Opinion ID: 298598
Heading Depth: 1
Heading Rank: 2

Heading: The Net Worth Proof

Text: 31 Other than appellants' conclusory and insubstantial allegations that they were prejudiced by the Government's use of a net worth analysis to corroborate the evidence of specific deficiencies in reported income, the only claim of error relates to the Government's reliance on the inventory figures revealed by appellants' partnership returns. The principal contention is that since the inventories, which were carried at cost, allegedly included many obsolete items — e. g., pre-World War II Chevrolet running boards, any reliance on inventory figures derived from appellants' records would produce a grossly inflated picture of appellants' assets — and increasingly so with the passage of time. 32 At the outset, it is important to note that [t]he use of the term `net worth' to describe the method used . . . is a possible source of misunderstanding since it connotes `value.' Actually, this method of prosecution for tax evasion is not concerned with value, but only with actual costs and expenditures. United States v. O'Connor, 237 F.2d 466, 473 n. 6 (2 Cir. 1956). 4 Inasmuch as there appears to be no dispute that inventory was calculated on a cost basis and that there was no change in the methods of determining quantities, costs, or valuations between opening and closing inventories, 5 the increases in the cost basis of the inventory necessarily reflect recent expenditures and were justifiably treated as an increase in the taxpayers' assets. 6 The only question is whether the failure to take account of any marginal decrease during the taxable years at issue (since any mark-down based on pre-1962 obsolescence is irrelvant in terms of the changes in net worth during 1962-63) in the value of inventory resulting from obsolescence prejudicially distorted the Government's net worth-expenditure analysis. 33 While it is true that a taxpayer may exclude from his inventory goods which have become entirely unsalable, he must do so when he first learns that the goods are unsalable, he must make the determination item-by-item, and he is not permitted to reduce values arbitrarily by eliminating a certain percentage as representing the fall in value . . . [since] [a]pproximations are not permitted. 2 Mertens, Law of Federal Income Taxation § 16.24 at 57-58 (1967 rev.). Under these standards, it is highly doubtful that the alleged obsolescence would have made any appreciable difference with respect to the net worth bulges of $74,000 for 1962 and $38,000 for 1963. Moreover, the remote possibility that some reduction of taxable income might have been effected had the appellants been able to substantiate, for 1962 and 1963, some recently discovered obsolescence, is deprived of almost any significance in light of the ample proof of specific items of unreported income which the net worth analysis simply corroborated. 34 Appellants' collateral argument with respect to the inventories — that the investigating agents should have pursued leads supplied to them by appellants and their counsel, and that the failure to do so requires a reversal of their convictions, Holland v. United States, 348 U.S. 121, 135-136, 75 S.Ct. 127, 99 L.Ed. 150 (1954) — is untenable on a number of grounds. In the first place, apparently aware of the appellants' contention that the inventory figures were inaccurate, the agents explored numerous leads to determine the inventory figures. They examined cancelled checks against the appellants' books and records for the years 1961 through 1964 to determine the amounts of merchandise purchased; for the years 1959 and 1960, with respect to which the agents were furnished with no books or records by appellants, the agents examined the microfilmed checks of Cramer's Auto Parts Co. at the First National Bank & Trust Co. of Ithaca; in addition, a number of suppliers of Cramer's Auto Parts Co. were contacted to ascertain whether they had records of Cramer's purchases — and all but one of those that did testified at trial. Moreover, according to Sager's testimony he had requested the inventory records from Richard Thaler, but was informed by him that there were none available. When these were produced as defense exhibits at trial, Sager stated that he had never seen them before. 35 Secondly, even assuming that this were a case in which the Government had failed to track down relevant leads furnished by the taxpayer — leads reasonably susceptible of being checked, which, if true, would establish the taxpayer's innocence, Holland v. United States, supra, 348 U.S. at 135-136, 75 S.Ct. at 135, we are not at all persuaded that the rule of Holland would be applicable. That case was one in which the Government rested its proof solely on the approximations and circumstantial inferences of a net worth computation, 348 U.S. at 135, 75 S.Ct. at 135, and the basis of the rule permitting the trial judge to consider uninvestigated leads as true and to take the case from the jury was that the Government's case would thereby be rendered insufficient. 348 U.S. at 136, 75 S.Ct. 127. Here, irrespective of the net worth evidence, the proof of specific items was more than sufficient to take the case to the jury; hence it is questionable whether there would be any justification under the rationale of Holland for taking the case from the jury when the Government's net worth analysis is but one string on its bow and its proof of specific items is sufficient. 36 Beyond all this, the leads here were quite as available to the defendants as to the Government. As we said in United States v. Vardine, 305 F.2d 60, 63 (2 Cir. 1962), it is reasonable to require the defendant, if he wishes to disprove intent and likely source, to bear the burden of going forward when he alleges that he had additional deductions not claimed on his income tax return. Here appellants did little more than make a broad allegation of 25% obsolescence in inventory — a fact which, if true, they should have supported by some concrete indications that during the tax years in question such obsolescence would have reduced their taxable income.