Merritt v. United States, 19603.

• Citation: 327 F.2d 820
• Decision Date: 28 January 1964
• Docket Number: No. 19603.,19603.
• Parties: Condor MERRITT, Appellant, v. UNITED STATES of America, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

327 F.2d 820 (1964)

Condor MERRITT, Appellant, v. UNITED STATES of America, Appellee.

No. 19603.

United States Court of Appeals Fifth Circuit.

January 28, 1964.

Sam E. Murrell, Robert G. Murrell, Sam E. Murrell & Sons, Orlando, Fla., for appellant.

Thomas J. Hanlon, III, Sp. Asst. U. S. Atty., Tampa, Fla., William A. Meadows, Jr., U. S. Atty., for appellee, Louis F. Oberdorfer, Asst. Atty. Gen., Joseph M. Howard, Washington, D. C., of counsel.

Before RIVES and JONES, Circuit Judges, and DAWKINS, District Judge.

RIVES, Circuit Judge.

This is an appeal from a judgment of conviction for income tax evasion in violation of Section 145(b), I.R.C.1939. The defendant, an uneducated but successful businessman, was indicted and tried on two counts covering the years 1947 and 1948. During that time he had employed a tax consultant who kept his books and records and prepared his tax returns. The Government's proof was based upon the net worth method. Its net worth schedule showed a computed net income of $25,634.63 compared to a reported income of $8,928.88 in 1947, and a computed net income of $25,991.65 compared to a reported income of $8,193.64 in 1948. Thus, there was an alleged understatement of income of $16,705.75 for 1947 and $17,798.01 for 1948.¹ The jury returned a verdict finding the defendant guilty on both counts, upon which a judgment of conviction was entered. The aggregate sentences imposed amounted to three years imprisonment, plus fines totaling $1,000.00.

The defendant bases his appeal on the following testimony of the Government's Special Agent who drew up the net worth schedule:

"Q. * * * As a matter of fact don\'t you know that as a matter of fact this taxpayer owned assets and had assets that you didn\'t even take into account in this case? Don\'t you know that of your own personal investigation?

"A. He has some other assets, yes, sir.

"Q. And this doesn\'t include all those assets does it?

"A. No, sir.

* * * * * *

"Q. * * * Are you willing to swear under oath that these assets represented in your net worth schedule are all and complete the assets of this taxpayer and all and complete the liabilities of this taxpayer?

"A. I know there are other assets of the taxpayer.

* * * * * *

"A. My investigation disclosed that the taxpayer would have other assets. I know of no other liabilities."

Neither counsel asked the Special Agent what these other assets were, and his testimony does not reveal what he had in mind.

The net worth method of proving income tax evasion proceeds on the assumption that, if in a particular year the increase (not accounted for by nontaxable items) in a taxpayer's net worth plus his nondeductible expenditures exceeds his reported net income to a substantial extent, the excess represents unreported income and permits an inference of willfulness on the part of the taxpayer. It is a method of reconstructing income rather than computing it, and provides circumstantial evidence only.²

In Holland v. United States, 1954, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150, the Supreme Court, in discussing the net worth method, concluded that the method "is so fraught with danger for the innocent that the courts must closely scrutinize its use." 348 U.S. at 125, 75 S.Ct. at 130, 99 L.Ed. 150. The Court further stated:

"While we cannot say that these pitfalls inherent in the net worth method foreclose its use, they do require the exercise of great care and restraint. * * * Appellate courts 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." 348 U.S. at 129, 75 S.Ct. at 132, 99 L.Ed. 150.

One of the most important elements of the Government's proof in a net worth case is the establishment of an opening net worth. In the Holland case the Supreme Court 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, 75 S.Ct. at 133, 99 L.Ed. 150. (Emphasis added.)³

There is nothing in the record of this case to indicate what assets the Special Agent was referring to.⁴ The Government's brief argues that there was one item of jointly-held real property appearing on the defendant's sworn list of real estate holdings which was not included in the net worth schedule because of the difficulty of ascertaining the defendant's interest in it. The Government points out that there is evidence that this property was not disposed of in 1947 or 1948 and, thus, would not affect the computed net income figures. Nevertheless, to assume that the Special Agent was referring to this particular item is a matter of pure speculation. Moreover, he referred to "some other assets," using the plural noun. There is no way for this Court to determine whether these assets were realty or personalty, or whether they were disposed of during the years in question.⁵

The disposition of this appeal, then, is dependent upon whether the burden of going forward with the evidence was on the Government or the defendant. We conclude that the burden was on the Government to identify these assets and to justify its failure to include them in the net worth schedule.

In the Holland case the Supreme Court made the following statements relating to burden of proof:

"Nor does this rule shift the burden of proof. The Government must still prove every element of the offense beyond a reasonable doubt though not to a mathematical certainty. The settled standards of the criminal law are applicable to net worth cases just as to prosecutions of other crimes. Once the Government has established its case, the defendant remains quiet at his peril. Cf. Yee Hem v. United States, 268 U.S. 178, 185 45 S.Ct. 470, 69 L.Ed. 904. The practical disadvantages to the taxpayer are lessened by the pressures on the Government to check and negate relevant leads." 348 U.S. at 138-139, 75 S.Ct. at 136-137, 99 L.Ed. 150. (Emphasis added.)

It is clear from that portion of the Holland opinion quoted earlier⁶ that the Government has not established its case until it has established with reasonable certainty an opening net worth. This would include listing or accounting for all assets of the taxpayer of which the Government is aware, either through its own investigation or through the checking of leads furnished by the taxpayer. To hold otherwise would defeat the requirement that the Government both check and negate leads furnished by the taxpayer:

"When the Government rests its case solely on the approximations and circumstantial inferences of a net worth computation, the cogency of its proof depends upon its effective negation of reasonable explanations by the taxpayer inconsistent with guilt. Such refutation might fail when the Government does not track down relevant leads furnished by the taxpayer — leads reasonably susceptible of being checked, which, if true, would establish the taxpayer\'s innocence. When the Government fails to show an investigation into the validity of such leads, the

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