U.S. v. Hiett

• Citation: 581 F.2d 1199
• Decision Date: 16 October 1978
• Docket Number: No. 77-5214,77-5214
• Parties: 78-2 USTC P 9754 UNITED STATES of America, Plaintiff-Appellee, v. Tommy HIETT, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 1199

581 F.2d 1199

78-2 USTC P 9754

UNITED STATES of America, Plaintiff-Appellee, v. Tommy HIETT, Defendant-Appellant.

No. 77-5214.

United States Court of Appeals, Fifth Circuit.

Oct. 16, 1978.

Joseph S. Chagra, Towner Leeper, El Paso, Tex., for defendant-appellant.

Jamie C. Boyd, U.S. Atty., Le Roy Morgan Jahn, W. Ray Jahn, Charles J. Muller, III, Malcolm Logan, Wayne F. Speck, Asst. U.S. Attys., San Antonio, Tex., Richard B. Buhrman, Atty., U.S. Dept. of Justice, Washington, D.C., for plaintiff-appellee.

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

Before COWEN ^*, Senior Judge, GOLDBERG and AINSWORTH, Circuit Judges.

GOLDBERG, Circuit Judge:

This is an appeal from a conviction for two counts of income tax evasion in violation of 26 U.S.C. § 7201.

Evidence presented at trial showed that from 1964 to 1970 appellant Hiett's chief source of income was a divorce consulting firm. During this time appellant routinely paid his bills by check. The divorce consulting firm closed in late 1970 or early 1971. At about that time appellant began paying for everything in cash, including such large purchases as a house and an airplane. He filed no individual tax returns for 1971 or 1972. This led the government to investigate his tax liabilities for those years.

In its investigation the government used the net worth method of reconstructing income. Under that method the IRS showed substantial increases in appellant's net worth for the years in question and found that appellant had taxable income of $16,000 in 1971 and $28,000 in 1972. Appellant did not cooperate in the investigation, nor did he offer any explanation for his increased net worth. The jury found him guilty of income tax evasion for the years of 1971 and 1972. He appeals.

I.

The principal issue raised on appeal concerns the government's burden of proof in a criminal prosecution for income tax evasion. To establish a § 7201 violation, the government must prove (1) the existence of a tax deficiency, (2) an affirmative act constituting an evasion or attempted evasion of the tax due, and (3) willfulness. Sansone v. United States, 380 U.S. 343, 351, 85 S.Ct. 1004, 13 L.Ed.2d 882 (1965). Because a § 7201 violation is a criminal offense, the government must prove each element of the crime beyond a reasonable doubt. On appeal Hiett contends that the government failed to prove beyond a reasonable doubt that there was a tax deficiency.

To establish a tax deficiency, the government must show first that the taxpayer had unreported income, and second, that the income was taxable. The government has several customary ways of overcoming the first hurdle. Here it used the net worth method of reconstructing income. ¹ Appellant does not contest the government's calculations under that method.

The government, however, does not satisfy its burden of proving a tax deficiency simply by showing that the taxpayer had unreported income for the year in question. In addition, the government must prove that the unreported income was Taxable income. This is the aspect of the government's case which appellant contests. Under the Supreme Court's decisions, the government can satisfy this burden in either of two ways. It can show that there is a likely taxable source of the unreported income, Holland v. United States, 348 U.S. 121, 138, 75 S.Ct. 127, 99 L.Ed. 150 (1954), or it can negate all possible nontaxable sources of that income. United States v. Massei, 355 U.S. 595, 78 S.Ct. 495, 2 L.Ed.2d 517 (1958). Since the government concedes that it did not establish a likely taxable source of appellant's unreported income, the issue narrows to whether the government negated all possible nontaxable sources within the meaning of Massei. If it did, the income must have come from a taxable source.

It is impossible, of course, to negate every Possible nontaxable source. In the typical case, the taxpayer gives the IRS "leads" to possible nontaxable sources. Some cases have held that the government satisfies its burden if it negates each of these leads. E. g., Kramer v. Commissioner of Internal Revenue, 389 F.2d 236 (7th Cir. 1968). Here, however, appellant provided no leads for the government to negate. He notes that the self incrimination clause of the fifth amendment and the requirement that the government bear the burden of proof in criminal prosecutions prevent the government from forcing him to provide leads. He seems to suggest that taxpayers who provide leads to the IRS stipulate that the search for nontaxable sources can be narrowed to an investigation of just those leads. This permits the government to convict those taxpayers by simply negating their proffered leads. Because appellant provided no leads, he argues that the search cannot be narrowed and the government must negate every possible source of nontaxable income. Since that is an impossible task, appellant contends that he cannot be convicted.

