admissible. The government was under no obligation to include the appellant's version of the facts in its exhibits. Myers v. United States [66-1 USTC ¶9371], 356 F. 2d 469 (5th Cir.), cert. denied, 366 U. S. 961 (1966); United States v. Shavin [63-2 USTC ¶9584], 320 F. 2d 308 (7th Cir. 1963); Flemister v. United States [58-2 USTC ¶9904], 260 F. 2d 513 (5th Cir. 1958). The jury was admonished by the court that the exhibits purported to be only "the Government's submission of the Government's theory of what the Government's case shows up to this point." The proper weight to be accorded the conclusions of the IRS agents was a question for the jury to decide.

II.

For the reasons set forth above, the appellant's convictions are affirmed.

^* The Honorable William J. Campbell, Senior District Judge for the Northern District of Illinois, sitting by designation.

¹ The appellant's most serious contention, that a $48,000 return from the sale of two rental properties (which would have reduced his tax liability for 1978 to zero) was not reflected in the government's computations, is not supported by the record. Agent Young testified on redirect that the money from the sale of those properties was included on lines twenty-four and twenty-six of the 1978 exhibit.

² We note that this is not a case where exhibits, properly introduced, are subsequently disclosed to be seriously inaccurate or where the government willfully introduced exhibits it knew presented a distorted picture of the defendant's financial situation. Agent Young testified that the errors in the expenditures exhibits in no way affected the accuracy of the other summaries which were the government's primary method of proof, nor did the failure to include certain sums change his conclusion that, even by the expenditures method, Radseck owed unpaid taxes for the years in question. Finally, the government made no attempt to conceal the errors, and referred to them in its closing argument to the jury.

³ While it might have been better as a procedural matter if the lines on the exhibits were more clearly correlated with the underlying evidence, see United States v. Dana, 457 F. 2d 205, 208 (7th Cir. 1972), we feel that the sources for the computations that appeared in the exhibits were well enough explored that the jury could not have been misled.

 

 

[84-2 USTC ¶9584]United States of America, Plaintiff-Appellee v. Jose Rob ert Gomez-Soto, Defendant-Appellant

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 82-1459, 723 F2d 647, 1/9/84, 723 F. 2d 649

[Code Sec. 7201]

Criminal penalties: Evidence: Bank records and net worth increases: Fact finding.--Upon viewing the entire evidence in the light most favorable to the government, there was substantial evidence to find the taxpayer guilty beyond a reasonable doubt of income tax evasion. The government needed only to identify a "likely" source of income from which it was inferred that the taxpayer's increase in net worth arose. Here, the government established its case by assuming that the assets of three Columbian corporations were personal assets of the taxpayer. There was no evidence that corporate bank accounts, of which the taxpayer and his wife were the sole signators, were used for a business purpose. Although the corporations were purportedly in the lumber export trade, they were used instead as means by which cocaine was smuggled into the U. S. in the inside of hollow wooden doors and posts. The government did not have to negate every possible source of nontaxable income.

Eric J. Swenson, Sandra Teters, Assistant United States Attorneys, San Francisco, Calif. 94102, for plaintiff-appellee. Kenneth M. Quigley, San Francisco, Calif., for defendant-appellant.

Before CHOY and NORRIS, Circuit Judges, and CURTIS, ^* District Judge.

CURTIS, District Judge:

Appellant Gomez-Soto (Gomez) appeals his conviction of violating Title 21 U. S. C. §963 [conspiracy to import cocaine]; Title 21 U. S. C. §846 [conspiracy to distribute cocaine]; and three counts of violating Title 26 U. S. C. §7201 [income tax evasion]. Gomez was tried and convicted by the court below, sitting without a jury.

Gomez asserts that: (1) the evidence seized by virtue of the March 19, 1981 search warrant was improperly admitted against him, because the warrant authorizing the search was so general in nature as to violate the fourth amendment; (2) closed containers found within the area to be searched, but not particularly described on the face of the warrant, were impermissibly searched and the contents seized; and finally, there was insufficient evidence to convict him of income tax evasion, as the government used the "net worth" method of computation without a proper foundation.

Believing as we do that none of these contentions have merit, we affirm.

Statement of Facts

On March 19, 1981, a warrant ^** was issued authorizing the search of Gomez's home in Woodside, California, based upon an affidavit submitted by a DEA agent.

In executing the warrant, among the objects found on the premises and subsequently searched and seized were a Gucci bag (characterized in the argument as a "briefcase") and a microcassette tape. The Gucci bag was locked. Gomez was asked for the combination of the lock, and upon his declaration of his inability to recall it, the agents cut open the bag and seized its contents, which, in fact, was cocaine. The microcassette was found on top of a dresser in the bedroom closet and contained statements incriminating Gomez.

On March 26, 1981, two more search warrants were issued. The first authorized a further search of the Gomez residence, and the second called for the search of a safe deposit box in the Menlo Park branch of the Bank of America. The affidavit submitted in support of the second set of warrants contained a recitation of facts gleaned from the earlier search. Thus, if the March 19 warrant is overbroad, the fruits of the second set of warrants must be suppressed as tainted.

At the trial, in seeking to determine Gomez's tax liability, the "net worth" method was used. In its computation, the government assumed that the assets of three Columbian corporations were the personal assets of Gomez. According to the affidavit, the appellant and his wife were the sole signators on the bank accounts of the corporations, the corporations' addresses were that of the appellant, and a number of items of a personal nature (automobile, jacuzzi, liquor, antiques, toys, etc.) were paid for out of these accounts. There was no evidence that the accounts were used for a business purpose. The corporations were purportedly in the lumber export trade, but, in fact, were means by which the appellant smuggled cocaine into the United States in the inside of hollow wooden doors and posts.

The Warrant was not Overbroad

Understandably the appellant makes no contention that the warrant lacks probable cause, for the underlying affidavit sets forth in great detail and particularity the nature and scope of appellant's activities. Appellant contends only that the warrant is so nonspecific and overbroad as to constitute a "general warrant" prohibited by the Fourth Amendment of the United States Constitution, which provides in relevant part:

[A]nd no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

It was, of course, fear of general warrants and indiscriminate rummaging among personal belongings which motivated the adoption of the fourth amendment. Payton v. New York, 445 U. S. 573, 100 S. Ct. 1371, 63 L. Ed. 2d 639 (1980).

The requirement that warrants shall particularly describe the things to be seized makes general searches under them impossible and prevents the seizure of one thing under a warrant describing another. As to what is taken, nothing is left to the discretion of the officer executing the warrant.

Marron v. United States, 275 U. S. 192, 196, 48 S. Ct. 74, 76, 72 L. Ed. 231 (1927).

Although technical precision of description is not required, United States v. Drebin, 557 F. 2d 1316, 1322 (9th Cir. 1977), cert. denied, 436 U. S. 904, 98 S. Ct. 2232, 56 L. Ed. 2d 401 (1978), the warrant must so circumscribe an officer's actions that the issuing magistrate can determine that the "search in all of its dimensions is based upon probable cause and particular descriptions." United States v. Hillyard, 677 F. 2d 1336, 1339 (9th Cir. 1982).

Although appellant challenges the entire warrant, he makes particular reference only to the broad descriptions of Items 4, 6, 7, 8 and 12, which we discuss seriatim.

Item 4 authorizes the search for and seizure of "representative original samples of handwriting, including writings in the Spanish language." Only an overly-technical reading could render Item 4 insufficiently particular. "Representative," although indicating no precise number, connotes a limited number of papers. Read in light of its purpose--to obtain a handwriting exemplar--Item 4 authorizes the seizure of only a very limited number of papers. Furthermore, since the samples were sought for the limited purpose of handwriting comparison, a magistrate could not be expected to describe any more particularly the specific papers to be seized.

Item 6 authorizes the seizure of documents indicative of appellant's residence or citizenship. This item specifically describes the types of documents sought and describes the contents thereof. In United States v. Honore, 450 F. 2d 31 (9th Cir. 1971), cert. denied, 404 U. S. 1048, 92 S. Ct. 728, 30 L. Ed. 2d 740 (1972), we upheld against a particularity challenge, a warrant including a similar description. The Honore warrant authorized the seizure of "articles . . . tending to establish the identify [sic] of persons in control of the premises . . . including but not limited to utility company receipts, rent receipts, cancelled mail envelopes, and keys." 450 F. 2d at 33. Item 6 is no less particular.

