Bank Records and Net Worth Increases
4 Page4
This
court agrees that it is not improper to exclude from such net worth
estimate such items as accounts receivable and accounts payable, which
are not attributable to the defendant's current income (income being
that income which is reportable by a taxpayer on a cash basis). However,
if the Government does exclude all non-cash items such as accounts
payable and accounts receivable it must not include in its net worth
figure any assets which were purchased by means of accounts payable or
any other non-cash liability account. For example, the value of a house
purchased by means of a still outstanding loan could not be included in
the net worth statement unless it was set off by the balance of the loan
still owing. Similarly, if the defendant here had obtained certain
materials for his crane business through accounts payable which were
still unpaid at the end of the tax year in question, the value of such
material could not appear in the closing net worth figure for that year
unless offset by the balance of the accounts payable.
In
the instant case the Government offered evidence from which the jury
could infer that the principal assets of J. Scanlon and Company were
purchased with cash and that this cash was obtained neither through
accounts payable, loans outstanding or any other non-income source. For
example, a bank official testified that the defendant had purchased a
bank check for $19,335 which was apparently made up of a withdrawal of
$1335 from the defendant's bank account plus an unknown credit from
another source; and this bank check was endorsed by a corporation from
which the defendant purchased a crane for J. Scanlon and Company for
$21,435. The Government also provided evidence tending to prove that the
only outstanding loan to J. Scanlon and Company which it had been able
to find was that of a local bank in the amount of $10,000, and this loan
was reflected in the Government's estimate of the defendant's net worth.
The Government also provided evidence that J. Scanlon and Company's
accounts payable amounted to $4,030.08, as of January 1, 1949, which
would indicate that no great prejudice could have been suffered by the
defendant through the Government's failure to offset this $4,030.08
item, which it had discovered itself through investigation of the
records of J. Scanlon and Company, against the value of a crane costing
twenty-four thousand dollars purchased by the defendant in 1948 along
with a truck and welding equipment. Moreover, there was no suggestion by
the defendant that the purchase in 1948 of these assets was made
possible though the establishment of an account payable of about only
four thousand dollars. The record does not reveal any other lead given
to the Government by the defendant which could possibly explain how
these assets were obtained other than through cash attributable to
current income and "* * * where relevant leads are not forthcoming,
the Government is not required to negate every possible source of
nontaxable income, a matter peculiarly within the knowledge of the
defendant." Holland v. United States, supra, at 138.
[Income
From Gambling]
The
defendant contends that the Government should have offered evidence from
which it could be found that his income from his gambling activities
exceeded his reported income before the allegedly prejudicial fact that
he was a bookie was made known to the jury. This contention does not
warrant lengthy discussion. In
United States
v.
Holland
, supra, at pp. 137, 138, it was said "Increases in net worth,
standing alone, cannot be assumed to be attributable to currently
taxable income. But proof of a likely source, from which the jury could
reasonably find that the net worth increases sprang, is
sufficient." Here it was shown that the defendant was a bookie and
that he kept no records to show income from his bookmaking operations
although the defendant had reported income from gambling operations. The
Government also produced evidence tending to prove that the defendant
was a bookie in other to make a large profit and not "for just a
week's pay." The proving by direct evidence of the extent of the
defendant's income from bookmaking was not necessary in this case so
long as the jury could reasonably find that it was a likely source from
which the defendant's increases in net worth arose.
The
defendant contends that Special Agent Charpentier's testimony was
improperly admitted. Charpentier testified in direct examination that on
February 24, 19
53, he "showed Mr. Scanlon that according to the net worth
statement prepared by Mr. Burnett, and also according to figures we were
preparing, that it was abvious that there was unreported income."
After objection by defendant that this was opinion evidence the trial
court allowed the answer on the ground it was a statement made to the
defendant and that as such it was not an inadmissible opinion of a
witness on an issue to be decided by the jury. See 7 Wigmore, Evidence
§1969(2), (3rd ed. 1940). We are of the opinion that the admission of
this testimony was not an abuse of discretion on the part of the trial
court.
