The opinion of the court was delivered by: Matthew Fox Simandle, District Judge
This matter is before the Court on the motion of Defendant Matthew Fox for acquittal notwithstanding a jury verdict, pursuant to Fed. R. Crim. P. 29(c), and, alternatively, for a new trial on Counts Two through Six of the indictment against him, pursuant to Fed. R. Crim. P. 33(a). The motion is opposed. The Court received written submissions from the parties, held argument on the motions, and received supplemental submissions after the argument. The Court has considered all of the submissions and arguments of the Defendant and the United States. For the reasons explained, the Court shall deny the motion for acquittal and a new trial.
On March 1, 2006, a federal grand jury returned an indictment charging Matthew Fox and Melody Willis Fox with one count of conspiracy to defraud the United States in violation of 18 U.S.C. § 371, and Matthew Fox with five counts of attempted evasion of income taxes for the years 1998 through 2002 in violation of 26 U.S.C. § 7201. Specifically, the Indictment alleged that the correct tax due and owing was substantially understated, as follows:
CountYearTaxable Income ReportedTax ReportedActual Taxable IncomeActual Tax
On July 30, 2007, following a three week trial before this Court, the jury convicted Matthew Fox of attempting to evade his individual income taxes for the years 1998 through 2002 (Counts Two through Six of the Indictment) and acquitted Matthew Fox and Melody Fox of conspiring to defraud the United States (Count One of the Indictment).
The Government adduced evidence at trial that Matthew Fox failed to report substantial income for each of the tax years 1998 through 2002. The Government utilized the net worth and expenditures method of proof in computing Fox's actual income for each of those years. The Government presented evidence of Fox's personal expenditures (including payments from his checking account, and purchases made with cash and/or money orders), and increases/decreases in his net worth, to establish by inference that his substantial increase in net worth came from unreported taxable income.
More specifically, the evidence showed that Mr. Fox began working at an Atlantic City gentleman's club called Bare Exposure as a doorman in 1997. (Tr. July 17 at 158.) Fox confirmed, in loan applications in 2001, that he had been employed at Bare Exposure for six years, establishing that he had certainly worked there since at least 1997 and perhaps as early as 1995. (Gov. Ex. 24.2 & 38.1.) The Bare Exposure manager, Anthony Ariemma, testified that Fox was promoted to manager in early 1998, when the prior manager was fired. (Tr. July 17 at 162.) Ariemma testified that he paid Fox $100 per shift and that Fox worked three and sometimes four shifts per week. (Id. at 162-163.) In addition, by the beginning of 1999, Fox began receiving a share of the tips for each shift, typically an additional $100-120 in tips on a Saturday shift, or $60-70 in tips on a Friday shift, or as little as $20-30 in tips on a weekday shift. (Id. at 163-165) He continued to work at Bare Exposure as a manager until 2004.
Fox filed tax returns for 1998-2002, the years at issue. He declared taxable income from Bare Exposure of $0 in 1998 (a year in which he stated he received only wages from a casino in the amount of $3,173, which is not at issue). He declared only $9,600 in wages from Bare Exposure for 1999 (declaring nothing for tips), $20,800 in wages from Bare Exposure for 2000 (again declaring nothing for tips), $14,400 in wages and $10,325 in tips from Bare Exposure for 2001, and finally, $16,800 in wages and $28,600 in tips from Bare Exposure for 2002, which return was not filed until April 2004.
According to evidence at trial, the IRS analysis of Fox's expenditures over these years revealed much higher levels of expenditures than explainable by the expenditure of the current years' declared income and any non-taxable income or assets. IRS Revenue Agent Ken Kelly testified to his opinion, based on the available evidence, that Fox's actual taxable income for the years in question was as follows: $29,688 in 1998, $24,244 in 1999, $112,529 in 2000, $149,406 in 2001, and $167,845 in 2002. (Gov. Ex. 43.1(a)). Agent Kelly testified that Fox therefore owed additional income taxes for the years 1998, 1999, 2000, 2001, and 2002 in the amounts of $5,257, $3,294, $28,046, $36,831, and $37,037, respectively. (Tr. July 19 at 162-164.)
As discussed in detail below, Defendant Fox took the position that his spending came from non-taxable sources, namely, a pre-existing "cash hoard" (derived from several sources including Social Security benefits as a minor, insurance payments, and cash from family sources) and beginning in August 2000 from the earnings of his then-girlfriend Melody Willis, a dancer at his gentleman's club who moved to New Jersey from Florida in July 2000, and whom he married in 2003. For the years 2000, 2001, and 2002, according to his defense, Melody's earnings exceeded $100,000 per year and were used by Matthew Fox to fund the high expenditures of those last three years at issue in this case.