To adopt appellant's position would require the government to exhaust the inexhaustable to conduct an absolutely limitless investigation. It would cast the government in the role of a conjurer, forcing it to pull nontaxable sources out of a hat. Appellant would require the government to embark on a Magellan-like expedition in order to prove that the unreported income was taxable. Not only would the government have to circle the globe in its search, it would also have extraorbital responsibility, since appellant's position requires it to prove a cosmic negative. To state appellant's position is to establish its absurdity. If Massei And Holland are to have viability in our jurisprudence, they cannot be read to sanction such a result.

Our cases adequately rebut appellant's position. In United States v. Boulet, 577 F.2d 1165 (5th Cir. 1978) and United States v. Penosi, 452 F.2d 217 (5th Cir. 1971), both prosecutions for income tax evasion, we held that the government satisfies its burden of proving that income is taxable if it conducts a thorough investigation that fails to disclose any nontaxable source. Appellant would have us distinguish Penosi And Boulet. In those cases, he correctly asserts, the government did not use the net worth method to prove that the taxpayer had unreported income. The government used the expenditures method in Penosi and the bank deposits method in Boulet. ² However, appellant's attempted distinction fails. It confuses the first issue, whether the taxpayer had unreported income, with the second issue of whether the income was taxable. Whatever method the government uses to answer the first question, the inquiry into possible nontaxable sources is wholly distinct. Thus Penosi and Boulet are indistinguishable on this issue, and they control this case. With the addition of Hiett, the Penosi and Boulet twins become triplets. We therefore hold that in an income tax evasion case based on the net worth method of proof, when the taxpayer gives no leads as to nontaxable sources, the government satisfies its burden of negating all possible nontaxable sources within the meaning of Massei by showing that it conducted a thorough investigation that failed to reveal any nontaxable source.

For purposes of this standard, a thorough investigation must be, of course, one which removes any reasonable doubt that the defendant's unreported income came from nontaxable sources. In this case the government made such an investigation. It contacted banks and third parties including appellant's family in an attempt to find out if appellant received any income by gift, loan, inheritance, or other nontaxable source. The government located no nontaxable sources that could account for appellant's unreported income. As we explained in Penosi,

the government cannot be expected to conduct an exhaustive nationwide investigation when the defendant supplies no relevant leads . . . the government agent did enough to carry the burden of proof when he interviewed friends and relatives and checked with financial and government institutions at both the present and former residences of the defendant.

United States v. Penosi, 452 F.2d at 220.

We wish to emphasize that our holding in no way shifts the burden of proof to the defendant. He is not required to supply leads or testify in court. The burden of establishing a taxable source remains on the government throughout the trial. But, as we stated in Penosi, once "the results of the investigation were put into evidence, the government established a Prima facie case, and by remaining silent, . . . (the defendant) took the risk that the jury would believe the government's witnesses and find him guilty." Id. After the government establishes its Prima facie case, the taxpayer defendant like all other defendants "remains quiet at his peril." Holland v. United States, 348 U.S. 121, 138-39, 75 S.Ct. 127, 99 L.Ed. 150 (1954).

II.

Appellant raises another issue on appeal related to the government's burden of proof. He contends that the district court erroneously placed the burden of proof on him to show that his expenditures were for business and not personal purposes. In other words appellant argues that the government, to carry its burden of proof in a prosecution for income tax evasion, must prove that the defendant has no unclaimed deductions.

We hold that the district court correctly placed the burden of proving deductions on appellant. The law in this area is clear. In a prosecution for income tax evasion, once the government has established the defendant's unreported income and has allowed both the deductions that the defendant claims and those that it can calculate without the defendant's assistance, it is not then required to prove that the defendant has no other deductions. The burden of proving additional deductions is on the defendant. United States v. Garguilo, 554 F.2d 59, 62 (2d Cir. 1977); Siravo v. United States, 377 F.2d 469, 473 (1st Cir. 1967); McClanahan v. United States, 292 F.2d 630,...