Opinion ID: 391122
Heading Depth: 1
Heading Rank: 2

Heading: Absence of Jury Instructions on Methods of Proof

Text: 6 The Government found the appellants' records inadequate to accurately determine income and tax liability. At trial, the prosecution elicited testimony from its experts establishing appellants' income by both the net worth 3 and the bank deposits 4 methods of proof. At the close of trial, no instructions concerning these methods of proof were requested, and none were given.
7 The use of the net worth method of proving unreported income has been approved by the Supreme Court and often encountered in this circuit. Holland v. United States, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150 (1954); e. g., United States v. Hamilton, 620 F.2d 712 (9th Cir. 1980); and United States v. Gardner, 611 F.2d 770 (9th Cir. 1980). When this method is invoked, however, it triggers special protections for the accused and particularly careful scrutiny by the courts. The Supreme Court has enumerated a number of the hazards to the innocent imposed by this circumstantial method of proof. Holland, 348 U.S. at 127-29, 75 S.Ct. at 131-32. 5 After reviewing the potential shortcomings, the Court concluded: 8 While we cannot say that these pitfalls inherent in the net worth method foreclose its use, they do require the exercise of great care and restraint. The complexity of the problem is such that it cannot be met merely by the application of general rules. (Citation omitted.) Trial courts should approach these cases in the full realization that the taxpayer may be ensnared in a system which, though difficult for the prosecution to utilize, is equally hard for the defendant to refute Appellate courts should review the cases, 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. Id. at 129, 75 S.Ct. at 132. 9 The dangers are evaluated from the perspective of the trier of fact, usually a jury. Of particular concern is the possibility that the trier of fact will not give the defendant the full benefit of doubt he deserves. The Supreme Court has noted that (t)here is great danger that the jury may assume that once the Government has established the figures in its net worth computations, the crime of tax evasion automatically follows. Id. at 127-28, 75 S.Ct. at 131. The crime, of course, does not automatically follow, and the danger that such a conclusion will be drawn lies in the complexity of the net worth method itself. 10 The net worth method is not simple to understand. Even when its operation is described by experts as part of the Government's case, the jury, without careful instruction, cannot be expected to perceive the basic underlying assumptions, nor to understand the nature of the inferences they are implicitly being asked to make. 11 The net worth method rests on the primary assumption that most increases in net worth are from taxable sources, and that when this is not true, the taxpayer is able to explain their origin. While this may often be true, it may not be transformed from permissible inference into presumption. The jury must pointedly be made aware of the nature of this underlying assumption and their freedom to draw or not draw the inference, as the facts may in their eyes command. The Government may not be relieved of its burden to prove all elements of the crime beyond a reasonable doubt. Id. at 126, 75 S.Ct. at 130. To obtain a proper verdict of conviction, the prosecution must establish evidence sufficient to convince the jury beyond a reasonable doubt that the inference of a taxable source should be made. 12 Recognizing the inherent danger to the defendant's fair trial due to the complex underpinnings of the net worth method, the Supreme Court in Holland established the requirement of detailed, comprehensive jury instructions on the net worth method of proof: 13 Charges should be especially clear, including, in addition to the formal instructions, a summary of the nature of the net worth method, the assumptions on which it rests, and the inferences available both for and against the accused. Id. at 129, 75 S.Ct. at 132. 14 We interpret and adopt this as a clear requirement for explanatory jury instructions in net worth cases. Accord, United States v. Tolbert, 367 F.2d 778 (7th Cir. 1966); United States v. O'Connor, 237 F.2d 466, 472-73 (2d Cir. 1956). 15 The Government argues that through its experts, it presented to the jury a clear and concise explanation of the net worth method, and that this satisfies the requirement of Holland. It contends the issue was one of credibility, and the jury understood that if it believed Hall and Uranga's explanations it would acquit, but if not, it should convict. We do not believe this is sufficient to insure the integrity of the trial process. Where such assumptions and inferences are involved, it is difficult to conceive of adversary testimony adequately substituting for impartial judicial instructions given at the time in the trial when the jury is attentive to its mandate. Further, there is no indication that the prosecution's evidence had any comment on the underlying assumptions and existing inferences of the method. This does not comport with the Supreme Court's mandate in Holland, and we reject the Government's contention.
