31.00 NET WORTH

Updated June 2001

31.01 GENERALLY

31.02 DESCRIPTION OF NET WORTH METHOD

31.03 USE OF NET WORTH METHOD

31.03[1] Inadequate Books and Records

31.03[2] Adequate Books and Records

31.03[3] Use With Other Methods

31.04 PROOF OF NET WORTH -- GENERALLY

31.05 OPENING NET WORTH

31.05[1] Proof -- "Reasonable Certainty"

31.05[2] Thorough Investigation a Necessity

31.05[3] Evidence Establishing Opening Net Worth

31.05[4] Opening Net Worth Not Established

31.06 CASH ON HAND

31.06[1] Definition -- Need to Establish

31.06[2] Jury Question -- Burden of Proof

31.06[3] Amount of Cash on Hand

31.07 EVIDENCE OF CASH ON HAND

31.07[1] Evidence of Financial Deprivation

31.07[2] Admissions of Defendant

   31.07[2][a] Pre-Offense Admissions

   31.07[2][b] Post-Offense Admissions

31.07[3] Tax Returns As Admissions

31.07[4] Statements Given to Financial Institutions

31.07[5] Defendant's Books and Records

31.07[6] Statements of Accountants and Attorneys

31.07[7] Accountant's Workpapers

31.07[8] Source and Application of Funds Analysis

31.08 NET WORTH ASSETS

31.08[1] Reflected at Cost -- Generally

31.08[2] Across the Board Assets

31.08[3] Bank Accounts and Nominee Accounts

31.08[4] Assets and Liabilities of Husband and Wife or Children

31.08[5] Real Property

31.08[6] Partnership Interest

31.08[7] Errors in Net Worth Computation

31.09 LIABILITIES

31.10 NONDEDUCTIBLE EXPENDITURES

31.10[1] Added to Net Worth Increase

31.10[2] Burden on Government

31.10[3] Nondeductible Expenditures -- Examples

31.11 REDUCTIONS IN NET WORTH

31.12 ATTRIBUTING NET WORTH INCREASES TO TAXABLE INCOME

31.12[1] Generally

31.12[3] Illegal Sources of Income

31.12[4] Negating Nontaxable Sources of Income

31.13 REASONABLE LEADS DOCTRINE

31.13[1] Duty to Investigate Reasonable Leads

31.13[2] Leads Must Be Reasonable and Timely

31.14 NET WORTH SCHEDULES

31.15 JURY INSTRUCTIONS

31.16 SAMPLE NET WORTH SCHEDULE

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                        31.01  GENERALLY

      The net worth method of proof is a long-established indirect method of 

proof regularly used in establishing taxable income in criminal tax cases.  

This method of proof is useful in reconstructing taxable income when the 

government is unable to establish income through direct evidence.  

See, e.g., United States v. Johnson, 319 U.S. 503, 517 

(1943), involving gambling transactions where all records had been 

destroyed. The net worth method produces an approximation.  Holland v. 

United States, 348 U.S. 121, 129 (1954); United States v. 

Giacalone, 574 F.2d 328, 332 (6th Cir. 1978).  See also 

United States v. Gomez- Soto, 723 F.2d 649, 655 (9th Cir. 1983); 

United States v. Schafer, 580 F.2d 774, 777 (5th Cir. 1978).   This 

method operates on the concept that if a taxpayer has more wealth at the end 

of a given year than at the beginning of that year, and the increase does 

not result from nontaxable sources such as gifts, loans, and inheritances, 

then the increase is a measure of taxable income for that year.  Because 

nondeductible expenditures are added to any net worth increase, the method 

is sometimes referred to as the net worth and expenditures method.

      It is important when constructing a net worth computation to include 

only items or transactions which reflect tax consequences.  For this reason, 

nontaxable items received during a prosecution year must be eliminated from 

the computation of additional taxable income under the net worth method. 

      A net worth computation  reveals not only that the defendant had 

income but how that income was spent.  In essence, the computation depicts 

the financial life of a taxpayer, both prior to and during the prosecution 

period. Holland, 348 U.S. at 132; United States v. 

Mastropieri, 685 F.2d 776, 778 (2d Cir.1982).