Appellant objects to the description in Item 7 which calls for the seizure of records of international travel. Appellant contends that the lack of limitation as to time renders the item overbroad. However, testing Item 7 in a "commonsense and realistic fashion," as we must, (United States v. Ventresca, 380 U. S. 102, 108, 85 S. Ct. 741, 746, 13 L. Ed. 2d 684 (1965)), it is valid. Unlike most of the descriptions in this warrant, Item 7 was not expressly limited to events occurring after January 1, 1976. Any international travel records available would, however, likely be related to appellant's current or recent activities--activities well within the scope of the probable cause underlying the warrant.

Item 8 authorizes the seizure of any documents relating to any business transactions of either the appellant or the three separate corporations for the previous five years. This item is particularly definitive, and we have upheld similar warrants. United States v. Offices Known as 50 State Distrib., 708 F. 2d 1371, 1374 (9th Cir. 1983). The fact that it authorizes the seizure of a large quantity of material is justified by probable cause supplied by the affidavit from which it appears that the appellant's sole business was trafficking in narcotics.

Item 12 is strenuously objected to by the appellant. It calls for papers, including currency, evidencing failures to file currency transaction reports as required by Title 31 U. S. C. Appellant argues that the limitation by way of statutory reference alone renders the description impermissibly vague, and cites United States v. Roche, 614 F. 2d 6 (1st Cir. 1980) and United States v. Cardwell [82-2 USTC ¶9470], 680 F. 2d 75 (9th Cir. 1982), for the proposition that a warrant phrased in terms seeking instrumentalities or evidence of a general statutory violation is unconstitutional.

In Cardwell, we found insufficiently particular a warrant calling for "books and records . . . which are the fruits and instrumentalities, of violations of 26 U. S. C. §7201." 680 F. 2d at 76. We explained that `limiting' the search to only records that are evidence of the violation of a certain statute is generally not enough. . . . If items that are illegal, fraudulent, or evidence of illegality are sought, the warrant must contain some guidelines to aid the determination of what may or may not be seized." Id. at 78. As did the warrant in Cardwell, Item 12 lacks objective guidelines to aid the determination of what may or may not be seized and is thus unconstitutionally vague.

In reaching this result, we do not ignore the admonition that "the Fourth Amendment's commands, like all constitutional requirements, are practical and not abstract." United States v. Ventresca, 380 U. S. 102, 108, 85 S. Ct. 741, 746, 13 L. Ed. 2d 684 (1965). A general description may be acceptable in a warrant if a more precise description is not possible. Cardwell, supra, 680 F. 2d at 78; VonderAhe v. Howland [74-2 USTC ¶9825], 508 F. 2d 364, 370 (9th Cir. 1975). Item 12, however, could have been drafted more precisely. Since the DEA sought articles it claims are typically found in the possession of narcotics traffickers, the warrant could have named or described those particular articles. Here, as in Cardwell, the government could have drafted a warrant to get what it wanted without authorizing an exploratory general search. Cardwell, supra, 680 F. 2d at 78; see also VonderAhe, supra, 508 F. 2d at 370.

Our conclusion that Item 12 is impermissibly general does not, however, require the invalidation of the entire March 19 warrant. This court has embraced the doctrine of severance, which allows us to strike from a warrant those portions that are invalid and preserve those portions that satisfy the fourth amendment. Only those articles seized pursuant to the invalid portions need be suppressed. Cardwell, supra, at 78; see also United States v. Christine, 687 F. 2d 749 (3d Cir. 1982).

In this warrant, Item 12 is only one of thirteen descriptions, twelve of which are sufficiently particularized. It is practicable, therefore, for us to sever Item 12 from the warrant and uphold the portion that remains. Since there is no indication in the record before us that there was any material seized pursuant to the warrant which did not come within the descriptions of the valid portions thereof, we uphold the search.

Search and Seizure of Gucci Bag and Microcassette

Appellant objects to the search and seizure of the briefcase, the microcassette and their contents on the ground that they were not particularly described in the warrant. Appellant argues by analogy from the long line of automobile luggage search cases contending that a separate warrant is necessary to open a locked container found within a larger container. Appellant characterizes the cassette as a locked container openable only by playing it on a tape player.

The cases involving locked luggage in automobiles are not in point, for those all deal with unwarranted searches of automobiles which have been allowed under exceptional circumstances. The right to conduct that type of an unwarranted search has never been extended to locked containers found within them.

The search and seizure of both the microcassette and the briefcase were proper. It is axiomatic that if a warrant sufficiently describes the premises to be searched, this will justify a search of the personal effects therein belonging to the person occupying the premises if those effects might contain the items described in the warrant. United States v. Ross, 456 U. S. 798, 820-21, 102 S. Ct. 2157, 2170, 72 L. Ed. 2d 572 (1982); 2 La Fave, Search & Seizure §4.10(b) at 154 (1978); United States v. Gentry, 642 F. 2d 385 (10th Cir. 1981) [warrant for drugs in certain premises authorized search of briefcase located therein] United States v. Morris, 647 F. 2d 568, 573 (5th Cir. 1981) [no separate warrant required to open locked jewelry box found inside residence searched pursuant to valid warrant].

The briefcase would be a logical container for any of the many things specifically described in the warrant. A microcassette is by its very nature a device for recording information in general whether it be statistical information, conversations, past events, future plans, all of which come clearly within the specific authority of the warrant. The failure of the warrant to anticipate the precise container in which the material sought might be found is not fatal.

The appellant suggests that since a greater right to privacy exists in a home than in a place of business, a warrant authorizing a search of a home should be more specific so as not to unduly invade the privacy which one expects in a home. It may be that authorization of a search of a home requires a stronger showing of probable cause than for a search of a place of business, but when probable cause is one established for the search wherever it is to be, the difference disappears. Admittedly, in the case at hand, there was probable cause for a warrant to search the home where the illegal transactions were being carried out, and the warrant was sufficiently specific to permit the search of the briefcase and the seizure of the tape.

Evidence of Income Tax Evasion Sufficient to Sustain Conviction

On a challenge to the sufficiency of the evidence, the standard of review is whether there is substantial evidence, taken in the light most favorable to the government, supporting the conviction. United States v. Basey, 613 F. 2d 198 (9th Cir. 1979), cert. denied, 446 U. S. 919, 100 S. Ct. 1854, 64 L. Ed. 2d 274 (1980).

In proving the elements of the crime of tax evasion by the "net worth" method, the government is required to: (1) accurately establish the defendant's opening net worth; (2) identify a likely source of taxable income from which it may be inferred that the defendant's net worth arose; and (3) conduct a reasonable investigation of any leads that suggest the defendant properly reported his income. These requirements are imposed because of the nature of the net worth method of proof. Evidence in these kinds of cases must be carefully reviewed bearing constantly in mind the difficulties that arise when circumstantial evidence as to guilt is the chief weapon of a method that is itself only an approximation. United States v. Hamilton [80-2 USTC ¶9497], 620 F. 2d 712, 714 (9th Cir. 1980).

The appellant challenges the government's assumption that the assets of the three Columbian corporations were indeed the assets of the appellant. The appellant asserts that the government put on no proof as to the foundation of this assumption, and thus there is no substantial evidence to support the conviction below.

However, the government need only identify a "likely" source of taxable income from which it may be inferred that the defendant's increase in net worth arose. In this case the government put on such evidence. Appellant contends that the government must establish an alter ego relationship between the defendant and the corporations. Hamilton, supra, 620 F. 2d at 714, makes it clear that the government does not have to go that far. "The government is not required 'to embark on a Magellan-like expedition in order to prove that the unreported income was taxable.' It need not 'negate every possible source of nontaxable income, a matter peculiarly within the knowledge of the defendant.' The principle remains that once the government has established its case, the defendant remains silent at his peril." Id.