The expenditures uncovered by the IRS are not disputed in this motion, but the sources of those expenditures were hotly contested at trial -- whether Matthew Fox had a cash hoard as of January 1998 (the beginning of the tax period) and whether Melody Fox was actually employed and earning the income to explain the expenditures Matthew Fox made in 2000-2002. To be sure, the jury heard evidence on both sides of these issues and was called upon to make determinations of credibility and weight of the competing evidence.
At trial, former retired IRS Special Agent Paula Lipski ("Agent Lipski") testified about the steps she took to investigate the alleged tax evasion in this case. She testified that after informing Mr. Fox's attorney in April of 2003 that Mr. Fox was under investigation for failing to report income for 1998-2002, she met with Fox's attorney, Louis Barbone, Esq., in July of 2003. (Tr. July 12 at 81-82.) At an August 14, 2003 meeting with Mr. Barbone, Agent Lipski received copies of Melody Willis tax returns for the years 2000, 2001, and 2002, which had been signed on July 29, 2003. (Id. at 83.) In Agent Lipski's words, those returns showed "substantial income that was consistent with the amount of income I stated was not reported on Mr. Fox's tax return." (Id. at 84.) As she explained, if those returns were true, they would have been a legitimate source of funds explaining Mr. Fox's expenditures for the latter half of 2000 and for the years 2001 and 2002 at issue.
Accordingly, Agent Lipski tried to determine whether there was any truth to the belated Melody Willis Fox returns. Agent Lipski examined sworn testimony by Melody Fox in a Florida child custody dispute with her ex-husband indicating that she hadn't worked since August of 2000 and that Matthew Fox was supporting her. (Id.) She also reviewed Melody Willis' affidavit submitted in the Florida case in which she claimed she was "unemployed." Agent Lipski also consulted IRS databases to determine whether any tax documents were available to indicate Melody Fox's employment or independent contractor status, including W-2 and 1099 forms, and there were none. (Id. at 84-85.) Agent Lipski also interviewed the person who prepared the Melody Willis tax returns, namely Maureen Dougherty, and tried to determine where Melody Fox was claiming to have worked because the forms apparently indicated only that she worked at "various locations." (Id. at 85.) When Agent Lipski asked the tax preparer where those "various locations" are, she received no reply. (Id.) She testified, "when I asked for records specifically just telling me the name of the employer,... no one came up with the name of an employer." (Id. at 94.) As a result of this investigation, the IRS determined that the Melody Willis Fox tax returns were not truthful, that is, that Melody Fox was reporting hundreds of thousands of dollars of income for 2000, 2001, and 2002 that had not in fact been earned, after learning of the IRS investigation, apparently in the effort to conceal Matthew Fox's alleged unreported income, and Melody Fox also became a target of the IRS investigation.
The government also introduced evidence of Matthew Fox's net worth as of the beginning of 1998, the first tax year in question, and for the beginning and end of each subsequent tax year through 2002. In the course of her investigation of Matthew Fox, Agent Lipski testified, she determined that on January 1, 1998 Matthew Fox had $500 cash on hand and $1,000 in his bank account. (Tr. July 12 at 86:18-23.) She based her determination in part on a loan application Matthew made on April 7, 1998, in which he stated that he had $500 cash on hand, $1,000 in the bank. Further, the application was to finance a motor boat at 13.5% interest, which, Agent Lipski noted, was inconsistent with having significant cash available. (Id. at 87.) However, on cross examination, Agent Lipski also testified that she learned during her investigation that Mr. Fox made a loan to his employer, in December of 1998, of $6,000. (Tr. July 17 at 38:15-17.) Mr. Ariemma, the employer, corroborated that Mr. Fox made such a loan in December 1998. (July 17 Tr. at 173.)
Agent Lipski also obtained credit card records indicating that Matthew Fox had a balance on his credit card in early 1998, and thereby incurring credit card fees, which was also inconsistent with having access to cash. (Tr. July 12 at 88.) In addition, Agent Lipski testified that Mr. Fox borrowed money from his sister, Jennifer, with whom he was living, to buy a car because, she said, he didn't have any money. (Id. at 133:7-8.) Matthew's sister Jennifer also told Agent Lipski that he did not keep cash in the safe (sometimes also called the gun-safe) in the house, as Matthew Fox later claimed.
