Opinion ID: 492452
Heading Depth: 2
Heading Rank: 1

Heading: Essential Elements Under the Cash Expenditures Method.

Text: 13 Caswell contends that the government failed to establish (1) a likely source of income for the years 1979, 1980, and 1981; (2) his cash on hand or net worth at the beginning of each year; and (3) the net worth of each Caswell relative whose expenditures were attributed to him. 14
15 Under the cash expenditures method of proof, the government is required to show either a likely source of the allegedly unreported income or that it has negated all reasonably possible nontaxable sources of income. United States v. Mastropieri, 685 F.2d 776, 784-85 (2d Cir.), cert. denied, 459 U.S. 945, 103 S.Ct. 260, 74 L.Ed.2d 203 (1982); see United States v. Bianco, 534 F.2d 501, 506-07 (2d Cir.), cert. denied, 429 U.S. 822, 97 S.Ct. 73, 50 L.Ed.2d 84 (1976). Caswell admits that the December 1982 gambling raids produced evidence of a likely source of income for 1982, and thus, he does not challenge (under this argument) his conviction for that year. 5 Rather, he contends that this evidence could not be used by the jury to make a quantum leap and infer that the bookmaking operation was also his likely source of income in 1979, 1980, and 1981. Caswell therefore maintains that the three counts corresponding to those years must fail as a matter of law. 16 The government's response is two-fold. First, relying on United States v. Heyward, 729 F.2d 297 (4th Cir.1984), cert. denied, 469 U.S. 1105, 105 S.Ct. 776, 83 L.Ed.2d 772 (1985), and Beard v. United States, 222 F.2d 84 (4th Cir.), cert. denied, 350 U.S. 846, 76 S.Ct. 48, 100 L.Ed. 753 (1955), the government asserts that the evidence from the 1982 gambling raids was admissible to allow the jury to infer that Caswell had a gambling income in the previous three years. In both cases, the Fourth Circuit held that discovery of certain evidence of unreported income in one year did not render the evidence inadmissible to substantiate the government's claims of tax evasion in previous years. Heyward, 729 F.2d at 301 (drug laden plane discovered in 1980 admissible to prove defendant's net worth in 1978 and 1979); Beard, 222 F.2d at 92 (bookmaking evidence found in 1945 relevant to 1944 tax evasion charge). Instead, the time difference was simply a matter to be considered by the jury. Heyward, 729 F.2d at 301 (citing United States v. Wright, 667 F.2d 793, 800 (9th Cir.1982)). Second, the government maintains that there was other evidence of Caswell's betting activities in 1979, 1980, and 1981 which allowed the jury to infer that appellant's likely source of income for those years was from gambling. 17 Although we are inclined to agree with the Fourth Circuit's analysis of the issue, we do not have to reach this question as the record clearly indicates that the government introduced sufficient other evidence of Caswell's gambling activity in 1979, 1980, and 1981 to show that the likely source of his unreported income was from gambling. For example, there was evidence from which the jury could infer that Caswell acted through the alias Don Dawson in purchasing sports information from two different services in 1981. Additionally, Stephen Geist, a convicted gambler, testified that he had made bets with Caswell since 1976. Further, Ivan Mullenix testified that from 1980 through 1982, he rented Caswell, under the alias Frank or Richard Quinn, the apartment from which bets were transferred to the Caswell farm. Mullenix also testified that he made weekly bets with Caswell on NFL games during 1979 and 1980. 18 In summary, the evidence of Caswell's bookmaking and gambling was not limited to the year 1982. Accordingly, we hold that the evidence of Caswell's betting activities was sufficient to allow the jury to conclude that this was a likely source of Caswell's unreported income for the years 1979, 1980 and 1981. 19
20 In a cash expenditures case, the government must also prove to a reasonable certainty (i) expenditures during the period in question and (ii) the opening net worth of the taxpayer, including cash on hand. Citron, 783 F.2d at 315 (citing Bianco, 534 F.2d at 504). In contrast to a tax evasion case prosecuted under the net worth method, however, the government need not prepare a formal net worth statement. Id. at 315, 316. Rather, accurate inclusion of diminution of resources serves the function of enabling the jurors to determine if expenditures were financed by liquidation of assets, depletion of a cash hoard, or unreported income. Id. at 315 (citation omitted); see Taglianetti v. United States, 398 F.2d 558, 565 (1st Cir.1968), aff'd, 394 U.S. 316, 89 S.Ct. 1099, 22 L.Ed.2d 302 (1969). 