       Although endorsing the net worth method, the Supreme Court has 

cautioned that "it is so fraught with danger for the innocent that the 

courts must closely scrutinize its use."  Holland, 348 U.S. at 125.  

Despite the possible pitfalls inherent in the method, the Supreme Court has 

approved its use a number of times.  See, e.g., Massei v. 

United States, 355 U.S. 595 (1958); United States v. Calderon, 

348 U.S. 160 (1954); Smith v. United States, 348 U.S. 147 (1954); 

Friedberg v. United States, 348 U.S. 142 (1954); Holland, 348 

U.S. 121; Johnson, 319 U.S. 503. 

      For an example of a net worth computation, see Section 31.16, 

infra.

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              31.02 DESCRIPTION OF NET WORTH METHOD

      The First Circuit described the net worth method as follows:

      The Government makes out a prima facie case under the net worth method 

      of proof if it establishes the defendant's opening net worth (computed 

      as assets at cost basis less liabilities) with reasonable certainty 

      and then shows increases in his net worth for each year in question 

      which, added to his nondeductible expenditures and excluding his known 

      nontaxable receipts for the year, exceed his reported taxable income 

      by a substantial amount. The jury may infer that the defendant's 

      excess net worth increases represent unreported taxable income if the 

      Government either shows a likely source, or negates all possible 

      nontaxable sources. 

      [T]he jury may further infer willfulness from the fact of 

      underreporting coupled with evidence of conduct by the defendant 

      tending to mislead or conceal.

United States v. Sorrentino, 726 F.2d 876, 879-80 (1st Cir. 1984) 

(citations omitted).  See also Holland v. United 

States, 348 U.S. 121, 125 (1954); United States v. Terrell, 754 

F.2d 1139, 1144 (5th Cir. 1985); United States v. Wirsing, 719 F.2d 

859, 871 (6th Cir. 1983); United States v. Greene, 698 F.2d 1364, 

1370 (9th Cir. 1983); United States v. Goldstein, 685 F.2d 179, 182 

(7th Cir. 1982); United States v. Goichman, 547 F.2d 778, 781 (3d 

Cir. 1976); United States v. O'Connor, 273 F.2d 358, 361 (2d Cir. 

1959).

      The Fifth Circuit summarized the steps necessary to establish income 

when applying the net worth method of proof: 

      The government established its case through the "net worth" approach, 

      a method of circumstantial proof which basically consists of five 

      steps: (1) calculation of net worth at the end of a taxable year, (2) 

      subtraction of net worth at the beginning of the same taxable year, 

      (3) addition of non-deductible expenditures for personal, including 

      living, expenditures, (4) subtraction of receipts from income sources 

      that are non-taxable, and (5) comparison of the resultant figure with 

      the amount of taxable income reported by the taxpayer to determine the 

      amount, if any, of underreporting.

United States v. Schafer, 580 F.2d 774, 775 (5th Cir. 1978).

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                  31.03 USE OF NET WORTH METHOD

31.03[1] Inadequate Books and Records

      The net worth method of proof frequently is used when it would be 

difficult or impossible to establish the defendant's taxable income by 

direct evidence. United States v. Dwoskin, 644 F.2d 418, 423 (5th 

Cir. 1981);  Often, the defendant's books and records are inadequate, false, 

or not available to the government.  See, e.g., United States v. 

Shetty, 130 F.3d 1324 (9th Cir. 1997);  United States v. Notch, 

939 F.2d 895, 897-98 (10th Cir. 1991); United States v. Stone, 531 

F.2d 939, 940  n.1 (8th Cir.1976); United States v. Hom Ming Dong, 

436 F.2d 1237, 1240 (9th Cir. 1971).   Although a defendant's books and 

records can be helpful, they are not essential. "[I]n a typical net worth 

prosecution, the Government, having concluded that the taxpayer's records 

are inadequate as a basis for determining income tax liability," seeks to 

establish taxable income by the net worth method. United States v. 

Schafer, 580 F.2d 774, 775 (5th Cir.1978). See also 

Holland v. United States, 348 U.S. 121, 125 (1954); accord 

United States v. Terrell, 754 F.2d 1139, 1144 (5th Cir. 1985).

      Similarly, the net worth method can be used when the defendant has no 

books and records.  In such a case, "willfulness may be inferred by the jury 

from that fact coupled with proof of an understatement of income."  

