Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-90-01172/USCOURTS-ca10-90-01172-0/pdf.json

Parties Involved:
Patrick J. Notch
Appellant
United States of America
Appellee

Document Text:

PUBLISH FILED 

UNITED STATES COURT OF APPEALS 

Utiiftd i~N~.Cultnti 

Tenth Circuit ~ 

UNITED STATES OF AMERICA, 

Plaintiff - Appellee, 

v. 

PATRICK J. NOTCH, 

TENTH CIRCUIT 

Defendant - Appellant. 

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JUL 1~ 1991 

&OBERT L. HOECKER 

Clerk 

No. 90-1172 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF COLORADO 

(D.C. No. 90-CR-27) 

Rick Budd (Benjamin Spitzer with him on the briefs) of Budd and 

Spitzer, P.C., Denver, Colorado, for Defendant-Appellant. 

William R. Lucero, Assistant u.s. Attorney (Michael J. Norton, 

United States Attorney, with him on the brief), District of 

Colorado, Denver, Colorado, for Plaintiff-Appellee. 

Before McKAY and ANDERSON, Circuit Judges, and CHRISTENSEN!, 

District Judge. 

McKAY, Circuit Judge. 

Patrick Notch appeals from a jury verdict convicting him on 

three counts of filing a false income tax return for 1983, 1984, 

1 Honorable A. Sherman Christensen, United States Senior 

District Judge for the District of Utah, sitting by designation. 

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and 1985 in violation of 26 u.s.c. § 7206(1) (1988). He also 

appeals his conviction on one count of conspiracy to defraud the 

United States in violation of 18 u.s.c. § 371 (1988). 

At trial, the government used the net worth method of proof 

to establish that defendant understated his income on his personal 

income tax returns. After the jury returned its verdict, the 

defendant filed a Motion for Judgment of Acquittal on the basis of 

sufficiency of the evidence. He also filed a Motion for New Trial 

and a Motion for Judgment Notwithstanding the Verdict. The district court denied the motions. 

In this appeal, defendant attacks his conviction on three 

grounds, alleging that: (1) there was insufficient evidence to 

establish the net worth method of proof for 1983, 1984 and 1985; 

(2) the district court erred when it allowed the government to 

introduce evidence that permitted the jury to improperly speculate 

as to his personal expenses; and (3) the government incorrectly 

charged him with conspiracy to defraud the United States. 

I. 

The Internal Revenue Service began an investigation of 

defendant and his partner, Walter Burkey, in 1986. The investigation focused on a scheme by the defendant and Mr. Burkey in which 

they agreed to conceal and not report to the IRS money generated 

from six adult bookstores in the Denver, Colorado area. Eighty to 

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ninety percent of the money came from customers viewing pornographic videos in private booths, also known as video arcades, 

located in the bookstores. 

The financial relationship between defendant and Mr. Burkey 

began in 1974 when Mr. Burkey hired defendant to work as a parttime clerk in his adult bookstores. By 1976, Mr. Burkey, through 

his business entitled Burkey Management, owned four stores. He 

promoted defendant to general manager to run them. 

The businesses were very profitable under defendant's direction. Burkey Management added a fifth adult bookstore. In 1983, 

Mr. Burkey and defendant entered into a number of business transactions as equal partners. They purchased a sixth store called 

the Ward Road Bookstore. They also purchased real estate in 

Missouri and on South Federal Street in Denver. Their partnership 

operated during 1981, 1982, and the first three months of 1983. 

They then liquidated the partnership and formed a corporation 

called Ward Road Bookstore, Inc., in which they were equal and 

sole shareholders. The corporation owned Ward Road Bookstore and 

the properties on South Federal Street and in Missouri. 

During the period from 1976 to 1985, defendant was paid 

fifteen percent of the net profits from the adult bookstores as 

compensation for managing them. The six stores grossed approximately $20,000 per week from the video arcades. Mr. Burkey and 

defendant agreed they would not report these funds to the IRS. 

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Testimony at trial showed that fifty percent of the arcade money 

was not reported. To hide the evidence of their income, Mr. 

Burkey and defendant used perforated accounting sheets on which 

the true amount of cash generated daily from the bookstores 

appeared on a bottom portion that was discarded, and another false 

figure was maintained as a record on the top portion. In addition, unreported income was placed in a safety deposit box. A 

third method to hide income was to falsify the total compensation 

to employees on their W-2 forms. 