The
defendant's objection to Charpentier's statement that proper accounting
on a cash basis would not consider accounts payable or receivable is
without substantial merit as Charpentier was in this instance properly
acting as an expert on income tax matters. United States v. Johnson,
319
U. S.
503 (1943) [43-1 USTC ¶9470], United States v.
Caserta
, 199 Fed. (2d) 905 (3 Cir. 1952) [52-2 USTC ¶9540]. The admission
in evidence near the close of the trial of two Government exhibits, one
being a net worth statement and the other a tax computation was not an
abuse of discretion by the trial judge as both were merely summaries of
evidence that had been properly offered by the Government and could have
been disbelieved by the jury in whole or in part. Defendant was free to
present his own evidence and summaries if he wished to rebut this
evidence. Hanson v. United States, supra.
Defendant's
further contention that the trial court was guilty of improper conduct
in that it demanded that the defendant produce certain documents does
not warrant discussion especially when these alleged demands are viewed
in the context of the entire record.
The
defendant further contends that the Government did not provide
sufficient evidence for the jury to infer with reasonable certainty that
the Government's beginning net worth figure of $28,599.77 as of
December 31, 19
46 was an accurate representation of the defendant's actual net worth on
that date. Defendant relies on Bryan v. United States, 175 Fed.
(2d) 223 (5 Cir. 1949) [49-1 USTC ¶9322], affirmed 338
U. S.
552 (1950) [50-1 USTC ¶9140] but the evidence presented in that case
was certainly weaker than was presented by the Government in the instant
case. In the
Bryan
case there was no admission by the defendant as to the extent of his
beginning net worth. See Pollock v.
United States
, 202 Fed. (2d) 281, 284 (5 Cir. 1953) [53-1 USTC ¶9229], cert.
denied 345
U. S.
993. In the instant case there was properly admitted in evidence a net
worth statement signed and sworn to by the defendant and prepared by the
defendant's accountant which stated his beginning net worth was
$26,262.22. It is to be noted that the net worth figure finally relied
upon by the Government was $28,599.77 or $2,337.55 more than the
defendant's own estimate of his net worth. Other admissions made by the
defendant during the course of the investigation by Special Agent
Charpentier supply additional evidence from which the jury could infer
that all of the defendant's assets as of
December 31, 19
46 were reflected in the Government's $28,599.77 net worth figure.
[Government's
Arguments to Jury]
The
defendant cntends that certain portions of the Government's argument to
the jury were so prejudicial as to entitle the defendant to acquittal.
With regard to the interest of Bernard Cowette in J. Scanlon and Company
and the Government's allegedly prejudicial remark with reference
thereto, the Government counsel was merely presenting to the jury his
conception of a reasonable deduction to be made from Cowette's
testimony. See Keal Driveway Co. v. Car & General Ins.
Corporation, 145 Fed. (2d) 345 (5 Cir. 1944). Defendant's contention
that Government counsel failed to completely discuss the capital gains
and losses provision of the Internal Revenue Code is without merit. The
remarks concerning the source of defendant's income were withdrawn after
objection and do not constitute prejudicial error.
The
defendant also objected to that portion of the Government's counsel's
argument to the jury which is as follows:
"I
submit to you, ladies and gentlemen of the jury, that although, as Mr.
Graf points out, the defendant does not have to take the stand, and a
jury is not entitled to make any inference from that, if there were that
information available, if in fact somebody had given Mr. Scanlon ten
thousand dollars in 1946 or 1947 or 1948, they could have brought him in
for you. But did you see any evidence of it? No."
