United States v. Lenamond

• Decision Date: 28 December 1982
• Docket Number: No. CR 3-80-073-R.,CR 3-80-073-R.
• Citation: 553 F. Supp. 852
• Parties: The UNITED STATES of America v. Lee Eugene LENAMOND.
• Court: U.S. District Court — Northern District of Texas

553 F. Supp. 852

The UNITED STATES of America v. Lee Eugene LENAMOND.

No. CR 3-80-073-R.

United States District Court, N.D. Texas, Dallas Division.

December 28, 1982.

David R. Bickel, Asst. U.S. Atty., Dallas, Tex., for plaintiff.

Howard Weinberger, Dallas, Tex., for defendant.

MEMORANDUM OPINION

BUCHMEYER, District Judge.

The defendant, Lee Eugene Lenamond, was convicted of income tax evasion for 1973 and 1974. His prosecution was based upon the "bank deposits-cash expenditures" method of proof.¹ Lenamond's motion for acquittal presents this question:

Did the government fail to conduct a full and adequate investigation, and did it fail to follow reasonable leads, concerning the value of Lenamond's business inventory—and, consequently, his business deductions for "cost of goods sold"² — for the years 1973 and 1974?

Because the government did not conduct a full and adequate investigation and did not follow reasonable leads, despite inventory figures which were truly astonishing, the bank deposits method of proof was not sufficient. Therefore, the motion for acquittal is granted and Lenamond's conviction is set aside.

The Legal Principles

At the conclusion of the government's case, and again at the end of the evidence, the defendant moved for acquittal. Decision on this motion was reserved, and the case was submitted to the jury. Fed.R. Crim.P. 29(b). Following the return of a jury verdict which found the defendant guilty on both counts of tax evasion, the motion for acquittal was timely renewed.

The controlling legal principles concerning the "two traditional indirect methods of proof" used by the government in income tax evasion cases — the net worth analysis and the bank deposits-cash expenditures method — are stated in United States v. Dwoskin, 644 F.2d 418 (5th Cir.1981); United States v. Normile, 587 F.2d 784 (5th Cir.1979); and United States v. Boulet, 577 F.2d 1165 (5th Cir.1978) — and, of course, in Holland v. United States, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150 (1954). As discussed in Dwoskin:

"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) ...

"To prove its case, the government relied upon circumstantial evidence there, a net worth analysis. 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)." (644 F.2d at 420.)

However, in Holland, the Supreme Court warned that the net worth method of proof 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). This is equally true with respect to the bank deposits-cash expenditures analysis. Accordingly, in Boulet, the Fifth Circuit emphasized that both methods trigger special protections for the accused and particularly careful scrutiny by the courts.³

"We, therefore, review the record `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.' Holland v. United States, 1954, 348 U.S. 121, 129, 75 S.Ct. 127, 132, 99 L.Ed. 150. The government must prove a full and adequate investigation in a bank-deposits case just as it must in a net-worth case. Holland v. United States, supra. `Such investigation must establish a guarantee of essential accuracy in the circumstantial proof at trial as an element of the government's burden of proving guilt beyond a reasonable doubt....' United States v. Slutsky, supra, 487 F.2d 832 at 840 (2nd Cir.1973)." (577 F.2d at 1168.)

As part of this duty to conduct "a full and adequate investigation in a bank deposits case," the government may not disregard any "explanations of the defendant reasonably susceptible of being checked." United States v. Boulet, supra 577 F.2d at 1169. As the Supreme Court held in Holland:

"... 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 trial judge may consider them as true and the Government's case as insufficient to go to the jury." (348 U.S. at 135-36, 75 S.Ct. at 135) (emphasis added).

However, a full and adequate investigation is required, not a "universal probe." The government is not required "to perform the impossible" (Dwoskin, 644 F.2d at 423) ... or "to bay down rabbit tracks" and "follow a trail that might have led nowhere" (Normile, 587 F.2d at 786) ... or to conduct a "bacteriophobic search for error" (Normile, 587 F.2d at 787).

The government's duty to investigate and to follow leads does apply to omitted or understated deductions — particularly, in this case, to the defendant's inventory and his business deductions for cost of goods sold. This is evident from several cases,⁴ including United States v. Hall, 650 F.2d 994 (9th Cir.1981), where the Ninth Circuit discussed this very question:

"Inventory Cost: Hall and Uranga argue that the Government's figures did not accurately reflect their inventory cost, and consequently yielded inaccurate figures for `cost of goods sold.' Appellants point out that the cost of goods sold is part of the Government's calculation of the business's gross profit and directly related to the income of the business. Thus, inventory valuation becomes an essential part of the Government's case.

"When choosing to proceed against a defendant using the net worth or bank deposits methods of proof, the Government assumes a special responsibility of thoroughness and particularity in its investigation and presentation. Holland, 348 U.S. at 135-36 72 S.Ct. at 135... This responsibility imposes the duty to, inter alia, accurately establish the figures upon which the methods are based, and to reasonably investigate leads which may reveal that the defendants properly reported their income... Here, both this duty to investigate and the duty to establish figures with reasonable certainty are implicated by the Government's treatment of Hall and Uranga's inventory valuation. In particular, the Government must show that it had followed through on appellant Hall's prior notation suggesting that the inventory figures used by the Government were too high. This is a possible explanation for the apparent unreported income and may not be overlooked by the Government." (650 F.2d at 999-1000) (emphasis added).

After a careful review of the evidence in this case (including the evidence concerning the government's investigation and the defendant's inventory), and after applying the legal principles just discussed, this Court is convinced that the Holland protections have been violated — and that, consequently, the conviction based upon the bank deposits method of proof must be reversed.

The Investigation

In July of 1975, Randell Choate,⁵ an IRS field agent, began a civil tax investigation of the defendant Lenamond — who owned and operated an auto supply store in a low income area in Dallas, Texas (Choate, p. 136; defendant's Exhs. 3-18).⁶ This was the first fraud investigation conducted by Choate (Choate, p. 61).

Over the next 18 months, Choate (sometimes accompanied by other IRS agents) had several meetings⁷ with the defendant Lenamond and with the CPA representing Lenamond (Robert Driegert), and completed a bank deposits-cash expenditures analysis. Lenamond was very cooperative in the investigation and, with only one exception,⁸ supplied Choate with all of the information he requested — although admittedly Lenamond had no accounting experience or ability, had never "gotten any advice on how to maintain books and records," and kept "crummy" books (Choate, pp. 119, 122).⁹

In June of 1976, the investigation was converted to a joint criminal and civil investigation (Choate, p. 82). On October 6, 1976, Choate held the first criminal investigation meeting with Lenamond — although he did not give any notice of this meeting to the CPA representing Lenamond (Choate, pp. 62-63). Lenamond still continued to cooperate.

The investigation concluded in 1976, and it resulted in a recommendation that Lenamond be indicted on income tax evasion charges for 1972, 1973, and 1974. Although Lenamond had no substantial assets or expenditures that pointed toward substantial unreported income — he lived in a $13,000 house in Pleasant Grove; he had no fancy clothes, expensive cars, jewelry, stocks or bonds, hidden bank accounts, etc.; and he owed money on a loan from his father (Choate, pp. 150-53) — he did withhold cash from his daily business receipts for personal living expenses, for payment of salaries, and for occasional...