Bank Records and Net Worth Increases
United States of America
, Plaintiff-Appellee v. Leland M. Carriger, Defendant-Appellant
U. S. Court of Appeals, 6th Circuit, No. 78-5272, 592 F2d 312, 2/5/79,
Reversing unreported District Court decision
[Code Sec. 7201]
Criminal penalty: Attempt to evade or defeat tax: Reconstruction of
income: Net worth method: Evidence: Promissory notes.--The
conviction was reversed and the cause remanded for a new trial in a
criminal action against a defendant for evading taxes. Evidence of the
existence of promissory notes produced to refute the government's
reconstruction of income by the net worth method was improperly denied
admission by the lower court. Such evidence was both material and
relevant. Commercial paper is self-authenticating and it was only
necessary that the documents be sufficiently identified as promissory
notes to make out a prima facie case of admissibility. It was error to
deny admission of this evidence for the determination by the jury of the
authenticity or persuasiveness of such evidence, particularly when such
evidence was used to refute a net worth prosecution.
inson, United States Attorney, F. William Soisson, Assistant United
States Attorney, Detroit, Mich. 48226, for plaintiff-appellee. Joseph S.
605 Fourth Avenue South
, for defendant-appellant.
LIVELY and MERRITT, Circuit Judges; and TAYLOR, * District
defendant was convicted by a jury of evading income taxes for the year
1971. 26 U. S. C. §7201 (1976). The jury acquitted him of the same
charge for 1972. The government sought to prove by the net worth method 1 that
Carriger substantially understated his taxable income on the returns
which he filed for each of the taxable years for which he was indicted.
Prosecution witnesses testified that the defendant owned approximately
$13,000 more federal income tax for 1971 than he paid.
net worth method of proof requires the government to establish a
taxpayer's "opening net worth" with reasonable certainty. Holland
v. United States, supra, 348
at 132. This consists of the taxpayer's assets, at cost, less his
liabilities on the last day of the year preceding the one for which
taxable income is being reconstructed. The next step involves an
analysis of expenditures of the taxpayer during the taxable year and a
determination of his net worth at the end of that year. If the net worth
at the end of the year plus non-tax-deductible expenditures during the
year exceeds the amount of taxable income reported, there is an
inference that additional taxable income was received. The government
must investigate all leads furnished by a taxpayer to explain
expenditures or increases in net worth in order to negate the existence
of non-taxable sources. See, generally,
, supra; United States v. Giacalone [78-1 USTC ¶9350], 574 F. 2d
778 (6th Cir.), cert. denied, --
--, 99 S. Ct. 114 (1978).
appeal Carriger contends that the district court erred in denying his
motion for an acquittal on the ground that opening (December 31, 1970)
net worth was not established with reasonable certainty. Since all
calculations in a net worth case use the opening net worth as their
starting point, it is obvious that this figure must be accurate. The
Supreme Court in
stated the requirement as follows:
agree with petitioners that an essential condition in cases of this type
is the establishment, with reasonable certainty, of an opening net
worth, to serve as a starting point from which to calculate future
increases in the taxpayer's assets. The importance of accuracy in this
figure is immediately apparent, as the correctness of the result depends
entirely upon the inclusion in this sum of all assets on hand at the
careful review of the evidence convinces us that the district court did
not err in denying the motion for acquittal. Starting with a financial
statement which the defendant prepared in 1966 the government witnesses
analyzed Carriger's income and expenditures through 1970 and concluded
that he could not have accumulated large amounts of cash or other assets
which were unknown to them. Among items considered were evidence that
Carrigar had cashed some savings bonds and made no new investments and
that he continued to pay interest on relatively small debts through
1971. The summary witness for the government, an experienced agent of
the Internal Revenue Service who was an accountant, assumed that the
defendant had "walking around money" of $500 on December 31,
1970 and on the same date in 1971. The evidence relied upon to establish
opening net worth in this case is similar in kind to that relied upon in
Giacalone, supra. The analysis of expenditures is similar in the
two cases also. The opening net worth was established with sufficient
certainty to present an issue for determination by the jury.
second ground urged for reversal is that the district court erred in
excluding evidence by which the defendant sought to attack the accuracy
of the prosecution's opening net worth calculation and analysis of 1971
income. In his opening statement counsel for Carriger stated that the
defense would show that the defendant's brother paid large amounts of
money to the defendant in 1971 and that two promissory notes dated in
1970 were evidence that his brother owed the defendant $24,000.
defendant's daughter testified that she saw her father count out a large
sum of money and hand it to her uncle in 1969 or 1970. An apparently
disinterested witness testified that in the spring or summer of 1971 he
saw the defendant's brother push a pile of money toward the defendant.
Describing the transaction the witness said, ". . . he hollered out
ten thousand, and 'Here's the rest' and pushed it to Leland [the
defendant], you know." Prior to presenting the above testimony the
defendant had sought to introduce as exhibits two promissory notes. Both
notes were signed by Vernon Carriger, identified as defendant's brother,
and Valada Mason. Both notes were payable to Leland Carriger in annual
installments of $1,000. One note, for $10,000, was dated March 2, 1970;
the other for $14,000, was dated September 10, 1970. The government
objected to the introduction of the notes and the objection was
promissory notes were first offered during the testimony of an attorney
who had represented the defendant's brother and had seen the notes in
his office, probably in 1971. Though the witness stated that he was
familiar with Vernon Carriger's signature, he was not permitted to
testify that the signature on the two notes appeared to be that of
Vernon Carriger. The notes were next offered as exhibits during the
testimony of another attorney who stated that he represented Vernon
Carriger for seven or eight years and had also represented the defendant
in tax matters. The witness testified that he was able to recognize the
signatures of Vernon Carriger and the other signer of the note, Valada
Mason. The witness was not permitted to testify that the signatures on
the notes were those of Vernon Carriger and Valada Mason because the
district court concluded that there was "no foundation at all"
for such testimony. Following this reling the witness testified that he
had seen both signers of the two notes sign their names hundreds of
times. He was then permitted to identify the signatures on the notes as
those of Vernon Carriger and Valada Mason.
the two notes were again offered in evidence the objection of government
counsel was sustained and they were excluded. The district court held
that the tendered exhibits had been adequately identified as purporting
to be two promissory notes payable to the defendant and signed by his
brother and Valada Mason. However, in concluding that the notes were
relevant, but not material, the trial judge stated:
has been no witness here that has testified as to the purpose, or the
execution of these, what the consideration was, why the notes were
transferred, how it is material to this lawsuit, how it accounts for any
asset or anything else.
court then indicated that the notes could be made material by the
testimony of any of the three parties to them or by a lawyer who
prepared the notes and could identify the transaction of which they were
district court correctly determined that the promissory notes were
relevant evidence. Rule 401, Fed. R. Ev., contains this general
evidence" means evidence having any tendency to make the existence
of any fact that is of consequence to the determination of the action
more probable or less probable than it would be without the evidence.
the government's opening net worth contained no indebtedness from Vernon
Carriger to the defendant, the notes at least had a tendency to make
more probable the fact as claimed by the defendant that the opening net
worth was inaccurate for failure to include assets owned by him on
December 31, 1970. They also tended to make more probable the claim that
some of the defendant's 1971 expenditures came from a non-taxable
source--the repayment of a preexisting debt. Since Rule 402, Fed R. Ev.,
makes all relevant evidence admissible unless otherwise provided, 2 we must
determine whether any exception applies.
excluding the notes the district court held that they were not material.
The Note of Advisory Committee on Proposed Rules appended to Rule 401
criticizes the word "material" as "loosely used and
C. A., Federal Rules of Evidence (1975) at 85. The word
"material" does not appear in the federal rules and appears to
be subsumed into the language of Rule 401, "any fact that is of
consequence to the determination of the action." Since the
promissory notes related to the central issues in the case they should
not have been excluded on grounds of materiality.
overruling Carriger's motion for a new trial the district court held
that "the promissory notes were properly excluded since no
foundation was laid for their admission into evidence; . . .." In
its brief the government equates this language with a holding that the
notes were excluded for lack of authentication. Rule 901, Fed. R. Ev.,
provides in part as follows:
REQUIREMENT OF AUTHENTICATION OR IDENTIFICATION
General provision. The
requirement of authentication or identification as a condition precedent
to admissibility is satisfied by evidence sufficient to support a
finding that the matter in question is what its proponent claims.
Illustrations. By way of
illustration only, and not by way of limitation, the following are
examples of authentication or identification conforming with the
requirements of this rule:
Testimony of witness with knowledge.
Testimony that a matter is what it is claimed to be.
Nonexpert opinion on handwriting.
Nonexpert opinion as to genuineness of handwriting, based upon
familiarity not acquired for purposes of the litigation.
note of the Advisory Committee appended to Rule 901 states,
"Authentication and identification represent a special aspect of
C. A., Federal Rules of Evidence, at 714. This comment ties Rule 901 to
Rule 104(b), Fed. R. Ev., which deals with the admission of evidence
where relevancy depends upon fulfillment of a condition of fact. 3 See In re
James E. Long Construction Co., 557 F. 2d 1039 (4th Cir. 1977).
Under this rule the district court was required to make a preliminary
determination of whether there was sufficient evidence "to support
a finding that the matter in question is what its proponent
claims." Rule 901(a), supra. The requirement of the
illustration in Rule 901(a)(2), supra, was clearly satisfied by
the testimony of the witness who was familiar with the handwriting and
signatures of both signers of the notes.
government argues that exclusion of the notes from evidence was proper
because defendant failed to present testimony of a witness with
knowledge "that a matter is what it is claimed to be." Rule
901(a)(1), supra. This argument echoes the statement of the
district court that testimony concerning the underlying transaction was
required to make the notes admissible. Actually the notes were
sufficiently identified as promissory notes by their production and no
further authentication was required by reason of an applicable provision
for self-authentication in Rule 902(9), Fed. R. Ev.:
evidence of authenticity as a condition precedent to admissibility is
not required with respect to the following:
Commercial paper and related documents.
Commercial paper, signatures thereon, and documents relating thereto to
the extent provided by general commercial law.
Advisory Committee Note and the Report of the House Committee on the
Judiciary indicate that "general commercial law" refers to the
Uniform Commercial Code. 28
C. A., Federal Rules of Evidence (1976) at 734-35; See 11 J. Moore,
Fed. Prac. §920.01[b] at IX -- 31 2d ed. 1976). Under Uniform
Commercial Code §3-307 mere production of a note is prima facie
evidence of its validity and of the holder's right to recover on it.
United States v. Goichman [77-1 USTC ¶9115], 547 F. 2d 778, 784
(3d Cir. 1976), the court stated:
a prima facie case [of authenticity] is made, the evidence goes to the
jury and it is the jury who will ultimately determine the authenticity
of the evidence, not the court. The only requirement is that there has
been substantial evidence from which they could infer that the document
conclude that the district court erred in requiring further
authentication of the promissory notes. Actually, no testimony was
required to establish the genuineness of the signatures on the notes. In
effect UCC §3-307 creates a presumption that commercial paper offered
in evidence is authentic and Rule 902 dispenses with a requirement of
extrinsic evidence for admissibility. By requiring proof of the
underlying transaction as a condition for admission the district court
denied the defendant the benefit of the rule. Of course, admission of
the notes would not have established their genuineness or the existence
of an indebtedness conclusively. As the Advisory Committee note states,
"in no instance is the opposite party foreclosed from disputing
C. A., Federal Rules of Evidence (1975), following Rule 902 at 733. In
effect the district court required the defendant to prove that the notes
were genuine and that a debt existed, whereas only a prima facie showing
was required to make them admissible.
has been pointed out, the notes, together with the testimony of cash
transactions between the Carriger brothers, tended to make more probable
the defense claims of error in the opening net worth statement and
inferences concerning 1971 taxable income. In fact, this was the only
evidence presented by the defendant with respect to 1971. The careful
consideration required before making a decision to exclude relevant
evidence offered by a defendant in any criminal case is even more
necessary in a net worth prosecution. After discussing the
"pitfalls inherent in the net worth method" the Supreme Court
, supra, that great care and restraint is required where this method
is employed. Justice Clark wrote for the Court:
complexity of the problem is such that it cannot be met merely by the
application of general rules. Trial courts should approach these cases
in the full realization that the taxpayer may be ensnared in a system
which, though difficult for the prosecution to utilize, is equally hard
for the defendant to refute. . . . Appellate courts should review these
cases, 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 (citation omitted). 348
judgment of the district court is reversed, and the cause is remanded
for a new trial.
ert L. Taylor,
District Court for the Eastern District of Tennessee, sitting by
The net worth method was described in detail by the Supreme Court, and
its use in tax evasion prosecutions approved in Holland v. United
States [54-2 USTC ¶9714], 348 U. S. 121 (1954).
RELEVANT EVIDENCE GENERALLY ADMISSIBLE; IRRELEVANT EVIDENCE
relevant evidence is admissible, except as otherwise provided by the
Constitution of the United States, by Act of Congress, by these rules,
or by other rules prescribed by the Supreme Court pursuant to statutory
authority. Evidence which is not relevant is not admissible.
Questions of admissibility generally.
Preliminary questions concerning the qualification of a person to be a
witness, the existence of a privilege, or the admissibility of evidence
shall be determined by the court, subject to the provisions of
subdivision (b). In making its determination it is not bound by the
rules of evidence except those with respect to privileges.
Relevancy conditioned on fact.
When the relevancy of evidence depends upon the fulfillment of a
condition of fact, the court shall admit it upon, or subject to, the
introduction of evidence sufficient to support a finding of the
fulfillment of the condition.
United States of America
, Plaintiff-Appellee v. James H. Normile, Defendant-Appellant
U. S. Court of Appeals, 5th Circuit, No. 78-5372, 587 F2d 784, 1/12/79,
Aff'g unreported DC decision
[Code Sec. 7201]
Crimes: Tax evasion: Bank deposit method: Opening cash balance:
Miscellaneous defenses.--A seller of auto parts was properly
convicted of tax evasion on the basis of a bank deposits-cash
expenditures analysis. The government did not need to corroborate his
statement as to the amount of cash he had on hand at the beginning of
the relevant period and it was not obligated to track down accounts that
were in the name of his wife. Substantial evidence existed to show a
likely source of unreported income. Certain opinion testimony was
properly excluded. Other defenses were likewise unavailing.