Viewing the entire evidence in the light most favorable to the government, there is substantial evidence to find the appellant guilty beyond a reasonable doubt.

The appellant's conviction in the court below is affirmed.

^* The Honorable Jesse W. Curtis, United States District Judge for the Central District of California, sitting by designation.

^** The search warrant authorized the seizure of the following items:

1. Cancelled checks, bank statements, currency transaction reports, receipts, notes, money orders, cashier's check applications or any other record, entry or paper showing any transaction since 1976, involving cash or currency in excess of $5,000 (for transactions involving movements of cash into or out of the United States) or $10,000 (for domestic transactions);

2. Books, papers, records, receipts, documents, notations, diaries, journals or ledgers showing receipt, expenditure, or availability of substantial amounts of currency, cash or money since January 1, 1976;

3. All business records, books, papers, and documents showing the date, destination, origin, shipping line, customer, and price paid for any shipment since January 1, 1976, of door panels, or other wood products, from Columbia to the United States. (sic)

4. Representative original samples of handwriting, including writings in the Spanish language;

5. A gold Rolex man's watch, engraved "J.R.G.";

6. Cancelled checks, bills, receipts, payment vouchers, and other papers indicating true place of residence and citizenship of Jose Rob ert Gomez-Soto;

7. Passports, airline ticket receipts, and other papers relating to travel outside the United States by Jose Rob ert Gomez-Soto;

8. Books, papers, records, and documents relating to any business transactions since January 1, 1976, in the United States by or on behalf of Jose Rob ert Gomez-Soto, Corporacion Financiera San Francisco Limitada, Industria De Maderas, Frederick Coffee Company, Maderas Victoria Limitada, and Otoya Instant Coffee Company;

9. Books, records, papers, documents and notations relating to or discussing transactions or arrangements for distributing, selling or importing cocaine or other controlled substances, including income or profits therefrom and any arrangements for splitting such income or profits or arrangements for paying or transporting such controlled substances;

10. Any papers, books, records, documents, showing utilization, ownership or scheduling of private airplane flight into or out of the United States any time since January 1, 1976.

11. Agreements, articles of incorporation, certificates or other papers showing partnership, joint venture, corporate, or other status, including ownership and control, for any entity or organization engaged at any time since January 1, 1976, in importing wood products into the United States from Columbia, or in transferring cash or currency in excess of $5,000 into or out of the United States;

12. Papers, including currency, evidencing failures to file currency transaction reports as required by Title 31, United States Code; and

13. Any controlled substances, containers or conveyance therefor, and all other instrumentalities and fruits of unlawful importing or distributing of controlled substances.

 

 

 

[84-1 USTC ¶9380]United States of America, Appellee v. Thomas G. Heyward, Appellant

(CA-4), U. S. Court of Appeals, 4th Circuit, No. 82-5183, 729 F2d 297, 3/5/84

[Code Sec. 7201]

Criminal penalties: Income tax evasion: Evidence: Hearsay: Admissibility.--A memorandum, which was contained within the files of a deceased attorney and which indicated the taxpayer may have received certain income through a loan rather than through drugsmuggling activities, was not admitted into evidence under the residual hearsay exception on the ground that it was not more probative than other reasonably available evidence. The residual hearsay rule should be invoked only where other evidence is difficult to obtain. Additionally, in failing to turn over the memorandum to the taxpayer's defense counsel, a prosecutor neither violated the taxpayer's constitutional rights nor shirked his duty to disclose exculpatory documents to the defense, since only documents materially affecting the question of an individual's guilt concerning criminal tax evasion need be disclosed and the memorandum was not material. Also, evidence could be introduced establishing the discovery of a drug-laden airplane since other evidence demonstrated the taxpayer's ownership of the plane. Finally, assets that were discovered by the IRS in 1980 were properly used as the basis for determining the taxpayer's net worth in 1978 and 1979. The time difference was sufficiently close to warrant the notion that the assets reflected the taxpayer's income in previous year.

Henry Dargan McMaster, United States Attorney, Wells Dickson, Assistant United States Attorney, Columbia, S. C. 29202, for appellee. Randolph Murdaugh, III, John W. Hendrix, Rob erts Vaux, for appellant.

Before RUSSELL and MURNAGHAN, Circuit Judges, and BULLOCK, ^* District Judge.

BULLOCK, District Judge:

Thomas G. Heyward was convicted in March 1982, in a trial by jury, of two counts of income tax evasion in violation of 26 U. S. C. §7201. The government's case rested on the net worth of proof, which requires either a negativing of all the possible nontaxable sources of the defendant's net worth increases over the years in question, or the establishment of a "likely source" of income. United States v. Massei [58-1 USTC ¶9326], 355 U. S. 595, 78 S. Ct. 495, 2 L. Ed. 2d 517 (1958). The instant case proceeded along the latter route, with the government convincing the jury that Heyward's increases in net worth were attributable to drugsmuggling activities.

I.

Heyward's defense was that any increase in net worth was due to a $175,000.00 loan he received from a man named Rob ert Horan, who died before these proceedings began. Horan's widow, business partner, and accountant each testified, however, that Horan did not have access to that amount of cash, that it would have been impossible for him to make that sizeable a loan, and that they had never heard of Heyward before. Heyward could present no note evidencing the indebtedness and claimed that the funds had been kept in a strongbox under his bed.

During the trial Heyward's attorney attempted to introduce into evidence a memorandum from the files of the deceased attorney who had handled Horan's estate, Rob ert O. Bowden. The memorandum, signed "R. O. B.," stated:

After several calls to various people . . . it turns out that Bob Horan had a Navajo B which he owned with Gary Scott and goes under the numbers of 33FZ. They also thought he had a Navajo Chieftan at Grumman American under the numbers 80RS or 80RJ, but it may have been sold about a week before he died. In conjunction with that, Savannah Bank reported to the FBI that he came in with $100,000 cash and turned it into a cashier's check payable to the C & S Bank, and this would conform with the indebtedness situation on his plane which he probably paid off.

In response to the prosecution's hearsay objection, Heyward's attorney claimed that the memorandum satisfied Fed. R. Evid. 804(b)(5), the residual hearsay exception. That rule states:

Other exceptions. A statement not specifically covered by any of the foregoing exceptions but having equivalent circumstantial guarantees of trustworthiness, if the court determines that (A) the statement is offered as evidence of a material fact; (B) the statement is more probative on the point for which it is offered than any other evidence which the proponent can procure through reasonable efforts; and (C) the general purposes of these rules and the interests of justice will best be served by admission of the statement into evidence. However, a statement may not be admitted under this exception unless the proponent of it makes it known to the adverse party sufficiently in advance of the trial or hearing to provide the adverse party with a fair opportunity to prepare to meet it, his intention to offer the statement and the particulars of it, including the name and address of the declarant.

The trial judge refused to admit the memorandum into evidence, principally on the ground that counsel had not given the prosecution the required advance notice, ¹ but also because he questioned whether it was more probative than other reasonably available evidence.

We decline to extend the residual hearsay exception to the memorandum in question for the latter reason. We are mindful that Rule 804(b)(5) was not written to be used as a "new and broad hearsay exception," Fong v. American Airlines, Inc., 626 F. 2d 759, 763 (9th Cir. 1980), but was meant to be "invoked sparingly." Rob inson v. Shapiro, 646 F. 2d 734, 742 (2d Cir. 1981). Accord Huff v. White Motor Corp., 609 F. 2d 286, 291 (7th Cir. 1979). The legislative history of the rules puts it more strongly: "It is intended that the residual hearsay exceptions will be used very rarely, and only in exceptional circumstances." Fed. R. Evid. 803 Senate committee note (quoted in United States v. Kim, 595 F. 2d 755, 765 [D. C. Cir. 1979]). Those exceptional circumstances are lacking here, for the Horan memorandum fails to meet the requirement of 804(b)(5)(B) that it be "more probative on the point for which it is offered than any other evidence the proponent can procure through reasonable efforts."

