Unpublished Disposition, 855 F.2d 863 (9th Cir. 1979)

MEMORANDUM^**

David Benson appeals his conviction, under 26 U.S.C. § 7201, for income tax evasion in his 1981 and 1982 tax years. Benson claims there was insufficient evidence to convict because the government failed to prove his opening net worth as of December 31, 1979, as well as a likely source for his allegedly unreported taxable income. We affirm.

DISCUSSION

A. Standard of Review.

The test for sufficiency of the evidence is whether, "after viewing the evidence in the light most favorable to the prosecution, any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt." United States v. Shortt Accountancy Corp., 785 F.2d 1448, 1453 (9th Cir. 1986) (citing Jackson v. Virginia, 443 U.S. 307, 319 (1979)) (original emphasis), cert. denied, 478 U.S. 1007 (1986). When the net worth method is used in a prosecution for tax evasion, it "triggers special protections for the accused and particularly careful scrutiny by the courts." United States v. Hall, 650 F.2d 994, 997 (9th Cir. 1981). Nevertheless, all reasonable inferences must be drawn in favor of the government, and circumstantial evidence is sufficient to sustain a conviction. United States v. Fleishman, 684 F.2d 1329, 1340 (9th Cir. 1982), cert. denied, 459 U.S. 1044 (1982).

Benson argues at some length that this court should substitute a reasonable hypothesis sufficiency test in the place of the standard of review now in force. This alternative formulation was specifically rejected by the Supreme Court in Holland v. United States, 348 U.S. 121 (1954). There, the Court noted that

[t]he petitioners assail the refusal of the trial judge to instruct that where the Government's evidence is circumstantial it must be such as to exclude every reasonable hypothesis other than that of guilt. There is some support for this type of instruction in the lower court decisions [citations omitted], but the better rule is that where the jury is properly instructed on the standards for reasonable doubt, such an additional instruction on circumstantial evidence is confusing and incorrect [.]

Id. at 139-40; see also Fleishman, 684 F.2d at 1340. While we may give a more searching review of the record in prosecutions using the net worth method, we decline the appellant's invitation to adopt a novel standard of review.

To sustain a conviction for income tax evasion, the government must prove the three elements of the offense: (1) the existence of a tax deficiency, (2) willfulness in evading taxes, and (3) an affirmative act constituting an evasion or attempted evasion of the income tax. United States v. Hamilton, 620 F.2d 712, 714 (9th Cir. 1980) (citing Sansone v. United States, 380 U.S. 343, 351 (1965)). Benson only challenges a lack of sufficiency in the government's proof of a tax deficiency. There is no question as to the sufficiency of the evidence for willfulness, because a consistent pattern of understating income is "highly persuasive evidence" of a fraudulent intent to evade taxes. Lollis v. Commissioner, 595 F.2d 1189, 1191 (9th Cir. 1979); Ruark v. Commissioner, 449 F.2d 311, 313 (9th Cir. 1971) Baumgardner v. Commissioner, 251 F.2d 311, 322 (9th Cir. 1957) (quoting Kurnick v. Commissioner, 232 F.2d 678, 681 (6th Cir. 1956)). Consistently understating and concealing income constitutes fraud. Moreover, the filing of a false and fraudulent return understating income is sufficient to satisfy the affirmative act requirement for conviction. Hamilton, 620 F.2d at 717. The only issue on appeal, therefore, is whether the government had adequately proved there was a deficiency in Benson's taxes.

B. The Net Worth Method.

The net worth method of establishing taxable income may be employed if the government (1) accurately establishes the defendant's opening net worth, (2) identifies a likely source of taxable income from which it may be inferred that the defendant's increase in net worth arose, and (3) conducts a reasonable investigation of any leads that suggest defendant properly reported his income. See Holland, 348 U.S. at 132-38; United States v. Hom Ming Dong, 436 F.2d 1237 (9th Cir. 1971). The prosecution must prove "every element of the offense beyond a reasonable doubt though not to a mathematical certainty." Holland, 348 U.S. at 138. Benson claims that the government failed to satisfy each of the elements of proof used with the net worth method.

(1) Opening net worth.

Benson's primary argument is that the government failed to refute his contention that he had a substantial "money hoard" which was not taken into account in the government's estimate of his opening net worth. This defense is hardly novel.

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, 348 U.S. at 127.

Benson claims that the government's calculation of his opening net worth was premised on the thin reed of the Bank of America loan application he filled out when seeking a car loan. On that application he indicated only nominal cash on hand. Benson claims that the only representation he made on the form was that he had only $180 located in bank accounts. He claims he was not asked, and did not provide, information about other holdings. The bank loan officer who filled out the form testified, however, that Benson indicated he had no other cash reserves. Obviously, Benson had no reason to understate his income on the form. In fact, he seemed to have over-valued the stock he had in his nightclub concerns.