Because defendant's records were inadequate to accurately 

establish his income, the government used the net worth method of 

proof. The government's expert testified that defendant had 

understated his income on his personal income tax returns for 

1983, 1984, and 1985 in the amounts of $4,582, $70,744, and 

$32,992 respectively. The likely source of the increase in 

defendant's net worth was cash generated from the video arcades. 

II. 

In reviewing the district court's denial of defendant's 

Motion for Judgment of Acquittal, we must examine all the evidence 

-- both direct and circumstantial, together with the reasonable 

inferences to be drawn therefrom -- in the light most favorable to 

the government. United States v. Hooks, 780 F.2d 1526, 1529 (lOth 

Cir.), cert. denied, 475 U.S. 1128 (1986). We must then determine 

whether a reasonable jury could find the defendant guilty beyond a 

reasonable doubt. United States v. Bowie, 892 F.2d 1494, 1497 

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(lOth Cir. 1990); Hooks, 780 F.2d at 1531. When direct evidence 

is lacking, a criminal conviction can be sustained solely on circumstantial evidence. Hooks, 780 F.2d at 1531. 

The net worth method of reconstructing income relies on circumstantial evidence whereby the defendant's liabilities are subtracted from his assets to establish a starting net worth at a 

particular time, usually the beginning of a tax year. The same 

calculation is made at the end of the year and compared to the 

starting net worth to determine defendant's increase in net worth 

over that time. See United States v. Terrell, 754 F.2d 1139, 1144 

(5th Cir.), cert. denied, 472 U.S. 1029 (1985). An increase or 

"bulge" greater than the increase in reported income for the corresponding tax year creates an inference of unreported income. 

Holland v. United States, 348 u.s. 121 (1954). 

Under the net worth analysis the government must accurately 

establish defendant's opening net worth, identify a likely source 

of taxable income, and reasonably investigate any leads that suggest defendant properly reported his income. United States v. 

Gomez-Soto, 723 F.2d 649 (9th Cir.), cert. denied, 466 U.S. 977 

(1984). We must closely scrutinize the net worth analysis due to 

"the difficulties that arise when circumstantial evidence as to 

guilt is the chief weapon of a method that is itself only an 

approximation." Holland, 348 u.s. at 129. 

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A. 

Defendant alleges several flaws in the government's net worth 

calculation, each of which concern the bookkeeping of Ward Road 

Bookstore, Inc. His first contention is that the evidence failed 

to accurately establish his liabilities. He argues that the government incorrectly allocated to him only fifty percent of a Loans 

Payable amount listed on the corporation's tax returns. The government did so because he and Mr. Burkey were equal partners, but 

defendant asserts that no evidence was presented establishing that 

he, in fact, owed only fifty percent of the money.

2 

Defendant also argues that the government's net worth calculation is flawed because the loan amounts were listed on the corporation's books for March 31 of 1984, 1985, and 1986 yet the government assigned these liabilities to December 31 of 1983, 1984, 

and 1985. He therefore contends that the government failed to 

produce any evidence sufficient for the jury to determine the 

liability balances that defendant owed Ward Road Bookstore, Inc., 

2 One of the line items in the liability section of the government's net worth computation was "Loans Payable: Ward Road 

Bookstore, Inc." in the following amounts: 

Year Ending 

December 31, 1983 

December 31, 1984 

December 31, 1985 

.Amount 

$22,037.00 

$37,646.00 

$37,646.00 

According to defendant, he may have owed all of the loans, 

which, if true, would reduce his net worth and result in an overstatement of income for 1983. He argues that it would also cast 

sufficient doubt on the net worth calculations for 1984 and 1985 

so that a jury could not find him guilty beyond a reasonable 

doubt. 

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on December 31 of 1983, 1984, and 1985. 

The burden of persuading the jury beyond a reasonable doubt 

that defendant wilfully falsified his tax returns remains with the 

government at all times. Holland, 348 u.s. at 1138; United States 

v. Scott, 660 F.2d 1145, 1160 (7th Cir. 1981), cert. denied, 455 

U.S. 907 (1982). In a net worth case, however, the government 

makes out a prima facie case when it has proved income greater 

than the income reported, the existence of a likely source of taxable income, and an effective negation of reasonable explanations 

by defendant inconsistent with guilt. Holland, 348 U.S. at 1135-

38; Scott, 660 F.2d at 1160-61. It is defendant's burden to furnish leads that might explain the increases in net worth so the 

government can investigate these leads before trial. United 

States v. Caswell, 825 F.2d 1228, 1234 (8th Cir. 1987); Terrell, 

754 F.2d at 1146. Once the government has established its case, a 

defendant who elects to rely on the jury finding some reasonable 

doubt remains quiet at his peril. Id. at 138-39; Scott, 660 F.2d 

at 1161; United States v. Cramer, 447 F.2d 210, 218 (2d Cir. 