Testimony by an officer of Savannah Bank would quite clearly be more probative of Horan's possession of $100,000.00 than is the file memorandum of the late Mr. Bowden. Bowden procured this information through a telephone call, and it hardly seems unduly burdensome to require defendant's counsel to duplicate that feat. The trial judge granted a recess to allow defendant's counsel to obtain this testimony, but the issue was not raised again the next morning, and we can only conclude that defense counsel himself questioned the value of the testimony.

Other courts have been equally loath to apply the residual hearsay exception when it would not be difficult to go behind the proferred hearsay to reach more solid evidence. In United States v. Kim, 595 F. 2d 755 (D. C. Cir. 1979), for example, defendant attempted to introduce a telex from his bank in Korea regarding $400,000.00 which he had on deposit there. Defendant's aim was to prove that he had other sources of funds and would not have accepted money to bribe members of Congress. The court refused to apply the residual hearsay exception, stating "[m]uch stronger evidence of alternative sources of income would be the actual business records reflecting the profitable business activities which produced that income, or testimony from business partners, employees and accountants as to the actual income source in some active business of Hancho Kim." Id. at 766. See Zenith Radio Corp. v. Matsushita Elec. Indus. Co., 505 F. Supp. 1190, 1264-65 (E. D. Pa. 1980); In re Sterling Navigation Co., 444 F. Supp. 1043, 1046-47 (S. D. N. Y. 1977).

II.

Heyward next claims that the Horan memorandum constitutes exculpatory material which the government had a duty to turn over to him under the rule of Brady v. Maryland, 373 U. S. 83, 83 S. Ct. 1194, 10 L. Ed. 2d 215 (1963). Assuming for the sake of argument that the prosecution had possession of the memorandum prior to trial, Brady has never been interpreted to require a prosecutor to throw open his files to opposing counsel. A prosecutor does not have "a constitutional obligation to disclose any information that might affect the jury's verdict." United States v. Agurs, 427 U. S. 97, 108, 96 S. Ct. 2392, 49 L. Ed. 2d 342 (1976). Thus every failure to make a disclosure is not reversible error.

The standard by which a prosecutor's failure to turn over allegedly exculpatory material must be judged is one of materiality. The United States Supreme Court has framed the question in terms of the strength of the evidence: "[I]f the omitted evidence creates a reasonable doubt that did not otherwise exist, constitutional error has been committed." Id. at 112. We thus turn to the Horan memorandum to determine whether its evidentiary impact would have risen to this level.

The Horan memorandum states merely that Horan had apparently sold one of his aircraft and had entered the Savannah Bank with $100,000.00 in cash, the proceeds from that sale, which he converted to a cashier's check made out to the lienholder on that aircraft. It makes no connection between Horan and the defendant, evidence of which was also entirely lacking at trial. It does not establish that Horan had access to large amounts of cash which he might conceivably have lent to the defendant. In short, we do not find the Horan memorandum to be so probative of Heyward's innocence that it should be considered error for the prosecution not to have diclosed it.

III.

Heyward's final contention is that the trial court erred in admitting into evidence that his plane was found in Georgia loaded with over 4,000 pounds of marijuana. This evidence was an integral part of the government's proof that Heyward's additional income had come through drug smuggling. Heyward's principal objection appears to be that there is insufficient evidence to link him to the plane's cargo. ² We find this argument unpersuasive. Heyward was the record owner of the plane and presented no evidence that it had been stolen. In fact, one day before its recovery by state agents in Georgia, Heyward asked one of his employees if the plan had returned. Other evidence also led to the conclusion that the plane was being used for illicit purposes. The plane was allegedly used for mosquito spraying, but the tanks for the insecticide opened into the main fuel tanks, giving the plane a range far greater than that needed for its purported purpose. Hilton Head Air Service, a corporation owned by Heyward, purchased approximately 15,000 to 20,000 gallons more fuel than they had recorded selling during 1976-78 and no explanation was provided for its disappearance. On one instance in January 1980, the corporation was missing 1,600 gallons from the close of business one night to its opening the next morning. These circumstances suggest a number of previous clandestine trips by Heyward.

Heyward also argues that the trial court erred in allowing the government to introduce evidence of the discovery of the drugladen plane in 1980 to substantiate its net worth claims for 1978 and 1979. We do not find the discovery of the plane in February 1980 to be so temporally remote from the two previous years which were the subject of this indictment as to render the evidence inadmissible. See, e.g., Beard v. United States [55-1 USTC ¶9400], 222 F. 2d 84, 92 (4th Cir.) (discovery of gambling equipment on defendant's premises in 1945 admissible in net worth case in 1944), cert. denied, 350 U. S. 846 (1955). The time difference was simply a matter to be considered by the jury. See United States v. Wright [82-1 USTC ¶9389], 667 F. 2d 793, 800 (9th Cir. 1982).

As there was no reversible error in the trial court proceedings, the appellant's conviction is

AFFIRMED.

¹ Courts have generally construed the notice requirements of 804(b)(5) and its companion rule 803(24) strictly. See, e.g., United States v. Atkins [80-2 USTC ¶9490], 618 F. 2d 366, 372 (5th Cir. 1980); United States v. Ruffin [78-1 USTC ¶9269], 575 F. 2d 346, 358 (2d Cir. 1978). When new evidence is uncovered on the eve of trial, however, advance notice is obviously impossible. Recognizing that practical realities in this instance bar compliance with the letter of the rule, at least one court has granted a continuance to allow the party entitled to advance notice an opportunity to prepare to meet the evidence. United States v. Bailey [78-2 USTC ¶9706], 581 F. 2d 341, 348 (3d Cir. 1978); 4 J. Weinstein and M. Berger, Weinstein's Evidence 803-294 (1982) (continuance is the proper remedy); see also Fed. R. Evid. 102 ("These rules shall be construed to secure fairness in admin istration . . . to the end that the truth may be ascertained . . ..").

² Hoyward also contends that this evidence was "more prejudicial than probative," an allusion to Rule 403, Fed. R. Evid., under which relevant evidence may be excluded if the trial court finds that "its probative value is substantially outweighed by the danger of unfair prejudice." The trial court has wide discretion in this area, however, and its determination will not be overturned except under the most "extraordinary" of circumstances. United States v. MacDonald, 688 F. 2d 224, 227-28 (4th Cir. 1982), cert. denied, -- U. S. --, 103 S. Ct. 726 (1983). We find no such circumstances in the present case.

 

 

[81-2 USTC ¶9567]United States of America, Plaintiff-Appellee v. John Wilson, Sr., Defendant-Appellant

(CA-5), U. S. Court of Appeals, 5th Circuit. Unit B, No. 80-7645, 647 F2d 534, 6/8/81, Affirming an unreported district court opinion

[Code Sec. 7201]

Crimes: Income tax evasion: Sufficiency of evidence: Inconsistent verdict: Motion for bill of particulars.--The government's evidence concerning the taxpayer's net worth at the beginning of 1973 plus its proof of his net worth increase and expenditures for the period in question was sufficient to convict the taxpayer on one count of income tax evasion for the year 1973 and the jury's verdict was supported by the evidence. The verdict was not inconsistent because the jury found the taxpayer guilty of income tax evasion in one year but acquitted him in subsequent years. Moreover, the district court did not err in denying the taxpayer's motion for a bill of particulars to allow him to ascertain the government's method of proof since the taxpayer made no showing of surprise or prejudice at trial due to the lack of the information sought.

Denver L. Rampey, Jr., United States Attorney, Miriam Wansley, Assistant United States Attorney, Macon Ga. 31202, for plaintiff-appellee. Denmark Groover, Jr., Floyd M. Buford, Groover & Childs, P. O. Box 755, Macon, Ga. 31202, for defendant-appellant.

Before HILL, FAY and ANDERSON, Circuit Judges.

PER CURIAM:

Appellant was indicted on five counts of income tax evasion in violation of 26 U. S. C. A. §7201. Each count represented one taxable year from 1973 to 1977. The jury convicted appellant on Count I, which involved the 1973 tax year, and acquitted him on Counts II through V. On appeal, appellant argues that the verdict on Count I is not supported by the evidence and that the trial court erred in denying his Motion for a Bill of Particulars. We affirm.

