Tuesday, May 3, 2011

The Net Worth Method and Negating Nontaxable Sources (5/3/11)

I have just re-read United States v. Fox, 2010 U.S. App. LEXIS 21386 (2010), a nonprecedential decision. (I know, one should not re-read or cite nonprecedential cases; they should just lapse into oblivion.)  But I did.

In that case, the defendant was convicted of five counts of tax evasion. The Government used the net worth method of proof. The net worth method requires that the Government prove opening and closing net worth and then account for the difference in the intervening accounting periods. Unlike, in civil cases, though, this accounting does not need to be a precise exercise because, for tax evasion, all the Government need show is some -- perhaps some substantial -- tax evaded without any need for establishing a precise or even an estimated amount of the total tax evaded. And the Government must also show some likely source of taxable income or at least negate nontaxable income. Even though this is a nonprecedential decision, I wonder whether the readers think this is an odd paragraph (case citations omitted):
The District Court explained that the Government could choose to prove unreported income circumstantially either by (1) negating all possible non-taxable sources of income or (2) showing a likely source of unreported income. If the Government chooses the first method, there is no further obligation to prove a likely source of taxable income. We agree with the [District] Court that the Government produced sufficient evidence such that the jury could find, beyond a reasonable doubt, that "all nontaxable sources of income of which it was made aware" were negated.
Are the bold face statements the same? Is there a burden on the Government, independent of leads from the taxpayer, to negate possible non-taxable sources of income? Can the Government just claim that it is not aware of any nontaxable sources and rest?

Ok, it is a slow news day!


  1. It would seem reasonable to me that the taxpayer would know about any non-taxable sources. I guess its a different ball game with criminal though ?

  2. The taxpayer would know of nontaxable sources, but is the taxpayer required to come forward with such evidence at trial? The bedrock principal of our jurisprudence is that the Government must prove all of the elements of the crime beyond a reasonable doubt. Tax due and owing is an element of tax evasion. Thus, taxable income from which tax due and owing can be computed is a component of an essential element of the crime. Is it required that the Government therefore prove there is taxable income -- which necessarily means that the Government prove that the income is not nontaxable? Stated otherwise, can the conviction be supported solely by proof that the taxpayer had income (accretion to wealth) with no proof that the income was taxable income?

    A "likely" taxable source of income is not necessarily proof that the income was taxable but it is probably the best that can be done in many cases. Approaching the task from the other direction, by negating all possible nontaxable sources, the Government necessarily proves by elimination that the income was taxable even if it can't identify the particular source of the income.

    But we are back to the question. Can the Government just prove income and that it is aware of no nontaxable source? Merely being unaware is not the same as having diligently traced all leads -- whether from the defendant or otherwise -- of nontaxable sources of income without success. I think that the Government must bear that additional burden, although some of the text taken out of context from this nonprecedential decision might suggest otherwise.


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