U.S. v. Dwoskin, 80-5140

• Decision Date: 04 May 1981
• Docket Number: No. 80-5140,80-5140
• Citation: 644 F.2d 418
• Parties: 81-1 USTC P 9416 UNITED STATES of America, Plaintiff-Appellee, v. Steven DWOSKIN, Defendant-Appellant. . Unit B
• Court: U.S. Court of Appeals — Fifth Circuit

Page 418

644 F.2d 418

81-1 USTC P 9416

UNITED STATES of America, Plaintiff-Appellee, v. Steven DWOSKIN, Defendant-Appellant.

No. 80-5140.

United States Court of Appeals, Fifth Circuit.

Unit B

May 4, 1981.

E. David Rosen, Miami, Fla., for defendant-appellant.

M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, Chief, Appellate Section, George L. Hastings, Jr., Robert E. Lindsay, Tax Div., Dept. of Justice, Washington, D. C., for plaintiff-appellee.

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

Before HILL, KRAVITCH and HATCHETT, Circuit Judges.

JAMES C. HILL, Circuit Judge:

Stephen Dwoskin appeals from a jury conviction for two counts of income tax evasion for the years 1972 and 1973. 26 U.S.C. § 7201. Evidence produced at trial showed that the appellant's taxable income in 1972 was $75,843.46 as opposed to the $12,728.12 he reported. In 1973 appellant's income was $44,809.50, in contrast to the $5,674.00 he reported. Record, Vol. V, at 595-596. Affording appellant the benefit of income averaging, the government's expert concluded that the appellant's correct tax liability for 1972 was.$18,173 as opposed to the $2,278 which appellant reported, and $13,525 in 1973, in contrast to the $928 appellant reported. Record, Vol. V, at 622-24. These calculations were based on evidence which indicated that appellant's net worth increased from $89,705.50 at the end of 1971 to $176,910.78 by the end of 1972, and to $252,349.13 by December 31, 1973. Record, Vol. V, at 584.

To establish a § 7201 violation, the government must prove (1) an additional tax was due and owing, (2) an attempt to evade or defeat such taxes, and (3) willfulness. Sansone v. United States, 380 U.S. 343, 351, 85 S.Ct. 1004, 1110, 13 L.Ed.2d 882 (1965). Because a violation of § 7201 is a criminal offense, the government must prove each element of the crime beyond a reasonable doubt. In this case, the government sought to carry its burden by using the net worth method of proof.

I. The Net Worth Method

The basic premise of the net worth method is that most increases in net worth are attributable to taxable income and, as the Supreme Court put it, "when this is not true the taxpayer is in a position to explain the discrepancy." Holland v. United States, 348 U.S. 121, 126, 75 S.Ct. 127, 130, 99 L.Ed. 150 (1954). The government offers evidence of the taxpayer's net worth at the end of the tax year in question, subtracting from this figure his net worth at the beginning of the year, and adding to the difference his non-deductible expenditures. The result is ostensibly the taxable income for the year. If this figure substantially exceeds the taxable income reported on the return, the jury is asked to infer that the return was willfully falsified by the defendant. See 348 U.S. at 125, 75 S.Ct. at 130; United States v. Schafer, 580 F.2d 774, 777 (5th Cir. 1978); Duke, Prosecutions for Attempts to Evade Income Tax; A Discordant View of a Procedural Hybrid, 76 Yale L.J. 1, 10-34 (1966).

The appellant offered no evidence at trial. On appeal he argues that the government's evidence was insufficient to fulfill several requisites of a net worth case. Specifically, he contends that the government failed to establish his opening net worth with reasonable certainty and that it failed to exclude non-taxable sources of income as the basis for his net worth increases. Appellant largely attributes these failures to inadequate investigation.

A motion for acquittal must be granted "when the evidence is such that a reasonably minded jury must have a reasonable doubt as to the existence of any element of the crime." United States v. Slone, 601 F.2d 800, 803 (5th Cir. 1979); United States v. Pinner, 561 F.2d 1203, 1207 (5th Cir. 1977). In evaluating a claim of insufficient evidence according to this standard, we must consider the evidence in the light most favorable to the government, Glasser v. United States, 315 U.S. 60, 80, 62 S.Ct. 457, 469, 86 L.Ed. 680 (1942), resolving reasonable inferences and credibility choices in support of the jury's verdict, United States v. Henderson, 588 F.2d 157, 161 (5th Cir. 1979); United States v. Juarez, 566 F.2d 511, 513 (5th Cir. 1978); United States v. Prout, 526 F.2d 380, 384 (5th Cir.), cert. denied, 429 U.S. 840, 97 S.Ct. 114, 50 L.Ed.2d 109 (1976).