6 21 The government has this burden whether it is prosecuting an individual for tax evasion for one year or successive years. In the latter case, however, the government has the duty only to establish the opening cash on hand balance for the beginning year; the income received less disbursements paid during that year will establish the opening funds for the next year, and so on. United States v. Marshall, 557 F.2d 527, 530 (5th Cir.1977). Furthermore, when an individual is charged with tax evasion in successive years, the government has the added responsibility of showing diminution of resources for each year under investigation in order to prove that the expenditures in each year were not made from other nontaxable sources of income such as gifts, loans, or bequests. Id. 22 Caswell contends that the government failed to meet this burden because it did not present any solid evidence of his cash on hand or diminution of resources for the years under investigation. A close examination of the record in view of the applicable law convinces us otherwise. 23 In Taglianetti, 398 F.2d 558, the government prosecuted the defendant for successive years of tax evasion, basing its case on the cash expenditures method of proof. There, the First Circuit held that the government's evidence at trial was sufficient to allow the jury an intelligent determination of the single relevant issue: whether any expenditures found to be in excess of reported income can be accounted for by assets available at the outset of the prosecution period or non-taxable receipts during the period. Taglianetti, 398 F.2d at 565-66 (citing United States v. Johnson, 319 U.S. 503, 63 S.Ct. 1233, 87 L.Ed. 1546 (1943)). Although the government did not inform the jury of the dollar value of the defendant's assets comprising his opening net worth, the government did present evidence of his opening cash on hand and assets acquired or disposed of during the years in question. Id. at 565. 24 Similarly, the government here, while not presenting formal net worth statements, did inform the jury of the currency available to Caswell at the beginning of each year. 7 Through the testimony of IRS Agent Fox, the government also informed the jury of Caswell's non-liquid assets, such as automobiles, which were either bought or sold during the years in question. Finally, Fox testified that the government's extensive investigation of bank records, prior years' tax returns, and the like revealed no other possible nontaxable sources of income, other than a cash gift that it included in Caswell's opening cash balance, to explain Caswell's large cash expenditures during the period under investigation. We believe that this evidence, strikingly similar to the type found sufficient in Taglianetti, was sufficient to prove Caswell's net worth and cash on hand and to allow the jury to infer that there were no other possible sources of income to explain Caswell's expenditures. 25 Further, although Caswell asserts that this evidence was insufficient, he did not introduce any evidence to rebut the government's findings in this area. 8 It is well-settled that once the government has introduced evidence from which the jury could conclude with reasonable certainty that no [nontaxable] assets existed, the defendant remains silent at his own peril. Bianco, 534 F.2d at 506 (citing, among other cases, Holland v. United States, 348 U.S. 121, 138-39, 75 S.Ct. 127, 136-37, 99 L.Ed. 150 (1954)). 26
27 Caswell further contends that the government failed to establish that he was the only likely source of cash for his relatives' expenditures, and thus, that the government's attribution to him of those expenditures in computing his tax deficiency must be deemed error as a matter of law. In a case like this, where the government has not alleged nor proven the existence of a conspiratorial or agency relationship, Caswell maintains that the only way he can be held liable for his relatives' expenditures is if the government establishes the net worth and cash on hand balance for each relative. He asserts that this is the only way the government can prove that the relatives had no other possible nontaxable sources of income for their expenditures other than himself. 28 Before analyzing this contention, it is essential to a full understanding of this case to point out the basic assumption the government impliedly relied upon in attributing to Caswell the large cash expenditures of his relatives--the basic principle of income tax law that income is taxed to the person who earns it, regardless of attempts to divert the income elsewhere. Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731 (1930). Because its investigation revealed that Caswell's relatives' expenditures far exceeded their reported incomes and further revealed that none of them had any possible nontaxable sources of income to explain their expenditures, the government theorized that the unreported income was derived from Caswell's gambling activities, and thus, under the principle just enunciated, he was the one responsible for the taxes due and owing. Moreover, because it was Caswell's income that was purportedly being diverted, the government obviously could not have proceeded against each or any of the relatives for tax evasion. Thus, the government indicted only Caswell for willfully evading taxes in violation of 26 U.S.C. Sec. 7201. 