Opinion ID: 391122
Heading Depth: 1
Heading Rank: 3

Heading: Inventory Cost

Text: 22 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. 23 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, 75 S.Ct. at 135; Gardner, 611 F.2d at 775. 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. Gardner, 611 F.2d at 775. See United States v. Keller, 523 F.2d 1009, 1011 (9th Cir. 1975). 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. 24 Because we remand this case, we leave to the District Court the task of applying these guidelines to the Government's proof on retrial. Should the Government continue to use the 100% markup factor for valuing inventory, the Court should require a showing by the Government that it has investigated the appellants' claimed figures and has justifiably rejected them. If there is no investigation of this lead, the trial court may consider the appellants' version as true, and so instruct the jury. See Holland, 348 U.S. at 136, 79 S.Ct. at 135. This may especially imperil the 1974 conviction. Of course, if it is shown arithmetically that even under the appellants' version there would be a substantial amount of unreported income, the error would be inconsequential and the Government relieved of the need to pursue the matter.