H. Hannah, Jr., United States Attorney, T. J. Baynham, Jr., William E.
Gordon, Jr., Assistant United States Attorneys,
, for plaintiff-appellee. C. M. Meadows, Jr., J. Gregory Jackson, 3900
First National Bank Bldg., Dallas, Tex. 75202, for defendant-appellant.
GEWIN, GEE and RUBIN, Circuit Judges.
of income tax evasion for 1972 1 on the basis
of a bank deposits-cash expenditures analysis, James H. Normile, who
sold auto parts under the trade name Barney's Auto Supply in Denton,
Texas, contends that a proper foundation for use of this indirect method
of proof was not laid because the government failed to establish the
opening cash balance and that various other prejudicial errors occurred
during his trial. Because we perceive no such errors, we affirm.
have recently reviewed the prerequisites for circumstantial proof of tax
evasion in United States v. Boulet [78-2 USTC ¶9628], 5 Cir.
1978, 577 F. 2d 1165, and it would be supererogatory to repeat what we
said there. Among other duties, the government is required to conduct a
full and adequate investigation in order to establish with reasonable
certainty the amount of cash the taxpayer had in his possession at the
start of the taxable period and the opening balance in his bank
accounts. The defendant's first objection is that the government failed
to conduct such an inquiry here in that it did not discover two bank
accounts that in fact existed.
the start of the investigation, Normile was approached by IRS Special
Agent David Black who interviewed him extensively about his financial
affairs. During this interview, Normile stated that he seldom kept more
than about $100 on hand in cash, did not have a safety deposit box, and
had checking or savings accounts at specified banks only. He also denied
receiving any income from non-taxable sources during 1972. The
government examined every account Normile disclosed; this included
checking accounts at Denton County National Bank, and savings accounts
and certificates of deposit at North Texas Savings and Loan,
; Farmers and Merchants Bank of Krum; Denton County National Bank; and
First State Bank of
. When, during the trial, for the first time the government learned of
the existence of two other accounts--one in the name of University
Service Station at the First National Bank of Denton, of which the
taxpayer was in fact the owner, and the other in his wife's name--it
immediately investigated the account controlled by the taxpayer. This
account's balance at the start of 1972 was only $442, an amount that
could not make and appreciable difference in the government's
calculations. No evidence as to the cash balance in Mrs. Normile's
account was introduced because the taxpayer's counsel both expressly
disclaimed any intention of arguing the existence of such an account and
vehemently objected on Fifth Amendment grounds to any court order
compelling production of her records. 2
investigation, however, was adequate without respect to the concession
by counsel. The Internal Revenue Service agent questioned Normile and
thoroughly investigated every bank account he mentioned. The government
was not obliged to bay down rabbit tracks and check every bank in the
area in the hope of locating other monetary scents. The taxpayer
suggests that, if the investigator had examined every one of the deposit
slips in the taxpayer's accounts, he would have found a "lead"
to Mrs. Normile's account; but the investigator was not obliged to
search out every conceivable link to other evidence and to exhaust every
possibility of proof. A full and adequate investigation is required, not
a universal probe. See, e.g., United States v. Beasley [79-1 USTC
¶9107], 5 Cir. 1978, 585 F. 2d 796 (1978); United States v. Hiett,
5 Cir. 1978, 581 F. 2d 1199; United States v. Esser [75-2 USTC ¶9654],
7 Cir. 1975, 520 F. 2d 213.
defense also alleges that the government's failure to corroborate
Normile's statement that he had only $100 on hand at the beginning of
1972 mandates reversal. With respect to cash on hand in currency the
government had no way of determining this save by interrogating the
taxpayer. He freely and voluntarily told agent Black that he kept no
more than $100 in cash because he did not feel safe having larger
amounts around. 3 It was not
necessary for the government to seek to corroborate the taxpayer's
statement; indeed the inherent secrecy of the cash hoard makes it
impossible for any but the keeper to know even of its existence, let
alone the amount.
requirement of corroboration of admissions in tax evasion cases was
discussed in Smith v. United States [54-2 USTC ¶9715], 1954, 348
U. S. 147, 75 S. Ct. 194, 99 L. Ed. 192. In that case, the Court said
Government may provide the necessary corroboration by introducing
substantial evidence, apart from petitioner's admissions, tending to
show that petitioner willfully understated his taxable income. This may
be accomplished by substantiating the opening net worth directly, . . .
[or] by independent evidence concerning petitioner's conduct during the
prosecution period, which tends to establish the crime of tax evasion
without resort to the net worth computations." 348 U. S. at 157-58,
75 S. Ct. at 199-200.
Smith the Court concluded that substantial expenditures made by
the taxpayer and his wife corroborated the net worth admission by
tending to show an understatement of income during the years in
the government introduced no evidence to corroborate directly the figure
given Black by Normile. There was, indeed, no evidence available that
would confirm it. The government was not obliged to prove a proposition
inherently impossible to establish. However, there was no evidence
showing that this figure was in any way unreliable. All testimony
regarding large cash purchases by Normile related to years other than
1972. The $100 figure was repeated to agent Black at a second interview.
Moreover, the independent evidence of substantial deposits in his bank
accounts, while insufficient in itself to convict him for tax evasion,
does tend to corroborate his admission by showing understatement of
argument that there was insufficient evidence to show a likely source of
income is tendentious if not frivolous; a comparison of the Barney's
sales receipts with the summaries prepared by Normile for his accountant
provided evidence that Normile sold more in auto parts that he reported
as gross income. It was also undisputed that both Normile and his
accountant had subtracted the sales tax from the reported sales,
resulting in a double deduction. The question whether the relatively
large amount of income that Normile was charged with concealing could
have been derived from Barney's operations was one for the jury, which
obviously gave it credence. The taxpayer's own disclaimer of other
sources of income made to agent Black supported the jury's conclusion.
judge excluded the opinion testimony of Normile's ex-partner as to the
income producing capability of Barney's on the basis the ex-partner was
not an expert. This appears to have been well within the judge's
discretion. Rule 702, Fed. R. Evid. If, however, the decision was
erroneous, it was harmless beyond reasonable doubt because the very same
observations were offered by another witness, also called by the
defense, who was an expert in auto supplies sales in the area and knew
his fastidious, if not bacteriophobic, search for error, counsel also
contends that Normile was prejudiced because the 1972 summary of
Normile's business bank account offered in evidence by the Government
was not supported by the original microfilm records of deposited checks,
records used by the agent who prepared the summary in determining that
there were no inter-account transfers that might explain some of the
deposits. Rule 1006, Fed. R. Evid. Because of the number of bank
accounts involved, the generality of the remarks of counsel when
offering or objecting to evidence, and the treatment of this issue in
the briefs, it is difficult to be entirely certain what happened at the
trial and therefore the precise nature of the objection now. Apparently,
however, all checks written on those of Normile's personal accounts
known to the investigator before the trial began, as well as the deposit
slips for the business account in question, were present in the
courtroom. These reflected no transfers from a personal account into the
business account. The only checks not present were those written on the
belatedly-revealed account in the name of University Service Station at
the First National Bank of Denton, and these records were presumably
available to the defense. Counsel for defendant was offered a
continuance to procure any documents not immediately present in the
courtroom that he wished to use to impeach the accuracy of the summary,
and refused such a continuance. It has not been demonstrated that any
inter-account transfers were made, or that any substantial right of
Normile was affected by the admission of the summary, Rule 103, Fed. R.
Evid. The availability of the original checks and deposit slips
satisfied that requirement of Rule 1006, Fed. R. Evid.
prosecutor's remarks during rebuttal argument about the opportunity
given the taxpayer to furnish information during the investigation did
not constitute a comment on Normile's failure to testify. Moreover, the
defense had implied on cross-examination, prior to the exchange on
redirect, that Normile had not been given the opportunity to provide any
leads. The prosecutor was not obliged silently to suffer an attack that
was in essence untruthful. The prosecuting attorney was attempting to
demonstrate that the government followed all leads supplied by Normile
in establishing the opening balance of his accounts, the amount of his
cash on hand, and the cource of the deposits. It was entirely proper for
him to do so in order to refute the groundless defense argument.
these reasons, the conviction is AFFIRMED.
The defendant was convicted of violating 26 U. S. C. §7201 and was
sentenced to three years' imprisonment, to become eligible for parole
upon serving a period of nine weeks pursuant to 18 U. S. C. §4205(b)(1).
The defendant was acquitted on similar charges for the years 1973 and
We note that the taxpayer offered no evidence that the amount in Mrs.
Normile's account was substantial. Although this goes to the sufficency
of the evidence, it is remarkable that the taxpayer seeks reversal on
the basis of the government's failure to follow a trail that might have
The argument that Normile made the statement under duress because the
agent "showed his gun" has no merit. Black himself testified
that he never drew his gun, and was not even sure he was wearing it,
although that was standard practice. Moreover, Black testified without
contradiction that Normile conveyed the same information about cash on
hand during a subsequent interview.
USTC ¶9170]United States of America, Plaintiff-Appellee v. Joseph J.
U. S. Court of Appeals, 2nd Circuit, Docket No. 77-1369, 567 F2d 1206,
1/6/78, Aff'g unreported District Court opinion
[Code Sec. 7201--result unchanged by '76 Tax Reform Act]
Crimes: Evasion: Reconstruction of income: Expenditures method.--An
individual's conviction of evasion of income tax was affirmed where the
evidence supported the Commissioner's determination of the taxpayer's
opening net worth and the amount of reconstructed income. The evidence
indicated that the taxpayer did not have a cash hoard.
J. Arcara, United States Attorney, Richard E. Mellenger, Assistant
United States Attorney, Buffalo, N. Y. 14202, for plaintiff-appellee. R.
William Stephens, Raichle, Banning, Weiss & Halpern, 10 Lafayetts
Sq., Buffalo, N. Y. 14203, for defendant-appellant.
FEINBERG, MANSFIELD and TIMBERS, Circuit Judges.
a jury trial before Judge John T. Curtin in the Western District of New
York appellant was on April 13, 1976, found guilty of five counts of an
indictment charging him with attempted willful evasion of income tax due
during the years 1967 through 1971 in violation of Title 26 U. S. C. §7201.
On July 21, 1977, following a delay attributable to extensive post-trial
motions pursued by new counsel for appellant, which were denied, the
defendant was sentenced to three years probation on count one and fines
on all five counts.
trial the government used the "expenditures" method to prove
the alleged attempted tax evasion of approximately $71,436 for the years
in question. See Taglianetti v. United States, [68-2 USTC ¶9479],
398 F. 2d 558 (1st Cir. 1968). Under the expenditures method the
government establishes as unreported income the amount of the taxpayer's
expenditures during the taxable year that are not attributable to
resources on hand at the beginning of the year, non-taxable sources
received during the year, or amounts reported by the taxpayer as income
during the year. The reliability of the method depends on a reasonably
accurate identification of the taxpayer's net worth position in terms of
assets held at the beginning and end of the taxable year. Holland v.
United States [54-2 USTC ¶9714], 348 U. S. 121 (1954); United
States v. Penosi [72-1 USTC ¶9103], 452 F. 2d 217 (5th Cir. 1971), cert.
denied, 405 U. S. 1065 (1972). Otherwise the expenditures might be
attributable to conversion of the taxpayer's prior accumulated capital
rather than to income received during that period. See United States
v. Fisher [75-2 USTC ¶9766], 518 F. 2d 836 (2d Cir. 1975); United
States v. Bianco [76-1 USTC ¶9351], 534 F. 2d 501 (2d Cir. 1976).
the present case the government offered extensive and detailed proof of
appellant's opening net worth as of December 31, 1966 (including
securities, mortgage receivables, United States Savings Bonds and cash
on hand), his closing net worth, non-taxable sources of income and his
expenditures. Appellant's principal defense was that the opening net
worth established by the government was incorrect because it did not
include a "cash hoard" of more than $100,000, which he
revealed for the first time in trial testimony as having been
accumulated by him prior to 1967, kept in a tin box in the basement of
his home, and used both prior to and after 1967 to make various cash
mortgage loans to relatives, friends and acquaintances who from time to
time paid back some or all of the loans to appellant. Appellant argued
that this cash hoard accounted for his later expenditures attributed by
the government to income and that since this was not taken into account
by the government it negated an inference from the government's evidence
that expenditures during the 1967-1971 period were derived from
response to appellant's claim of a cash hoard, the government pointed to
appellant's own statement to its agents, made during the course of their
pre-prosecution investigation, to the effect that appellant would never
have more than $2,000 in cash around the house and that his wife had
saved not more than $11,000. On the basis of these statements the
government credited $13,000 in cash to appellant's opening net worth.
Moreover, the government credited appellant's net worth with mortgage
receivables that were a matter of record.
principal contention here is that, in view of the evidence introduced by
him for the first time at trial with respect to the cash hoard,
mortgages and pay-backs, the indictment must be dismissed because of the
government's failure to negate this proof by investigating, obtaining
and analyzing evidence with respect to his cash hoard and mortgage
dealings for the years prior to those which were the subject of the
indictment. This contention must be rejected. The government was not
under any such burden. See United States v. Penosi, supra, 452 F.
2d at 219-20. It was entitled to accept appellant's statement to the
effect that at most he kept $2,000 on hand and did not have any larger
cash hoard. To impose on the government the burden of anticipating that
appellant would change his version and of negating a possible contrary
story with respect to matters peculiarly within appellant's personal
knowledge is to ask the impossible. The evidence presented a clear issue
of fact and the jury was entitled to infer, as it apparently did, that
appellant's "cash hoard" testimony was a belated and blatant
concoction which was not entitled to any credit.
find it unnecessary to discuss the other point raised by appellant,
which are equally meritless.
judgment of conviction is affirmed.