The
Government argues that this comment was allowable on two grounds. One
ground appears to be that the defendant's counsel had already discussed
the subject of the defendant not having to testify and that consequently
the Government could be allowed to comment on the defendant's
nonpresentation of witnesses. The Government cites as authority for this
point United States v. Feinberg, 140 Fed. (2d) 592 (2 Cir. 1944),
cert. denied 322
U. S.
726, and Myres v. United States, 174 Fed. (2d) 329 (8 Cir. 1949)
[49-1 USTC ¶9275], cert. denied 338 U. S. 849, but these cases
presented situations unlike that presented in the instant case and do
not stand as authority for the Government's contention. In the instant
case defendant's counsel did not attempt to indicate what the defendant
would have said if he had testified and thus did not create an
opportunity for the prosecution to comment upon the defendant's lack of
evidence. The other ground of the propriety of Government's counsel's
comment is that it is allowable to comment on the failure of the
defendant to bring in a witness who could testify as to giving or
loaning the defendant such sums of money as would justify the
defendant's net worth increases. In Graves v. United States, 150
U. S. 118 (1893), the Supreme Court, although reversing a conviction
because of prejudicial comment by the district attorney, stated at p.
121: "The rule even in criminal cases is that if a party has it
peculiarly within his power to produce witnesses whose testimony would
elucidate the transaction, the fact that he does not do it creates the
presumption that the testimony if produced would be unfavorable."
This rule has been generally followed and consequently comments on the
non-production of evidence which is peculiarly within the control of the
other party have been allowed. 88 C. J. S. Trial §184;
Chesapeake
& O. Ry. Co. v. Richardson, 116 Fed. (2d) 860 (6 Cir. 1941),
cert. denied 313
U. S.
574; Milton v. United States, 110 Fed. (2d) 556 (D. C. Cir.
1940); see Bell v. United States, 185 Fed. (2d) 302, 309 (4 Cir.
1951) [50-2 USTC ¶9499], cert. denied 340
U. S.
930. In the instant case the testimony of any person who had made a gift
or loan to the defendant would certainly be evidence peculiarly within
the control of the defendant and consequently the allowance of the
prosecution's comment did not result in prejudicial error.
[Trial Court's Charge]
The
defendant's final contentions deal with the trial court's charge. This
charge adequately instructs the jury as to placing on the Government the
burden of proving the defendant's guilt beyond a reasonable doubt and
also made clear to the jury that the fact of the defendant's indictment
was not to be considered as evidence of guilt. Objection was made to the
trial court's instruction that if the defendant's net worth statement
was voluntarily given, the jury must consider its contents. This
instruction, however, did not invade the province of the jury for only
if the jury decided the statement was obtained voluntarily was it to
consider the contents of that statement and the weight to be given to
the contents was left entirely to the judgment of the jury.
The
main objection of the defendant is to the trial court's instruction with
regard to the defendant's net worth on
December 31, 19
46. It is contended that the trial court in effect made what amounted to
a finding of fact on this issue when it stated: "The prosecution in
this case has taken
December 31, 19
46, as a base or starting point and has determined the amount of the
excess of his assets over his liabilities at that time. This constitutes
his net worth as of that date." However, when this was objected to
by the defendant the trial judge attempted to correct any
misunderstanding on the part of the jury by further charging the jury on
this point. In our opinion the jury should have understood from this
amounded instruction that it was their function to determine whether or
not the defendant's net worth was substantially identical to the
Government's figure.
The
judgment of the district court is affirmed.
*
26 U. S. C. §145(b) (1946), 53 Stat. 62 (1939)
"§145.
Penalties
*
* *
"(b)
Failure to collect and pay over tax, or attempt to defeat or evade
tax. Any person required under this chapter to collect, account for,
and pay over any tax imposed by this chapter, who willfully fails to
collect or truthfully account for and pay over such tax, and any person
who willfully attempts in any manner to evade or defeat any tax imposed
by this chapter or the payment thereof, shall, in addition to other
penalties provided by law, be guilty of a felony and, upon conviction
thereof, be fined not more than $10,000, or imprisoned for not more than
five years, or both, together with the costs of prosecution."
