3. How does the IRS prove a deficiency (the first element of a criminal tax evasion case)?

One of two methods: 1) specific items theory or 2) net worth theory.

U.S. v. Smith, 890 F.2d 711 (5th Cir.(Miss.) Dec 04, 1989)

Page 713

Before discussing the error asserted by appellant, it is best for us to describe generally the mechanics of a net worth case. An income tax return reflects the taxpayer's statement to the government that the taxpayer received money (or items of value) and that the receipts, after appropriate deduction, were subject to the applicable tax. The government may question a taxpayer's voluntary disclosure and certification of correctness by employing one or both of two generally accepted analytical methods. The government can present evidence that a specific item of income was not disclosed on the return, i.e., taxpayer did not include wages from his employment with XYZ Corporation or his interest income from a savings account with ABC Homestead. The government may also demonstrate that specific deductions were not experienced by the taxpayer, or were inflated. This procedure is known as the specific items theory.

Another method which may be employed is the net worth analysis. Simply stated, an increase in a taxpayer's patrimony must be traced to acquisitions with after tax income, donations or non-taxable transactions. If these sources fail to explain the increase and the increase can reasonably be attributed to sources which should have been reported, but were not, the taxpayer may well be convicted of tax fraud.

[1] The government utilized both the specific items method and the net worth method in prosecuting its case against the taxpayer. For the return year of the taxpayer's defeat, 1983, only the net worth method was invoked. The net worth method has long been approved as a tool to prove a willful violation as required by 26 U.S.C. § 7201. See Holland, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150 (1954); Tax Management Criminal Tax Procedure, 162-Second A10-13. Essential to this methodology is the taxpayer's opening net worth. The government must prove the taxpayer's opening net worth for calendar year 1983 with reasonable certainty.

Holland, 348 U.S. at 132, 75 S.Ct. at 133-34; United States v. Terrell, 754 F.2d 1139, 1146 (5th Cir.), cert. denied, 472 U.S. 1029, 105 S.Ct. 3505, 87 L.Ed.2d 635 (1985); United States v. Sorrentino, 726 F.2d 876 (1st Cir.1984). We 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. United States v. Achilli, 234 F.2d 797 (7th Cir.1956), aff'd on other grounds, 353 U.S. 373, 77 S.Ct. 995, 1 L.Ed.2d 918 (1957).

4. Burden of proof as to whether the transactions are gifts/loans or income in a criminal case:

U.S. v. Richerson, 833 F.2d 1147 (5th Cir.(La.) Dec 02, 1987)

Page 1158

At the beginning of the charge the district court gave a general burden of proof instruction, requiring that the Government prove Richerson's guilt beyond a reasonable doubt. With regard to the tax counts the district court specifically instructed the jury that:

In order to establish that offense, the Government must prove both of the following elements beyond a reasonable doubt:

First: That substantial income tax was due and owing from the Defendant in addition to that declared in his tax return; and

Second: That the Defendant knowingly and willfully attempted to evade or defeat such tax.

The district court followed this instruction with various definitions including “ A taxpayer must show that a transfer of property is out of ‘detached and disinterested generosity’ in order to be classified as a gift. The test for determining whether the property is a gift is the donor's intent.” (Emphasis added). The four italicized words, “[a] taxpayer must show” are clearly incorrect. The defendant does not have the burden to prove anything in a criminal case.FN27 Again, however, because neither party objected to these four words at trial, the plain error doctrine governs our review.

III. IF TRANSFERRED MONIES ARE CHARACTERIZED AS “GROSS INCOME,” DO ANY EXCEPTIONS OR EXCLUSIONS (e.g., gift, loan) APPLY?

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