U.S. v. Terrell, 84-1366

• Decision Date: 14 February 1985
• Docket Number: No. 84-1366,84-1366
• Citation: 754 F.2d 1139
• Parties: -1049, 85-1 USTC P 9249 UNITED STATES of America, Plaintiff-Appellee, v. David H. TERRELL, a/k/a Daniel H. Ford, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1139

754 F.2d 1139

55 A.F.T.R.2d 85-1049, 85-1 USTC P 9249

UNITED STATES of America, Plaintiff-Appellee, v. David H. TERRELL, a/k/a Daniel H. Ford, Defendant-Appellant.

No. 84-1366.

United States Court of Appeals Fifth Circuit.

Feb. 14, 1985.

Charles J. Muller, III, San Antonio, Tex., Harvey G. Sanders, Jr., Greenville, S.C., for defendant-appellant.

Edward C. Prado, U.S. Atty., Sidney Powell, Jack O'Donnell, Asst. U.S. Attys., San Antonio, Tex., Michael L. Paup, Chief, Glenn L. Archer, Jr., Kent S. Robinson, Robert E. Lindsay, Appellate Sect., Tax Div., Dept. of Justice, Washington, D.C., for plaintiff-appellee.

Appeal from the United States District Court for the Western District of Texas.

Before GOLDBERG, POLITZ and WILLIAMS, Circuit Judges.

JERRE S. 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. Sec. 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 has 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:

The increases in appellant's net worth over the indictment period 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 guitar-shaped 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 personal 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 the agents with a list of his non-taxable sources of income dating back to 1967, including loans and various 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. Sec. 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 Sec. 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, 380 U.S. 343, 351, 85 S.Ct. 1004, 1110, 13 L.Ed.2d 882 (1965), United States v. Dwoskin, 644 F.2d 418, 419 (5th Cir.1981). The primary contention of appellant 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, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150 (1954). The...