USTC ¶9410]United States of America, Appellee v. Edgar F. X. Shields,
U. S. Court of Appeals, 9th Circuit, No. 77-1816, 571 F2d 1115, 3/9/78,
Aff'g unreported District Court decision
[Code Sec. 7201--result unchanged by 1976 Tax Reform Act]
Crimes: Tax evasion: Impeachment: Destruction of interview notes: Use
of grand jury: Evidence.--The defendant was properly convicted, by
the bank deposits method, of three counts of tax evasion. He was not
impeached on account of his silence prior to trial as to the sources of
his funds. He was not prejudiced by the government's destruction of
notes of its interviews with prospective witnesses. He failed to make a
timely objection to allegedly improper grand jury proceedings. And he
did not show that the government had failed to pursue all leads as to
possible nontaxable sources of funds.
D. Gray, Assistant United States Attorney, Spokane, Wash. 99210, for
appellee. Michael J. Hemovich, Hemovich, Smith & Nappi, 422 W.
Riverside Ave., Spokane, Wash., for appellant.
MERRILL and ELY, Circuit Judges, and ORRICK, * District
a jury trial appellant Shields was convicted of three counts of willful
evasion of income taxes for the years 1971 through 1973. To prove its
case, the Government introduced analyses of appellant's bank deposits
and withdrawals. The evidence reflected large deposits that could not be
attributable to appellant's reported income. In an effort to explain
these deposits, appellant raised the "cash hoard" defense.
Appellant's accountant and business associate, one Brickert, testified
that appellant had a cash hoard of approximately $33,000, part of which
appellant stashed in his car, part at his home, and part at his
nightclub. Supposedly, appellant's cash hoard diminished during the
prosecution years of 1971-1973 as appellant made periodic bank deposits
from that reserve. Brickert also testified that appellant received two
loan repayments totalling $9000 during the years in question, which
would constitute another nontaxable source of funds. We affirm.
Prior to trial, on June 19, 1975, the Internal Revenue Service (IRS)
held a conference, attended by appellant, Brickert, and appellant's
attorney, Randall, to discuss appellant's tax liability. An IRS
representative, Bouker, confronted appellant with his alleged tax
deficiency and stated that the purpose of the conference was to permit
"anyone to say anything" on behalf of the appellant. Bouker
specifically asked if appellant had nontaxable sources of funds that
would explain his unaccounted for bank deposits. At the conference
Brickert mentioned only the two loan repayments.
trial the prosecutor impeached Brickert by eliciting that Brickert had
said nothing about a cash hoard at the IRS conference. He argued that
Brickert's silence was inconsistent with his testimony that he had
personally observed appellant's cash hoard. To augment this line of
attack, Bouker later testified that Brickert had not referred to the
cash hoard at the conference. The prosecutor then asked Bouker whether
Randall, appellant's attorney, had revealed by non-taxable sources of
funds at the conference. Appellant objected, the District Court
sustained the objection, and the jury never heard an answer. Finally, in
the closing argument the prosecutor broadly referred to the failure to
raise the cash hoard defense at the conference:
defense which is raised here, and the one that where the evidence is
produced for the first time in court, never occurred outside of the
court before, before we started on the Tuesday a week ago, the
government was never offered these explanations which--
counsel]: If Your Honor please, at this time, I would like to move for a
mistrial on the basis of . . . that statement . . ..
I'm getting right into the matter of Brickert, what Brickert said, and
Brickert's testimony on the stand.
I am not commenting on the defendant's failure to say anything.
COURT: Well, I think it was too general of a statement.
COURT: Well, I'm going to admonish the jury, but I'm not going to grant
the motion for a mistrial. . . . Members of the jury, I want to call
your attention to one of the instructions I just gave you, that the
defendant on trial has no obligation to say anything, and anything he
does say, or any silence is not to be used against him, . . ..
silence of an accused at the time of arrest may not be used to impeach a
defense subsequently offered at trial. Doyle v. Ohio, 426 U. S.
610, 96 S. Ct. 2240, 49 L. Ed. 2d 91 (1976); United States v. Hale,
422 U. S. 171, 95 S. Ct. 2133, 45 L. Ed. 2d 99 (1975); Fowle v.
United States, 410 F. 2d 48 (9th Cir. 1969). The prohibition of such
impeachment stems from the privilege against self-incrimination and from
the representation implicit in the Miranda 1 warnings
that a defendant will not be penalized for his decision to remain
the urgings of appellant, we find the above rule inapplicable. Appellant
claims that the cross-examination of Brickert, Bouker's testimony
concerning Brickert's silence at the IRS conference, and the
prosecutor's closing argument reflected upon appellant, implying to the
jury that appellant also had failed to mention his cash hoard at the IRS
conference. 2 Appellant
concedes, as he must, that he was not cross-examined concerning his
silence and that no direct evidence was introduced concerning his
silence. For this reason the rule against impeaching an accused by his
prior silence does not apply, and we elect not to extend the rule to
situations such as the present one in which the silence of nondefendant
witnesses might conceivably suggest that the explanation of a defendant
is a recent fabrication.
Fed. R. Evid. 403 contains the correct standard for determining wheher
evidence, though relevant and not directly concerning the silence of an
accused, is nonetheless inadmissible because it circumstantially tends
to suggest his silence. Rule 403 grants discretion to the District Court
to exclude evidence "if its probative value is substantially
outweighed by the danger of unfair prejudice, confusion of the issues,
or misleading the jury . . .." Twice the District Court instructed
the jury that appellant had the right to remain silent and that his
silence could not be used against him. Clearly this minimized the
possibility that the jury improperly considered whether appellant was
silent at the IRS conference. Thus, the District Court did not err in
refusing to exercise its discretion under rule 403 to exclude the
evidence of Brickert's silence. 3
also maintains that Brickert's impeachment, apart from its reflection on
appellant, was improper because Brickert's silence was
"ambiguous." The argument that Brickert's silence in and of
itself lacked probative value was not presented to the District Court,
and consequently we decline to consider it now. See Gollaher v.
United States, 419 F. 2d 520, 523 (9th Cir.), cert. denied,
396 U. S. 960, 90 S. Ct. 434, 24 L. Ed. 2d 424 (1969).
Pursuant to the routine practice of government agencies, officials
destroyed the rough notes of interviews with four prospective witnesses.
It is not clear whether IRS agent Bouker made any notes at the
conference with appellant, Randall, and Brickert. All the interviews in
question occurred during 1974 and 1975, and the notes were not verbatim
transcripts of witnesses' statements. The government officials prepared
typed memoranda of the interviews, which were disclosed to appellant.
insists that the destruction of the notes violated the Jencks Act, 18 U.
S. C. §3500 (1970), and the rule of Brady v. Maryland, 373 U. S.
83, 83 S. Ct. 1194, 10 L. Ed. 2d 215 (1963). In United States v.
Harris, 543 F. 2d 1247 (9th Cir. 1976), we held that rough interview
notes constitute potentially discoverable material and therefore must be
preserved. Our court, however, has continually refused to apply the Harris
rule retroactively in the absence of a specific demonstration that the
destruction of notes resulted in prejudice. United States v. Wood,
550 F. 2d 435, 440 (9th Cir. 1976); United States v. Parker, 549
F. 2d 1217, 1224 (9th Cir.), cert. denied, 430 U. S. 971, 97 S.
Ct. 1659, 52 L. Ed. 2d 365 (1977); United States v.
inson, 546 F. 2d 309, 312 (9th Cir. 1976), cert. denied, 430
U. S. 918, 97 S. Ct. 1333, 51 L. Ed. 2d 597 (1977). Appellant does not
contend that the interview memoranda are incomplete or inaccurate and
does not otherwise specify any prejudice to his defense resulting from
the destruction of the rough notes. Accordingly, we conclude the
appellant's contention in this respect must be rejected.
of Grand Jury]
Another issue presented here is whether the Government improperly used
an Idaho grand jury to obtain the testimony of one of appellant's
witnesses, a man named Popp. 4 A memorandum
from IRS agent Bouker, dated September 8, 1975, stated:
the course of the investigation it became necessary to use the grand
jury proceedings to elicit testimony from reluctant witnesses. No prior
judicial approval required under Rule 6(e) was obtained; however, the
testimony was not relevant as regards the revenue agent's computation of
gross of taxable income.
makes four related arguments concerning misuse of the grand jury. First,
he claims that Bouker's memorandum concedes a violation of Fed. R. Crim.
P. 6(e). 5 Second, he
asserts that the IRS wrongfully used the Idaho grand jury to collect
evidence and did not submit evidence to that grand jury for the purpose
of obtaining its indictment. Third, he asserts that at the time of
Popp's testimony before the Idaho grand jury, the IRS had not yet
recommended criminal sanctions against appellant, and, therefore, the
IRS was using the grand jury for the purpose of establishing appellant's
civil tax liability. 6 Last,
appellant maintains that the Government's impeachment of Popp with the
transcript of the proceedings before the Idaho grand jury was improper.
Generally, impeachment is a proper use of grand jury testimony, e.g.,
Gollaher v. United States, 419 F. 2d 520, 523 (9th Cir.), cert.
denied, 396 U. S. 960, 90 S. Ct. 434, 24 L. Ed. 2d 424 (1969), so
appellant's contention must rest upon his previous arguments that the
Idaho grand jury proceedings were illegal.
did not object at trial or even in posttrial proceedings to the Idaho or
the Washington grand jury proceedings. Nor did appellant object to
Popp's impeachment. We are unable to accept appellant's proffered excuse
that he could not have known of the alleged grand jury misuse until too
late in the trial to seek recourse. Before trial began the Government
had disclosed the Idaho grand jury transcript to appellant. Bouker's
memorandum was released to appellant's counsel sometime during the
course of the trial. Although the record does not reveal the exact date,
it is clear that appellant had the memorandum in his possession on the
day before the last trial day. Thus, his failure to permit the district
judge to evaluate the grand jury proceedings is unjustified, and we
shall not review the alleged improprieties. No plain error is evident,
as the record contains nothing that can substantiate or disprove
appellant's allegations. Fed. R. Crim. P. 52(b).
The Government employed an analysis of appellant's bank deposits and
withdrawals to establish appellant's understatement of taxable income.
Appellant contends that the Government did not attempt to prove
appellant's "cash on hand" on January 1, 1970, the beginning
date of the tax years in question. The relevance of cash on hand is that
if it were deposited into accounts during the tax years, it would
explain those deposits and reduce the understatement of income.
Specifically, appellant claims that the Government did not follow leads
that might have demonstrated currency withdrawals made in late 1969.
Agent White conducted the investigation of appellant's income tax
liability, and there is sufficient evidence that he diligently pursued
all leads that could have disclosed nontaxable sources of funds,
including cash on hand. White testified that he prepared a
"complete analysis of all the bank accounts, savings and
checking." He also stated that he covered leads and properly
credited appellant for all nontaxable sources and that he examined
financial statements given by appellant to financial institutions. There
is no indication that White failed to evaluate 1969 withdrawals. After
his investigation, White decided to use a cash on hand figure of zero,
having found no evidence of cash on hand. An expert witness heard all
the testimony at trial and examined all the exhibits, concluding that
"there was insufficient evidence upon which to form a conclusion
that there was cash on hand."
at the evidence in a light most favorable to the Government, as we must,
Glasser v. United States, 315 U. S. 60, 80, 62 S. Ct. 457, 86 L.
Ed. 680 (1942) the Government clearly presented sufficient evidence for
the jury to infer that White had adequately pursued all leads and had
correctly shown as the proper amount of cash on hand the zero figure.
Honorable William H. Orrick, United States District Judge for the
Northern District of California, sitting by designation.
1 Miranda v. Arizona,
384 U. S. 436, 467-73, 86 S. Ct. 1602, 16 L. Ed. 2d 694 (1966).
We reject the Government's argument that this issue was not preserved
for appeal. It is true that appellant did not object to the
cross-examination of Bricket on the basis that his silence reflected
upon appellant; he only objected on the ground that the questions were
argumentative. Appellant, however, objected and moved for a mistrial
during Bouker's testimony concerning Brickert's silence and during the
prosecutor's reference during closing argument to the newness of the
cash hoard defense. In light of the latter objections, appellant fully
preserved his right to challenge on appeal all the alleged indirect
references to appellant's silence. See United States v. Semensohn,
421 F. 2d 1206, 1210 (2d Cir. 1970) (objection made on an incorrect
ground preserved appeal because trial judge's attention was later
focused on the proper reason for objection).
For the purposes of this decision, we have assumed, as did the District
Court, the impropriety of a direct reference to appellant's silence at
the IRS conference. This issue is not directly presented, and we express
no view as to its merits. Doyle, Hale, and Fowle all
involved the impeaching use of the postarrest silence of an
accused. The IRS conferences, however, occurred during the preindictment
stage. The evidentiary use of such silence would not present a Miranda
problem and might not be so inherently lacking of probative value so as
to justify a per se rule.
It was the grand jury for the Eastern District of Washington that issued
the indictment upon which appellant was convicted.
Fed. R. Crim. P. 6(e) provides:
of Proceedings and Disclosure. Disclosure of matters occurring before
the grand jury other than its deliberations and the vote of any juror
may be made to the attorneys for the government for use in the
performance of their duties. Otherwise a juror, attorney, interpreter,
stenographer, operator of a recording device, or any typist who
transcribes recorded testimony may disclose matters occurring before the
grand jury only when so directed by the court preliminary to or in
connection with a judicial proceeding or when permitted by the court at
the request of the defendant upon a showing that grounds may exist for a
motion to dismiss the indictment because of matters occurring before the
See In re Grand Jury, Nos. 76-1893, 76-1995 (9th Cir. May 2,
1977) (proscribing civil use by IRS of grand jury information without
adversary hearing resulting in finding that disclosure is reasonably
necessary, withdrawn as moot (9th Cir. June 28, 1977).
USTC ¶9290]United States of America, Plaintiff-Appellee v.
ert E. Helina, Defendant-Appellant
U. S. Court of Appeals, 9th Circuit, No. 74-3453, 549 F2d 713, 3/4/77,
Affirming an unreported District Court decision
[Code Secs. 7201 and 7206--result unchanged by '76 Tax Reform Act]
Crimes: Tax evasion: Fraud and false statements: Assertion of error
at trial.--A taxpayer's conviction for tax evasion and for willfully
subscribing to false income tax returns was affirmed. The trial court
did not commit reversible error in permitting the prosecutor to comment
on the taxpayer's invocation of his Fifth Amendment right to refuse to
turn over his books and records to government agents who were conducting
a criminal investigation of his tax returns. One dissent.