[85-1
USTC ¶9249]
United States of America
, Plaintiff-Appellee v. David H. Terrell, a/k/a Daniel H. Ford,
Defendant-Appellant
(CA-5),
U. S. Court of Appeals, 5th Circuit, No. 84-1366, 754 F2d 1139,
2/14/85
[Code Sec. 7201]
Crimes: Failure to report income: Net worth method.--Use of the
net worth income reconstruction method in convicting a taxpayer of tax
evasion was upheld. On appeal, the taxpayer argued that the IRS failed
to include in his opening net worth the prices he received for selling
cattle. But, according to the appellate court, there was no need to
consider the amounts because the taxpayer concealed the cattle sales,
and the IRS, after following leads on the sales, correctly decided to
exclude the sales from computations. The IRS also properly used the
source and applications of funds method to conclude that the taxpayer
did not have cash on hand at the beginning of the net worth
reconstruction period. Attacks against jury instructions were dismissed
as gross misrepresentations of what the lower court judge actually
charged. Finally, the lower court's refusal to sever the trial of one of
the tax evasion counts from the others was upheld. Although the
taxpayer's attorney was a potential government witness regarding that
count, he was never called and his testimony was not indispensable.
Also, prosecution of all counts was based on the same body of evidence.
Charles
J. Muller, III, One Alamo Center, San Antonio, Tex. 78205, Harvey G.
Sanders, Jr., 217 East Coffee St., Greenville, S. C. 29602, for
plaintiff-appellee. Edward C. Prado, United States Attorney, Sidney
Powell, Jack O'Donnell, San Antonio Tex. 78206, Glenn L. Archer, Jr.,
Assistant Attorney General, Michael L. Paup, Kent S.
Rob
inson,
Rob
ert E. Lindsay, Department of Justice, Washington, D. C. 20530, for
defendant-appellant.
Before
GOLDBERG, POLITZ and WILLIAMS, Circuit Judges.
WILLIAMS,
Circuit Judge:
David
H. Terrell appeals from his conviction by jury on four counts of
willfully attempting to evade federal income taxes for the years 1976
through 1979, in violation of 26 U. S. C. §7201. The proof showed that
appellant's taxable income during those years totaled in excess of
$439,000, while he reported only $217,000. Appellant alleges, inter
alia, that the government failed to establish a prima facie
case as to his net worth starting point, and that the court erroneously
shifted the burden of establishing the net worth starting point to him.
Appellant also alleges several errors relating to jury instructions and
evidentiary rulings. We find no error, and accordingly affirm.
I.
Facts
David
H. Terrell had made his living as an evangelist since the late 1950's.
In 1965, he formed a tax-exempt corporation known as the New Testament
Holiness Church. He preaches under the auspices of that church, while
not receiving any direct compensation from the corporation. Because he
received no direct compensation, appellant's income for the indictment
period, 1976 through 1979, was reconstructed using the net worth plus
expenditures method of proof. 1 Appellant's
net worth increases and taxable income for the indictment period as
established by the evidence are:
Net Worth Corrected Taxable Income Tax Due
Year Increases Taxable Income Not Reported and Owing
1976 ..... $ 82,604.51 $ 67,901.78 $ 34,459.31 $ 19,071.07
1977 ..... 69,451.27 72,764.42 35,355.77 18,289.75
1978 ..... 116,145.49 123,566.48 86,454.49 43,220.21
1979 ..... 200,760.47 194,121.32 84,846.70 42,232.56
Total .... $468,961.74 $458,354.00 $241,116.27 $122,813.59
The
increases in appellant's net worth over the indictment were largely
attributable to his acquisition of loan receivables, five parcels of
real estate totaling 482 acres at a cost of $347,315, and tradings in
sixteen automobiles, including several motor homes, at a total cost of
$150,000. In addition, during 1978 and 1979, appellant paid cash for his
$138,000 residence and a $29,000 guitarshaped swimming pool.
The
likely source of appellant's income was money earned through his
ministry. Terrell preached daily at branches of his church and traveling
tent revivals. At each service, in addition to collecting church
offerings, appellant collected person contributions known as "love
offerings". Typically, a bucket would be placed in front of the
congregation for church offerings, and Terrell would make an appeal to
his audiences to help him personally by handing him money directly or
placing it in one of the pockets of an apron that he wore at the time of
the offerings. In addition, contribution envelopes were distributed at
services resulting in the receipt of substantial sums of money through
the mail at a post office box in
Waco
,
Texas
. After a particular service, receipts were at least partially recorded
on slips of papers referred to as "love offering breakdowns".