With respect to appellant's challenge to the sufficiency of the evidence, he argues that the government's proof was ultimately dependent upon the accuracy of his starting net worth at the beginning of the 1973 tax year. Appellant claimed at trial that his cash on hand at the beginning of 1973 was $75,000. The government witnesses testified that appellant admitted to them that he had $25,000 in cash at the beginning of 1973. In a credibility choice, the jury obviously chose to believe the government's evidence concerning the amount of appellant's cash on hand at the beginning of 1973. ¹ This evidence plus the government's proof of net worth and expenditures for 1973 supported the jury's verdict on Count I.

Appellant also argues, in support of his challenge to the sufficiency of the evidence, that the verdicts were inconsistent. He asserts: "the only way that the jury could have found against the contention of the government with respect to the last four counts was to accept the defendant's version about the amount of cash which was available to explain his increase in net worth." Appellant's brief at 12. We do not agree that the jury must have rejected the government's proof that appellant had $25,000 in cash at the beginning of 1973. The jury the government failed in its proof with year 1973 with $25,000, and that he received unreported taxable income in 1973 as alleged by the government. Such findings are not at all inconsistent with a finding that United States v. Roundtree [69-2 USTC ¶9733], respect to the 1974 through 1977 tax years. It is also possible that the jury could have decided for reasons other than a failure in the government's proof to acquit on Counts II through V. See United States v. Espinosa-Cerpa, 630 F. 2d 328, 332 (5th Cir. 1980). Therefore, we conclude that the verdicts are not inconsistent. Even if they were, appellant's conviction on Count I, if supported by the evidence, may stand, notwithstanding an inconsistency between the verdicts. United States v. Romeros, 600 F. 2d 1104 (5th Cir. 1979), cert. denied, 444 U. S. 1077, 100 S. Ct. 1025, 62 L. Ed. 2d 759 (1980).

Appellant next argues that the district court erred by denying his Motion for a Bill of Particulars which he asserts was intended to allow him to ascertain whether the government was going to proceed on the net worth method, the net worth and expenditures method, or the specific items method of proving income tax evasion. Appellant also sought other data such as a list of assets and liabilities which comprised his net worth at the beginning and ending of the years involved. In Rob erson v. United States, 249 F. 2d 737, 739 (5th Cir. 1957), cert. denied, 356 U. S. 919, 78 S. Ct. 704, 2 L. Ed. 2d 715 (1959), we held "[t]he granting or denial of a bill of particulars rests in the sound discretion of the trial court, and in the absence of abuse of discretion or prejudice, its ruling will not be disturbed." (citations omitted). More recently we said, "[t]he denial of a bill of particulars rests within the sound discretion of the district court and can be reversed by this Court only upon demonstration that defendant was actually surprised at trial and thus incurred prejudice to his substantial rights by the denial." (citation omitted). United States v. Diecidue, 603 F. 2d 535, 563 (5th Cir. 1979), cert. denied, 445 U. S. 946, 100 S. Ct. 1345, 63 L. Ed. 2d 781 (1980). The government introduced into evidence only one asset which was not reflected in the documents exchanged before trial, i. e., the amount of cash the government claimed was on hand as of the beginning of 1973. There is no evidence in the record that appellant was surprised that the amount of such cash hoard was a crucial issue. Appellant has made no showing of surprise or prejudice at trial due to the lack of information he sought. Accordingly, he has not demonstrated that the district court abused its discretion in denying his motion.

The conviction of the appellant

AFFIRMED.

¹ We note the requirement that in cases in which circumstantial proof of tax evasion is used, such as the instant case, the government must establish with reasonable certainty the net worth of the taxpayer, including the amount of cash he had in his possession, at the beginning of the tax period. United States v. Normile [79-1 USTC ¶9151], 587 F. 2d 784 (5th Cir. 1979). When the government uses the taxpayer's admissions as to his opening net worth, the government must corroborate that admission. 587 F. 2d at 786, citing Smith v. United States [54-2 USTC ¶9715], 348 U. S. 147, 75 S. Ct. 194, 99 L. Ed. 192 (1954). However, because a cash hoard is inherently secret, it is not susceptible to independent verification and the government need not corroborate the taxpayer's statement with respect to his cash on hand at the beginning of the tax period. "The government . . . [is] not obliged to prove a proposition inherently impossible to establish." 587 F. 2d at 586-7.

Here appellant attempts to explain the increase in his cash apparently available during 1973 by alleging at trial the existence at the beginning of 1973 of a cash hoard of $75,000. The evidence shows that the government did everything reasonably possible to verify appellant's opening net worth, including his cash on hand, at the beginning of 1973. On two separate occasions prior to trial, the taxpayer admitted to government agents that he had only $25,000 in cash on hand at the beginning of 1973. Under these circumstances, the issue of the amount of appellant's cash hoard was properly submitted to the jury. Hayes v. United States [69-1 USTC ¶9204], 407 F. 2d 189 (5th Cir.), cert. dismissed, 395 U. S. 972, 89 S. Ct. 2133, 23 L. Ed. 2d 777 (1969).

 

 

[80-2 USTC ¶9593]United States of America, Appellee v. Sylvio J. Grasso, Appellant

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket No. 79-1476, 629 F2d 805, 7/29/80

[Code Secs. 446 and 7201]

Conviction for tax evasion: Commissioner's use of net worth plus non-deductible expenditures method of reconstructing income: Government's burden of proof: All possible sources of non-taxable income not negated: Conviction overturned.--The Court of Appeals overturned the taxpayer's conviction for tax evasion because the government failed to carry its burden of proof in relying on the net worth plus expenditures method of reconstructing income to determine that the taxpayer had unreported income. The court held that the IRS had no factual basis for identifying a likely source of the allegedly unreported income, that it failed to negate all alternative possible non-taxable sources and that therefore the government had failed to establish an essential element of its case.

Richard Blumenthal, United States Attorney, Michael Hartmere, Assistant United States Attorney, David H. Beitz, Department of Justice, Washington, D. C. for appellee. Henry B. Rothblatt, Rothblatt & Seijas, 232 West End Ave., New York, N. Y. 10023, for appellant.

Before KAUFMAN, OAKES, Circuit Judges, and WILL, District Judge. ^*

PER CURIAM:

This is an appeal from a judgment of conviction entered November 30, 1979 after a bench trial by Judge Daly of the District of Connecticut. A brief history of the case may be helpful. The defendant was first indicted in April 1975 on three counts of alleged tax evasion under 26 U. S. C. §7201 for the years 1969, 1970 and 1971. A jury trial which commenced November 5, 1975, before Judge Clarie ended in a mistrial declared sua sponte by the court following a key government witness' recantation of his testimony. The case was then reassigned to Judge Zampano, the defendant moved to dismiss the indictment on grounds of double jeopardy, the motion was granted, and the indictment dismissed. 413 F. Supp. 166 (D. Conn. 1976).

The government appealed and this Court affirmed. 552 F. 2d 46 (2d Cir. 1977). An en banc rehearing petition was denied. 568 F. 2d 899 (2d Cir. 1977). The government's petition for certiorari was granted, the judgment vacated and the case remanded in light of United States v. Scott, 437 U. S. 82 (1978) and Arizona v. Washington, 434 U. S. 497 (1978). 438 U. S. 901 (1978). Thereafter, this Court reversed the judgment of the district court and remanded the case for a new trial. 600 F. 2d 343 (2d Cir. 1979).

A jury trial was waived and, on the government's motion, count one of the indictment was dismissed. After trial, in which the parties stipulated that all of the evidence in the 1975 trial would be considered by the trial judge except the testimony of three witnesses, the district court found the defendant not guilty on count two and guilty on count three. That count relates to the year 1971.

The government contended that the defendant had taxable income of $71,226 in 1971 and a tax liability of $26,338 as opposed to the $16,646 of reported taxable income and the tax paid of $3,441. At the trial, the government sought to establish that the unreported income exceeded $60,000 through the net worth plus non-deductible expenditures method. The starting point for such a computation of taxable income is the "opening net worth" at the beginning of the tax year or sequence of tax years. As the government concedes, the most difficult item of opening net worth to establish is customarily "cash on hand". In the instant case, the government used a starting date of December 31, 1968 since it originally charged Mr. Grasso with tax evasion in 1969, 1970 and 1971. In its net worth calculations, the government assumed cash on hand at that date of $200 based on an answer Mr. Grasso had given to a question by an IRS Special Agent in 1972 as to how much cash he customarily had on hand. Mr. Grasso explained at trial that he understood the agent to be asking how much cash he kept on his person and not how much cash he had available on that date.