1971), cert. denied, 404 U.S. 1024 (1972). 

Here, the government's thorough investigation made out a 

prima facie case. At trial, the government presented the testimony of defendant's partner, Mr. Burkey. He stated that the mortgage payments on three properties owned equally by defendant and 

himself (the Ward Road Bookstore and the properties on South 

Federal Street and in Missouri) were made by Ward Road Bookstore, 

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Inc. In addition, one of defendant's witnesses, an accountant 

retained to prepare his tax returns, testified that the loan 

amounts listed on the corporation's tax returns represented mortgage payments on these properties. These sums were also included 

on the corporation's accounting worksheets as loans to shareholders, a group comprised of defendant and Mr. Burkey whose ownership interests were equal. The evidence also showed that they 

agreed not to report the money from the video arcades to the IRS. 

Moreover, defendant did not put on evidence rebutting the 

government's evidence that the loans were not made during the calendar tax year. Nor did he attempt to rebut the showing that the 

amount he owed was fifty percent of the loans. Defendant's assertion that the net worth analysis is fatally flawed because of the 

possibility that the loans could have been made during a time 

other than the tax years charged, or the possibility that the 

loans might have been in a proportion different than the equity 

interests of defendant and Mr. Burkey, does not rise to the level 

of a reasonable explanation inconsistent with guilt that the government has the burden to negate. See Holland, 348 U.S at 1135; 

Scott, 660 F.2d at 1160-61. The government is not required to 

disprove every possible source of nontaxable income. Holland, 348 

u.s. at 138; United States v. Beasley, 585 F.2d 796, 799 (5th Cir. 

1978), cert. denied, 440 U.S. 947 (1979). Nor is the government 

required to document defendant's financial affairs to an absolute 

certainty before he can be convicted, particularly when the corporation itself did not keep records on the amounts loaned during 

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the calendar tax year. Holland, 348 u.s. at 138; United States v. 

Dwoskin, 644 F.2d 418 (5th Cir. 1981). The net worth method of 

proof is itself an approximation. 

Based on all the evidence, the jury could draw the conclusion 

that fifty percent of the loans were attributable to defendant. 

Likewise, the jury could infer that the loan amounts were attributable to loans made during the calendar tax years. Viewing the 

evidence in the light most favorable to the government, Hooks, 780 

F.2d at 1529, we conclude that the evidence was sufficient to support defendant's conviction. 

B. 

Defendant also argues that the loan amounts are inaccurate 

because the corporation's cash entry in its books was never reconciled with the amount of cash on deposit in its bank account. 

Defendant asserts that the loan amounts were adjusted to make 

these two amounts match and that the loan figures do not accurately reflect the amount owed by defendant. 

Whether the loan figures were accurate is a factual determination for the jury. On one hand, the government presented evidence showing the figures on the corporation's returns and what 

these amounts were used for. Defendant cast doubt on their 

accuracy during cross-examination of the government's expert witness and during direct testimony of his own expert by emphasizing 

that the corporate cash account and the bank account had not been 

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reconciled. The defendant did not, however, present evidence conclusively demonstrating that the loan figures were inaccurate. 

The government need not prove the increase in defendant's net 

worth to a mathematical certainty. Holland, 348 u.s. at 138. It 

was permissible, therefore, for the jury to infer that the loan 

figures were accurate. The evidence was sufficient to support the 

jury's verdict. 

II. 

Defendant's next argument is that the district court erred by 

allowing the government to introduce evidence that permitted the 

jury to improperly speculate as to his personal expenses. At 

trial, the government's expert witness testified that she did not 

take into consideration defendant's personal expenditures for food 

and clothing in arriving at her net worth computation. Such 

expenses are non-deductible and, if included in the net worth 

analysis, would increase the amount of total income defendant was 

charged with failing to report. 

Defendant objected to this testimony because it allegedly 

invited the jury to speculate that his increase in net worth was 

greater than the amount the government was attempting to prove. 