29 With this in mind, it becomes apparent that Caswell's contention that the government must show the net worth of each relative is actually an assault on the sufficiency of the government's evidence in this case. This conclusion finds support in many other tax evasion cases where courts have held a defendant liable for the expenditures of others, despite the absence of a conspiracy charge. E.g., United States v. Tempesta, 587 F.2d 931, 933 (8th Cir.1978) (father's expenditure attributed to defendant-son), cert. denied, 441 U.S. 910, 99 S.Ct. 2005, 60 L.Ed.2d 380 (1979); United States v. Giacalone, 574 F.2d 328, 333 (6th Cir.) (wife's expenditures treated as made with defendant-husband's money), cert. denied, 439 U.S. 834, 99 S.Ct. 114, 58 L.Ed.2d 129 (1978); Marshall, 557 F.2d at 531 (capital contributions made by partner to partnership attributed to defendant-partner); Taglianetti, 398 F.2d at 567 (brother-in-law and wife's expenditures may be attributed to defendant); see Citron, 783 F.2d at 318 (jury entitled to conclude that stock in parent's account and income derived therefrom belonged to defendant-son); United States v. Pack, 773 F.2d 261, 264 (10th Cir.1985) (defendant attempted to conceal income by placing ownership titles of purchases in names of others). These cases indicate that the real question is whether the government introduced sufficient evidence to allow the jury to infer that the other individual's expenditures were made with the defendant's income. See, e.g., Tempesta, 587 F.2d at 933. 9 Thus, the specific question becomes: what amount of evidence is sufficient? 30 Our examination of the relevant cases convinces us that the government is not required to establish the other individual's net worth or cash on hand as if that person was under investigation. Rather, the government can meet its burden of proof if it conducts a reasonable investigation into the finances of those individuals and introduces evidence to negate the possibility that the income came from a source other than the defendant. See id.; see also United States v. Grasso, 629 F.2d 805, 807 (2d Cir.1980) (per curiam) (under net worth theory, government must separate spouses' finances to justify inference that wife's expenditures made with husband's funds). To meet this burden, we believe the government is obligated to show that it has investigated all leads provided by the defendant into other possible sources of nontaxable income such as gifts, inheritances, or cash hoards. See Bianco, 534 F.2d at 506. After a careful review of the evidence presented in this case, we believe that the government met this burden. 31 The IRS agents, as a part of their investigation of the Caswell family finances, subpoenaed and examined numerous cashier checks, statements, and other documents from banks, savings and loan institutions, and commercial lending institutions, in addition to examining court records. This investigation revealed that Caswell's relatives made several large cash expenditures during the years under investigation. At trial, the government introduced this evidence along with the tax returns of these relatives to show that none of them had the reported incomes to account for the expenditures. In addition, the government's investigation turned up no inheritances, gifts, cash hoards, or other sources of nontaxable income to explain the expenditures. We believe that this evidence, along with that of Caswell's gambling income, was sufficient to allow the jury to conclude that Caswell was the only likely source of his relatives' large cash expenditures during 1979, 1980, 1981, and 1982, and that Caswell gave them these funds or opened accounts in their names in order to conceal his illegally-unreported income. 32 Moreover, although there was some evidence of a $40,000 cash hoard found by Caswell's grandfather in 1984 after his wife died, and a $30,000 death bed gift given to Caswell's first wife by his mother in 1979 while she was in the hospital just before her death, the jury was fully justified in disregarding these alleged funds as other possible sources of income. First, the government's extensive investigation and discussions with the Caswell family did not uncover these sources. In fact, they were apparently made known to the government only shortly before trial commenced. Cf. Bianco, 534 F.2d at 506 (post hoc suggestions of other possible nontaxable sources of income do not render government's search insufficient). Second, the alleged cash hoard was found in 1984. This by itself does not explain the cash expenditures made in 1979, 1980, 1981, and 1982, and indeed, there was no evidence showing that the hoard existed during this time. Under these circumstances, and in light of the fact that the persons testifying to the funds were Caswell's own relatives, we hold that the jury was under no duty to accord face value to this self-serving, undocumented testimony. United States v. Goldstein, 685 F.2d 179, 182 (7th Cir.1982). 33