Although as a matter of course, the offerings received were counted and
recorded on breakdowns after Saturday morning revivals, they were
frequently not recorded for revivals during the week. Appellant had
exclusive control over the record keeping process of the breakdowns.
After services, the cash received and all records were placed in
Terrell's possession. Despite the fact that Terrell would receive
between $400 and $5,000 a week through the mail, the breakdowns only
twice included receipts from offerings received in this manner, both
times after he had been notified that he was the subject of a criminal
investigation.
Terrell
had been advised by his accountant that the money he personally received
during services was taxable income. He was instructed to keep track of
his receipts and report them to his tax return preparers. Terrell
provided his tax return preparers with the "love offering
breakdowns" as a purported record of his total receipts. The
breakdowns were submitted weekly, and showed average gross weekly income
of approximately $800 to $1,000. Yet Terrell told IRS agents that he
often received $4,000 to $5,000 in the course of a week-long revival.
The
evidence produced at trial represented a three-year investigation by the
Internal Revenue Service. IRS agents consulted with Terrell at the
beginning of the investigation and questioned him about his non-taxable
sources of income to ensure that they would be excluded from the net
worth calculations. At that time, Terrell and his attorney provided
agents with a list of his non-taxable sources of income dating back to
1967, including loans and gifts that he had received while he was a
minister. The list in a form of a book was represented to the IRS agents
as itemizing "substantially all his gifts for those years".
The Government credited appellant with all gifts indicated in the book,
and built that figure into its net worth computation as non-taxable
sources of income. 2
In
order to ensure that pre-indictment savings could not have accounted for
the increases in Terrell's net worth, the government conducted a
"source and application of funds" analysis of his finances
between 1967 and 1975. The analysis showed that Terrell's expenditures
exceeded his reported income plus nontaxable gifts during that period by
$229,000. This analysis was used for the sole purpose of determining
that appellant held no substantial cash-on-hand at the beginning of the
indictment period.
During
the time covered by the investigation, Terrell made several attempts to
conceal his income. Terrell possessed numerous bank accounts with
substantial balances, and dealt almost exclusively in cash. Among his
cash purchases were an automobile for $12,000 and real estate for
$25,000. When purchasing property in 1976, appellant paid a real estate
commission of $10,000 and requested that the agent not report it until
the following year. Also in 1975, Terrell legally changed his name to
Daniel H. Ford and began purchasing assets in the name of Ford,
including two farms of 375 and 400 acres. Yet he continued to file tax
returns under the name of Terrell. During the course of the IRS
investigation, Terrell discussed his real estate holdings with IRS
agents but never mentioned those properties held in the name of Ford. He
possessed 25 automobiles over the investigation period in six different
names, using eight different home addresses. Real estate was purchased
in six different names, and he maintained
Texas
driver's licenses in both the names of Terrell and Ford. Furthermore, in
an attempt to characterize some of his expenditures as loan repayments,
Terrell on two separate occasions approached individuals to execute loan
papers in order to substantiate nonexisting loans.
Terrell
was indicted on four counts of willful attempt to evade federal income
taxes for the years 1976 through 1979, in violation of 26 U. S. C. §7201.
The indictment charged that he earned taxable income during those years
totaling in excess of $439,000, while reporting only $217,000. His
alleged tax liabilities for those years totaled in excess of $184,000,
although he reported only $71,000. After a thirteen-day jury trial,
Terrell was convicted on all four counts. He was sentenced to five years
imprisonment to be served concurrently on counts One through Three, and
a five-year sentence on Count Four was suspended and appellant placed on
probation. Terrell was fined $5,000 on each count and ordered to pay the
cost of prosecution. A notice of appeal was timely filed.
II.
