32.00 EXPENDITURES

Updated June 2001

32.01 GENERALLY

32.02 REQUIREMENTS FOR ESTABLISHING AN EXPENDITURES CASE

32.03 CONCEPTS APPLICABLE TO EXPENDITURES CASES
      32.03[1] Opening Net Worth
      32.03[2] Cash on Hand
      32.03[3] Cash Hoard Defense
      32.03[4] Duplication of Expenditures
      32.03[5] Likely Source of Income
      32.03[6] Summary Exhibits

32.04 JURY INSTRUCTIONS

                        
                        32.01  GENERALLY

      The expenditures method of proof and the net worth method of proof are 
essentially the same.  The two computations are merely accounting variations 
of the same basic approach, with the expenditures method being an outgrowth 
of the net worth method.  United States v. Breger, 616 F.2d 634, 635 
(2d Cir. 1980); Taglianetti v. United States, 398 F.2d 558, 562 (1st 
Cir. 1968), aff'd, 394 U.S. 316 (1969); United States v. 
Caserta, 199 F.2d 905, 906 (3d Cir. 1952).  Accordingly, in considering 
an expenditures case, reference should be made to Section 31.00, 
supra, which examines the net worth method of proof.

      The use of the expenditures method of proof to establish unreported 
income was approved as early as 1943 in United States v. Johnson, 319 
U.S. 503, 517 (1943).  Subsequently, in Caserta, Judge Goodrich 
defined the expenditures method of proof as follows:

       It starts with an appraisal of the taxpayer's net worth situation at 
       the beginning of a period.  He may have much or he may have nothing. 
       If, during that period, his expenditures have exceeded the amount he 
       has reported as income and his net worth at the end of the period is 
       the same as it was at the beginning (or any difference accounted 
       for), then it may be concluded that his income tax return shows less 
       income than he has in fact received. Of course it is necessary, so 
       far as possible, to negative nontaxable receipts by the taxpayer 
       during the period in question.

Caserta, 199 F.2d at 907.

      The expenditures method of proof  tracks a taxpayer's expenditures for 
consumable goods and services (i.e., items which do not increase 
one's net worth), as opposed to any acquisition of assets (i.e., 
items such as stocks, bonds, or real estate which increase one's net worth).  
The expenditures method is designed to account for the taxpayer who spends 
his income on consumable items, such as food, vacations, travel, or gifts to 
third parties, which do not increase net worth.  The expenditure method is 
distinct from the use of expenditures in an analysis of bank deposits.  
See, e.g., United States v. Conaway,  11 F.3d 40, 43  
(5th Cir. 1993); United States v. Abodeely, 801 F.2d 1020, 1024 (8th 
Cir. 1986);.

      One advantage of using the expenditures method of proof, rather than 
the net worth method, is well summarized by the Taglianetti court:

       The government proceeded on a "cash expenditure" theory. This is a 
       variant of the net worth method of establishing unreported taxable 
       income.  Both proceed by indirection to overcome the absence of 
       direct proof.  The net worth method involves the ascertaining of a 
       taxpayer's net worth positions at the beginning and end of a tax 
       period, and deriving that part of any increase not attributable to 
       reported income.  This method, while effective against taxpayers who 
       channel their income into investment or durable property, is 
       unavailing against the taxpayer who consumes his self-determined tax 
       free dollars during the year and winds up no wealthier than before. 
       The cash expenditure method is devised to reach such a taxpayer by 
       establishing the amount of his purchases of goods and services which 
       are not attributable to the resources at hand at the beginning of the 
       year or to non-taxable receipts during the year. 

Taglianetti, 398 F.2d at 562 (footnotes omitted).

        
        32.02 REQUIREMENTS FOR ESTABLISHING AN EXPENDITURES CASE
        
        The requirements for establishing an expenditures case are virtually
identical to those required for establishing a net worth case.  Thus, in an
expenditures case, the government must:

        1.    Establish an opening net worth with reasonable certainty and 
              demonstrate that the taxpayer's expenditures did not result 
              from cash on hand, or the conversion of assets on hand at the 
              beginning of the period;

        2.    Establish through independent evidence that the expenditures 
              charged to the taxpayer are non-deductible;

        3.    Establish a likely source of income from which the 
              expenditures sprang, or negate nontaxable sources of income; 
              and