Holland, 348 U.S. at 128.  See also Campodonico v. 

United States, 222 F.2d 310, 313 (9th Cir. 1955).

31.03[2] Adequate Books and Records

      Although early cases held that the government could not use the net 

worth method in situations in which the defendant had "adequate" books and 

records, the Supreme Court rejected this view in 1954, stating:

      The net worth technique, as used in this case, is not a method of 

      accounting different from the one employed by defendants.  It is not a 

      method of accounting at all, except insofar as it calls upon taxpayers 

      to account for their unexplained income.  Petitioners' accounting 

      system was appropriate for their business purposes; and admittedly, 

      the Government did not detect any specific false entries therein.  

      Nevertheless, if we believe the Government's evidence, as the jury 

      did, we must conclude that the defendants' books were more consistent 

      than truthful, and that many items of income had disappeared before 

      they had ever reached the recording stage. . . . To protect the 

      revenue from those who do not `render true accounts,' the Government 

      must be free to use all legal evidence available to it in determining 

      whether the story told by the taxpayer's books accurately reflects his 

      financial history.

 Holland v. United States, 348 U.S. 121, 131-32 (1954). Thus, the 

state of the defendant's records has no bearing on whether the net worth 

method of proof may be used.

      In the wake of Holland, the Fifth Circuit rejected a 

defendant's claim that the government's use of the net worth method of proof 

was improper because the government did not make a preliminary showing 

regarding the state of the defendant's records.  McGrew v. United 

States, 222 F.2d 458, 459 (5th Cir. 1955); [FN1] accord United 

States v. Vanderburgh, 473 F.2d 1313, 1314 (9th Cir. 1973) (government 

may use the net worth method of proof even where the defendant contends that 

he maintained an allegedly complete and adequate set of books of account); 

United States v. De Lucia, 262 F.2d 610, 614 (7th Cir. 1958). 

31.03[3]  Use With Other Methods

      The government is not limited to a single method of proof and may use 

the net worth method in conjunction with other methods of proof.  

See, e.g., United States v. Abodeely, 801 F.2d 1020, 

1023 (8th Cir. 1986).  In Abodeely, a tax evasion prosecution in 

which the defendant received unreported income from gambling and 

prostitution, the Eighth Circuit discussed the net worth, cash expenditures, 

and bank deposits methods of proof:

      The government may choose to proceed under any single theory of proof 

      or a combination method, including a combination of circumstantial and 

      direct proofs.

Abodeely, 801 F.2d at 1023.  See also United States 

v. Smith, 890 F.2d 711, 713 (5th Cir.1989) (net worth and specific items 

methods of proof combined in a section 7201 prosecution).

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              31.04 PROOF OF NET WORTH -- GENERALLY

      In using the net worth method, the government must:

      1.    Establish an opening net worth with reasonable certainty, 

            i.e., the defendant's net worth at the beginning of the 

            prosecution year.

      2.    Establish the defendant's net worth at the end of the 

            prosecution year, with any excess over opening net worth 

            representing the net worth increase.

      3.    Establish a likely source of taxable income from which the jury 

            could find the net worth increase sprang; or, in the 

            alternative, negate nontaxable sources of income.

      4.    Negate "reasonable explanations" by the taxpayer inconsistent 

            with guilt.

Holland v. United States, 348 U.S. 121 (1954).  See 

also United States v. Massei, 355 U.S. 595 (1958); United 

States v. Notch, 939 F.2d 895, 898 (10th Cir. 1991); United 

States v. Blandina, 895 F.2d 293, 301 (7th Cir. 1989); United States 

v. Koskerides, 877 F.2d 1129, 1137 (2d Cir. 1989); United States v. 

Scrima, 819 F.2d 996, 999 (11th Cir. 1987); United States v. 

Tracey, 675 F.2d 433, 435 (1st Cir. 1982); United States v. 

Scott, 660 F.2d 1145, 1147 (7th Cir. 1981); United States v. 

Dwoskin, 644 F.2d 418, 420, 422 (5th Cir. 1981); United States v. 

Grasso, 629 F.2d 805, 807 (2d Cir. 1980); United States v. 

Hamilton, 620 F. 2d 712, 714 (9th Cir. 1980); United States v. 

Goichman, 547 F.2d 778, 781 (3d Cir. 1976); United States v. 