Net Worth Starting Point
Section
7201 of 26
U. S.
C. imposes criminal sanctions upon "any person who willfully
attempts in any manner to evade or defeat any tax imposed by this
title". To establish a violation of §7201, the Government has the
burden of proving beyond a reasonable doubt that (1) the defendant owed
taxes for the period in question; (2) that he attempted to evade payment
of them; and (3) that he acted willfully. Sansone v. United States
[65-1 USTC ¶9307], 380
U. S.
343, 351, 85
S. Ct.
1004, 1110, 13 L. Ed. 2d 882 (1965), United States v. Dwoskin
[81-1 USTC ¶9416], 644 F. 2d 418, 419 (5th Cir. 1981). The primary
contention of appeallant is that the Government failed to meet its
burden of proof on taxes owing for the indictment period because the
Government's reconstruction of appellant's income using the net worth
method was incomplete.
Where
a taxpayer's records are an inadequate basis for determining income tax
liabilities, the net worth method of determining income has been
utilized in criminal tax prosecutions to reconstruct income. Using this
method, the Government first must establish the taxpayer's total value
of assets at the beginning of a given period and compare that worth to
the value of the taxpayer's assets at the end of the period. The
Government must take into account cash-on-hand as an asset at the
starting point of the net worth evaluation. Increases in net worth are
subject to certain adjustments before it can be claimed that such
increases represent income acquired over the period in question. For
example, the Government subtracts from net worth increase any gifts,
inheritances, loans and the like that may account for unexplained
increases in net worth. Nondeductible expenditures are then added back
into the net worth figure. Once these adjustments have been made, the
Government attempts to prove that any unexplained increase in net worth
represents unreported income.
The
use of the net worth method in criminal tax prosecutions was approved in
Holland v. United States [54-2 USTC ¶9714], 348
U. S.
121, 75 S. Ct. 127, 99 L. Ed. 150 (1954). The Court recognized that such
a reconstruction of income might be the only way to prosecute
individuals who kept inaccurate records and who cleverly concealed
income. But the Court's approval was given with the caveat that
establishing unreported income by the net worth method "involved
something more than the ordinary use of circumstantial evidence in the
usual criminal case."
Id.
at 124, 75
S. Ct.
at 130. The Court in
Holland
recognized that an innocent individual with poorly kept records may not
always be in a position to explain discrepancies in net worth. In order
to avoid the pitfalls of the net worth system, the Government must
conduct a meticulous investigation, and the investigation techniques and
figures are subject to close scrutiny. Moreover, the court must be
particularly mindful of the potential dangers of using the method in
drafting its instructions.
Id.
at 129, 75
S. Ct.
at 132.
In
Holland
, the Supreme Court set out the standard that the Government must
meet in order to establish a prima facie showing of tax evasion
using the net worth method. The Government must establish with
"reasonable certainty" an opening net worth as the basis upon
which to calculate increases in the taxpayer's assets. "The
importance of accuracy in this [net worth] 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."
Id.
at 132, 75
S. Ct.
at 134. Appellant argues that the Government has not met its burden of
proving an opening net worth with reasonable certainty because it did
not include certain assets in its starting net worth.
A.
The Herd of Cattle. Appellant claims that he received as a gift a
herd of cattle worth $76,500 in 1974, prior to the indictment period. He
alleges that at least some of the cattle were sold sometime during the
indictment period, and that the proceeds were used to purchase other
property. He argues that the basis in all of the cattle should have been
added to the starting net worth evaluation, and that the Government knew
of the existence of the cattle during their investigation but
intentionally failed to take them into consideration in its net worth
calculation.
Assets
may be included in the net worth analysis at their basis so long as cost
basis is consistently used throughout the analysis. Dwoskin, 644
F. 2d at 421. Using cost basis to determine net worth means that assets
preexisting the indictment period are a source of non-taxable funds only
to the extent of that basis. Appellant contends that he had a herd of
cattle with a basis of $75,600 that should have been included in the net
worth starting point calculation. But appellant overlooks the elementary
fact that the basis established in a net worth calculation is irrelevant
so long as the same basis is used throughout and at the end of the
calculation. Thus the only relevance of the herd of cattle already owned
by appellant at the beginning of the tax period is to be found in
purchases and sales of the cattle during that period. It is the profit
and loss realized from such sales that have the sole relevance to the
prosecution for income tax evasion. Actually, the cattle and cattle
sales could at best create only a minor lessening of appellant's tax
liability. But because he stresses them in his argument, we go into them
in some detail.
