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United States v. Caserta.

decided: November 21, 1952.

UNITED STATES
v.
CASERTA.



Author: Goodrich

Before MARIS, GOODRICH and STALEY, Circuit Judges.

GOODRICH, Circuit Judge.

This is an appeal from a conviction for income tax evasion under 26 U.S.C. ยง 145 (b).*fn1

I.

The prosecution was confronted here with a situation not unusual in income tax prosecutions.If the taxpayer had done what he was legally required to do, keep a record of his income and expenditures, the case would be comparatively easy. The question then would be the accuracy of the records kept. The taxpayer here involved kept no records. How is his violation of income tax obligation to be proved?*fn2 In the effort to ascertain a non-bookkeeping taxpayer's liability, many cases have discussed the requirements which must be met on the so-called net worth theory.*fn3 This theory is in effect that if a taxpayer's net worth has increased during a given period in an amount greater than his reported income for that period, there must be a discrepancy in his income tax return and payment.

An outgrowth of this net worth method is the "expenditure" test involved in this case. The theory of it is simple, though its application may become difficult. It starts with an appraisal of the taxpayer's net worth situation at the beginning of a period. He may have much or he may have nothing. If, during that period, his expenditures have exceeded the amount he has returned as income and his net worth at the end of the period is the same as it was at the beginning (or any difference accounted for), then it may be concluded that his income tax return shows less income than he has in fact received. Of course it is necessary, so far as possible, to negative nontaxable receipts by the taxpayer during the period in question. The cases show, however, a rather surprising rule that when the discrepancy between increased net worth and reported income is shown, the burden of explanation shifts to the taxpayer, at the same time repeating the usual criminal law rule that the burden throughout a criminal case is upon the prosecution.*fn4 We do not, however, get into this particular ramification in the case under discussion, for the prosecutor offered proof negativing receipts for nontaxable sources such as gifts, inheritance and so on.*fn5

The expenditure method of proof of income received judicial approval in United States v. Johnson, 1943, 319 U.S. 503, 517, 63 S. Ct. 1233, 87 L. Ed. 1546. We think that with this case as a foundation some of the vacillation apparent in Courts of Appeals opinions*fn6 with regard to proof in tax evasion cases should now be disregarded.

What constitutes expenditure? The natural answer is: What a man spends, of course. How does one show expenditures? If a man has a bank account and puts everything he receives into the account, his expenditures are pretty well shown by what he spends it for in checking it out. But suppose he withdraws from his bank account a sum in cash, a check made payable to himself or an impersonal payee. Does that show expenditure?It may well do so if we proceed on the ordinary assumption that people do not draw money from bank accounts unless they are going to spend the money for something. On the other hand, suppose a man writes a check to "cash" for $500. and the same day buys an overcoat for $100. and a suit of clothes for the same amount. Now what do we charge him with, an expenditure of $700.? If cash withdrawals from a bank account are to be treated as cash receipts to a person, surely it is incorrect to charge individual items for which he has paid cash to his list of expenditures unless it is shown that the cash bank withdrawals had nothing to do with the individual items. Otherwise, a man doubles his taxable income when he writes a check for "cash" and spends the money he gets from his bank. This would be a very happy way of increasing one's income if it could be done.

All of this seems so obvious that we have had difficulty in believing that the government's case proceeded on a different theory here. But the record does show that this defendant was charged, in the evidence tending to show what his income was, with both cash withdrawals and cash purchases.It was not shown that the cash withdrawals did not go for cash purchases.*fn7 Furthermore, it is denied, even on appeal, that this was an incorrect method.

The trial judge told the jury that they must not duplicate items. We do not think this is enough in the case at bar in view of the testimony just quoted.

What has just been said demonstrates such fundamental error that defendant is entitled to a new trial.

II.

Defendant in the court below and again here presses the point that the evidence is not sufficient to sustain a conviction. With this we disagree. A verdict of guilty was sustainable if the jury believed the ...


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