Bethea, 537 F.2d 1187, 1188-89 (4th Cir. 1976).

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                     31.05 OPENING NET WORTH

31.05[1] Proof -- "Reasonable Certainty"

      Net worth increases are determined by establishing a taxpayer's net 

worth (assets minus liabilities) at the beginning of a given year and then 

comparing this beginning net worth with the taxpayer's net worth at the end 

of the year. December 31 of the year preceding the first prosecution year 

(the opening net worth) is the point from which net worth increases are 

measured.  For example, if the first prosecution year, or the year to be 

measured, is 1993, then the defendant's net worth as of December 31, 1992, 

would be the opening net worth from which to determine whether the 

defendant's net worth increased or decreased in 1993.  The defendant's 1993 

ending net worth would in turn become the opening net worth for 1994, and so 

on.

      Establishing an opening net worth can be equated to the process 

followed when a person goes on a diet.  One of the first things that a 

doctor does is weigh the patient to have a starting point from which to 

determine whether the patient has gained or lost weight.  The patient is 

thereafter weighed at intervals, and comparisons are made with the weight at 

the previous weighing to determine whether or not the diet is working.  The 

same process basically is followed in a net worth computation, except that 

the "weighing" is of the defendant's net worth or wealth on an annual basis.

      The Supreme Court described the need to establish an opening net 

worth, and the standard of proof required to do so: 

      Establishing a Definite Opening Net Worth.  We agree with petitioners 

      that an essential condition in cases of this type is the 

      establishment, with reasonable certainty, of an opening net worth, to 

      serve as a starting point from which to calculate future increases in 

      the taxpayer's assets. The importance of accuracy in this figure is 

      immediately apparent, as the correctness of the result depends 

      entirely upon the inclusion in this sum of all assets on hand at the 

      outset.

Holland v. United States, 348 U.S. 121, 132 (1954).

      While every effort should be made to obtain all of the assets and 

liabilities of the defendant at the starting point, the government does not 

have to establish the starting point, or opening net worth, "to a 

mathematical certainty and each case presents its own peculiar 

difficulties."  Smith v. United States, 236 F.2d 260, 266-67 (8th 

Cir. 1956); United States v. Gardner, 611 F.2d 770, 775 (9th Cir. 

1980).  It is sufficient if the government establishes the defendant's 

opening net worth with reasonable certainty -- more than this is not 

required.  Holland, 348 U.S. at 132;  United States v. 

Terrell, 754 F.2d 1139, 1145 (5th Cir. 1985); United States v. 

Sorrentino, 726 F.2d 876, 879 (1st Cir. 1984); United States v. 

Greene, 698 F.2d 1364, 1372 (9th Cir. 1983); United States v. 

Goldstein, 685 F.2d 179, 181 (7th Cir. 1982); United States v. 

Breger, 616 F.2d 634, 635 (2d Cir. 1980); United States v. 

Carriger, 592 F.2d 312, 313 (6th Cir. 1979); United States v. 

Honea, 556 F.2d 906, 908 (8th Cir. 1977); United States v. 

Goichman, 547 F.2d 778, 781 (3d Cir. 1976);.

      Once the government has established the defendant's opening net worth 

with reasonable certainty, the defendant remains silent "at his peril."  

United States v. Stone, 531 F.2d 939, 942 (8th Cir.1976); see 

also Holland, 348 U.S. at 138-39.  For more information 

concerning the defendant's burden to come forward with reasonable leads, 

see Section 31.13, infra, regarding the "reasonable leads 

doctrine."

      Finally, the government is not required to prove every item in a net 

worth statement submitted in a bill of particulars.  Items included in the 

starting point prior to trial may vary somewhat from the evidence admitted 

at trial.  The Seventh Circuit stated that: 

      This net worth statement, which was introduced into evidence as 

      Government's Exhibit 8, was, in essence, a bill of particulars.  There 

      is no merit in defendant's assertion that these items must be included 

      in the starting point.  There were several items contained in this 

      statement, some of which favored defendant and some Government, which 

      were not substantiated during the trial by admissible evidence.  

      Government's starting point must be based upon items which are 

      supported by evidence introduced during trial.  It is certainly not 

      unusual in cases of this type for the starting point as proved during 

      the trial to vary from the bill of particulars or indictment which are 

      prepared prior to trial.