[Code Sec. 446--result unchanged by '76 Tax Reform Act]
Tax accounting: Reconstruction of income: Bank deposits method:
Source of deposits.--A taxpayer's conviction for income tax evasion
established through the bank deposits method of reconstruction of income
was affirmed even though the taxpayer's counsel objected to the
admissibility of the bank deposit analysis evidence at trial. The court
stated that the taxpayer's reliance on Morse, 74-1 USTC ¶9228,
491 F. 2d 149, was misplaced since all of the prerequisites set out in Morse
for the admission of a bank deposit analysis had been met by the
Gray, Assistant United States Attorney, Seattle, Wash., for appellee.
John W. Flynn, Stern, Gayton, Neubauer & Brucker, Seattle, Wash.,
ELY and WRIGHT, Circuit Judges, and LUCAS, * District
was indicted on three counts of income tax evasion, in violation of 26
U. S. C. §7201, and four counts of wilfully subscribing a false income
tax return, in violation of 26 U. S. C. §7206(1). Defendant was
convicted by a jury on all seven counts. He now appeals from the
judgment of conviction and urges as error:
That the prosecution was permitted to comment upon the fact that he
chose to exercise his fifth amendment right in declining to turn over
his books and records to Government agents who were conducting the
criminal investigation of his tax returns.
That the trial court admitted into evidence the Government's bank
January, 1971, the defendant, Helina, was contacted by Revenue Agent
Marx, who had been assigned the audit of Helina's 1969 tax return. At
the end of March, 1971, the audit of Helina's tax returns shifted to a
criminal investigation and Marx referred Helina's case to the
Intelligence Division of the Internal Revenue Service. On August 25,
1971, Special Agent O'Boyle of the Intelligence Division of the Internal
Revenue Service met with Helina and Marx. According to O'Boyle, he
immediately advised Helina that a criminal tax investigation was in
progress and that Helina had the right not to talk to or furnish the
agents with any books and records. Throughout the investigation, Helina
refused to produce his business records.
to trial, defense counsel made a motion in limine to exclude any
evidence that Helina had exercised his fifth amendment rights and had
refused to provide the Internal Revenue Service with his books and
records. The trial court precluded direct examination by the Government
on this issue but, in case the subject was raised by the defendant
during the trial, refused to prevent cross-examination and rebuttal on
the trial, the Government was forced to use the net worth method of
and a bank deposit analysis. 2
Evidence of the bank deposit analysis, in the form of testimony by
Special Agent Huntsman and Mrs. Clark, Helina's assistant, was admitted
over the objection of defense counsel.
thrust of Helina's defense at trial was that although the Government's
net worth analysis showed an increase in net worth during the years in
question, he was not guilty of any of the crimes charged as the
increases were due to his negligent bookkeeping and were not a result of
his intent to evade his income taxes.
Comment on Helina's Exercise of His Fifth Amendment Privilege
although recent United States Supreme Court cases 3
and cases from other circuits 4
perhaps intimate a different result, we initially conclude that Helina
was within his rights, granted pursuant to fifth amendment protections
against self-incrimination, to refuse to produce his books and records
during the Internal Revenue Service criminal investigation.
Additionally, the Government does not challenge Helina's invocation of
his fifth amendment rights.
fifth amendment commands that "No person . . . shall be compelled .
. . to be a witness against himself." It has been the law for
ninety years that compelled production of documents falls within the
ambit of the privilege against self-incrimination. Boyd v. United
States, 116 U. S. 616, 6 S. Ct. 524, 29 L. Ed. 746 (1886). In Boyd,
the Supreme Court held that production of an invoice on goods belonging
to defendants could not be compelled under the fourth and fifth
amendments and stated: "[W]e have been unable to perceive that the
seizure of a man's private books and papers to be used in evidence
against him is substantially different from compelling him to be a
witness against himself." Boyd v. United States, supra, 116
U. S. 633, 6 S. Ct. 534. This sound legal principle has been applied by
this circuit to cases involving the production of tax records. United
States v. Cohen [68-1 USTC ¶9140], 388 F. 2d 464 (9th Cir. 1967). 5
established that Helina was entitled to exercise his fifth amendment
rights in the manner in which he did, the next question is whether the
prosecutor improperly commented on Helina's invocation of those rights.
To answer this, it must be determined what language will constitute
five occasions during the course of trial, it was evident that
investigators did not have access to all of Helina's records. The first
exchange, which took place on direct examination, 6
made no reference to why the records were not available. This was in no
way a comment upon the defendant's failure to produce. See
United States v. Grammer, 513 F. 2d 673, 676 (9th Cir. 1975). Any
connection between this testimony and defendant's fifth amendment
privilege was so remote as to escape the notice of Helina's counsel and
conclusion that this was not a comment is strengthened by noting that
the judge had already granted Helina's in limine motion as to
direct examination by the prosecutor. The failure of the judge to make a
ruling at this juncture, and of defense counsel to call it to the
judge's attention, indicates that no prejudicial comment had been made.
in the trial, during the prosecutor's cross-examination of Helina, the
following exchange took place:
Now, these particular checks [in exhibit], how long had you had these
Since--I imagine since they came back on the bank statements.
How long has that been?
This is 1967 through 1970.
So you had them that period of time?
Did you ever lose them?
Not that I know of.
Do you recall Mr. O'Boyle asking you particularly about these checks?
I recall Mr. O'Boyle calling me on the telephone and asking me if I
cashed a check for $5,000.00 . . . and what it was for . . .
In addition to that check and other checks, did you have some of
these records available also when Mr. O'Boyle was asking you about those
that you brought in here today?
I think Mr. O'Boyle asked me--[Objection by defense counsel. The basis
for this objection is unclear; however, it does not appear to be upon
fifth amendment grounds.]
Court: This is cross-examination on this subject on this particular
I was going to go into the record of Mr. Helina's records, also, your
Court: Objection denied.
Isn't it a fact during the periods that Mr. O'Boyle talked to you and
also Mr. O'Leary, they asked you on a number of occasions about your
business records, didn't they?
That's not true.
They never asked you?
The only man that ever asked me to see anything in my office was Mr.
Marx, and I showed him everything he asked for, with the exception of
Mr. O'Boyle, which was two years after this investigation began and he
asked me for all of my cancelled checks from 1963 through 1970. That is
the time that I sought legal counsel and I was told not to give them to
the Internal Revenue Service, and at no other time did they ask me for
Well during this period of time in 1971 and '72, you did have your
business records available to you, did you not?" (Tr. 540-42)
questioning may constitute "comment" despite its obliquity. In
Johnson v. Patterson, 475 F. 2d 1066 (10th Cir.), cert.
denied, 414 U. S. 878, 94 S. Ct. 64, 38 L. Ed. 2d 124 (1973), the
court found that the question, "Now, Mr. Johnson, you didn't tell
the police this, did you?", constituted comment, reasoning that the
jury could as easily draw prejudicial inferences even where the comment
was not direct. Id. at 1067-68.
United States v. Rose, 500 F. 2d 12 (2d Cir. 1974), vacated
422 U. S. 1031, 95 S. Ct. 2648, 45 L. Ed. 2d 688, aff'd, 525 F.
2d 1026 (2 Cir. 1975), cert. denied, 424 U. S. 956, 96 S. Ct.
1432, 47 L. Ed. 2d 362 (1976), however, defendant was asked several
times on cross-examination whether he told his story to the police upon
arrest. 500 F. 2d 14, n. 1. This was not held to be improper comment.
the prosecution questioning could have been answered by "Yes"
or "No" responses for the most part. Instead, defendant
volunteered the information that legal counsel advised him to use the
fifth amendment and withhold his records.
arguendo, without deciding, that this was improper prosecutorial
comment, it must be noted that defense counsel failed to object to this
His in limine motion having been denied with respect to
cross-examination and rebuttal testimony, defese counsel once more bore
the burden of making a proper objection at the appropriate time.
it is error for the prosecution to comment on an accused's pretrial
silence for purposes of impeaching his trial testimony in a situation
where the earlier silence is not clearly inconsistent with the
subsequent testimony (Doyle v. Ohio, 426 U. S. 610, 96 S. Ct.
2240, 49 L. Ed. 2d 91 (1976); Fowle v. United States, 410 F. 2d
48 (8th Cir. 1969)), for the reasons that follow, we affirm the judgment
of the district court.
not made at trial cannot be raised on appeal to the court of appeals
absent the presence of plain error. See, e.g., United States v. Rose,
supra, 500 F. 2d at 17; United States v. Machado, 457 F. 2d
1372, 1375 (9th Cir.), cert. denied, 409 U. S. 860, 93 S. Ct. 96,
34 L. Ed. 2d 106 (1972); Fed. R. Crim. P. 52; Fed. R. Evid. 103(d).
regard to this second exchange, it is our conclusion that it did not
amount to plain error. This holding is supported by the fact that
defense counsel, during his recross-examination of Agent Huntsman,
opened the door and invited discussion of Helina's failure to turn over
his records. This portion of the record reads as follows:
You indicated that you had made no allowance in 1970 for any check
cashing whatsoever in the tavern because you didn't have Mr. Helina's
checks, is that what you said?
Well, would it really perhaps be helpful if you had the customers'
cancelled checks . . . ?
That wouldn't have been helpful?
Would you please ask the question again?
Well, certainly wouldn't it have been helpful if, for example, in one
month you had all the checks of all customers that deposited into the
tavern, that would have been helpful?
It would have been more helpful to have the taxpayer's checks."
this colloquy, defense counsel, at best, sought to discredit the
Government's case by suggesting to the jury that the Government had
failed to document its case and, at worst, was intimating to the jury
that Helina had fully cooperated with the Government agents. Having thus
raised the subject of the Government's documentation of its case, Helina
opened the door to a full and not just a selective development of that
subject. See United States v. Fairchild, 505 F. 2d 1378 (5th Cir.
1975). He cannot be heard now to complain of discussion of a subject he
introduced into the proceedings.
third and fourth relevant exchanges occurred during rebuttal testimony
by Agents O'Boyle and O'Leary. 8
The prosecution called these rebuttal witnesses to contradict Helina's
cross-examination testimony that the agents had not on more than one
occasion asked him about his tax records.
Martin v. United States, 400 F. 2d 149, 153 (9th Cir.), cert.
denied, 393 U. S. 987, 89 S. Ct. 466, 21 L. Ed. 2d 449 (1968), this
court held that rebuttal evidence was permissible to contradict
defendant's testimony that he had told federal agents his exculpatory
story at the time of his arrest. This case falls within the Martin
the prosecution, during closing argument, commented on Helina's failure
to produce documents prior to putting on his defense at trial. Defense
counsel specifically objected to this comment. (Tr. 655)
see no error but, if it be such, it was certaintly harmless. See Chapman
v. California, 386 U. S. 18, 87 S. Ct. 824, 17 L. Ed. 2d 705 (1967);
Harrington v. California, 395 U. S. 250, 89 S. Ct. 1726, 23 L.
Ed. 2d 284 (1969). As the Court stated in Harrington, a departure
from constitutional procedures does not result in automatic reversal.
Here, the impact of the prosecutor's statement was lessened by the
exchanges that had occurred earlier in the trial regarding Helina's
seeking and following the advice of an attorney on whether to turn over
certain tax records to the agents.
therefore affirm the district court as to this issue.
Admission of the IRS Bank Deposit Analysis
previously indicated, the Government used the net worth method of proof
and a bank deposit analysis to prove the offenses with which Helina was
Defense counsel objected to the admissibility of the bank deposit
analysis evidence on the grounds that the Government failed to eliminate
all non-income deposits from gross receipts. Appellant argues that the
Government's bank deposit analysis was an "arbitrary and
support of his position, appellant cites the seminal case of United
States v. Morse [74-1 USTC ¶9228], 491 F. 2d 149 (1st Cir. 1974).
In Morse, the First Circuit reversed the defendant's conviction
of wilful tax evasion, held that absent some primary evidence to support
the agent's bank deposit analysis his testimony was merely inadmissible
hearsay, and established the following three prerequisites to the
admissibility of a bank deposit analysis:
order to legitimately avail itself of this approach, the government must
initially introduce evidence to show (1) that, during the tax years in
question, the taxpayer was engaged in an income producing business or
calling; (2) that he made regular deposits of funds into bank accounts;
and (3) that an adequate and full investigation of those accounts was
conducted in order to distinguish between income and non-income
deposits." United States v. Morse [74-1 USTC ¶9228], 491 F.
2d 149, 152 (1st Cir. 1974).
reliance upon the third prong of the Morse test above is
misplaced, however, under the facts of the present case. There is ample
evidence on the record to demonstrate that the Government conducted an
extensive investigation of Helina's bank accounts in order to
distinguish between income and non-income deposits. First, the testimony
of Mrs. Clark was presented as primary evidence of the Internal Revenue
Service's basis for estimating the percentage of Lithotype receipts paid
into the Lithotype bank account. Second, there was testimony that an
effort was made to identify specific deposits that might have been made
from the tavern check cashing into the Lithotype account by checking the
identification numbers on the checks. Finally, on two occasions, the
trial judge asked defense counsel what more the Internal Revenue Service
agent could have done, and his only response was that the agent knew
about the check cashing and should have investigated further. The trial
court specifically found that the agent had done all he could to
investigate and eliminate the non-income sources of the defendant's bank
accounts. The finding is not clearly erroneous but is amply supported by
the record. We must, therefore, affirm as to this issue.
judgment is affirmed.
Honorable Malcolm M. Lucas, United States District Judge, Central
District of California, sitting by designation.
This method of proof requires the Government to show the net worth of
the taxpayer as of the beginning and the end of the taxable year and the
non-deductible expenditures made by him that year. If the increase in
his net worth, plus his non-deductible expenditures, exceed his reported
income for the year and such excess is not attributable to gifts,
devises, loans or other non-taxable receipts, the conclusion may be
drawn that the taxpayer realized income which he failed to report. Papadakis
v. United States [54-1 USTC ¶9137], 208 F. 2d 945 (9th Cir. 1953); McFee
v. United States [53-2 USTC ¶9549], 206 F. 2d 872 (9th Cir. 1953).