He contended at the trial that the government's 12/31/68 computation of his net worth which totalled $129,000 was inaccurate since it omitted substantial assets including $20,800 in personal savings which his wife and he had, as well as a reserve of $23,950 for bond forfeitures that he kept in cash. He therefore contended that the opening net worth should have been $185,781 or some $57,000 more than that calculated by the government. Since the subsequent year-end and beginning of the year net worth calculations all depend on the accuracy of the initial year's opening net worth, this represents a substantial disagreement in the net worth calculations for the year 1971.

In a criminal tax case, the government has the burden of establishing three essential elements: (1) that an additional tax was in fact due and owing by the taxpayer, (2) that he knowingly and wilfully failed to pay the same, and (3) that he did so in an attempt to evade or defeat the tax. When the government seeks to prove by the net worth method than an additional tax was in fact due and owing, it must prove the following facts: (1) a reasonably accurate opening net worth and closing net worth for the year in question, (2) an increase in net worth in the taxable year comparable to the allegedly unreported income, including an allocation of any increase in net worth or receipt of income over a period of years to establish that it is properly allocable to the year in question, (3) evidence of a "likely source" of income or the negation of any possible non-taxable source, (4) differentiation between the husband's and wife's assets, income and expenditures sufficient to justify the inference that the defendant supplied the funds for expenditures by the wife, and (5) exhaustion by the government of all "leads" provided by the taxpayer suggesting relevant information with respect to any of the foregoing.

Judge Daly carefully analyzed the net worth calculations made by the government's expert and the defendant's accountant. He concluded that, with certain minor exceptions, the government's figures, including the $200 cash on hand which the government assumed represented the opening and closing cash on hand in each of the years 1969, 1970 and 1971 were correct and that, therefore, the defendant's net worth increased by more than $60,000 in 1971.

Accepting the accuracy of the government accountant's calculations, however, does not satisfy the government's burden of proof. Either a "likely source" of the illegally unreported income represented by the calculated increase in net worth plus non-deductible expenditures in the year in question must be shown or all possible sources of non-taxable income must be negated. United States v. Massei [58-1 USTC ¶9326], 355 U. S. 595 (1958); United States v. Bianco [76-1 USTC ¶9351], 534 F. 2d 501 (2d Cir. 1976). Moreover, all leads as to sources and amounts of income, taxable and non-taxable, must be exhausted. Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121 (1954).

In the instant case, the government, while accepting the taxpayer's stated sources of income and suggesting them as the possible sources of the allegedly unreported income, apparently made no effort to ascertain whether the amounts he reported as having received from those sources were understated. His income from the Wigwam Restaurant, playing part-time with the Al Jarvis band, the bonding business, his investments, and income earned by his wife, all were subject to verification. He apparently kept meticulous records for his bonding business and, if he had issued a substantial number of bonds not reflected in his books, this could easily have been detected by reference to public records of the bonds he posted or to the records of the bonding company which he represented. The suggestion that his reported sources of income were the likely sources of his more than $60,000 in unreported income without verification is inconsistent with the requirements of Massei and Holland that the government in a net worth case must verify the available facts and leads either to show a likely source or negate alternative sources. We are aware that internal revenue agents cecked banks and brokerage houses, examined various financial statements and transactions and conducted hundreds of interviews. When their efforts were concluded, however, they had no factual basis for identifying a "likely source" of the allegedly unreported income and contend only that the sources of income he reported on his 1971 return were also the sources of the more than $60,000 in allegedly unreported income. The record contains no justification for this conclusion and it is inherently implausible.

We recognize that convictions under the net worth method of computation may stand absent specific proof of a likely source of the unreported income so long as all alternative possible non-taxable sources are negated. United States v. Massei, supra; United States v. Bianco, supra. But while specific proof of a likely source is not necessary, given the uncertainties inherent in the net worth method of proof, a conviction based on sources suggested but not verified by the government (although apparently verifiable) and which are not even plausible much less proved hardly establishes guilt beyond a reasonable doubt. On the contrary, it indicates that the government has failed to establish an essential element of its case.

Under the circumstances, the judgment of conviction must be reversed.

^* United States Senior Judge, United States District Court for the Northern District of Illinois, sitting by designation.

 

 

 

[80-2 USTC ¶9497]United States of America, Appellee v. James C. Hamilton, Appellant

(CA-9), U. S. Court of Appeals, 9th Circuit, Nos. 79-1340, 79-1611, 620 F2d 712, 4/30/80, Affirming an unreported District Court decision

[Code Sec. 7201]

Crimes; Filing false and fraudulent return; Reconstruction of income; Net worth and expenditures method; Circumstantial evidence.--The Court of Appeals upheld the taxpayer's conviction of filing a false and fraudulent income tax return and held that the government's use of the net worth and expenditures method of proof was sufficient to establish that the taxpayer had received taxable income from illegal skimming of the slot machines of which he was manager. It was not necessary that the IRS negate every possible source of nontaxable income in order to establish an affirmative act of willfulness in evading taxes although a mere understatement of income would not be considered sufficient evidence. The Court also found the taxpayer's contention that the district court had abused its discretion in refusing to conduct an investigation into allegations that the jury relied on sources outside the record to be without merit.

C. Stanley Hunterton, Las Vegas, Nev., for appellee. Patrick R. Doyle, Sorensen & Becker, 323 Las Vegas Blvd., Las Vegas, Nev. 89101, for appellant.

Before KILKENNY, SKOPIL and PREGERSON, Circuit Judges.

Nature of the Case

KILKENNY, Circuit Judge:

Appellant was indicted, tried by a jury, and convicted of filing a false and fraudulent income tax return, understating his income for the year 1975, in violation of 26 U. S. C. §7201.

From January, 1975, through May, 1976, appellant was the manager of slot machine operations for the Fremont Hotel and Casino in Las Vegas, Nevada. Briefly stated, the evidence showed that appellant acquired substantial holdings in real estate, stocks, and savings accounts while his liabilities increased by less than $13,000.00 in 1975. The government showed that appellant experienced an increase in net worth of $64,664.00 in twelve months on a reported taxable income of less than $26,000.00, and ultimately demonstrated that appellant had a true taxable income for the year 1975 of $68,000.00, and that he had evaded $12,878.00 in taxes. Substantial evidence was presented from which it could be inferred that the likely source of the increase in net worth was a slot machine "skim."

Method of Proof

Appellee employed what is commonly known as the "net worth and expenditures" method of proof. ¹ This procedure was approved by the Supreme Court in Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 75 S. Ct. 127, 99 L. Ed. 150 (1954), and was recognized and approved by this court as recently as United States v. Gardner, 611 F. 2d 770 (CA-9, 1980).

In framing the law on the subject, the Supreme Court has said that the government, to sustain a conviction, must prove the three elements of the offense: (1) the existence of a tax deficiency, (2) willfulness in evading taxes, and (3) an affirmative act constituting an evasion or attempted evasion of the income tax. Sansone v. United States [65-1 USTC ¶9307], 380 U.S. 343, 351, 85 S. Ct. 1004, 1010, 13 L. Ed. 2d 882 (1965). In proving the elements, the government is required to: (1) accurately establish the defendant's opening net worth, (2) identify a likely source of taxable income from which it may be inferred that the defendant's increase in net worth arose, and (3) conduct a reasonable investigation of any leads that suggest that defendant properly reported his income. Holland, supra; Gardner, supra. The latter three requirements are imposed because of the nature of the net worth and expenditures method of proof. As Holland and Gardner caution, the evidence in this kind of case should be carefully reviewed "bearing constantly in mind the difficulties that arise when circumstantial evidence as to guilt is the chief weapon of a method that is itself only an approximation." Holland, supra at 129, 75 S. Ct. at 132.