United States v. Mackey, 345 F.2d 499, 505 (7th Cir. 1965).

31.05[2] Thorough Investigation a Necessity

      An extremely thorough investigation is crucial in proving that the 

government established the defendant's opening net worth with reasonable 

certainty.  As the Ninth Circuit noted, when the government chooses to 

proceed against a defendant using the net worth method of proof, "the 

Government assumes a special responsibility of thoroughness and 

particularity in its investigation and presentation."  United States v. 

Hall, 650 F.2d 994, 999 (9th Cir. 1981).  The burden on the government 

has been described as follows:

      The Government must affirmatively prove an initial amount available to 

      the taxpayer, with evidence that excludes the possibility that the 

      defendant relied on previously accumulated  assets rather than 

      unreported taxable income, United States v.  Marshall, 557 F.2d 

      527, 530 (5th Cir. 1977), without refuting all possible speculation as 

      to sources of funds, however.

McFee v. United States, 206 F.2d 872, 874 (9th Cir. 1953), vacated 

and remanded, 348 U.S. 905 (1955), aff'd, 221 F.2d 807 (9th 

Cir.1955).

      In United States v. Smith, 890 F.2d 711, 713 (5th Cir. 1989), 

the Fifth Circuit stated that "[w]e join the Seventh Circuit in observing 

that sloppy or mediocre financial and accounting evaluation upon which a 

conviction is obtained can be the genesis for reversal."   See 

also United States v. Terrell, 754 F.2d 1139, 1145 (5th Cir. 

1985) (the government must conduct a meticulous investigation, and the 

investigation techniques and figures are subject to close scrutiny); 

United States v. Breger, 616 F.2d 634, 635-36 (2d Cir.1980).

      A good example of a thorough and detailed investigation is found in 

United States v. Terrell, 754 F.2d 1139 (5th Cir.1985), in which the 

defendant was convicted of evasion for the years 1976 through 1979, and the 

government began its investigation of Terrell's funds with the year 1967.  

Noting that "we can only be surprised by appellant's attack on the 

thoroughness of the Government's investigation", the court described the 

investigation as follows:

      The investigation consumed three and one-half  years.  Approximately 

      20 agents canvassed public records to determine the extent of 

      appellant's holdings.  Thirty banks were contacted, and 20 banks 

      produced documents or witnesses.  Nearly 300 potential witnesses were 

      interviewed, many of them several times.  IRS agents identified in 

      excess of 70 assets purchased and sold by Terrell, and questioned 

      third parties involved in these transactions.  Additionally, every 

      expenditure made by Terrell was traced including all cashier's checks 

      traced back to their sources to determine how they were purchased.

Terrell, 754 F.2d at 1147-48.  For another example of the detailed 

steps required to conduct a net worth investigation, see United 

States v. Sorrentino, 726 F.2d 876, 880 (1st Cir. 1984).

      When using the net worth method, the scope of the investigation and 

the evidence developed must be carefully examined with the goal of 

ascertaining whether the evidence establishes to a reasonable certainty all 

of the defendant's assets and liabilities.  If  the investigation failed to 

establish an opening net worth with reasonable certainty,  the investigation 

must be continued until sufficient additional evidence has been developed.

31.05[3] Evidence Establishing Opening Net Worth

      A legally sufficient opening net worth computation requires an 

extensive and thorough investigation by the Internal Revenue Service agent.  

The opening net worth must include all of the defendant's assets that are 

reasonably discoverable, including assets derived from nontaxable sources of 

income, such as gifts, loans, and inheritances, as well as assets derived 

from taxable income. It would distort taxable income for the year in which 

taxable income is being computed if assets derived from nontaxable sources 

were omitted from the starting point.

      For example, assume that the prosecution year is 1995 and in 1994 the 

taxpayer inherited or borrowed $100,000, which is not accounted for in the 

opening net worth.  If the defendant purchases a house with the $100,000 in 

1995, which is reflected on the defendant's 1995 net worth as an asset, the 

net worth computation would  incorrectly attribute a net worth increase of 

$100,000 to the defendant in 1995.  The effect of this error would be to 

overstate the defendant's income for 1995 because  he had the $100,000 at 

the beginning of the year.   It is important that gifts, inheritances, and 

other nontaxable sources of income acquired during the year for which 

taxable income is being computed are subtracted from the calculated net 

worth increase in order to correctly compute the taxable income under the 

net worth method.