The bank deposit analysis has been described as follows:
. . the government totals all bank deposits, and, after the non-income
deposits are excluded, United States v. Lacob, supra, 416 F. 2d
 at 759 (7 Cir.), and the amounts on deposit prior to the tax years
in question have been deducted, see Price v. United States [64-2
USTC ¶9708], 335 F. 2d 671, 677 (5th Cir. 1964), the circumstantial
inference properly permitted to arise is that all remaining deposits
constitute taxable income. United States v. Doyle [56-1 USTC ¶9553],
234 F. 2d 788, 793 (7th Cir.), cert. denied, 352 U. S. 893, 77 S.
Ct. 132, 1 L. Ed. 2d 87 (1956). The government then includes any
additional income which the taxpayer received during the tax year but
did not deposit in any bank account, and the resulting total would be
the taxpayer's reconstructed gross income. From this amount, the
appropriate tax deductions, exclusions, exemptions and credits to which
the taxpayer is entitled are taken, leaving a net income upon which is
computed the amount of tax due. This is then compared with the actual
tax paid in the years in question. See Percifield v. United States
[57-1 USTC ¶9406], 241 F. 2d 225, 229-230 n. 7 (9th Cir. 1957); Morrison
v. United States, supra, 270 F. 2d  at 2-3 (4 Cir.).
States v. Morse [74-1 USTC ¶9228], 491 F. 2d 149, 152 (1st Cir.
Two recent Supreme Court cases have narrowly interpreted the fifth
amendment's application to the production of a defendant's business
records. In the recent case of Fisher v. United States [76-1 USTC
¶9353], 425 U. S. 391, 96 S. Ct. 1569, 48 L. Ed. 2d 39 (1976), the
Court held that an attorney's production, pursuant to a lawful summons,
of his client's tax records in his hands does not violate the fifth
amendment privilege of the taxpayer
enforcement against a taxpayer's lawyer would not 'compel' the taxpayer
to do anything--and certainly would not compel him to be a 'witness'
the more recent case of Andresen v. Maryland, -- U. S. --, 96 S.
Ct. 2737, 49 L. Ed. 2d 627 (1976), the Court held that the search of an
individual's office for business records, their seizure, and subsequent
introduction into evidence does not offend the fifth amendment's
person . . . shall be compelled in any criminal case to be a witness
cases, however, recognized a distinction which is clearly applicable in
the present case:
party is privileged from producing the evidence but not from its
v. United States, 228 U. S. 457, 458, 33 S. Ct. 572, 57 L. Ed. 919
See Smith v. United States [56-2 USTC ¶9830], 236 F. 2d 260 (8th
Cir.), cert. denied, 352 U. S. 909, 77 S. Ct. 148, 1 L. Ed. 2d
118 (1956); Beard v. United States [55-1 USTC ¶9400], 222 F. 2d
84 (4th Cir.), cert. denied, 350 U. S. 846, 76 S. Ct. 48, 100 L.
Ed. 753 (1955); United States v. Mousley [62-1 USTC ¶9380], 201
F. Supp. 510 (D. C. Pa. 1962), aff'd, 311 F. 2d 795 (3rd Cir. 1963); Garner
v. United States [75-1 USTC ¶9388], 501 F. 2d 228, 236 (9th Cir.
1972), aff'd [76-1 USTC ¶9301], 424 U. S. 648, 96 S. Ct. 1178, 47 L.
Ed. 2d 370 (1976).
See also Garner v. United States [75-1 USTC ¶9388], 501 F. 2d
228, 236 (9th Cir. 1972), aff'd [76-1 USTC ¶9301], 424 U. S.
648, 96 S. Ct. 1178, 47 L. Ed. 2d 370 (1976); United States v. Judson
[63-2 USTC ¶9658], 322 F. 2d 460, 464 (9th Cir. 1963).
The testimony was:
Okay, Mr. Huntsman, if I can direct your attention now back to the
approximate spring of 1972, did you at that time receive an assignment
to conduct an investigation with respect to Mr. Helina's case?
Yes, I did.
And as part of your investigation in this case, did you have access to
the taxpayer's books and records?
No, I did not.
only was no contemporaneous objection made by defense counsel but, in
his appellate brief, defense counsel did not object to this testimony.
The record does indicate that Helina's counsel made a vague objection,
which was not based on fifth amendment grounds, during the critical
cross-examination of Helina. The exchange went as follows:
In addition to that check and other checks, did you have some of these
records available also when Mr. O'Boyle was asking you about those that
you brought in here today?
I think Mr. O'Boyle asked me--
counsel]: The question was with respect to Mr. O'Boyle talking about
these checks, I don't recall Mr. O'Boyle testifying about anything else
other than he did ask him about the particular accounts, and what other
records we are talking about, I don't recall Special Agent O'Boyle
Court: This is cross-examination on this subject on this particular
I was going to go into the records of Mr. Helina's records also, Your
Court: Objection denied.
objection is, however, insufficient to preserve the issue for appeal.
There were no contemporaneous objections on fifth amendment grounds to
this rebuttal testimony. However, after argument and after the jury had
retired, defense counsel objected and called attention to his prior in
limine motion as follows:
have a comment with respect to the objection to cross-examination of
rebuttal. [and rebuttal?] Even before the jury was selected, in
chambers we made known our concerns in this area and made a motion in
limine. We didn't want to be driving the point home in front of the jury
an objection to questions with respect to this evidence if it was going
to be admitted anyway, and at that point in time it was in our mind
clear that the court had decided that this was proper.
. . [T]his does not indicate any concession. (Tr. 684)
See notes 1 & 2 and accompanying text, supra.
Circuit Judge (dissenting):
court has unequivocally held that it is constitutionally impermissible
for the prosecution to use against an accused his pretrial silence,
maintained in the exercise of his privilege against incrimination,
unless the accused waives that privilege by offering "any testimony
as to the contents of any conversation" at the relevant time in
question. Fowle v. United States, 410 F. 2d 48, 55 (9th Cir.
1969). The present case is controlled by Fowle. Accordingly,
Helina's conviction should be reversed if the District Court erroneously
allowed the prosecution to question witnesses regarding their "lack
of access" to Helina's records.
all due respect, I submit that the first exchange, found in footnote six
of the majority's opinion, did, without question, involve a prejudicial
comment upon Helina's privileged refusal to supply his personal records.
United States v. Grammer, 513 F. 2d 673, 676 (9th Cir. 1975),
cited by the majority as support for its proposition that the first
colloquy did not involve a comment on the exercise of Helina's fifth
amendment privilege, is inapposite. In Grammer, the prosecutor
remarked during closing argument that the defendant's failure to call an
expert witness left the testimony of a Government's witness
uncontradicted. The court held that this remark "in no way
commented upon the defendant's failure to testify." Id.
(emphasis in original). Thus, Grammer differs obviously and
materially from the case now under review. Here, it is clear that the
interchange with Agent Huntsman was intended for the jury to appreciate
that the defendant had not authorized access to his personal records.
majority attempts to bolster its conclusion that this interchange did
not involve an impermissible "comment" by emphasizing defense
counsel's failure to record a specific objection. The majority's
perspective ignores the context of the colloquy and, in effect, converts
Helina's constitutional privilege of silence to a meaningless
technicality. While it is true that Helina's counsel did not object
every time the prosecution improperly raised the issue of Helina's
refusal to supply his records, the significant point is the very fact
that the defense attorney had made a motion in limine, prior to
the impaneling of the jury, requesting the exclusion of all evidence
concerning Helina's invocation of his fifth amendment right. Following
the jurors' selection, defense counsel reiterated his motion in open
court (out of the presence of the jury), thereby evidencing an
undeniable intent that the motion would serve as a continuing objection
throughout the trial. 1
at a hearing in the midst of the prosecution's case-in-chief, defense
counsel objected to the prosecutor's request that he be permitted to
elicit testimony from government witnesses in respect to their
"lack of access" to Helina's records. Helina's attorney
reaction is exactly the same as it was yesterday when Your Honor made
the ruling [that the prosecution could not introduce evidence of
Helina's silence in its case-in-chief]. I think essentially this is just
a back door attempt to do the same thing." (Tr. 116).
the trial judge later stated that he did not "see any
constitutional problem" (Tr. 119), defense counsel further
. . [I]t's just cumulative and getting into an area that is very
dangerous . . . and for him [the special IRS agent] to go back and
rehash essentially what Mr. Marx already testified to as to why the net
worth method is used is again just essentially a subtle back door method
of getting the facts in that for some reason or another, the special
agent didn't have the books and records." (Tr. 119-20).
court then ruled that the prosecution's witnesses would be allowed to
testify concerning their inability to review Helina's records.
was following this hearing that the colloquy between the prosecutor and
Agent Huntsman occurred. I simply cannot agree that the significance of
this interchange is dissipated because defense counsel failed to make a
contemporaneous objection. Only shortly before Agent Huntsman testified,
Helina's counsel had expressed to the judge his specific objection to
the admission of such evidence. The judge nevertheless decided to admit
it. In light of the defense attorney's motion in limine and his
objection to the particular line of questioning that the prosecutor
ultimately pursued with Agent Huntsman, it is, in my view, manifestly
unreasonable and unfair to hold that this colloquy did not give rise to
a prejudicial comment of the most flagrant character.
we are here concerned with one of the most basic and substantial rights
enjoyed by all citizens of his country, we should, I think, have a duty
to look a little beyond procedural irregularities. Our court has never
thought itself to be inextricably constrained by the failure of counsel
always to raise an objection at a precise time. When we find plain error
affecting substantial rights, we may, should, and often do consider the
issue even though no objection whatsoever has been made, either during a
trial or even on the appeal. Beadnell v. United States, 303 F. 2d
87 (9th Cir. 1962). As I see it, the trial court's ruling in this case,
allowing the prosecutor to raise the question of the agent's access to
Helina's records, is pivotal. Under our decision in Fowle, supra,
this ruling was egregious error, error of constitutional dimension.
Surely, it cannot be held that the error was "harmless beyond a
reasonable doubt," Chapman v. California, 386 U. S. 18, 24,
87 S. Ct. 824, 17 L. Ed. 2d 705 (1967).
In Helina's motion for a new trial, his defense counsel again emphasized
the view, which I think correct, that the motion in limine served
as a continuing objection, making it unnecessary for him to object time
after time, repeatedly reasserting Helina's privilege against
self-incrimination. See footnote 9 supra.
USTC ¶9379]United States of America, Appellee v. William Edward Bethea,
U. S. Court of Appeals, 4th Circuit, No. 75-1472, 537 F2d 1187, 4/29/76,
Reversing unreported District Court decision
[Code Secs. 446 and 7201]
Crimes: Evasion or avoidance of tax: Reconstruction of income:
Net-worth method: Burden of proof: Source of income: Cash hoard.--The
Court of Appeals reversed the taxpayer's conviction in the lower court
for willful evasion of income tax. The government, in reconstructing the
taxpayer's income by the net-worth method, failed to negate all
nontaxable sources of income that could have accounted for the
taxpayer's sudden accretion of wealth. Although the lower court had
discounted as unbelievable the taxpayer's claim that he had inherited a
large amount of money which he had hoarded in a safety deposit box, the
Court of Appeals found some merit to the taxpayer's claim and, thus,
held that the government had not satisfied its burden of proof since it
had not established the taxpayer's guilt beyond a reasonable doubt.
T. Williams, Assistant United States Attorney, William B. Cummings,
United States Attorney, Norfolk, Va., for appellee. Thomas R. Frantz,
Frederick T. Stant, Jr., Suite 1230, Va. Nat'l Bank Bldg., Norfolk, Va.,
HAYNSWORTH, Chief Circuit Judge, and CRAVEN and FIELD, Circuit Judges.
is a "net worth" income tax evasion 1 case. More
than 20 years ago Mr. Justice Clark, speaking for a unanimous Court,
lectured the nation's prosecutors on the dangers of the net-worth method
of proof in tax evasion prosecutions. 2 What he then
said, in Holland v. United States [54-2 USTC ¶9714], 348 U. S.
124 (1954), has not been eroded by time. He began by recognizing that
the net-worth method involves "something more than the ordinary use
of circumstantial evidence in the usual criminal case." Id.
at 124. He emphasized that the method is "so fraught with danger
for the innocent that the courts must closely scrutinize its use." Id.
at 125. Although concluding that the dangers inherent in the net-worth
method were not so great as to outlaw it, he cautioned that they do
"require the exercise of great care and restraint," and
admonished trial courts to "approach these cases in the full
realization that the taxpayer may be ensnarged in the system which,
though difficult for the prosecution . . . is equally hard for the
defendant . . .." Id. at 129. Holland also carried a
message to the courts of appeals: that we "should review the cases,
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." Id. Having done that, we
are convinced that the government failed to establish guilt beyond a
reasonable doubt, and reverse.
Bethea filed no income tax return for the years 1971 and 1972 and paid
no income tax in either year. In order to convict Bethea under 26 U. S.