According to Agent Lipski, in her August 2003 meeting with Matthew Fox's attorney, Louis Barbone, she was told that Mr. Fox received payments, totaling approximately $54,053 from 1987 to 1994, from an insurance settlement as a result of his mother's death (id. at 89), including a lump sum of $34,053 in 1994 (id. at 118). Agent Lipski noted that none of that money appeared in Defendant's bank accounts at the beginning of 1998. (Id.) Agent Lipski determined that the insurance payments received from 1987 to 1994 were not relevant to the years under investigation in this case or Defendant's opening net worth because the money did not appear to be available to him at the beginning of 1998. (Id.)
Mr. Barbone also told Agent Lipski that Matthew Fox received Social Security payments, of about $40,000, as a result of his mother's death twenty years earlier in 1981. Agent Lipski determined that those funds were also unavailable to Defendant as of January 1, 1998 because she believed the money would have been long since spent many years before 1998, since Social Security payments would have ended at age 21 in 1990. (Id. at 90-91.)
Defendant's attorney also told Agent Lipksi that Matthew Fox received cash from his parents' business over the years that was available to him in January 1998. (Id. at 91.) Defendant's attorney indicated that Fox had received and saved approximately $34,000 as a child from his parents' business. (Id.) No other information was given to Agent Lipski about when this money was received, what the nature of Defendant's parents' business had been, or where it was located. Agent Lipski did not attempt to interview Defendant's parents because his mother had passed away in the 1981 accident and his father was not mentally competent in 2003. (Id. at 92.)
At the August 2003 meeting, Agent Lipski was also told by attorney Barbone that Mr. Fox's father and grandmother had held money for him and gave it to him in 1996 or 1997. (Id. at 148-49.) No proof of this assertion was furnished to her, nor was the amount of this money, if any, revealed to her.
Mr. Barbone, as Defendant's attorney, also showed Agent Lipski $20,000 in cash in 2003, claiming that this was part of Matthew Fox's cash hoard. Agent Lipski indicated that the availability of that cash at a meeting in August 2003 did not indicate, to her, that it had been available in January of 1998, but rather, that it likely had been earned from 1998-2002; alternatively, the existence of the $20,000 cash in 2003 was irrelevant to the expenditures she found he made in 1998-2002, because it would not explain the money he had spent during those five years.
Agent Lipski also testified that in her endeavor to determine whether Defendant had a cash hoard, she learned that Mr. Fox had a safe in his home. (Id. at 116.) She investigated the safe. Thereafter, she spoke with Mr. Fox's sister, Jennifer, who lived with Mr. Fox at the time and told Agent Lipski that no money was being stored in the safe. (Id. at 116-17.) Agent Lipski also testified that Mr. Fox's bills for these years were not "being paid off timely." (Id. at 117:11-12.)
Based on all this evidence and evidence of cash withdrawals from Defendant's bank account during the early part of 1998, as well as the absence of other bank or investment accounts containing the money, Agent Lipski determined that he had no cash hoard, from any of these sources, in January 1998. His financial behavior, such as financing relatively small purchases and paying interest, taking cash advances from his credit card with interest and transaction fees, borrowing from his own sister because he had no money, lack of cash secured in his home's safe, and the absence of money in his bank account from the previous insurance payments and Social Security benefits that had been paid by check, led Agent Lipski to rule out the existence, as of January 1998, of a cash hoard from which his expenditures could be explained for the 1998-2002 period.
Agent Lipski further determined that Melody Fox's tax returns were not accurate because of her testimony and Matthew Fox's testimony in the Florida custody case, the lack of documentation of her employment, and her inability to provide the name of her employer. (Tr. July 12 at 94:13-18.) Agent Lipski received from the preparer of the returns, Maureen Dougherty, "a schedule that reflected her methodology in computing the income that was reported" as Melody's. (Id. at 94:19-22.) That schedule indicated that Melody Fox was claiming certain deposits into Matthew Fox's bank accounts represented income she had earned and deposited in his account. Agent Lipski testified that her investigation revealed Matthew and Melody did not meet until July 2000, but that the schedule indicated in February of 2000, $4,500 deposited into Matthew's account was Melody's income, which had to be impossible because the couple did not even know each other before July 2000. (Id. at 95-96.) Similar large deposits to Matthew's account were credited to Melody that could not have been her earnings, for example in March ($6,000), April ($6,600), and May ($8,720), all before Melody and Matthew met in July 2000, leading Agent Lipski to conclude the new Melody Fox tax returns were not factually correct. (Id. at 96.) At the very least, those large deposits from February through May 2000, totaling $25,820, could not have come from Melody's earnings.