      In United States v. Breger, 616 F.2d 634 (2d Cir.1980), the 

defendant was convicted of evasion and filing false income tax returns for 

the years 1972 through 1974.  In upholding the starting point established by 

the government at trial, the court commented:

      We think the Government met its burden here.  It used information 

      gleaned from a 1969 mortgage application, traced a real estate and 

      cash inheritance from appellant's mother in 1968, and investigated 

      bond statements and checking accounts in order to ascertain 

      appellant's access to funds as of January 1, 1972.  We note that 

      appellant adduced no specific evidence, such as a cash hoard, to 

      suggest that the starting point was inaccurate or misleading.

Breger, 616 F.2d at 634.

      Prior income tax returns of a defendant are relevant and can play a 

significant role in developing a defendant's opening net worth.  Thus, in 

United States v. Mackey, 345 F.2d 499, 504 (7th Cir. 1965), the 

starting point of the net worth computation was December 31, 1955, and the 

court upheld the use by the government of "the income tax returns of 

defendant and his wife from 1929 through December 31, 1955, as a guide in 

determining defendant's net worth at the starting point."  Additionally,  

net worth statements submitted by the defendant either to the government or 

to financial institutions can be particularly helpful in establishing an 

opening net worth.  See, e.g., Smith v. United States, 

348 U.S. 147, 149 (1954); United States v. Honea, 556 F.2d 906, 908 

(8th Cir. 1977); United States v. Balistrieri, 403 F.2d 472, 479 (7th 

Cir. 1968), vacated on other grounds, 395 U.S. 710 (1969).

      In United States v. Mastropieri, 685 F.2d 776, 785 (2d 

Cir.1982), the court noted that less stringent standards with respect both 

to establishing opening net worth and to negating non-taxable income sources 

are justified in a case where the defendants were shown to have gone to 

great lengths to conceal their unreported increases in wealth.  While the 

court observed that the investigation in that case should not be regarded as 

a model, the case does furnish an example of a number of the steps that must 

be taken to establish an opening net worth.  Mastropieri, 685 F.2d at 

779, 783. [FN2]

      For additional cases holding that the government's evidence was 

sufficient to establish the defendant's opening net worth with reasonable 

certainty, see United States v. Greene, 698 F.2d 1364, 1372 

(9th Cir. 1983) (jury could draw adverse inferences from the late stage at 

which defense evidence was disclosed in spite of a motion for reciprocal 

discovery); United States v. Goldstein, 685 F.2d 179, 181 (7th Cir. 

1982) (evasion charged for three years, conviction on only one year, 

sufficient if opening net worth established for year of conviction); 

United States v. Dwoskin, 644 F.2d 418, 420 (5th Cir. 1981) (opening 

net worth based on a financial statement signed by the defendant and 

submitted to a bank); United States v. Schafer, 580 F.2d 774, 

778 (5th Cir.1978); United States v. Giacalone, 574 F.2d 328, 331 

(6th Cir. 1978); United States v. Honea, 556 F.2d 906, 908 (8th Cir. 

1977); United States v. Mancuso, 378 F.2d 612 (4th Cir. 1967), 

amended, 387 F.2d 376 (4th Cir. 1967); United States v. 

Goichman, 407 F.Supp. 980, 986 (E.D. Pa. 1976), aff'd, 547 F.2d 

778 (3d Cir. 1976).

31.05[4] Opening Net Worth Not Established

      In a relatively small number of cases, the courts have found the 

government's proof of the defendant's opening net worth insufficient to 

support a conviction.  For the most part, these are earlier cases, but they 

furnish examples of pitfalls that must be avoided if the opening net worth 

is to be established with reasonable certainty.

      For an example of an erroneous opening net worth computation,  

see United States v. Achilli, 234 F.2d 797, 804 (7th Cir. 

