Silberman, Buckley and Williams, Circuit Judges.
UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT
Appeals from the United States District Court for the District of Columbia, Criminal Nos. 83-00321-01, 83-00321.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE SILBERMAN
This is an appeal from a conviction of income tax evasion. Appellant, Fred Black, complains of insufficiency of the Government's evidence, of error in the trial court's charge to the jury, and of improper anti-deadlock instructions.
Black was indicted and prosecuted on numerous counts including a RICO Act violation, one count of conspiracy, seven counts of concealment of material facts, seven counts of causing a failure to file currency transaction reports, five counts of Travel Act violations, mail and wire fraud counts, and four counts of tax evasion. After a forty day trial, Black was convicted on three counts of tax evasion. *fn1 The Government charged that although Black received $65,827 of taxable income in 1978, $109,251 of taxable income in 1979, and $174,755 of taxable income in 1981, he failed to file a return for any of those years. I.
The resolution of Black's claims concerning sufficiency of evidence and adequacy of the jury charge turns entirely upon the proper characterization of the actual method used by the Government to prove Black's tax evasion. The Government contends it employed the "specific items" method of proof, a direct method of demonstrating tax evasion in which the Government "produce[s] evidence of the receipt of specific items of reportable income by the defendant that do not appear on his income tax return." United States v. Marabelles, 724 F.2d 1374, 1377 n.1 (9th Cir. 1984). Black claims, however, that the Government used the "bank deposits/cash expenditures" method. When using that indirect method of proof, the Government shows, either through increases in net worth, increases in bank deposits, or the presence of cash expenditures, that the taxpayer's wealth grew during a tax year beyond what could be attributed to the taxpayer's reported income, thereby raising the inference of unreported income.
In any indirect method case, the Government must prove that the increased wealth did not come from non-taxable sources. Otherwise the evidence will be insufficient, for
there is always the possibility that the taxpayer deposited cash that he received from a non-taxable source or from income taxed in a prior year but kept on hand as cash or even from unreported income from a prior year kept on hand in cash. Such events are common human occurrences, and this possibility may of itself create reasonable doubt. Therefore, the government must establish in some fashion the amount of cash the taxpayer had on hand at the start of the period. This is part of the government's duty to negate the possibility that bank deposits or cash expenditures in the year under investigation originated from non-taxable sources.
On the other hand, where the Government's case is based on evidence showing specific items of unreported income, the safeguards required for indirect methods of proof are not necessary, as the possibility that the defendant may be convicted because non-taxable income is mistakenly presumed to be taxable income, or because cash expenditures are mistakenly assumed to be made from taxable income, is not present. *fn2 See United States v. Lewis, 759 F.2d 1316, 1328 (8th Cir.) (proof of opening net worth not required in case involving both net worth and specific-item methods), cert. denied, 474 U.S. 994, 106 S. Ct. 406, 88 L. Ed. 2d 357 (1985); Conford v. United States, 336 F.2d 285, 287 (10th Cir. 1964) (rule of Holland v. United States, 348 U.S. 121, 99 L. Ed. 150, 75 S. Ct. 127 (1954), requiring proof of net worth, not applicable where expenditures evidence used only to corroborate specific items proof).
Black claims that the Government relied on a bank deposits/cash expenditures method of proof, but utterly failed to rebut the possibility that his expenditures originated from non-taxable sources, and therefore the evidence was insufficient to sustain a conviction. In particular, Black maintains that the Government was obliged to negate the possibility that his bank deposits and cash expenditures were from non-income sources, and to establish his opening net worth for the years in question. Black, moreover, argues that the jury instructions omitted necessary explanations of the assumptions inherent in indirect methods of proof, and of the inferences that may properly be made by the jury, all in violation of the Supreme Court's clear guidance in Holland v. United States, 348 U.S. 121, 99 L. Ed. 150, 75 S. Ct. 127 (1954). In short, Black claims the Government tried to convict him of tax evasion "by simply showing that he spent money and did not file a tax return during the tax years in question."
The Government's response is that since it introduced evidence of specific items of income received by Black, it was not required to disprove the likelihood of a cash hoard or a non-taxable source of income. From approximately 1975 to the time of the trial, Black was subject to an IRS lien of approximately three million dollars. During this time, Black created two corporations, Dunbar and Machine-A-Rama, portrayed by the Government as dummy corporations which had neither paid employees nor offices. At trial, Black disputed the bogus nature of these entities, claiming the corporations were involved in developing a casino in Atlantic City -- a project which never materialized -- and he also insisted that any money he took from these corporations was in the form of loans which he felt obligated to repay. Nevertheless, it was uncontroverted that during the period covered by the indictment Black had no personal bank accounts and that many of Black's personal expenses were paid by checks drawn on accounts of these two corporations. Black further conceded that he created Dunbar because he did not want to put property in his own name and because he wished to conceal from the IRS money he was spending.
In the Government's view, Black received taxable income each time he wrote a check on the accounts of Dunbar and Machine-A-Rama to cover his personal expenses. Evidence that Black paid for personal expenses with checks drawn on corporate accounts and that Black never truly considered the checks to be loans would be sufficient for conviction, for "all the law requires is that there be proof sufficient to establish that there has been a receipt of taxable income by the accused and a willful evasion of the tax thereon." United States v. Nunan, 236 F.2d 576, 586 (2d Cir. 1956), cert. denied, 353 U.S. 912, 1 L. Ed. 2d 665, 77 S. Ct. 661 (1957). *fn3
Black, by focusing on isolated remarks at trial, argues that the Government presented only a cash expenditures case against him. We disagree. If the statements by the prosecutor, the testimony of the Government's tax witness, and the trial judge's instructions to the jury, are each considered in light of the evidence actually submitted, it is clear that the Government presented ...