Agent Lipski also testified about what she did to verify whether or not Matthew Fox was working for the charged years. On July 11, 2003 she interviewed Anthony Ariemma, an owner of Bare Exposure, a club where Agent Lipski believed Matthew Fox had been employed. (Tr. July 12 at 159.) Ariemma confirmed that Matthew Fox worked at Bare Exposure and described his income and tips, as noted above. Lipski also obtained W-2 status from Bare Exposure for Matthew Fox from the IRS database beginning with 1999, there being none for 1998, a year in which Fox claimed no income from Bare Exposure despite working there as a manager and receiving tips.
The jury also heard the testimony of Matthew Fox and Melody Willis Fox. Contrary to his many written and testimonial statements, Matthew Fox testified at trial that he started working at Bare Exposure in 1999 (Tr. July 24 at 124); he was confronted on cross-examination, by his own testimony in the Florida custody hearing, that he was the manager at Bare Exposure since March 1995, as reflected in the Florida transcript at Ex. 7.1(a), p.77. (Id. at 190.) Likewise, he admitted his March 2001 credit application (Ex. 38.1) stated he had worked at Bare Exposure (identified as "PRBA") for six years, i.e., since 1995, earning $4,500/month salary. (Id. at 191-192.) His Kensington Furniture credit application in April 2001 (Ex. 24.2) likewise acknowledged six years of continuous employment, at $70,000 per year, at Bare Exposure ("PRBA"), see id. at 193. He likewise admitted he stated on his Ford Credit application (Ex. 11.1) in June 1999 that he has been a manager at Bare Exposure for four years earning $36,000/year. (Id. at 195-196.)
At trial, Matthew Fox claimed he had received $137,000 in cash from his father in a Shop-Rite grocery bag full of money on March 17, 1997, that he believed was money his father had held for him, (Tr. July 24 at 148), of which he surmised $55,000 came from the settlement of his mother's death case and other money may have come from the Social Security checks his father had received years before in his behalf when he was a minor, although he didn't know what his father did with those checks. (Id. at 149.)
He claimed at trial to have stashed this money into a gun safe which also held shotguns for hunting. (Id. at 155.) He explained that he borrowed small amounts of money rather than use this cash in order to build up credit. He also described how he met Melody Willis in the end of June 2000 and claimed she continued as a dancer earning $500 to $1,000 on weeknights, $1,000 to $2,000 on Fridays, and $1,200 to $3,300 on Saturdays. (Id. at 170.) He explained how, after he came under IRS investigation, he went to Maureen Dougherty for tax assistance for preparation of Melody Fox's tax returns in 2003, resulting in the 2000, 2001, and 2002 Melody Willis Fox returns that were eventually filed.
Again, on cross-examination about his claimed receipt of a large bag of cash from his father, Matthew Fox claimed he kept that sum in his home and that he was unaware of federally-insured banks, or of the fact that banks would pay him interest upon his bank deposits, (Tr. July 24 at 209-211.) which the jury could well have found incredible, undermining whatever else he offered about this secret cash resource.
He claimed he lied to the Florida court to help Melody win her child custody case, although he later admitted he was concerned Melody's ex-husband could discover she was still employed as a dancer at Bare Exposure. (Tr. July 24 at 175; Tr. July 25 at 16-18, 20-21.) Again, the jury would have found that his testimony in this trial was unbelievable and contradicted by his Florida testimony that she had quit dancing, since it would not have been difficult for a private investigator to learn the truth if Melody was dancing.
Melody Fox's testimony described her earlier marriage to Michael Willis, with whom she had a daughter born in 1998, how she had worked as a dancer and model in Florida, and how their marriage failed. She testified about moving to New Jersey and working at Bare Exposure after August 2000. She also acknowledged her child custody deposition, hearing, and trial in Florida in which she testified she was not working in New Jersey and was supported by Matthew Fox. (Tr. July 25 at 66-69). She claimed she falsely swore to an affidavit in the custody battle that she was "unemployed" and a "stay-at-home mother." (Id. at 68.) She confirmed that after Matthew Fox came under IRS investigation, she met with Maureen Dougherty in June 2003, who advised her to file her tax returns if she had earned income for those years. (Id. at 57-61.) She also testified she had no discussion about her tax returns with Matthew Fox. (Id. at 62:16-20.)