Extrajudicial statements of the accused, that tend to establish an opening net worth, must be corroborated by substantial independent evidence. Smith v. United States, 348 U.S. 147, 157 (1954). The district court ruled that Benson's July, 1979, financial statement, corroborated by other evidence, was sufficient for the government's opening net worth figure. The government is permitted to draw inferences from the defendant's financial behavior in order to establish that he had no cash hoard in his opening net worth. See Holland, 348 U.S. at 133 (validating inferences drawn from defendants' conduct in operating business, suffering default judgments, and enduring hardship and privation); Friedberg v. United States, 348 U.S. 142, 144 (1954) (inferences from payment on mortgage, writ of execution, and loan application). Evidence provided by a defendant on a contemporaneous loan application has also been admitted. See United States v. Greene, 698 F.2d 1364, 1372 (9th Cir. 1983) (credibility of foreign bank accounts questioned); Hamilton, 620 F.2d at 715 ("the loan application made only vague references to some assets allegedly held by appellant....").

Benson's financial statement was corroborated by the following evidence: (1) borrowing money at 13.5% interest to buy a car was inconsistent with having substantial available cash; (2) borrowing money and signing a "killer" note were likewise inconsistent with being cash rich; (3) Benson used a savings account in 1977 through 1979 and made withdrawals which would not have been necessary with a cash hoard; (4) Benson was an overall loser in gambling; (5) Benson's father resumed gift giving in 1979 because he believed that Benson did not need funds in 1976 through 1978; and (6) 1978 and 1979 were periods of high interest on bank deposits, which would be enough inducement for a person educated in finance and accounting, such as Benson, not to leave substantial cash in a safe deposit box. The jury was entitled to infer from all of this evidence that Benson had no substantial holdings in cash as of December 31, 1979. There was thus substantial evidence to support the government's opening net value assessment for Benson.

(2) Identifying source of taxable income.

The government must establish a likely source of the unreported income from direct or circumstantial evidence. The applicable rule is that "proof of a likely source, from which a jury could reasonably find that the net worth increases sprang, is sufficient." Holland, 348 U.S. at 138. In proving a likely source, it is not necessary for the government to prove beyond a reasonable doubt that the unreported income, reflected in the net worth computation, came from the likely source established. United States v. Mackey, 345 F.2d 499, 506-07 (7th Cir.), cert. denied, 382 U.S. 824 (1965); United States v. Costello, 221 F.2d 668, 671-72 (2d Cir. 1955), aff'd, 350 U.S. 359 (1956).

Skimming cash is a likely source of income where the taxpayer is engaged in a "cash-intensive" trade or business. See United States v. Sorrentino, 726 F.2d 876, 880 (1st Cir. 1984) (manager and owner of a motel); Hamilton, 620 F.2d at 715 (manager of a slot machine operation at a Las Vegas casino). Running a nightclub seems to be a classic "cash-intensive" establishment. The government introduced at trial evidence that Benson handled all of the financial affairs for his nightclubs. He was the sole signatory on their bank accounts. There was substantial evidence to permit a jury to find that the source of the unreported income was Benson's operation of his nightclubs in San Francisco.

(3) Reasonable investigation of leads.

To arrive at an accurate opening figure from which annual changes in the taxpayer's net worth can be computed, the government must conduct a thorough investigation and must "track down relevant leads furnished by the taxpayer--leads reasonably susceptible of being checked, which, if true, would establish the taxpayer's innocence." Holland, 348 U.S. at 135-36. "It is of course impossible for the government to negate every possible nontaxable source." Greene, 698 F.2d at 1371. The government is not required to embark on "Magellan-like expedition [s]," United States v. Hiett, 581 F.2d 1199, 1201 (5th Cir. 1978), or pursue "phantom clues as to some mysterious sources and assets." Hamilton, 620 F.2d at 715.

Benson claims that the government failed to take into account income derived from parental gifts, stock sales, and the $130,000 loan he received in 1978. The record indicates, however, that all of these sources were taken into account by the government, and that the government proved all of this money had been dissipated by December 31, 1979. In denying Benson's motion for acquittal at the close of the government's case, Judge Lynch stated that "the government has done Herculean efforts to try and find out where the money went that the parents gave him" and that the defense counsel had failed to show an instance where the government had not tracked down a lead. The government subpoenaed bank records, analyzed bank accounts, interviewed Benson's friends and gambling associates, brokerage accounts were studied, and safe deposit box records were subpoenaed. The government, therefore, exhausted all possible leads concerning any cash hoard that Benson might of had on hand as of December 31, 1979. We find that the government searched all reasonable leads concerning Benson's net worth. Because Holland's three elements for the calculation of a taxpayer's net worth have been satisfied, we hold there was sufficient evidence to support Benson's conviction for tax evasion in the 1981 and 1982 tax years.

CONCLUSION

The judgment of the district court is AFFIRMED.