16 No objections to the instructions given were made by appellants at trial, nor did they themselves request any explanatory instructions. We, therefore, must review appellants' challenge to the instructions under the plain error standard. United States v. Krasn, 614 F.2d 1229 (9th Cir. 1980). Fed.R.Crim.P. 30, 52(b). Under this standard, a criminal conviction will be reversed when there has been highly prejudicial error affecting substantial rights. United States v. Giese, 597 F.2d 1170, 1199 (9th Cir.), cert. denied, 444 U.S. 979, 100 S.Ct. 480, 62 L.Ed.2d 405 (1979). This occurs only in exceptional circumstances. Id. It must be a situation where reversal is necessary to preserve the integrity and reputation of the judicial process, or to prevent a miscarriage of justice. Krasn, 614 F.2d at 1236. Because the omission of these explanatory instructions goes to the very basis of the jury's ability to evaluate the evidence, we conclude that a finding of plain error is warranted. Accord, Tolbert, 367 F.2d at 781. See O'Connor, 237 F.2d at 471-72. 17 Finding that plain error was present does not end the inquiry. We must look to the effect of the error. United States v. Lopez, 575 F.2d 681, 685 (9th Cir. 1978). Did it affect the outcome of the trial? The courts have developed different standards of review depending upon whether the error was perceived to be of constitutional or non-constitutional dimension. We need not here delve into the niceties of the distinctions between constitutional and non-constitutional error as we find that the failure to instruct on the assumptions and inferences of the net worth method so tainted the jury's deliberative tools that we simply cannot say that the verdict would probably have been the same had the error not been made. 6 As explained above, an understanding of this method of proof is essential to the jury's proper evaluation of the evidence, and goes to the heart of the deliberative process. Such a structural infirmity cannot be passed over lightly, and a conviction may not be allowed to stand when tarnished by these doubts about such a fundamental aspect of trial. See Tolbert, 367 F.2d at 781. 18 Accordingly, we conclude that the omission of explanatory instructions, as required by Holland, was plain error. We cannot say that it was more-probably-than-not harmless. We must, therefore, reverse the convictions of both defendants. 7
19 The Government argues that it relied on the bank deposits method of proof to show appellants' unreported income, using the net worth method only for corroboration. Noting that Holland concerned only the net worth method, the Government contends that reversal is thus not called for nor necessary in this case. We do not agree. 20 Although the net worth method may have been used for corroboration, the results of the net worth analysis were thoroughly presented to the jury by the Government's expert. We cannot speculate on the role which the Government's net worth analysis played in the minds of the jury, Beck v. United States, 298 F.2d 622, 631 (9th Cir. 1962), but it may have been substantial. If the jury had disbelieved the Government's net worth result, it may very well have cast doubt on the bank deposits result as well, inasmuch as both analyses yielded the same figures. But we need not rest our decision on our estimation of the role played by the net worth method, for we believe that explanatory instructions are similarly required when the bank deposits method of proof is used. 21 Like the net worth method of proof, the bank deposits method seeks to show by circumstantial means that the defendant had income which was not reported. 8 And like the net worth method, it asks the jury to infer that this excess income was from a taxable source. Although the mechanics of arriving at an income figure are different, both methods involve similar underlying assumptions and afford much the same inferences for and against the accused. Moreover, these assumptions and inferences are not self-evident, and the technicalities of the bank deposits method of proof are just as subtle as those of the net worth method. For the reasons detailed in Section II-A above, we conclude that comprehensive explanatory instructions must be given when the bank deposits method of proof is used, just as is required by Holland for the net worth method. Accord, Greenberg v. United States, 295 F.2d 903, 907 (1st Cir. 1961).