On cross examination, Melody Fox stated she made four false statements under oath in the custody proceedings (emergency hearing, deposition, trial, and financial affidavit). She acknowledged that if she was trying to hide her employment as a nude dancer, it may have failed since anyone, including an investigator, could come in off the street and see her if she were working. (Id. at 86-87.) She also attempted to explain how money she earned in early 2000 came to be reflected as claimed deposits in Matthew's bank account at a time before they knew one another. (Id. at 95-96.)
Under Rule 29(c) of the Federal Rules of Criminal Procedure, a court may enter a judgment of acquittal if it finds that as a matter of law the evidence is insufficient to sustain a conviction. In reviewing a motion for Judgment of Acquittal, the court must "'review the record in the light most favorable to the prosecution to determine whether any rational trier of fact could have found proof of guilt beyond a reasonable doubt based on the available evidence.'" United States v. Smith, 294 F.3d 473, 476 (3d Cir. 2002) (quoting United States v. Wolfe, 245 F.3d 257, 262 (3d Cir. 2001)). Further, the court is required to draw "'all reasonable inferences in favor of the jury's verdict.'" Smith, 294 F.3d at 476-77 (quoting United States v. Anderskow, 88 F.3d 245, 251 (3d Cir. 1996)).
The defendant must also overcome the jury's special province in evaluating witness credibility and conflicting testimony. United States v. Hakim, 2002 U.S. Dist. LEXIS 18151, No. 02-CR-131, 2002 WL 31151174, at *6 (E.D. Pa. Sept. 24, 2002) (citing United States v. McGlory, 968 F.2d 309, 321 (3d Cir. 1992)). Further, the court in United States v. Scarfo, 711 F. Supp. 1315, 1334 (E.D. Pa. 1989) held that "a court may not grant a motion for acquittal based on conflicting testimony, that is, testimony of a questionable quality; it is up to the jury to weigh conflicting testimony, determine credibility, and ultimately draw factual inferences." Thus, "a finding of insufficiency should be confined to cases where the prosecution's failure is clear." Smith, 294 F.3d at 477 (quoting United States v. Leon, 739 F.2d 885, 891 (3d Cir. 1984)).
United States v. Carmichael, 269 F. Supp. 2d 588, 594-595 (D.N.J. 2003) (Simandle, J.).
[A] trial court's ruling on the sufficiency of the evidence is governed by strict principles of deference to a jury's findings. In deciding whether to grant the motions for acquittal, the trial court [is] required to view the evidence in the light most favorable to the prosecution and to draw all reasonable inferences therefrom in the government's favor. Viewing the evidence in this light, the trial court [is] obliged to uphold the jury's verdict unless no rational jury could conclude beyond a reasonable doubt that the defendant willfully attempted to evade [his] tax obligations.
United States v. Ashfield, 735 F.2d 101, 106 (3d Cir. 1984) (citations omitted). More recently, in reversing a district court's granting of a judgment of acquittal, the Court of Appeals found:
The evidence was not overwhelming, but all that was required was that "any rational juror could have found the elements of the crime beyond a reasonable doubt."
United States v. Carbo, 572 F.3d 112, 119 (3d Cir. 2009), quoting United States v. Cartwright, 359 F.3d 281, 286 (3d Cir. 2004).
Federal Rule of Criminal Procedure 33(a) states that "upon the defendant's motion, the court may vacate any judgment and grant a new trial if the interest of justice so requires." Such a remedy is available in exceptional cases where an injustice would occur if the court failed to act. United States v. Lebovitz, 586 F. Supp. 265, 267 (W.D. Pa.), aff'd, 746 F.2d 1468 (3d Cir. 1984); United States v. Phifer, 400 F. Supp. 719, 722 (E.D. Pa. 1975), aff'd, 532 F.2d 747 (3d Cir. 1976). Rule 33 affords relief if, for example, the trial court finds prosecutorial misconduct or when the trial court does not believe the evidence supports the jury's verdict. United States v. Dixon, 658 F.2d 181, 193 (3d Cir. 1981) (reversing judgment of acquittal but remanding for consideration whether to grant new trial under Rule 33 on grounds of juror confusion and insufficient limiting instructions).