No
cattle sales were reported by Terrell for the years 1976 or 1978. On his
1977 return, he reported the purchase and resale of $1,600 worth of
cattle. Terrell's income tax return for 1979 indicated that he had sold
$19,981.73 worth of cattle in which he claimed no recoverable basis.
This return was filed after his second interview with the Government. At
this point, appellant had already turned over to the government the
"gift book" in which he identified what he considered
"substantially all" the gifts he had received for the years
investigated. After receiving the 1979 tax return reporting the cattle
sales, the Government once again contacted appellant to state that the
return did not account for all his expenditures for the year and to
inquire if there had been any additional sources of income. Nothing was
said about the cattle, and appellant never provided any leads to sales
of cattle in which he had a basis.
In
its investigation, however, the Government did discuss cattle sales with
four witnesses, and all leads provided by those witnesses were traced.
In addition to the sales reported on the 1979 return, the investigation
turned up two additional sales. In 1977, Terrell apparently sold $9,000
worth of cattle which he did not report, and similarly, $6,000 worth in
1978. Because appellant had not volunteered any information concerning
sales of cattle, the Government concluded that the proceeds for sale of
cattle generated more unexplained increase in net worth. But even
assuming, arguendo, that the basis of this cattle should have
been included in the net worth starting point, and that appellant's
basis in the cattle sold was equal to the total proceeds of the sales,
the net worth starting calculation would have been off by a maximum of
$15,600, the total of the unreported sales. Because the appellant's
unreported income for 1977 and 1978 combined exceed $120,000, failure to
credit him with the basis in cattle would have had a minimal impact on
the net worth starting point. The amount of tax owing for those years
would still have been in excess of $100,000.
Appellant,
again overemphasizing the importance of the cattle in the case, also
contends that the Government failed to establish a prima facie
case because it failed to follow leads appellant had given them on the
existence of the cattle. Holland, 348 U. S. at 135, 75 S. Ct. at
135, placed upon prosecutors using the net worth evaluation the burden
of investigating leads that may be furnished by the taxpayer that could
result in an explanation for increases in net worth. Failure to pursue
leads that are reasonably susceptible of being checked could result in
serious injustice. Terrell accuses the Government of not following leads
to identify non-taxable sources of income, yet the evidence shows that
appellant, even during the course of investigation, continued to conceal
information relating to cattle sales. Terrell did not provide the
Government with a single lead pertaining to the sale of cattle.
Moreover, if a taxpayer has transactions in previously owned assets
which provide him with non-taxable funds, "the taxpayer has a
burden to furnish 'leads' on them, so that the Government can
investigate and perhaps clear the taxpayer prior to trial." United
States v. Schafer [78-2 USTC ¶9717], 580 F. 2d 774, 779 (5th Cir.),
cert. denied, 439
U. S.
970, 99 S. Ct. 463, 58 L. Ed. 2d 430 (1978) (citing
Holland
, 348
U. S.
at 135-136, 75
S. Ct.
at 135-136). Schafer also establishes that it is sufficient for
the Government to identify with "reasonable specificity" a
defendant's basis in assets.
Id.
at 778.
We
find that the Government can in no way be faulted for failure to
identify any possible basis in cattle. Even if Terrell did have a basis
in these cattle, the effect on the net worth computation would be
minimal because substantial sums for the years 1977 and 1978 would still
be owing above and beyond the amount in question. Moreover, the
Government was diligent in following up on all leads relating to the
cattle, despite the fact that Terrell himself was uncooperative in
providing leads.
B.
Source and Application of Funds Analysis: Cash-on-hand. Appellant
also claims that the Government's starting net worth figures were
inaccurate because he was not given credit for having any cash-on-hand
at the beginning of the indictment period. In its net worth analysis,
the Government concluded that there was no cash-on-hand, while Terrell
claimed that he had approximately $200,000 at the beginning of the
indictment period. The Government must take into consideration
cash-on-hand as an element of its net worth analysis. While the source
and existence of cash-on-hand need not be proved with mathematical
exactitude, the amount must be established with reasonable certainty. United
States v. Boulet [78-2 USTC ¶9628], 577 F. 2d 1165, 1170 (5th Cir.