Principal Issues on Appeal

I. Whether the government proved the existence of a tax deficiency.

II. Whether the government proved the element of willfulness of appellant in attempting to evade income taxes.

III. Whether the government proved an affirmative act constituting an evasion of income taxes.

I. The establishment of an accurate opening net worth is crucial under the net worth and expenditures method of proof for "the correctness of the result depends entirely upon the inclusion in this sum of all assets on hand at the outset." Holland, supra 348 U. S. at 132, 75 S. Ct. at 134. Our review of the record convinces us that the government has supplied evidence to meet this requirement. Appellant's chief argument is that he must have had a cash hoard on hand at the end of 1974 and that this would mean that his opening net worth was substantially greater than the amount the government established. In this regard, he argues that the government failed to investigate and "purify" assets and sources of income allegedly revealed by a "150 M" notation on a 1974 new account form with a brokerage firm, by large bank deposits in 1972, 1973, and 1975, and by a 1967 loan application.

The government is not required "to embark on a Magellan-like expedition in order to prove that the unreported income was taxable." United States v. Heitt, 581 F. 2d 1199, 1201 (CA-5 1978). It is only required to pursue any reasonable leads as to possible sources of nontaxable income, United States v. Hom Ming Dong [71-1 USTC ¶9175], 436 F. 2d 1237, 1242 (CA-9 1971). It need not "negate every possible source of nontaxable income, a matter peculiarly within the knowledge of the defendant." Holland, supra 348 U. S. at 138, 75 S. Ct. at 137. The principle remains that once the government has established its case, the defendant remains silent at his peril. Holland, supra at 138-139, 75 S. Ct. at 136-37; United States v. Costello [55-1 USTC ¶9342], 221 F. 2d 668, 671 (CA-2 1955), aff'd. [56-1 USTC ¶9321] 350 U. S. 354, 76 S. Ct. 406, 100 L. Ed. 397 (1956).

Appellant provided no reasonable leads, but now argues that the documents and deposits mentioned above put the government on notice of possible sources of income. We disagree. The loan application made only vague references to some assets allegedly held by appellant in 1967. Only a fraction of those assets were even valued on the application; and that at only $2,500.00. There was no indication that these assets were sold to produce a cash hoard ² or that they were the source of nontaxable income. At trial, it became apparent that the "150 M" notation on the brokerage house new account form meant nothing. Testimony revealed that it was put on the form by a salesman and that there was no evidence in the record to substantiate the figure. Finally, there was no reasonable suggestion that the bank deposits came from nontaxable sources. It would be entirely unreasonable to require the government to pursue these phantom clues as to some mysterious sources and assets.

We, of course, recognize that the burden is always on the government to prove each element of the offense beyond a reasonable doubt. The record reveals that the government thoroughly investigated appellant's financial status at the beginning of 1975. It established appellant's opening net worth figure by considering the information contained in appellant's income tax returns over the previous six years, nine bank accounts and their records, the acquisition and sale of ten securities, and six real estate transactions. Viewing the evidence in the light most favorable to the government, as this court must, Gardner, supra at 775; Hom Ming Dong, supra at 1242, there is sufficient evidence to support the jury's verdict on this question.

As part and parcel of this issue of the sufficiency of the evidence of a tax deficiency, it is appellant's contention that the government failed to meet its burden of proving the likely source for the unreported income, Holland, supra 348 U. S. at 138, 75 S. Ct. at 136; Gardner, supra at 775, and that the district court improperly admitted figures from standard budgets prepared by the Bureau of Labor to show appellant's living expenses.

We have no difficulty in holding that the jury could well have found that the likely source of taxable funds was the illegal diversion of money from slot machine revenues at the Fremont Hotel, where appellant was the slot machine manager. Fremont employees testified to the unusual system of dealing with slot machine revenues. The comptroller of the Fremont testified that during 1975 his representative was barred from the counting and wrapping of coins taken from the slot machines. Other witnesses testified regarding the operation of an unusual auxiliary bank which was very susceptible to being used to divert funds. The corporate head of the Fremont testified that he had filed an insurance claim to recover money lost by the Fremont through employee dishonesty. Most convincingly, a statistical expert examined the Fremont's slot machines, reviewed their reported performance, and compared them with similar machines at other casinos and with the manufacturer's built in performance specifications. He concluded that the odds against such machines performing as poorly as the Fremont's records indicated were greater than two billion to one. We disagree with appellant's contention that this statistical analysis should not have been admitted because it was speculative, confusing to the jury, and introduced without proper foundation. There is no question that it was highly relevant to whether moneys were being diverted from the slot machines and that it would likely assist the trier of fact in reaching its decision as to whether the government showed a likely source of income. The admission of the testimony was well within the trial court's discretion under FRE 702 and 703.

We observe that those involved in gambling and its related activities are engaged in enterprises having indeterminate possibilities and capable of bringing in large sums of money in cash. Costello, supra at 672. Appellant was manager of the slot machine operation at the Fremont and was present at the counting and wrapping of the coins. He also told an acquaintance that he had been making $1,000.00 a day during his tenure at the Fremont. Taken in its totality, the evidence, both circumstantial and direct, established the likely source of appellant's unreported income.

As noted above, the proof of the nondeductible expenditures is one factor in the net worth and expenditures method of proof. 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. In this case, the government found that during 1975 there was little activity in appellant's checking account and that the microfilming from two of appellant's banks was illegible. Consequently, it was impossible to reconstruct appellant's living expenses in the typical manner of producing checking account records. Instead, the government was forced to rely on independent estimates from the Bureau of Labor on what a person with appellant's reported income and family and financial obligations would be expected to spend on nondeductible items. Certainly, appellant must have expended some funds to maintain himself. At all times the government relied on the figures most favorable to appellant. Under these circumstances, we see no reason why these statistics should not have been admitted.

II. Relying principally on a set of guidelines set forth in Spies v. United States [43-1 USTC ¶9243], 317 U. S. 492, 63 S. Ct. 364, 87 L. Ed. 418 (1943), appellant argues that there is absolutely no evidence, circumstantial or otherwise, to support the finding of willfulness. However, the Spies decision does not support appellant's position. For that matter, the decision recognizes that willfulness may be shown by a variety of circumstances:

"Congress did not define or limit the methods by which a willful attempt to defeat and evade might be accomplished and perhaps did not define lest its effort to do so result in some unexpected limitation. Nor would we by definition constrict the scope of the Congressional provision that it may be accomplished 'in any manner.' By way of illustration, and not by way of limitation, we would think affirmative willful attempt may be inferred from conduct such as keeping a double set of books, making false entries or alterations, or false invoices or documents, destruction of books or records, concealment of assets or covering up sources of income, handling of one's affairs to avoid making the records usual in transactions of the kind, and any conduct, the likely effect of which would be to mislead or conceal. If the tax-evasion motive plays any part in such conduct the offense may be made out even though the conduct may also serve other purposes such as concealment of other crime." Spies, supra at 499, 63 S. Ct. at 368. ³ [Emphasis supplied.]

It is clear that the acceptable indicia of willfulness are not set in concrete.

It has been said that the crime of attempted tax evasion has its roots in nondisclosure. United States v. Ramsdell [71-2 USTC ¶9627], 450 F. 2d 130, 133 (CA-10 1971). Every indication is that appellant was involved in a slot machine "skim." Certainly, one engaged in such conduct would not be expected to forego his prior secretive design of concealment and tell all on his tax return. We consider it significant that the underlying activity producing the unreported income is itself illegal. We also note that the amount of the understatement alone is sizeable and we think that that is not altogether irrelevant on the issue of willfulness. However, mere understatement of income, without more, is not sufficient evidence on this element. Holland, supra 348 U. S. at 139, 75 S. Ct. at 137; United States v. House [75-2 USTC ¶9782], 524 F. 2d 1035, 1044-45 (CA-3 1975).

