U.S. v. Smith

• Decision Date: 04 December 1989
• Docket Number: No. 88-4886,88-4886
• Citation: 890 F.2d 711
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Bobby M. SMITH, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 711

890 F.2d 711

102 A.L.R.Fed. 627

UNITED STATES of America, Plaintiff-Appellee, v. Bobby M. SMITH, Defendant-Appellant.

No. 88-4886.

United States Court of Appeals, Fifth Circuit.

Dec. 4, 1989.

Charles W. Wright, Jr., Palmer, Wright & Williamson, Meridian, Miss., for defendant-appellant.

Ruth R. Harris, Asst. U.S. Atty., George Phillips, U.S. Atty., Jackson, Miss., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Mississippi.

Before DAVIS and SMITH, Circuit Judges, and LITTLE, District Judge. ¹

LITTLE, District Judge:

The conviction of Bobby M. Smith of one of four counts of tax evasion prompts this appeal. We AFFIRM the conviction.

BACKGROUND

Smith was convicted of the willful attempt to evade the payment of income tax for calendar year 1983. Specifically, the count of the indictment upon which Smith was convicted provides in part:

That on or about July 16, 1989, ... Bobby M. Smith ... did willfully attempt to evade and defeat a large part of the income tax due and owing by him and his spouse to the United States of America for the calendar year 1983 by preparing and causing to be prepared, and by signing and causing to be signed, a false and fraudulent joint U.S. Individual Income Tax Return Form 1040, on behalf of himself and his spouse, which was filed with the Internal Revenue Service, wherein it was stated that there was a negative taxable income for said calendar year of $10,507.20, and that the amount due and owing thereon was zero, whereas, as he then and there well knew and believed, their joint taxable income for the said calendar year was the sum of $81,361.30, upon which said joint taxable income there was owing to the United States of America an income tax of $29,570.64.

In violation of Title 26, United States Code, Section 7201.

Smith asserts that the jury verdict requires reversal as it was contrary to the law and the weight of the evidence in six specific areas. Alternatively, Smith seeks a new trial claiming that he was prejudiced by the trial tactics of the government representatives. We will address each of appellant's concerns. We will measure those concerns by this circuit's standard of review which requires us to uphold a jury's verdict unless that verdict is based upon record evidence which no rational trier of fact could have found guilt beyond a reasonable doubt. United States v. Montalvo, 820 F.2d 686, 688 (5th Cir.1987).

APPELLANT'S OPENING NET WORTH

Before discussing the error asserted by appellant, it is best for us to describe generally the mechanics of a net worth case. An income tax return reflects the taxpayer's statement to the government that the taxpayer received money (or items of value) and that the receipts, after appropriate deduction, were subject to the applicable tax. The government may question a taxpayer's voluntary disclosure and certification of correctness by employing one or both of two generally accepted analytical methods. The government can present evidence that a specific item of income was not disclosed on the return, i.e., taxpayer did not include wages from his employment with XYZ Corporation or his interest income from a savings account with ABC Homestead. The government may also demonstrate that specific deductions were not experienced by the taxpayer, or were inflated. This procedure is known as the specific items theory. Another method which may be employed is the net worth analysis. Simply stated, an increase in a taxpayer's patrimony must be traced to acquisitions with after tax income, donations or non-taxable transactions. If these sources fail to explain the increase and the increase can reasonably be attributed to sources which should have been reported, but were not, the taxpayer may well be convicted of tax fraud.

The government utilized both the specific items method and the net worth method in prosecuting its case against the taxpayer. For the return year of the taxpayer's defeat, 1983, only the net worth method was invoked. The net worth method has long been approved as a tool to prove a willful violation as required by 26 U.S.C. Sec. 7201. See Holland, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150 (1954); Tax Management Criminal Tax Procedure, 162-Second A10-13. Essential to this methodology is the taxpayer's opening net worth. The government must prove the taxpayer's opening net worth for calendar year 1983 with reasonable certainty. Holland, 348 U.S. at 132, 75 S.Ct. at 133-34; United States v. Terrell, 754 F.2d 1139, 1146 (5th Cir.), cert. denied, 472 U.S. 1029, 105 S.Ct. 3505, 87 L.Ed.2d 635 (1985); United States v. Sorrentino, 726 F.2d 876 (1st Cir.1984). We join the Seventh Circuit in observing that sloppy or mediocre financial and accounting evaluation upon which a conviction is obtained can be the genesis for reversal. United States v. Achilli, 234 F.2d 797 (7th Cir.1956), aff'd on other grounds, 353 U.S. 373, 77 S.Ct. 995, 1 L.Ed.2d 918 (1957).