C. §7201, the government had to prove that during those years he
incurred tax liability 3 and that he
took some affirmative act with the intent of thereby evading that tax
liability. 4 It undertook
to do so by invoking the "net worth" method of proof.
the net-worth theory, the government must first establish the total net
value of the defendant's assets at the beginning of the tax year in
question. That figure is subtracted from the net value of his assets at
the close of the tax year, and to it is added all his non-deductible
expenditures during the year. The final figure is the defendant's
"taxable income" if the government's proof either (1) negates
all non-taxable sources of income or (2) demonstrates a likely
taxable source which generated the income. United States v. Massei
[58-1 USTC ¶9326], 355 U. S. 595 (1958); Holland, supra. We
conclude that under neither theory did the government introduce
sufficient evidence from which the trier of fact could find guilt beyond
a reasonable doubt. See United States v. Fisher, 484 F. 2d 868,
869 (4th Cir. 1973), cert. denied, 415 U. S. 924 (1974); United
States v. Sherman, 421 F. 2d 198, 199 (4th Cir.), cert. denied,
398 U. S. 914 (1970).
Bethea does not challenge the government's final net-worth figure in
either tax year. Instead, he contends that the prosecution failed to
negate all non-taxable sources of the net worth increase. Under the
facts of this case, that claim is equivalent to the contention, which
Bethea also makes, that the government failed to establish "with
reasonable certainty" his opening net worth. 5
testified at trial that the increases in his worth established by the
government were derived from an inheritance of between $53,000 and
$54,000 which was left him by his brother, Vernon Bethea, who was knifed
to death in July 1970 in New York City. Vernon Bethea had been a
narcotics dealer 6 who made
frequent trips to Norfolk, Virginia. According to the defendant, his
brother often left with him sealed envelopes containing money to be put
in his safe deposit box and told him the contents of those envelopes
were his if Vernon were to die. Bethea swore that he never opened them
until approximately a month after his brother's death. 7 He said he
found between $53,000 and $54,000, but because of his uncertainty as to
the legal status of the money, he did not begin to spend it in
appreciable amounts until October 1971. He soon learned, however, and by
May 9, 1973, when the box was inventoried by internal revenue agents, it
contained only $1,062; the rest, according to Bethea, having been spent.
government responds that Bethea's statements are simply the typical
unverified and unverifiable "cash hoard" defense raised
frequently in net worth tax evasion cases. 8 Furthermore,
it strongly emphasizes that when asked by revenue agents early in the
investigative process concerning any "inheritances," Bethea
mentioned only $2,000-$3,000 which he recovered from a box in his
brother's New York City apartment. 9
court found "the defendant's assertions to be inherently
incredible, and not worthy of belief." We think Judge MacKenzie
meant that Bethea's story was inherently stranger than fiction, and in
that sense "unbelievable." We find no clear rejection of
Bethea as one unworthy of belief, i.e., a judgment resting upon
observation of demeanor, manner, voice tones, etc., and a judgment
peculiarly within the province of the trial judge. 10
objective facts make Bethea's story not so incredible. The government
concedes, indeed insists, that Bethea at the end of 1970 was a poor man.
For the tax years 1967 through 1970, his adjusted gross income averaged
approximately $2,850, 11 according
to government figures. He lived in what was described as a cold-water
flat, with a rent of from $10 to $11 per week. He made purchases on
credit with extended payment periods.
his brother's death Bethea's life style changed dramatically. In October
1971, he moved into a new apartment with rent of $180 per month--some
four times more expensive than his old apartment. He purchased a new
Buick, paying more than $4,000 in cash, and he placed approximately
$2,000 in a savings account. All told during that year, his net worth
increased $7,419.21. And in 1972 it increased by $15,741.06, which
amounted to better than a 100 percent increase.
is an undisputed fact that at a time when Bethea was living in poverty
conditions, he rented a safety deposit box at a bank. What would a poor
man want one for and what would he keep in it? Why would he visit that
box 18 times between June 1969, when he acquired it, and July 13, 1970,
the date of his brother's death? The government's evidence of his
poverty lifestyle during that period strongly supports Bethea's
testimony that he visited the box to put envelopes containing his
brother's money in it, and not to take money out of it. That Bethea's
brother Vernon had a lot of money is corroborated in the record by the
testimony of Thomas W. Moss, attorney at law, who saw Vernon Bethea
exhibit a large envelope containing $100 bills. He testified that Vernon
Bethea said the envelope contained $7,500 and that he could get that
much more with little or no effort.
typical "cash hoard" defense which the government disparages
rests upon the totally uncorroborated testimony of a defendant that
years ago he buried money in his backyard. Bethea's story is atypical.
He says his brother made a lot of money in the narcotic traffic in New
York. Vernon's criminal record confirms that he was in the business.
Lawyer Moss' testimony confirms that Vernon at times carried very large
sums on his person. And finally the bank's records show the rental of a
safety deposit box by a defendant living at a poverty level. The
government, in short, offers no evidence to refute the probability of a
cash hoard, and instead, relies solely upon a natural disinclination to
believe that large sums of money are ever cashed away.
is not necessary that we believe Bethea's story to reverse his
conviction. He is not required, even under the networth theory, to prove
his innocence; the government must establish his guilt beyond a
it is urged upon us that even if we should view the evidence as a
failure on the part of the government to satisfactorily negate all
non-taxable sources of increase in net worth, the conviction may
nevertheless be sustained on the ground that the evidence shows a likely
source of taxable income. We agree that the net worth evidence rules
provide the prosecutor with a two-edged sword and that he may cut either
way. If he cannot negate all non-taxable sources, he can prove the
substantial equivalent by demonstrating a "likely source" of
taxable income. Holland, supra, as interpreted in Massei, supra.
this point the district court found:
evidence clearly showed beyond all reasonable doubt that the defendant,
in the years in question, had a source of income as a carpenter. He,
himself, estimated his income from that source on credit applications
signed by him during the years in question as $250 per week.
reasons that subsequently appear, we view this finding as clearly
for the statement on a credit application that his income was $250 per
week, which was highly self-serving at the time made and not then either
under oath or subject to cross-examination, all the evidence
showed that Bethea normally made only $200-$300 per month when
working for his uncle, Wilson Hill, and acquired small amounts of
additional income (approximately $20 per job) working independently.
During the tax years 1971 and 1972 his income from carpentry was,
according to uncontroverted testimony, even smaller because of the
significant amounts of time he spent in 1971 repairing his grandmother's
house and in 1972 building houses for himself and his mother.
importantly, there is nothing in the record to indicate that Bethea's
carpentry income went up at all during the years 1971 and 1972 when his
net worth sharply increased. The government's own accounting showed that
Bethea averaged only $2,856.31 during the four tax years 1967 through
1970 from his employment. Finally, we think it fair to comment that the
government seemed at one point during the trial to urge that ethea's
source of income was illicit rather than derived from his carpentry
business. Bethea's cross-examination by Roger Williams, Assistant United
States Attorney, disclosed the government's theory:
As a matter of fact, Mr. Bethea, weren't you and your brother in
What do you mean, partnership?
In the narcotics business?
No sir, I don't deal in narcotics.
Mr. Bethea, didn't you take over your brother's narcotics business?
Wasn't this where you got all the money to put in the house?
are two problems with this suggested source of income. First, not one
shred of evidence was introduced at trial to show that Bethea had any
dealings in narcotics or was in partnership with his brother. Second,
the timing of any narcotics activity was not shown or even suggested.
Such timing would be critical to the government's proof under the
present indictment. If Bethea was in partnership with his brother,
presumably the profits would have been realized before his brother's
death in the summer of 1970 and would therefore have been a source of
net worth at the beginning of the period of the indictment and would
have gone to exculpate him. On the other hand, if Bethea "took
over" his brother's business, then the revenues may have been
realized during 1971 and 1972, but there is absolutely no proof either
as to Bethea's participation in criminal enterprise or the timing of any
participation. We cannot sustain this conviction upon mere speculation
that Bethea might have made a lot of money unlawfully. The short answer
is there is no evidence of substantial earned income--either
lawful or unlawful that can account for the increases in net worth.
The government emphasizes that when Bethea was interviewed by Special
Agent Jerry Rowe on May 8, 1973, and was asked whether he had received
any gifts or inheritances during the period 1968 through 1972 he said
that he received only $2,000-$3,000 from a box in his brother's
apartment. It is urged that the trier of fact was entitled to credit
Bethea's declaration and thus reject his cash hoard testimony. As for
the declaration to Agent Rowe, the district judge was in no better
position to judge credibility than are we: he did not hear or see him
explained his failure to disclose the larger inheritance to be a result
of his ignorance if the tax consequences of inherited wealth and his
fear that "they would try to take it away from [him] . . .."
Transcript at 202.
is not an irrational appehension. Aside from moral sensibility, we think
some bankers, perhaps even a few lawyers, might feel uncomfortable in
possession of a very large sum of tainted money. Bethea attended school
for only a five-year period, and we cannot impute to him knowledge of
the common law of trover. Not everyone knows that the innocent possessor
of illicitly gained money has a sufficient property interest to retain
it against all the world except the true owner. Armory v. Delamire,
93 Eng. Rep. 664 (K. B. 1722).
Bethea's testimony may be interpreted as an admission that he initially
lied to the agent because he feared income tax liability is insufficient
to establish guilt under 26 U. S. C. §7201. Willful intent is
irrelevant unless a tax deficency is established. Lawn v. United
States [58-1 USTC ¶9189], 355 U. S. 339, 361 (1958). See also Sansone
v. United States [65-1 USTC ¶9307], 380 U. S. 343, 351 (1965).
of failure to offer evidence sufficient to establish Bethea's guilt
beyond a reasonable doubt, the conviction will be
The defendant was convicted on two counts of having violated 26 U. S. C.
§7201 which provides:
person who willfully attempts in any manner to evade or defeat any tax
imposed by this title or the payment thereof shall, in addition to other
penalties provided by law, be guilty of a felony and, upon conviction
thereof, shall be fined not more than $10,000, or imprisoned not more
than 5 years, or both, together with the costs of prosecution.
Mr. Justice Clark was especially well qualified. He spoke to the United
States Attorneys as their former boss. Five years previously he had
relinquished his job as Attorney General or the United States.
Lawn v. United States [58-1 USTC ¶9189], 355 U. S. 339, 361
(1958). See also Sansone v. United States [65-1 USTC ¶9307], 380
U. S. 343, 351 (1965).
Spies v. United States [43-1 USTC ¶9243], 317 U. S. 492, 499
Holland, supra at 132.
That Vernon Bethea's extensive police record [some five pages long]
contained eight counts of sale of heroin strongly supports that
Bethea testified that he never opened the envelopes "[b]ecause I
didn't want no [sic] misunderstanding with him. He would know if i had
opened them." Transcript at 185.
See, e.g., Smith v. United States [56-2 USTC ¶9830], 236 F. 2d
260 (8th Cir.), cert. denied, 352 U. S. 909 (1956) (money hidden
in an old mail bag or buried in an iron pot); Mighell v. United
States [56-2 USTC ¶9630], 233 F. 2d 731 (10th Cir.), cert.
denied, 352 U. S. 832 (1956) (a buried cash hoard).
At trial, Bethea testified that this $3,000 which he personally went to
New York to recover, was in addition to the money in the safe deposit
A finding of fact in a criminal case may certainly be set aside by a
federal court of appeals if found to be clearly erroneous (See United
States v. Glover, 514 F. 2d 390, 391 (9th Cir. 1975), cert.
denied, -- U. S. --) and might even be set aside upon a lesser
showing given the higher burden of proof on the government in criminal
prosecutions. (Cf. Jones v. Pitt County Bd. of Education, No.
74-2257 (4th Cir. Nov. 19, 1975) (Craven, J. dissenting)).
Bethea's adjusted gross income according to government figures for the
four years is as follows: 1967-$2,068.19; 1968-$1,551.17;
1969-$6,500.64; and 1970-$1,305.26. Transcript at 154.
we have presented his income as an average for those four years because
we believe it more accurately reflects the evidence as to Bethea's
accretion of wealth. We find that the figure of $6,500.64 for 1969,
while eminently fair as to the critical issue of net worth increase
during 1971 and 1972, artificially lumps income in that year. A key
element of that figure is $3,000 cash on hand which Bethea testified was
in addition to the $3,000 obtained from his brother's apartment and
which he told the revenue agents he accumulated between 1969 and 1972.
By placing that amount in the earliest tax year, 1969, the government
reduced Bethea's income during the indictment period but increased it in
1969 From Bethea's testimony, which is the only source of this figure
(see Transcript at 118 & 135), we have no way to determine when the
money was accumulated. Similarly, the 1969 income includes a $1,023.90
non-deductible loss which Bethea realized when he traded for a newer
automobile and received less than the original purchase price as a
tradein. We do not believe that this increase is properly viewed as
occurring in only 1969 when the issue at hand is the real availability
of income to Bethea in that year. Again, the government's treatment of
this issue did not prejudice Bethea as to the critical period of
1971-72, but it does have the effect of making the 1969 income appear
USTC ¶9219]United States of America, Plaintiff-Appellee v. Bernard A.
U. S. Court of Appeals, 5th Circuit, No. 75-1530, 526 F2d 884, 2/5/76
[Code Secs. 446, 7203, and 7206(1)]
Criminal penalties: Fraud: Income not reported: Reconstruction of
income: Bank records: Specific items: Net worth increase.--Evidence
of criminal tax fraud found in defendant's total bank deposits was
admissible as corroborative evidence with respect to the "omission
of specific items" method of proof used by the government, and was
not limited to proof under the net worth increase method. Bank deposit
evidence implied that the specific-item testimony had correctly
indicated the defendant's receipt of considerable unreported income. The
District Court erred in refusing to instruct the jury to limit
evaluation of the bank deposit evidence to corroborative credibility;
but the error was harmless.
J. Gallinghouse, United States Attorney, Mary Williams Cazalas,
Assistant United States Attorney, New Orleans, La., for
plaintiff-appellee. George W. Reese, 1802 Broadway, New Orleans, La.,
THORNBERRY, SIMPSON and MORGAN, Circuit Judges.
Bernard Horton was convicted by a jury of willfully and knowingly
subscribing false income tax returns for the years 1968, 1969, and 1970.
See 26 U. S. C. §7206(1). Appellant's conviction followed from
his understating on his returns for the years in question his gross
receipts from the practice of law. The present appeal challenges that
conviction on three grounds. We reject appellant's contentions and
affirm his conviction.
response to appellant's request pursuant to F. R. Cr. P. 7(f) for a bill
of particulars, the Government stated that it intended to establish
appellant's guilt by the "specific item" method of proof.
Appellant now challenges the Government's later introduction--in
Schedule VI and through the testimony of expert summary witness
Rotolo--of evidence as to his total bank deposits in 1968, 1969, and
1970. He argues that introduction of this evidence created a fatal
variance between the Government's asserted method of proof set out in
the bill of particulars and the proof at trial and, more specifically,
that evidence of total bank deposits is admissible only where the
Government proceeds under the "net worth" theory. To be
contrasted with the specific item method of proof, the net worth method
hinges on a proven increase in the taxpayer's net worth during the
period in question in an amount greater than that reported to IRS with
the consequent implication of unreported income. See, e.g., United
States v. Meriweather [71-1 USTC ¶9390], 440 F. 2d 753 (5th Cir.
