Bank Records and Net Worth Increases 1 Page3

---

[ Back ] [ Next ]

   

[79-1 USTC ¶9195] United States of America , Plaintiff-Appellee v. Leland M. Carriger, Defendant-Appellant

(CA-6), 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.

James K. Rob inson, United States Attorney, F. William Soisson, Assistant United States Attorney, Detroit, Mich. 48226, for plaintiff-appellee. Joseph S. Friedberg, 605 Fourth Avenue South , Minneapolis , Minn. 55415 , for defendant-appellant.

Before LIVELY and MERRITT, Circuit Judges; and TAYLOR, ^* District Judge.

LIVELY, Circuit Judge:

The 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.

The 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 U. S. 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, Holland v. United States , supra; United States v. Giacalone [78-1 USTC ¶9350], 574 F. 2d 778 (6th Cir.), cert. denied, -- U. S. --, 99 S. Ct. 114 (1978).

On 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 Holland stated the requirement as follows:

We agree with petitioners that an essential condition in cases of this type is the establishment, with reasonable certainty, of an opening net worth, to serve as a starting point from which to calculate future increases in the taxpayer's assets. The importance of accuracy in this figure is immediately apparent, as the correctness of the result depends entirely upon the inclusion in this sum of all assets on hand at the outset.

348 U. S. at 132.

Our 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.

The 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.

The 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 sustained.

The 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.

When 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:

There 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.

The 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 a part.

The district court correctly determined that the promissory notes were relevant evidence. Rule 401, Fed. R. Ev., contains this general definition:

"Relevant 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.

Since 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.

In 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 ambiguous." 28 U. S. 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.

In 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:

Rule 901.

REQUIREMENT OF AUTHENTICATION OR IDENTIFICATION

(a) 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.

(b) 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:

(1) Testimony of witness with knowledge. Testimony that a matter is what it is claimed to be.

(2) Nonexpert opinion on handwriting. Nonexpert opinion as to genuineness of handwriting, based upon familiarity not acquired for purposes of the litigation.

The note of the Advisory Committee appended to Rule 901 states, "Authentication and identification represent a special aspect of relevancy." 28 U. S. 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.

The 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.:

Rule 902.

SELF-AUTHENTICATION

Extrinsic evidence of authenticity as a condition precedent to admissibility is not required with respect to the following:

* * *

(9) Commercial paper and related documents. Commercial paper, signatures thereon, and documents relating thereto to the extent provided by general commercial law.

The 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 U. S. 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.

In United States v. Goichman [77-1 USTC ¶9115], 547 F. 2d 778, 784 (3d Cir. 1976), the court stated:

Once 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 was authentic.

We 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 authenticity." 28 U. S. 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.

As 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 concluded in Holland v. United States , supra, that great care and restraint is required where this method is employed. Justice Clark wrote for the Court:

The 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 U. S. at 129.

The judgment of the district court is reversed, and the cause is remanded for a new trial.

^* The Honorable Rob ert L. Taylor, Judge , United States District Court for the Eastern District of Tennessee, sitting by designation.

¹ 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).

²

Rule 402.

RELEVANT EVIDENCE GENERALLY ADMISSIBLE; IRRELEVANT EVIDENCE INADMISSIBLE

All 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.

³

Rule 104.

PRELIMINARY QUESTIONS

(a) 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.

(b) 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.

 

 

 

[79-1 USTC ¶9151] United States of America , Plaintiff-Appellee v. James H. Normile, Defendant-Appellant

(CA-5), 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.

John H. Hannah, Jr., United States Attorney, T. J. Baynham, Jr., William E. Gordon, Jr., Assistant United States Attorneys, Tyler , Tex. 75701 , for plaintiff-appellee. C. M. Meadows, Jr., J. Gregory Jackson, 3900 First National Bank Bldg., Dallas, Tex. 75202, for defendant-appellant.

Before GEWIN, GEE and RUBIN, Circuit Judges.

RUBIN, Circuit Judge:

Convicted 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.

We 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.

[Background]

At 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, Denton ; Farmers and Merchants Bank of Krum; Denton County National Bank; and First State Bank of Denton . 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

[Adequacy of Investigation]

The 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.

The 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.

The 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

"The 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.

In 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 question.

Here, 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 income.

The 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.

The 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 Barney's well.

In 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.

The 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.

For these reasons, the conviction is AFFIRMED.

¹ 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 1974.

² 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 led nowhere.

³ 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.

 

 

 

[78-1 USTC ¶9170] United States of America , Plaintiff-Appellee v. Joseph J. Gay, Defendant-Appellant

(CA-2), 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.

Richard 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