Here, we have much more than a mere understatement. One of the important indicia of willfulness mentioned in Spies is handling one's affairs to avoid making a record of transactions, and any other conduct, the likely effect of which is to mislead or to conceal. See also, United States v. Mansfield [67-2 USTC ¶9586], 381 F. 2d 961 (CA-7 1967), cert. denied 389 U. S. 1015, 88 S. Ct. 593, 19 L. Ed. 2d 661. Appellant made large cash deposits and withdrawals from his several accounts during the indictment period and he acquired large holdings in corporate stock by paying $6,000.00 in cash in one instance and $20,000.00 in cash in another. Certainly, such large acquisitions are normally accomplished by a check or with some other record of the transaction. $732.00 twice each month, up to $780.00 from 1969 through 1974, the six years preceding the indictment, appellant was employed as a slot machine mechanic, making a taxable income of something less than $10,000.00 per annum on up to a high of just over $16,000.00. In 1975, he became the manager of all slot machine operations of his employer, the Fremont Hotel. He was paid at the beginning at the rate of $732.00 twich each month, up to $780.00 prior to the termination of his employment in May, 1976. Not only did he work full time at this job, but there is testimony in the record which would show that he occasionally worked seven days a week. Almost half of the salary checks went directly into a savings acocunt. In addition to all of the unusual cash transactions and the substantial increase in his wealth on a reported income which could not account for the increase, appellant remarked to an associate that he was earning $1,000.00 a day. While each of these factors standing alone might not be sufficient to support a finding of willfulness, we have no difficulty in holding that the entire record provided substantial evidence from which a jury could properly infer that appellant knowingly underreported his income for the purposes of attempting to evade income taxes.

III. Appellant's filing a false and fraudulent return understating his income is sufficient to satisfy the affirmative act requirement. Sansone, supra 380 U. S. at 352, 85 S. Ct. at 1010; United States v. Schafer, 580 F. 2d 774 (CA-5 1978), cert. denied 439 U. S. 970, 99 S. Ct. 463, 58 L. Ed. 2d 430; Swallow v. United States [62-2 USTC ¶9693], 307 F. 2d 81, 83 (CA-10 1962), cert. denied 371 U. S. 950, 83 S. Ct. 504, 9 L. Ed. 2d 499 (1963).

Incidential Issues

Appellant's contention that the district court abused its discretion in refusing to conduct an investigation into the allegation that the jury relied on sources outside the record is meritless. For that matter, counsel's conduct in calling the jurors after the verdict and secretly tape recording the conversations was improper. To hold a hearing on whether the jury relied on sources outside the record, with counsel's investigation as the basis for such a hearing, might well establish a precedent which would encourage the harassment of jurors and encourage jury tampering. See United States v. Weiner, 578 F. 2d 757 (CA-9 1978), cert. denied 439 U. S. 981, 99 S. Ct. 568, 58 L. Ed. 2d 651.

We have examined appellant's claim under Brady v. Maryland, 373 U. S. 83, 83 S. Ct. 1194, 10 L. Ed. 2d 215 (1963), and find it but a figment of his imagination.

Conclusion

Viewing the entire evidence in the light most favorable to the government, as we must, we find there was sufficient evidence to find appellant guilty beyond a reasonable doubt. Furthermore, the other assignments of error are groundless. The judgment of conviction must be affirmed.

IT IS SO ORDERED.

¹ To prove the existence of a tax deficiency under the net worth and expenditures method of proof, the government must first establish an "opening net worth" or total net assets of the taxpayer at the beginning of a given year. The government then proves the increase in the taxpayer's net worth for the year by calculating the difference between the net worth of the taxpayer's assets at the beginning and at the end of the year. To that figure is added the taxpayer's nondeductible expenses, including living expenses, yielding the putative income. If that figure is substantially greater than that reported by the taxpayer, the government claims the difference is unreported income.

² We note that had they in fact been sold between 1969 and 1975, appellant failed to report any gain on his tax returns.

³ See also, United States v. Hom Ming Dong [71-1 USTC ¶9175], 436 F. 2d 1237, 1240 (CA9 1977) (absence of business record sufficient to establish willfulness); Feichtmeir v. United States [68-1 USTC ¶9217], 389 F. 2d 498, 503 (CA9 1968) (buying of several large cashier's checks on different days, irregularities in personal books, large volume of currency transactions during indictment period sufficient to support a finding of willfulness); United States v. Swallow [75-1 USTC ¶9267], 511 F. 2d 514 (CA10 1975), cert. denied 423 U. S. 845, 96 S. Ct. 82, 46 L. Ed. 2d 66; United States v. House [75-2 USTC ¶9782], 524 F. 2d 1035 (CA3 1975).

 

 

[80-1 USTC ¶9258]United States of America, Appellee v. Herbert Breger, Appellant

(CA-2), U. S. Court of Appeals, 2nd Circuit, No. 79-1395, 616 F2d 634, 2/28/80

[Code Secs. 7201 and 7206]

Evasion of taxes: False statements on tax returns: Sufficiency of evidence.--The appellate court determined that the evidence presented by the government was sufficient to support conviction of the taxpayer for evasion of taxes and making false statements on returns. Thus, the trial judge did not err in denying the taxpayer's motion for a directed verdict and the conviction was upheld.

Edward R. Korman, United States Attorney, Rhonda C. Fields, Vivian Shevitz, Assistant United States Attorneys, Brooklyn, N. Y. 11201, for appellee. Murry Appleman, 225 Broadway, New York, N. Y., for appellant.

Before OAKES, VAN GRAAFEILAND, and NEWMAN, Circuit Judges.

PER CURIAM:

This appeal is from convictions after a jury trial in the United States District Court for the Eastern District of New York, George C. Pratt, Judge, for three counts of tax evasion, in violation of I. R. C. §7201, for the years 1972, 1973, and 1974, and three counts of false statements in tax returns, for the same years, in violation of I. R. C. §7206(1). We affirm.

Appellant makes two principal arguments on appeal. He first contends that a motion for directed verdict should have been granted, because the excess funds revealed by the expenditure method of proof resulted not from record and tape sales but from repayment of loans. His supporting evidence at trial consisted primarily of testimony from his brother-in-law, father-in-law, and a close family friend, to the effect that they repaid Breger certain cash during the tax years in question. Appellant also claims that he was not a principal but merely an agent for other dealers in the sale of records and tapes. But the Government's proof consisted of invoices in appellant's name and cancelled checks made out to appellant from three record companies for over $90,000. And the testimony as to the cash "repayments" was totally unsubstantiated by any documentation such as books, records, notes, receipts, or the like. We think that these are precisely the sort of factual issues designed for submission to a jury, see Glasser v. United States, 315 U. S. 60, 80 (1942); United States v. Marrapese, 486 F. 2d 918, 921 (2d Cir. 1973), cert. denied, 415 U. S. 994 (1974), which in this case apparently did not accept appellant's version of the story. In any event, even assuming appellant were correct as to each of the alleged repayments, he still substantially understated his taxable income--by more than $17,000. ¹

Appellant's other principal argument attacks the reliability of the Government's opening net worth evaluation. The net worth/expenditure method for proving tax evasion necessitates the establishment with reasonable certainty of a starting point. Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 132 (1954); McFee v. United States [53-2 USTC ¶9549], 206 F. 2d 872, 874 (9th Cir. 1953), vacated and remanded, [55-1 USTC ¶9139] 348 U. S. 905, aff'd upon reconsideration per curiam, [55-1 USTC ¶9414] 221 F. 2d 807 (5th Cir.), cert. denied, 350 U. S. 825 (1955) (expenditure and net worth methods of proof in tax evasion cases are essentially same method). 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 [77-2 USTC ¶9581], 557 F. 2d 527, 530 (5th Cir. 1977), without refuting all possible speculation as to sources of funds, however. McFee v. United States, supra, 206 F. 2d at 874. 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 innaccurate or misleading.

Appellant's other contentions are without merit and require no comment.

¹ The argument that the Government did not investigate the repayments under the "leads" doctine, see Holland v. United States, 348 U. S. 121, 135-36 (1954), is without substance. Even if the doctine were applicable the evidence was sufficient to convict. But appellant had not advised the Government of the supposed cash receipts, his close friend had not done so when interviewed, and their joint attorney never produced the supposed documentation--stock purchase orders--underlying the "loan" and "repayment." In other words there were not "leads" to follow, only afterthoughts.