Opinion ID: 748851
Heading Depth: 2
Heading Rank: 2

Heading: The Net Worth Method in General

Text: 57 Use of the net worth method is proper where a taxpayer's records do not accurately reflect income. United States v. Stonehill, 702 F.2d 1288, 1296 (9th Cir.1983). 58 The net worth method seeks to derive taxable income in any given year by determining from all available evidence of assets and liabilities the increase (or decrease) in [a] taxpayer's net worth over a twelve-month period, adding to it his nondeductible expenses for that year, and subtracting from the sum any amount attributable to nontaxable sources. For example, if a taxpayer begins the year with a net worth (cost of property less liabilities) of $40,000, ends it with $50,000, and has spent $7,500 during the year on living expenses, his receipts must have been at least $17,500. And if there is no likely nontaxable sources of funds, such as gifts or inheritances, this set of facts constitutes strong circumstantial evidence that the receipts were taxable income. 59 United States v. Colacurcio, 514 F.2d 1, 2 n. 2 (9th Cir.1975) (quoting McGarry v. United States, 388 F.2d 862, 864 (1st Cir.1967)). 60 The net worth method was approved by the Supreme Court in Holland v. United States, 348 U.S. 121, 130-39, 75 S.Ct. 127, 132-37, 99 L.Ed. 150 (1954), and has been recognized in this circuit on numerous occasions. United States v. Greene, 698 F.2d 1364, 1370 (9th Cir.1983). The net worth method of establishing income may be used if the Government (1) accurately establishes the taxpayer's opening net worth, (2) identifies a likely source of income from which it may be inferred that the taxpayer's increase in net worth arose, and (3) conducts a reasonable investigation of any leads that suggest that the taxpayer properly reported his income. Id. (citing Holland, 348 U.S. at 132-38, 75 S.Ct. at 133-34).