        4.    Investigate all relevant, reasonable leads which are 
              reasonably susceptible of being checked.

Taglianetti v. United States, 398 F.2d 558, 562 (1st Cir. 1968), 
aff'd, 394 U.S. 316 (1969) (cited in United States v. 
Sutherland, 929 F.2d 765, 780 (1st Cir. 1991)); United States v. 
Caswell, 825 F.2d 1228, 1231 (8th Cir. 1987); United States v. 
Mastropieri, 685 F.2d 776, 778 n.2 (2d Cir. 1982); United States v. 
Breger, 616 F.2d 634, 635 (2d Cir. 1980); United States v. Gay, 
567 F.2d 1206, 1207 (2d Cir. 1978); United States v. Marshall, 557 
F.2d 527, 529 (5th Cir. 1977); United States v. Bianco, 534 F.2d 501, 
504 (2d Cir. 1976); United States v. Fisher, 518 F.2d 836, 841-42 (2d 
Cir. 1975); United States v. Newman, 468 F.2d 791, 793 (5th Cir. 
1972); United States v. Penosi, 452 F.2d 217, 220 (5th Cir. 1971); 
McFee v. United States, 206 F.2d 872, 874 (9th Cir. 1953), vacated 
and remanded, 348 U.S. 905, aff'd upon reconsideration per 
curiam, 221 F.2d 807 (9th Cir.1955); United States v. Caserta, 
199 F.2d 905, 907 (3d Cir. 1952); see also United States v. 
Pinto, 838 F.2d 426, 431-32 (10th Cir. 1988); United States v. 
Marrinson, 832 F.2d 1465, 1469-70 (7th Cir. 1987); United States v. 
Citron, 783 F.2d 307, 315 (2d Cir.1986),  rev'd on other grounds, 853 
F.2d 1055 (2d Cir.1988); United States v. Radseck, 718 F.2d 233, 
237-38 (7th Cir. 1983).

      Reference should be made to Section 31.00, supra, in which the 
net worth method of proof is discussed.

         
         32.03 CONCEPTS APPLICABLE TO EXPENDITURES CASES

      As noted above, the government has essentially the same burden in an 
expenditures case that it has in a net worth case.  There are, however, a 
few wrinkles which should be mentioned.


32.03[1] Opening Net Worth

      The requirement that the government must establish the defendant's 
opening net worth with reasonable certainty is derived from Holland v. 
United States, 348 U.S. 121, 132, (1954).  However, the government's 
method of proving an expenditures case is slightly different from the net 
worth method employed in Holland.  This distinction was examined by 
the Taglianetti court:

       In a typical net worth case, as Holland, precise figures would 
       have to be attached to opening and closing net worth positions for 
       each of the taxable years to provide a basis for the critical 
       subtraction.  In a cash expenditures case reasonable certainty may be 
       established without such a presentation, as long as the proof . . . 
       makes clear the extent of any contribution which beginning resources 
       or a diminution of resources over time could have made to 
       expenditures.

Taglianetti, 398 F.2d 558, 565 (1st Cir. 1968), aff'd, 394 
U.S. 316 (1969).

      Thus, the government must prove not only that yearly expenditures 
exceeded reported income, but also, either directly or inferentially, that 
those expenditures were made with currently taxable income.  Unless both 
requirements are met, a conviction cannot stand.  See, e.g., 
United States v. Marshall, 557 F.2d 527, 529 (5th Cir. 1977).  Thus, 
the government must present evidence indicating that the defendant did not 
liquidate assets acquired in a previous year or deplete a cash hoard to make 
the expenditures in issue.

      Once the government establishes a starting point for the first 
prosecution year, it should then proceed to compute the total taxable and 
nontaxable receipts for each of the following consecutive years to prove its 
case. Marshall, 557 F.2d at 530.  In United States v. Bianco, 
534 F.2d 501, 504 (2d Cir. 1976), the government attempted to show that 
Bianco's beginning resources were nonexistent, and thus, could not have 
contributed at all to his expenditures during the tax years.  The court 
described the extensive investigation by the government into Bianco's 
financial background, and concluded that the "totality of this evidence 
clearly was sufficient for the jury to have concluded that Bianco had 
insufficient assets at the beginning of the prosecution period to have 
supported his expenditures in any of those years." Bianco, 534 F.2d 
at 505.  See also United States v. Fisher, 518 F.2d 836, 
841-42 (2d Cir. 1975) (government introduced evidence that Fisher had 
$30,000 in bank accounts and that this constituted all of the assets that 
Fisher and his wife possessed). 