1971), cert. denied, 417 U. S. 948, 94 S. Ct. 3074, 41 L. Ed. 668
(1974). The net worth method generates a circumstantial case laden with
possibilities for error and is, in turn, circumscribed in its use by a
number of limiting rules. See Holland v. United States [54-2 USTC
¶9714], 348 U. S. 121, 75 S. Ct. 127, 99 L. Ed. 150 (1954); Merritt
v. United States [64-1 USTC ¶9226], 327 F. 2d 820 (5th Cir. 1964).
For example, the Government must establish opening net worth with
reasonable certainty and must investigate and show false leads furnished
by the taxpayer. E.g., Holland v. United States, 348 U. S. at
135-36, 75 S. Ct. at 135; Agoranos v. United States [69-1 USTC ¶9316],
409 F. 2d 833, 835 (5th Cir. 1969); Merritt v. United States, supra
specific item method is, however, direct in its operation. The usual
strategy with the latter method is for the Government to produce
evidence of the receipt of specific items of reportable income by the
defendant that do not appear on his income tax return or appear in
diminished amount. United States v. Goldstein, 56 F. R. D. 52, 55
n. 8 (D. Del. 1972); see Azcona v. United States [58-2 USTC ¶9666],
257 F. 2d 462 (5th Cir. 1958); Lloyd v. United States [55-2 USTC
¶9665], 226 F. 2d 9 (5th Cir. 1955). Appellant Horton's prosecution
presents a good example of the specific item method of proof in income
tax cases. Horton was a lawyer in New Orleans with an extensive criminal
defense practice. Agents of IRS, working from records supplied by
appellant and from records in the local court clerk's office that showed
those cases in which appellant was attorney of record, derived the names
of a large number of clients represented by Horton during 1968, 1969,
and 1970. The agents then determined through a lengthy process of
interviews the amounts paid to appellant as legal fees by those clients
in the above years. Unfortunately for appellant, the amounts his clients
were willing to testify to exceeded the amounts of gross receipts stated
on his income tax returns. Relying on the testimony of appellant's
clients, the Government successfully built its case and obtained a
reject appellant's argument that use of evidence of total bank deposits
created a fatal variance. In this appeal, as was the case at trial, the
Government argues that evidence of total bank deposits was properly
admissible in corroboration of the testimony of appellant's former
clients as to amounts paid him in 1968, 1969, and 1970. Many of the
former clients called by the Government possessed no documents or
receipts to substantiate their claims of payment to appellant. The
Government contends, correctly, that the evidence of total bank deposits
corroborated this unsupported testimony as to the fact of payment. The
corroborative feature of the bank deposits evidence proceeds apace with
the implication that appellant handled and expended large sums of money,
as would be expected if the specific item testimony were true. See
United States v. McGuire [65-1 USTC ¶9299], 347 F. 2d 99 (6th Cir.
1965), cert. denied, 382 U. S. 826, 86 S. Ct. 59, 15 L. Ed. 2d 71
(1966); McKenna v. United States [56-1 USTC ¶9492], 232 F. 2d
431, 436-37 (8th Cir. 1956); United States v. Nunan [56-2 USTC ¶9876],
236 F. 2d 576, 588 (2d Cir. 1956), cert. denied, 353 U. S. 912,
77 S. Ct. 661, 1 L. Ed. 2d 665 (1957). For this reason, appellant's
fatal variance argument is inapposite. The evidence of total bank
deposits during the years in question was properly admissible as
corroborative evidence in this specific item prosecution and there was no
for the purposes of argument only, however, that a variance did exist
between the method of proof designated in the bill of particulars and
the Government's introduction of the total bank deposits evidence,
appellant has still failed to demonstrate that the variance was fatal to
the Government's case. The purpose of the bill of particulars is to
apprise the defendant of the charges against him with sufficient
precision to enable him to prepare his defense, e.g., United States
v. Bearden, 423 F. 2d 805 (5th Cir. 1970), cert. denied, 400
U. S. 836, 91 S. Ct. 73, 27 L. Ed. 2d 68 (1971), and this purpose is
particularly well-served in complicated income tax prosecutions like the
instant one. The usual manner in which questions as to bills of
particulars reach this Court is on review of a district court's denial
of a defendant's request for the bill. In such cases, the standard of
review is one of discretion; viz., did the district court abuse its
discretion? See e.g., Buie v. United States, 420 F. 2d 1207 (5th
Cir. 1969), cert. denied, 398 U. S. 932, 90 S. Ct. 1830, 26 L.
Ed. 2d 97 (1970); Joseph v. United States, 343 F. 2d 755 (5th
Cir. 1965), cert. denied, 382 U. S. 828, 86 S. Ct. 65, 15 L. Ed.
2d 73 (1966). In the instant situation, where a fatal variance is
argued, appellant must demonstrate that he was taken by surprise by
reason of the variance and that such surprise prejudiced the preparation
of his defense. See United States v. Glaze, 313 F. 2d 757 (2d
Cir. 1963); cf. Buie v. United States, supra. Appellant Horton
has not made and cannot make the requisite demonstration. As early as
the first day of trial, the Government stated and defendant acknowledged
in their respective opening remarks that bank statements and other
documents connected with four basic bank accounts used by appellant and
his wife would be introduced and analyzed. First Supplemental Record on
Appeal, Vol. I at 7, 15. Appellant cannot argue that the evidence of
total bank deposits unreasonably impeded the adequate preparation of his
defense by reason of surprise.
also challenges the refusal of the district court to give the jury an
instruction limiting its consideration of the total bank deposits
evidence to corroboration of the specific item testimony. The district
court relied on Azcona v. United States, supra, to support its
denial of the requested instruction. This was error. The Azcona
opinion dealt with a district court's denial of an additional bill of
particulars in a specific item prosecution; it did not address the
problem of a limiting instruction on corroborative evidence. We hold
that the district court erred in refusing the requested instruction.
However, we also find the error to be harmless under the facts of the
instant case. The evidence against appellant was overwhelming, and the
bank deposits evidence was but an insignificant portion of the
Government's total case. Moreover, the colloquy that occurred between
the Government, the defense attorney, and the bench in the presence of
the jury when defense counsel objected to the introduction of this
evidence served as the functional equivalent of a limiting instruction.
Your Honor, we tender this schedule into evidence as corroborative
evidence, not to be added to Exhibits 1 through 5 previously admitted,
but as separate corroborative evidence to show the availability of cash
as testified to by witnesses who have testified previously.
I object to the introduction of all of this evidence as far as Schedule
VI is concerned, Your Honor.
COURT: Objection overruled; let it be admitted.
Would you give us the total amounts shown on your schedules for the
period we are concerned with, Mr. Rotolo?
In 1968 the total deposits amounted to $31,511.80; in 1969, $52,499.25;
in 1970, $43,835.99.
Now, did you prepare another schedule in connection with all the
Yes, sir. That's G-VII, I believe.
Would you identify that for us please?
COURT: Let me ask you first: These amounts the witness has mentioned as
being total deposits, is it the government's contention that they
represent the gross receipts on the books?
No, Your Honor. Those figures are only in corroboration of the witnesses
who have testified.
COURT: In 1970, for example, the understatement alleged here was $9,199.
WITNESS: That's inclusive of all the sources we used, Your Honor.
In other words, Your Honor, we have introduced evidence of four types of
sources to indicate that $9,000 amount.
of the important sources of that was the testimony of witnesses, who did
not have receipts any longer that they paid, and we have intended to
show, by this corroborative evidence, that there were bank deposits in
this year of amounts which will justify belief in those witnesses that
what they paid was received and deposited.
And I have objected on the grounds that I previously stated, Your Honor.
COURT: I just don't want the jury to get the impression that this is an
addition to the $9,000 already mentioned.
Oh, no, sir.
COURT: All right; go ahead.
Your Honor, also because of my previous objection to Government Exhibit
VI, on the bank deposits, I also want to interpose an objection to
Exhibit VII, where these figures are carried over in an attempt to
summarize the figures, which I don't think is proper.
COURT: Objection overruled. Go ahead.
Supplemental Record on Appeal, Vol. I at 1062-64. Accordingly, the
district court's refusal to give the limiting instruction was harmless
error. See Kotteakos v. United States, 328 U. S. 750, 66 S. Ct.
1239, 90 L. Ed. 1557 (1946); United States v. Harbolt, 491 F. 2d
78 (5th Cir. 1974).
a second point of error, appellant attacks the Government's use of prior
statements by appellant's clients, given to IRS agents at the time of
their investigation, to refresh the memories of those witnesses at the
time of trial. Appellant's contention is answered by this Court's
opinion in Esperti v. United States, 406 F. 2d 148, 150-51 (5th
Cir.), cert. denied, Farinella v. United States, 394 U. S. 1000,
89 S. Ct. 1591, 22 L. Ed. 2d 777 (1969).
is hornbook law that any writing may be used to refresh the recollection
of a witness. See Wigmore, Evidence §758. This is true even where the
document itself would be inadmissible as evidence. Williams v. United
States, 7 Cir. 1966, 365 F. 2d 21. Caution must be exercised to
insure that the document is actually being used for purposes of
refreshing and not for purposes of putting words into the mouth of the
witness. Such, however, is within the discretion of the trial judge.
Redfearn v. United States, 375 F. 2d 767 (5th Cir. 1967).
It must be borne in mind that the reliability and credibility of
witnesses is a matter for the trier of fact--here, the jury. See Thompson
v. United States, 342 F. 2d 137 (5th Cir.), cert. denied, 381
U. S. 926, 85 S. Ct. 1560, 14 L. Ed. 2d 685 (1965). Moreover, where the
issue, as here, is one of present recollection revived, the doctrine of
contemporaneity has little application. See Putnam v. United States,
162 U. S. 687, 16 S. Ct. 923, 40 L. Ed. 1118 (1895). We perceive no
abuse of discretion in the district court's allowing the Government to
refresh the witnesses' memories with their prior statements to IRS
a final point of error, appellant challenges that portion of the Plan
for Random Selection of Grand and Petit Jurors for the Eastern District
of Louisiana which excuses operators of "one-man" businesses
from jury duty upon request. We reject appellant's argument. In the
first instance, the exclusion of sole proprietors is not automatic. On
the contrary, it is necessary for such persons to request that they be
excused from jury duty. This element of choice makes the present case
analogous to that before the Court in Camp v. United States, 413
F. 2d 419 (5th Cir. 1969), where the use of voter registration lists to
compile a roster of potential jurors was approved. As the Court stated
in Camp, persons choosing not to register to vote do not
constitute a cognizable class capable of systematic exclusion from
juries. 413 F. 2d at 421. Likewise, sole proprietors requesting to be
excused from juries in the Eastern District of Louisiana do not
constitute a cognizable class systematically excluded from petit juries.
See Labat v. Bennet, 365 F. 2d 698 (5th Cir. 1966); cf. Taylor
v. Louisiana, 419 U. S. 522, 95 S. Ct. 692, 42 L. Ed. 2d 690 (1975);
Curry v. Estelle, 524 F. 2d 981 (5th Cir. 1975). The categorical
exclusion of certain occupational groups from jury duty is permissible
on the "bona fide ground that it [is] for the good of the community
that their regular work should not be interrupted." Government
of the Canal Zone v. Scott, 502 F. 2d 566, 569 (5th Cir. 1974), quoting
Mr. Justice Holmes in Rawlins v. Georgia, 201 U. S. 638, 640, 26
S. Ct. 560, 561, 50 L. Ed. 899 (1906). The exclusion of sole proprietors
upon request meets that standard.
judgment of conviction in the instant case is in all respects affirmed.
USTC ¶9372]United States of America, Plaintiff-Appellee v. George J.
U. S. Court of Appeals, 5th Circuit, No. 79-5429, 615 F2d 1117, 4/24/80,
Affirming unreported District Court decision
[Code Sec. 7201]
Criminal penalties: Tax evasion: Net worth method.--The
taxpayer's conviction for willfully evading income tax in 1975 and 1976
was upheld. The IRS properly used the net worth method to establish the
taxpayer's true income for the years at issue. The taxpayer's consistent
pattern of substantial understatement of income, together with evidence
of falsehoods and inadequate records, permitted the jury to draw an
inference of willfullness. The trial court's granting of the taxpayer's
motion for acquittal on the first of three counts did not affect the
validity of the IRS' determination of the taxpayer's true income under
the remaining two counts.
H. Hannah, Jr., United States Attorney, Janet Hellmich, T. J. Baynham,
Assistant United States Attorneys, Tyler, Tex. 75710, for
Long, 818 Citizens Bank Building, Tyler, Tex. 75702, for
AINSWORTH and HENDERSON, Circuit Judges, and HUNTER,* District Judge:
JR., District Judge:
J. Skalicky appeals from his conviction by a jury on two counts of
willful evasion of federal income taxes. 1 The
government established its case through the "net worth"
approach. The procedure for this method was approved in Holland v.
United States [54-2 USTC ¶9714], 348 U. S. 121, 125, 75 S. Ct. 127,
130, 99 L. Ed. 150 (1954):
a typical net worth prosecution, the Government, having concluded that
the taxpayer's records are inadequate as a basis for determining income
tax liability, attempts to establish an 'opening net worth' or total net
value of the taxpayer's assets at the beginning of a given year. It then
proves increases in the taxpayer's net worth for each succeeding year
during the period under examination and calculates the difference
between the adjusted net values of the taxpayer's assets at the
beginning and end of each of the years involved. The taxpayer's
nondeductible expenditures, including living expenses, are added to
these increases, and if the resulting figure for any year is
substantially greater than the taxable income reported by the taxpayer
for that year, the Government claims the excess represents unreported
also United States v. Schafer, 580 F. 2d 774 (5th Cir. 1978); United
States v. Calles [73-2 USTC ¶9544], 482 F. 2d 1155 (5th Cir. 1973);
United States v. Tunnell [73-2 USTC ¶9560], 481 F. 2d 149 (5th
appeal, Skalicky contends that the district court's action in granting a
Judgment of Acquittal on the first count completely discredited the
validity of the government's net worth computations; that the record
contains no evidence of willfulness; and that the trial court erred in
admitting into evidence certain government charts and summaries. These
contentions have been earnestly and ably presented by appellant's
counsel, but we are quite sure that they are totally without merit. We
affirm the judgment of conviction.
jury returned a verdict of guilty on all counts. 2 Following
the trial, defendant filed a Motion for Judgment of Acquittal as to all
three counts on the grounds that "* * * the Government has failed
to introduce substantial evidence of an essential element in the case,
this being that the Appellant owed Federal Income Tax * * *" for
the years 1974, 1975 and 1976 "* * * which he failed to pay."