1978), cert. denied, 439
U. S.
1114, 99
S. Ct.
1017, 59 L. Ed. 2d 72 (1979). The question of whether a defendant has a
substantial amount of cash-on-hand at the beginning of the indictment
period must be carefully investigated because the existence of a cash
hoard could greatly distort the net worth evaluation. Unaccounted for
funds that surface during the course of the net worth evaluation might
be explained by the fact that a defendant accumulated large sums of cash
which he kept on hand and began to spend during the indictment period.
As
a means of determining whether appellant had an appreciable amount of
cash-on-hand at the beginning of an indictment period, the IRS conducted
a "source and application of funds" analysis. Under this
analysis, appellant's sources of cash were compared with his
expenditures over the investigation period. The surplus (or deficit)
from each year covered when expenditures were subtracted from sources of
funds was recorded as "net funds available." Net funds for the
years 1967 to 1975 were added together to arrive at a "cumulative
net funds available" figure. This "cumulative net funds"
figure, indicating possible sources of cash accumulated over this
preindictment period, represented how much cash appellant was likely to
have had on hand at the beginning of an indictment period.
The
Government began its investigation of Terrell's funds with the year
1967. All of his returns for the years 1967 through 1975 were examined,
and gross receipts indicated on the returns were entered as part of the
source of funds analysis. Added to those figures were any other sources
identified by the appellant or other witnesses, such as appellant's
proceeds from assets listed in his "gift book". As of December
31, 1975, the Government's analysis indicated that Terrell had expended
nearly $230,000 more than his total accumulated funds for the nine-year
period covered. This means that in order to have arrived even at a
figure of zero for cash-on-hand for the net worth starting point figure,
appellant would had to have had additional sources of funds between 1967
and 1975 totaling at least $230,000, and more than $400,000 of
additional funds to have netted his $200,000 cash-on-hand figure. The
only use the Government made of the source and application of funds
analysis was to conclude that any cash Terrell might have had on hand
would not have been substantial enough to affect the opening net worth.
This purpose was clearly presented to the jury, and no inference was
made that the unaccounted-for expenditures for the investigation years
1967-1975 were at issue in Terrell's prosecution.
Appellant
makes a second attack on the source and application of funds analysis,
arguing that in its evaluation the Government unjustifiably relied upon
his uncorroborated admissions concerning sources of funds. He relies
upon Smith v. United States [54-2 USTC ¶9715], 348
U. S.
147, 154-55, 75 S. Ct. 194, 198, 99 L. Ed. 192 (1954), which requires
the Government to corroborate post-offense admissions regarding net
worth. We have held, however, that the corroboration requirement does
not necessarily extend to admissions relating to cash-on-hand, a figure
that is ultimately incorporated into the starting net worth figure. United
States v. Normile [79-1 USTC ¶9151], 587 F. 2d 784 (5th Cir. 1979).
In Normile, the Government relied on the defendant's statement
that he had only $100 cash-on-hand at the beginning of the indictment
period because he did not feel safe having larger amounts on hand. The
court held that this statement did not necessitate corroboration because
"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."
Id.
at 786. Thus, we find no error in the use of the source and application
of funds analysis to conclude that Terrell had no cash-on-hand at the
beginning of the indictment period. The Government clearly met its
burden of establishing this fact with reasonable certainty.
In
reviewing the record in this case, we can only be surprised by
appellant's attack on the thoroughness of the Government's
investigation. The investigation consumed three and one-half years.
Approximately 20 agents canvassed public records to determine the extent
of appellant's holdings. Thirty banks were contacted, and twenty banks
produced documents or witnesses. Nearly 300 potential witnesses were
interviewed, many of them several times. IRS agents identified in excess
of 70 assets purchased and sold by Terrell, and questioned third parties
involved in these transactions. Additionally, every expenditure made by
Terrell was traced, including all cashier's checks traced back to their
sources to determi