But evidence of irresponsible accounting and financial analysis is lacking in the instant case. The contrary is revealed by the record. Agent Lindsay's testimony as to the taxpayer's cash on hand of $31,234 was supported by evidence that the taxpayer possessed three cashier's checks and cash totalling that sum. While we recognize that slipshod methods of financial analysis will not be tolerated, one need not be letter perfect. Reasonable certainty is required but not mathematical exactitude. Terrell, 754 F.2d at 1146. At no time during the investigation did the defendant or his spouse disclose evidence of a cash hoard. At trial the defendant's spouse claimed to have cash in a vase in the sum of $23,000, that she had paid $23,000 cash for an automobile and that she saved a large sum of money from cash gifts from her parents. The existence and source of these cash transactions were never disclosed to the investigating agent. The defendant's spouse merely told the agent about a small amount of cash on hand and didn't believe the agent's questions were applicable to other funds and transactions. To the same extent, the taxpayer concludes that a corporation was a receptacle of his funds and that the value of the corporation should be included in the opening net worth. There is no evidence that funds were diverted by the taxpayer to his corporation or that the corporation had assets actually belonging to the taxpayer or that the taxpayer parked assets in the corporate name. The government's opening net worth conclusions had firm support in fact and were prepared with reasonable certainty. The return subject to scrutiny was that filed for calendar year The defendant's argument as to the appreciated value of the family home not having been accounted for by the agent is also without merit. The house was built in 1975 at a cost unknown to the taxpayer. The house was owned by the taxpayer at the beginning and end of the year in question. The unaccounted for appreciation, if any, plays no part in this controversy. It's absence does not distort the opening or closing inventory. United States v. Schafer, 580 F.2d 774, 778 (5th Cir.), cert. denied, 439 U.S. 970, 99 S.Ct. 463, 58 L.Ed.2d 430 (1978).

1983. Loan repayments to the taxpayer in other years were too remote to enter into an opening inventory figure.

The complaint that the opening net worth figure for 1983 does not include bearer bonds owned by the taxpayer is without effect. The agent was unable to establish the year of acquisition or the cost of the investment. The agent did remove from net worth calculations all interest paid on the bonds as well as money received by the taxpayer for bond redemption. Again, distortion is absent.

FAMILY NET WORTH

Another area of alleged defective analysis is the failure of the government to exclude assets of the defendant's spouse and child. The agent testified, and her schedules reveal, that the income of the defendant's daughter and gifts to defendant's wife and daughter were excluded before arriving at a final net worth determination. The agent did not present a family net worth calculation. Only the financial condition of defendant and spouse appears. No confusion or adulteration is present. The fabric of the financial blanket is so closely woven that a computation of net worth on the joint income of the spouses is clearly permissible. See United States v. Brown, 667 F.2d 566 (6th Cir.1982); United States v. Giacalone, 574 F.2d 328 (6th Cir.), cert. denied, 439 U.S. 834, 99 S.Ct. 114, 58 L.Ed.2d 129 (1978).

A LIKELY SOURCE OF TAXABLE, BUT UNREPORTED INCOME

The government is required to prove likely sources of unreported income or negate nontaxable sources of income. Holland, 348 U.S. at 137, 75 S.Ct. at 136; United States v. Massei, 355 U.S. 595, 78 S.Ct. 495, 2 L.Ed.2d 517 (1958). A likely source of income, according to the government, was proved when evidence was presented showing that defendant actively participated in the operations of businesses which he owned including furniture stores, a jewelry store, a cemetery monument company, a pawn shop and a recreational center. Further, the defendant's investments included producing mineral interests, real estate and stock, bonds and commodities. The record reflects that all of those endeavors provided liquid funds. Evidence was also presented that defendant engaged in gambling activities involving significant sums. Thus, a likely source of nonreported but taxable income was clearly indicated. "Proof of a likely source from which the jury could reasonably find that the net worth increases sprang is sufficient." Holland, 348 U.S. at 138, 75 S.Ct. at 136.

FAILURE TO NEGATE THE EXISTENCE OF NON-TAXABLE SOURCES OF MONEY

The defendant also asserts that the government failed to negate the presence of non-taxable funds. The government counters that the only lead given it by defendant was family gifts from defendant's in-laws. The record reflects that the agent did make deductions for gifts...