The District Judge granted the motion as to Count I and denied as to
Counts II and III. 3
argues that the entry of the judgment of acquittal completely
discredited the government's net worth statement and the validity of its
computation of the opening and closing net worth for each of the
calendar years. This argument is based on several mistaken assumptions.
There is absolutely nothing in the trial court's action to justify the
conclusion that appellant attributes to it. Contrariwise, the denial of
the motion as to Counts II and III attests to an endeavor to carefully
weigh the evidence as to each count. Our inquiry is limited to a
determination of whether the evidence is sufficient to support the
jury's conclusion that the defendant was guilty beyond a reasonable
doubt on Counts II and III. What the judge did with the remaining count
is immaterial. 4 United
States v. Dubea, 612 F. 2d 950 (5th Cir. 1980); United States v.
Varkonyi, 611 F. 2d 84 (5th Cir. 1980); United States v. Michel,
588 F. 2d 986 (5th Cir. 1979). A careful review of the record reveals
with reasonable certainty the begining net worth and the increases in
net worth for each year in question. Those figures were clearly proven
by the introduction of Chart A during the testimony of Revenue Agent
Smith, which gave the computation of the defendant's net worth for
12-31-73 as $18,769.67, for 12-31-74 as $41,761.33, for 12-31-75 as
$71,738.18 and for 12-31-76 as $97,412.52. No useful purpose would be
served by further recital of the testimony to demonstrate the accuracy
of these calculations; it suffices to state that the evidence was more
than sufficient for the jury to find beyond a reasonable doubt that
substantial tax deficiencies existed for each of the three years.
can not really dispute the deficiencies in his tax returns, but argues
vigorously that the government has failed to prove a willful attempt to
evade payment of those taxes. He contends that willfulness cannot be
inferred from the mere understatement of income but must be shown by
independent proof. Whatever validity this argument might have as a
single element, the record here reflects a number of facts which warrant
an inference of willfulness.
areas of criminal law pose more difficulty than the definitions of the
words "willfully attempts" in the statute. In United States
v. Bishop [73-1 USTC ¶9459], 1973, 412 U. S. 346, 93 S. Ct. 2008,
36 L. Ed. 2d 941, the Supreme Court held that the term
"willfully" requires more than a showing of careless disregard
for the truth. In United States v. Pomponio [76-2 USTC ¶9695],
1976, 429 U. S. 10, 97 S. Ct. 22, 50 L. Ed. 2d 12, the Court noted that
proof of evil motive or bad intent was not necessary, and that
willfulness in the context of the felony tax evasion statutes simply
means a voluntary intentional violation of a known legal duty.
was the owner of George's Coffee Bar and a bingo parlor known as the
Silver Dollar Ballroom. The use of cash was common in the two
businesses, and defendant used large amounts of cash for the purchase of
automobiles and gifts. The government has established that during the
years of 1974, 1975 and 1976 he followed a persistent pattern of
underreporting large amounts of income. His tax returns were prepared at
H & R Block by Larry Wilson. Whatever information Wilson had was
obtained from summary sheets furnished him by Skalicky, and what he
furnished turned out to be totally erroneous. When Revenue Agent
McPherson notified Skalicky that there appeared to be a substantial
understatement of income on his (defendant's) tax returns, Skalicky
replied, "everyone lies at times."
the consistent pattern of understating large amounts of income, coupled
with evidence of falsehood, surreptitious cash transactions and
inadequate records kept by taxpayer, permits an inference of willfulness
sufficient to create a jury question. Spies v. United States
[43-1 USTC ¶9243], 1943, 317 U. S. 492, 63 S. Ct. 364, 87 L. Ed. 418.
The requisite affirmative act can be found in the filing of false
returns for each year in the indictment. United States v. Tunnell
[73-2 USTC ¶9560], 481 F. 2d 149 (5th Cir. 1973).
reject appellant's claim that the district court's treatment of the
summaries and charts unduly prejediced his trial. In permitting the jury
to utilize them the court proceeded well within the discretion accorded
it under Federal Rules of Evidence, rule 1006, 28 U. S. C. A. By
instructing the jury that the summaries were not evidence, however, the
trial judge took one further step to insure that the jury would not rely
on the conclusory matter as independent proof of the appellant's guilt. 5
the evidence establishes with reasonable certainty the beginning net
worth and the increase in net worth for each year in question, and
because there was sufficient evidence from which the jury could infer
the requisite element of willfulness, and because we discern no
prejudicial error of any nature, we affirm the judgments of conviction
on Counts II and III of the indictment.
District Judge for the Western District of Louisiana, sitting by
26 U. S. C. §7201, the applicable statute, provides:
person who willfully attempts in any manner to evade or defeat any tax
imposed by this title or the payment thereof shall, in addition to other
penalties provided by law, be guilty of a felony and, upon conviction
thereof, shall be fined not more than $10,000, or imprisoned not more
than 5 years, or both, together with the costs of prosecution.
Count I involved income tax allegedly due and owing for 1974. The 1975
tax return was the subject of Count II, and the 1976 return was the
subject of Count III.
No reasons were assigned. The formal order entered read:
on this day to be considered Defendant's Motion for Judgment of
Acquittal in the above styled and numbered cause of action and the Court
is of the opinion that the motion as to
I is Granted,
II is Denied,
III is Denied,
this 11th day of July, 1979.
ert M. Parker
The government had a right to appeal under 18 U. S. C. §3731 from the
Judgment of Acquittal on Count I. United States v. Varkonyi, 611
F. 2d 84 (5th Cir. 1980); United States v. Burns, 597 F. 2d 939,
940 (5th Cir. 1979). By brief the United States requests that we uphold
the jury convictions for all three years and "bring the defendant
forward for sentencing on Count I (1974)." However, no formal
appeal was entered by the United States.
That the court below did not apply the rule so as to receive the
summaries in evidence is understandable, in light of the conflicting
case law, but prior uncertainties regarding the status of summaries are
now resolved by rule 1006. See United States v. Smyth, 556 F. 2d
1179 at 1184 (5th Cir. 1977).
USTC ¶9729]United States of America, Plaintiff-Appellee v. Virgil V.
Keller and Alice I. Keller, Defendants-Appellants
U. S. Court of Appeals, 9th Circuit, No. 74-3087, 523 F2d 1009, 9/17/75,
Aff'g and rev'g unreported District Court decision
[Code Sec. 7201]
Crimes: Tax evasion: Net worth prosecution: Defenses.--A husband
and wife were improperly convicted of tax evasion for 1967. The
prosecution was based on a net worth reconstruction of income and the
government did not investigate the spouses' claim that they had made
improvements to their two residences which, if verified, would have
eradicated their 1967 tax liability. Moreover, it was error not to
permit the wife to retake the stand to testify as to certain evidence
she had just discovered. However, these errors did not carry through to
later years and the spouses' 1968 and 1969 tax evasion convictions, also
based on net worth reconstructions, were affirmed.
D. Gray, Assistant United States Attorney, Spokane, Wash., for
plaintiff-appellee. Douglas A. Wilson, Wilson, Flower & Sullivan,
Suite 2, Yakima Legal Center, 303 E. D St., Yakima, Wash., for
WRIGHT and CHOY, Circuit Judges, and PLUMMER, * District
Alice and Virgil Keller were convicted by a jury on three counts of
wilfully and knowingly attempting to evade income taxes, for the years
1967, 1968, and 1969, in violation of 26 U. S. C. §7201. We reverse as
to the 1967 count and affirm as to the 1968 and 1969 counts.
Kellers owned and operated two drive-in restaurants and a catering
business in Yakima, Washington. They also dealt in a few real estate
transactions. Although their businesses were profitable and their
financial affairs were expanding, they paid no taxes during any of those
three years. Eventually coming under the scrutiny of the Internal
Revenue Service (I. R. S.), they were subjected to investigation by the
"net worth" method because they supplied incomplete financial
the net worth method, the taxpayer's total assets and liabilities as of
December 31 each year are determined to yield the taxpayer's net worth.
When done at successive yearly intervals, annual net worth increases or
decreases are shown. Using the annual net worth figures, with due
allowance for amounts spent on living expenses and deductible items, I.
R. S. agents recompute the taxpayer's tax liability. If the resulting
figure for any year is substantially larger than the taxable income
reported by the taxpayer on his tax return, the Government may charge
tax evasion, making an inference of wilfulness.
R. S. agents Costan and Turk constructed the following net worth
computations for the Kellers.
12-31-66 12-31-67 12-31-68 12-31-69
Total assets ....................................... $94,368 $219,981 $263,320 $380,571
Total liabilities .................................. 66,685 164,523 177,273 255,592
Net worth .......................................... 27,683 55,458 86,046 124,978
(27,683) (55,458) (86,046)
Increase in net worth .............................. $ 27,775 $ 30,587 $ 38,932
(Amount included for living expenses not shown)
Deducting depreciation, exclusions, exemptions, and
yielded taxable income in the amounts of:
$ 14,955 $ 22,014 $ 29,686
The Kellers had reported
respectively for taxable income:
$ 632 $ 414 $ 0
Values Allowed For Two Residences
allege error concerning the values allowed them for two residences that
they held on December 31, 166 and traded-in in 1967 for their second
restaurant. The I. R. S. allowed bases of $16,000 and $42,000 for the
two properties, which had been the original purchase prices paid by the
Kellers some years before. The Kellers maintained that the values were
$20,000 higher due to improvements and furniture they had put into both
houses. If these improvements and furnishings existed as the Kellers
claim, the December 31, 1966 assets would be increased to the point that
the tax liability for 1967 would disappear.
record shows that the I. R. S. agents credited the Kellers with no basis
for any furnishings or improvements and that the agents had not made a
reasonable investigation into these matters. The Kellers gave leads
whereby the agents could have investigated the existence of the
furniture and the improvements. Photostats of the Kellers' checks for
these years were available from the local bank. Payments by an insurance
company and a fire loss statement on the 1965 tax return indicate that
there existed at least $15,800 in furnishings. A realtor itemized a long
list of furniture in 1967. The buyer of the two residences credited the
Kellers with the approximate increased values which the Kellers claim,
but which the I. R. S. denies. When the I. R. S. sets a taxpayer's
return aside and constructs a new return for him, it assumes the burden
of proving, beyond a reasonable doubt, that the items contained therein
are true. Lenske v. United States [66-2 USTC ¶9686], 383 F. 2d
20, 25 (9th Cir. 1967). In proving the new return, the I. R. S. must
investigate leads reasonably susceptible of being checked. Holland v.
United States [54-2 USTC ¶9714], 348 U. S. 121, 135 (1954). Because
the Government failed to pursue leads which were reasonably susceptible
of being checked, the opening net worth for 1967 was not reasonably
certain and the evidence as to the 1967 count was insufficient to go to
the jury. That count should have been dismissed.
Keller testified concerning the furniture in the house and its
approximate value. At the close of trial, defense counsel sought to
recall Mrs. Keller to clarify several furniture expenditures and
introduce receipts and other supporting documentary evidence which she
had just discovered. The court did not allow her to be recalled, and
only part of the documentary evidence was admitted. We find that the
court abused its discretion in refusing to allow Mrs. Keller to retake
defendant in a net worth prosecution is ensnared in a system which is
difficult to refute. Holland v. United States, 348 U. S. at 129.
The trial court should not be unduly restrictive when the defendant
tries to meet the mass of technical evidence adduced by the Government.
We acknowledge the wide latitude allowed the trial court in permitting
the recall of a defendant and in excluding cumulative evidence. But when
the court restricts the admission of newly-found documentary evidence
and prevents the itemization, receipt by receipt, of expenditures
completely denied by the Government, it cannot be said that the jury's
verdict would have been the same and that the defendants were not denied
an essential part of their defense. This error, however, only affected
the 1967 count.
of 1967 Errors
must be recognized that a separate net worth analysis, and a separate
indictment, is made for each year. The compilations of net assets on
December 31 of each year are also distinct from one another, and are
interrelated only to the extent that an asset carries through, or
credits and losses can be carried over. It follows, then, that an
accounting error in one net worth compilation does not affect analysis
for the succeeding year unless the error concerns an asset that is
present in both years or credit or loss carryovers.
errors noted as to the 1967 count do not carry through into the later
years. The uncertainty in the December 31, 1966 net worth and the
excluded testimony related only to the issue of what furniture and
improvements were present in the Kellers' two houses. During 1967 these
houses were traded in for the Kellers' second restaurant, which had an
undisputed value of $110,000. For the Kellers the houses were no longer
present on December 31, 1967, and whatever worth they had was replaced
by the restaurant. It is the restaurant that was carried on the new
assets list and was used for the 1968 and 1969 net worth computations.
It is plain that the 1968 and 1969 indictments are unaffected by the
errors relating to the houses.
1968 and 1969 net worth computations being otherwise valid, we turn to
the few remaining errors alleged by the Kellers as affecting these later
years: failure by the I. R. S. to consider carryovers of income taxes
withheld in 1967, investment credit carryovers and capital loss
carryovers; and failure to deduct from the 1969 net worth the sum of
checks outstanding as of the close of 1969. Without resolving these
errors we note that, even favorably disposed to appellants, they amount
to no more than one-tenth of the understatement shown by the Government
for the years 1968 and 1969. The Government is not required to prove its
case to a mathematical certainty. This would be particularly unfair
because taxevaders' surreptitious dealings create a barrier to such
exactitude. United States v. Calderon [54-2 USTC ¶9712], 348
160, 167 (1954). Olender v. United States [56-2 USTC ¶10,077],
237 F. 2d 859, 867 (9th Cir. 1956). An understatement of taxable income
of over $20,000 having been proven for each of 1968 and 1969, the
evidence was clearly sufficient to sustain the verdict as to the 1968
and 1969 counts.
conviction on the 1967 count is reversed. The convictions on the 1968
and 1969 counts are affirmed.
The Honorable Raymond E. Plummer, United States District Judge, District
of Alaska, sitting by designation.