To prove its case, the government relied upon circumstantial evidence. Since circumstantial evidence is to be treated no differently than direct evidence, Holland v. United States, 348 U.S. 121, 140, 75 S.Ct. 127, 137, 99 L.Ed. 150 (1954), the test for judging the sufficiency of the evidence is the same whether the evidence is direct or circumstantial, United States v. Bright, 550 F.2d 240, 242 (5th Cir. 1977); United States v. Gomez-Rajos, 507 F.2d 1213, 1221 (5th Cir.), cert. denied, 423 U.S. 826, 96 S.Ct. 41, 46 L.Ed.2d 42 (1975).

We are mindful of the Supreme Court's admonition that the net worth method of proof is "fraught with danger for the innocent ...." 348 U.S. at 125, 75 S.Ct. at 130. ¹ However, after a careful review of the record we are convinced that the protections established by Holland have not been violated and that the evidence is sufficient to convict.

II. Establishing A Definite Opening Net Worth

"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." Holland v. United States, 348 U.S. at 132, 75 S.Ct. at 133. Appellant's opening net worth was established as of December 31, 1971. Record, Vol. II, at 117. Appellant challenges the "reasonable certainty" of this figure in several respects.

A. Cash on Hand and Unrestricted in Banks

Appellant's opening net worth was based on a financial statement signed by him and submitted to the Commercial Bank of Kendall for a loan on May 29, 1970. Record, Vol. II, at 117-118. Appellant argues that he was incorrectly credited with a total of only $9,000 for cash on hand and cash unrestricted in banks, when the proper figure was.$19,000, the amount he had listed on this May 29, 1970 financial statement. Appellant's Brief, at 4-6, 23. The record shows, however, that the.$19,000 figure listed by the appellant consisted of $8,000 in the appellant's personal bank account and of $11,000 in an account owned by the appellant's children, of which the appellant was trustee. Record, Vol. II, at 130. There is no evidence that the appellant used the funds in his children's account. Indeed, the record indicates the account not only existed but also had a higher balance subsequent to the prosecution years. Record, Vol. II, at 131.

The record does show that on several occasions the appellant borrowed money from Dade Federal Savings and Loan where he maintained his children's savings account. The loans were made against the children's account. Id. at 205. However, the appellant was given credit in the net worth computations for these and his other bank loans. Id. at 75-77.

The government's $9,000 opening unrestricted cash figure consisted of $8,000 from appellant's bank account plus a $1,000 allowance for cash which appellant claimed to have on hand. Id. at 63. Based on the above analysis we find the government's figure is "reasonably certain."

B. Assets Connected with Auto Electric Supply Business

Appellant argues that the government's opening net worth statement did not properly credit him for assests connected with the operation of his auto electric supply business. Appellant again makes reference to his May 29, 1970 financial statement in developing this argument. Specifically, he contends that he should have been credited with a $14,000 asset entitled "Accounts and Loans Receivable" and a $65,000 asset simply entitled "Business." Appellant's Brief, at 6. Both assets were listed by the appellant on his May 29, 1970, financial statement.

Again, however, appellant's contentions do not reflect the whole story. Appellant had been engaged in the auto electric supply business since 1962 and on through the prosecution years, 1972 and 1973. Record, Vol. II, at 62. Prior to May of 1971, appellant actually owned two businesses, Auto Electric Service and Auto Electric Suppliers. Record, Vol. II, at 158. In May 1971, appellant incorporated these businesses as one entity, Auto Electric Suppliers, Inc. Id. at 158-159. Thus, the appellant's electric supply business assets were effectively subsumed by the new corporate entity.

The $65,000 figure represents the appellant's estimate of the fair market value of his business ² prior to incorporation. The government's opening net worth figure valued the appellant's recently formed corporation, which was comprised of his previous businesses, at $15,026.67. Record, Vol. II, at 149. This figure reflects the corporation's cost basis to the defendant, rather than its fair market value. Id. at 156. Indeed, the $15,026.67 figure is taken "from Mr. Dwoskin's books and records concerning (his) corporation as the amount that was transferred to the corporation upon the institution of that corporation." Id. at 149. The appellant was not prejudiced by the use of this cost basis figure as it was used throughout the net worth analysis. Furthermore, the appellant's personal tax returns and those of his corporation show that the appellant still owned the corporation subsequent to the prosecution years and that he did not receive any non-taxable distributions from the corporation which would explain his net worth bulge.

Appellant also challenges the investigating IRS agent's "assumption" that Auto Electric Service went out of business after Auto Electric Suppliers, Inc. was formed. Appellant's Brief, at 8. This contention is based on the appellant's alleged receipt of a $4,000 check from Auto Electric Service on March 1972 well after the formation of Auto Electric Suppliers, Inc. However, the record is clear that...