The district court's decision to allow the government's expert to 

testify on this matter will not be overturned absent an abuse of 

discretion. See LeMaire v. United States, 826 F.2d 949, 953 (lOth 

Cir. 1987); United States v. Cooper, 733 F.2d 1360, 1366 (lOth 

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Cir.), cert. denied, 467 U.S. 1255 (1984). 

Personal expenditures for food and clothing are usually 

included in the net worth calculation. Holland, 348 u.s. at 125. 

The government's expert did not include food and clothing expenditures in her net worth analysis because she could not verify these 

figures. This conservative approach to the net worth computation 

made the analysis appear more credible. Although defendant characterizes the expert's testimony as an invitation to the jury to 

speculate that defendant's net worth was greater than the amount 

charged in the indictment, it can also be viewed as showing that 

the jury need not consider personal expenses in order to conclude 

that defendant understated his income. In these circumstances, we 

cannot say that the district court abused its discretion. 

III. 

Defendant's final argument is that the government charged him 

under the wrong provision of 18 u.s.c. § 371. The statute provides that it is unlawful for "two or more persons [to] conspire 

either to commit an offense against the United States, or to 

defraud the United States .... " Count IV of the indictment 

charged defendant with conspiring to defraud the United States by 

impeding, impairing, obstructing, and defeating the lawful efforts 

of the IRS to ascertain, compute, assess, and collect income 

taxes. See 18 U.S.C. § 371. Defendant contends that he should 

have been charged under the offense provision of 18 u.s.c. § 371, 

not the fraud provision, because the evidence at trial was 

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directed at proving that he had committed an "offense" against the 

United States, specifically, the offense of filing a false income 

tax return. He argues that he was wrongly charged and that his 

conviction must therefore be reversed. 

Defendant principally relies on United States v. Minarik, 875 

F.2d 1186 (6th Cir. 1989). In that case, the United States Court 

of Appeals for the Sixth Circuit held that the defendants could 

not be convicted when they had been indicted under the "defraud" 

clause of 18 u.s.c. § 371 but the evidence showed only that they 

conspired to commit the specific statutory offense found in 26 

U.S.C. § 7604(4) (1988) -- concealing assets upon which the IRS 

may impose a levy for taxes owed. The court in Minarik was particularly concerned that the broad language of the defraud provision prejudiced the defendant's ability to prepare for trial by 

allowing the prosecutor to indict without precisely setting forth 

the alleged crime. Id. at 1196; United States v. Reynolds, 919 

F.2d 435, 439 (7th Cir. 1990), cert. denied, 111 S. Ct. 1402 

(1991); see also McNally v. United States, 483 u.s. 350, 361 

(1987) (refusing to interpret criminal fraud statute "in a manner 

that leaves its outer boundaries ambiguous"); Tanner v. United 

States, 483 U.S. 107 (1987) (section 341 should not be broadly 

construed to criminalize activity not within its plain language). 

Unlike the situation in Minarik, the facts of this case did 

not constitute only a conspiracy under the offense clause to violate 26 U.S.C. § 7206(1). See United States v. Bilzerian, 926 

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F.2d 1285, 1302 (2d Cir. 1991), petition for cert. filed, (May 22, 

1991) (indictment under defraud clause proper where criminal 

activity broader than specific statutory prohibition). The object 

of the conspiracy went beyond filing false tax returns; it was to 

conceal taxable income in order to prevent the IRS from accurately 

ascertaining and collecting income taxes. Several methods were 

used so the IRS could not trace gains generated from the adult 

bookstores if it were to conduct a tax audit. One of these was 

the filing of false income tax returns. In addition, the 

defendant and Mr. Burkey concealed their income by using perforated accounting sheets on which the daily income from the video 

arcades was recorded and then discarded. Another device was the 

payment of salaries and bonuses in cash. Defendant also purchased 

cashier's checks with cash in order to buy property and hide the 

source of his income. 

Furthermore, the indictment did not prejudice defendant's 

ability to prepare for trial. It listed numerous overt acts, 

including those discussed above. Defendant cannot complain that 

he was unaware of the activities on which the government based the 

conspiracy charge. Under these circumstances, the district court 

did not err in denying defendant's Motion for Judgment of 

Acquittal on Count IV. 

For the foregoing reasons, the district court's denial of 

defendant's Motion for Judgment of Acquittal is AFFIRMED. 

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