This Circuit has described a district court's consideration of a Fed. R. Crim. P. 33 motion for a new trial based on the "weight of the evidence" as follows: A district court can order a new trial on the ground that the jury's verdict is contrary to the weight of the evidence only if it "believes that 'there is a serious danger that a miscarriage of justice has occurred--that is, that an innocent person has been convicted.' " United States v. Santos, 20 F.3d 280, 285 (7th Cir. 1994) (quoting United States v. Morales, 902 F.2d 604, 606 (7th Cir. 1990)). Unlike an insufficiency of the evidence claim, when a district court evaluates a Rule 33 motion it does not view the evidence favorably to the Government, but instead exercises its own judgment in assessing the Government's case. See United States v. Lacey, 219 F.3d 779, 783-84 (8th Cir. 2000); United States v. Ashworth, 836 F.2d 260, 266 (6th Cir. 1988). United States v. Johnson, 302 F.3d 139, 150 (3d Cir. 2002). Thus, "motions for a new trial based on the weight of the evidence are not favored. Such motions are to be granted sparingly and only in exceptional cases." Government of Virgin Islands v. Derricks, 810 F.2d 50, 55 (3d Cir. 1987) (citations omitted).
United States v. Brennan, 326 F.3d 176, 188-89 (3d Cir. 2003)
B. Net Worth & Expenditures Method for Proving Tax Evasion
In this case, the United States sought to prove that Defendant Matthew Fox evaded his taxes by showing he spent considerably more money during each year between 1998 and 2002 than he could have if he had earned only the income he declared on his tax returns for those years, taking into account his net worth at the beginning of 1998 and making reasonable efforts to exclude non-taxable sources for such expenditures. This so-called net worth and expenditures method for proving tax evasion is an indirect method for proving that an individual has earned unreported income during a given period of time. As the Supreme Court explained in Holland, the methodology depends on an accurate understanding of an individual's net worth at the beginning of the period and a calculation of money spent during the period:
In a typical net worth prosecution, the Government, having concluded that the taxpayer's records are inadequate as a basis for determining income tax liability, attempts to establish an "opening net worth" or total net value of the taxpayer's assets at the beginning of a given year. It then proves increases in the taxpayer's net worth for each succeeding year during the period under examination and calculates the difference between the adjusted net values of the taxpayer's assets at the beginning and end of each of the years involved. The taxpayer's nondeductible expenditures, including living expenses, are added to these increases, and if the resulting figure for any year is substantially greater than the taxable income reported by the taxpayer for that year, the Government claims the excess represents unreported taxable income.
Holland v. United States, 348 U.S. 121, 125 (1954). An assumption underlying this methodology is that money expended during this period that is in excess of reported income plus opening net worth derives from a reportable but unreported source of income, "and that when this is not true the taxpayer is in a position to explain the discrepancy." Id. at 126.
The application of such an assumption raises serious legal problems in the administration of the criminal law. Unlike civil actions for the recovery of deficiencies, where the determinations of the Commissioner have prima facie validity, the prosecution must always prove the criminal charge beyond a reasonable doubt.
Id. Thus, there are several required safeguards on the use of the net worth and expenditures methodology to prove criminal guilt.
The first requirement is that the Government must establish the opening net worth with reasonable certainty. Id. at 132.
[A]n essential condition in cases of this type is the establishment, with reasonable certainty, of an opening net worth, to serve as a starting point from which to calculate future increases in the taxpayer's assets. The importance of accuracy in this figure is immediately apparent, as the correctness of the result depends entirely upon the inclusion in this sum of all assets on hand at the outset.
The second safeguard is the requirement that the Government investigate "reasonable leads" provided by the accused that would explain the spending or increase in net worth. In other words, the Government cannot prosecute a person for tax evasion who has provided a reasonable explanation of a non-taxable source for his or her income that the Government has not investigated.
When the Government rests its case solely on the approximations and circumstantial inferences of a net worth computation, the cogency of its proof depends upon its effective negation of reasonable explanations by the taxpayer inconsistent with guilt. Such refutation might fail when the Government does not track down relevant leads furnished by the taxpayer -- leads reasonably susceptible of being checked, which, if true, would establish the taxpayer's innocence. When the Government fails to show an investigation into the validity of such leads, the trial judge may consider them as true and the Government's case insufficient to go to the jury. This should aid in forestalling unjust prosecutions, and have the practical advantage of eliminating the dilemma, especially serious in this type of case, of the accused's being forced by the risk of an adverse verdict to come forward to substantiate leads which he had previously furnished the Government. It is a procedure entirely consistent with the position long espoused by the Government, that its duty is not to convict but to see that justice is done.
Third, the Government must prove either that there is a likely source of unreported income or negate all possible non-taxable sources of that income. Thus, as the Third Circuit summarized in United ...