1956), aff'd on other grounds, 353 U.S. 373 (1957).  In 

Achilli, one count of a three-count conviction was reversed because 

the value of a residence sold by the defendant in the first prosecution year 

(1946) was erroneously omitted from the opening net worth computation and 

the error accounted for almost 80 percent of the deficit shown by the 

government's computation.  The error seems to have resulted from an 

oversight by the government, because the sale of the residence omitted from 

the defendant's opening net worth was reported in the capital gains schedule 

of the defendant's 1946 return.  Since the tax return was the only evidence 

with respect to the time when the defendant acquired the property, the 

government conceded that the property should have been included as an asset 

in the computation of the defendant's net worth as of December 31, 1945.  

Achilli, 234 F. 2d at 804.  See also United States 

v. Keller, 523 F.2d 1009, 1011 (9th Cir. 1975) (because the government 

failed to pursue leads (regarding home improvements and furnishings) which 

were reasonably susceptible of being checked, the opening net worth for 1967 

was not reasonably certain and the evidence as to the 1967 count was 

insufficient to go to the jury).

      The importance of the testimony given by the agent who presents the 

government net worth computation and the necessity for testifying fully is 

illustrated in Merritt v. United States, 327 F.2d 820, 821 (5th Cir. 

1964).  The Merritt court reversed a tax evasion conviction because 

the government failed in its burden of identifying which of the defendant's  

assets had not been included in the opening net worth statement. The court 

based its decision on the following testimony of the special agent who drew 

up the net worth schedule:

      Q.    As a matter of fact don't you know that . . . this taxpayer 

            owned assets and had assets that you didn't even take into 

            account in this case?  Don't you know that of your own personal 

            investigation?

      A.    He has some other assets, yes, sir.

      Q.    And this doesn't include all those assets does it?

      A.    No, sir.

            . . . .

      Q.    Are you willing to swear under oath that these  assets 

            represented in your net worth schedule are all and  complete the 

            assets of this taxpayer and all and complete the liabilities of 

            this taxpayer?

      A.    I know there are other assets of the taxpayer.

            . . . .

      A.    My investigation disclosed that the taxpayer would have  other 

            assets.  I know of no other liabilities.

Merritt, 327 F.2d at 821.  The appellate court observed that 

"[n]either counsel asked the Special Agent what these other assets were, and 

his testimony does not reveal what he had in mind."  Merritt, 327 

F.2d at 821.  Thus, the appellate court was unable to "determine whether 

these assets were realty or personalty, or whether they were disposed of 

during the years in question."  Merritt, 327 F.2d at 822.  

      The Merritt case clearly demonstrates the requirement to review 

the net worth computation  in depth with the special agent and to establish 

through testimony that the starting point includes, to a reasonable 

certainty, all of the defendant's assets and liabilities.  On occasion, the 

agent will  omit items from the net worth schedules for good reason.   In 

that event, the agent should questioned on direct examination regarding what 

these items were and why he made the determination to omit those particular 

items.

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                       31.06 CASH ON HAND

31.06[1] Definition -- Need to Establish

      As one court observed, "the most frequent challenge to the 

government's computations in a net worth case is the opening cash balance."  

United States v. Schafer, 580 F.2d 774, 779 (5th Cir. 1978).  A 

defendant's claim of cash on hand is commonly referred to as a cash hoard 

defense.  A typical cash hoard defense asserts that the defendant in earlier 

years received money from such sources as gifts from family members or 

friends, or an inheritance, which he then spent during the prosecution 

period.  The Supreme Court described the cash hoard defense as follows:

      Among the defenses often asserted is the taxpayer's claim that the net 

      worth increase shown by the Government's statement is in reality not 

      an increase at all because of the existence of substantial cash on 

      hand at the starting point.  This favorite defense asserts that the 

      cache is made up of many years' savings which for various reasons were 

      hidden and not expended until the prosecution period.  Obviously, the 

      Government has great difficulty in refuting such a contention.

Holland v. United States, 348 U.S. 121, 127 (1954).

      While it is often difficult to disprove the existence of a cash hoard, 

the government must establish with reasonable certainty the amount of cash 

that the defendant had in his possession at the beginning of the tax period.  

United States v. Wilson, 647 F.2d 534, 536 n.1 (5th Cir. 1981).  The 

necessity for establishing cash on hand "with reasonable certainty" is well 

summarized in United States v. Terrell, 754 F.2d 1139, 1146-47 (5th 

Cir.1985):

      The question of whether a defendant has a substantial amount of