      It is not necessary in an expenditures case, as it is in a net worth 
analysis, to reflect the opening and closing net worth position of the 
taxpayer in a formal net worth statement.  Thus, reasonable certainty may be 
established without such a presentation, as long as the expenditures 
analysis takes into account the extent of any contribution, which beginning 
resources or a diminution of resources over time, could have made to the 
expenditures during the prosecution years.  Taglianetti, 398 F.2d at 
565.  In a footnote, the Taglianetti court discussed various 
expenditures cases and the absence of any requirement of a formal net worth 
statement. Taglianetti, 398 F.2d at 565 n.7.


32.03[2] Cash on Hand

      Formal proof of a net worth is not required in an expenditures case. 
See United States v. Conaway, 11 F.3d 40, 43  (5th Cir. 1993).   
Establishment of cash on hand, however, is essential and recognized to be 
the most difficult component of proof in such tax prosecutions. See 
United States v. Citron, 783 F.2d 307, 316 (2d Cir. 1986), rev'd 
on other grounds, 853 F 2d. 1055 (2d Cir. 1988) (an agent's 
investigation into the truth of a cash hoard defense was sufficient in 
establishing cash on hand).  In Citron, however, the Second Circuit 
reversed the convictions because the District Court admitted into evidence a 
summary chart containing figures not demonstrably supported by the evidence. 
Citron, 783 F.2d at 317.


32.03[3] Cash Hoard Defense

      Similar to net worth cases, a cash hoard defense is frequently raised 
in expenditures cases.  To assert a cash hoard defense, the taxpayer 
contends that expenditures during the relevant years were made with 
previously accumulated funds (cash on hand) and not with currently taxable 
receipts.  See Sections 31.06 and 31.07, supra.

      In United States v. Radseck, 718 F.2d 233, 239 (7th Cir. 1983), 
the government rebutted a cash hoard defense with testimony from the special 
agent "that in his experience in investigating thirty-five to forty 
attempted income tax evasion cases, people who have five bank accounts, 
thirteen savings and loan accounts and two brokerage accounts do not keep 
substantial amounts of cash on hand."  The court found that the inference 
that the defendant did not keep cash at home was a permissible one.  

      In United States v. Gay, 567 F.2d 1206, 1207 (2d. Cir. 1978), 
the defendant testified at trial that he had a cash hoard of more than 
$100,000 in spite of the fact that he had told the investigating agents that 
he and his wife had no more than $13,000.  The $13,000 figure was used in 
the opening net worth computation.  The court stated that "the jury was 
entitled to infer, as it apparently did, that appellant's 'cash hoard' 
testimony was a belated and blatant concoction which was not entitled to any 
credit."  Gay, 567 F.2d at 1207.


32.03[4] Duplication of Expenditures

      In establishing a taxpayer's expenditures, care must be taken to 
insure against a duplication of expenditures.  In United States v. 
Caserta, 199 F.2d 905, 907 (3d Cir. 1952), a new trial was ordered 
because a duplication resulted from the defendant being charged with both 
cash withdrawals from a bank account and expenditures for individual items 
since the evidence did not establish that the cash withdrawals were not 
applied to the cash purchases.  For an excellent and detailed explanation of 
such an error, see the opinion of Judge Goodrich in Caserta, 
199 F.2d at 906-08.  Cf. United States v. Radseck, 718 F.2d 
233, 238 (7th Cir. 1988) (the duplication of $2,766 as both a personal 
expenditure and an increase in assets did not render the government summary 
exhibits inadmissible because this error and others were revealed to the 
jury during cross-examination of the government's summary witness and 
acknowledged by the government during closing argument).


32.03[5] Likely Source of Income

      In an expenditures case, as in a net worth case, the government must 
establish a likely source of taxable income, or eliminate the possibility 
that the cash expenditures were made with nontaxable sources of income.  
See, e.g., United States v. Marrinson, 832 F.2d 1465, 
1472 (7th Cir. 1987); United States v. Bianco, 534 F.2d 501, 506-07 
(2d. Cir. 1976).  Therefore, from a purely legal standpoint, the government 
need not negate nontaxable sources when it has already established a likely 
source of taxable income.  However, as a matter of trial strategy, it is 
advisable not only to establish a likely source of taxable income, but also 
to eliminate any nontaxable sources for the funds.  Such an approach makes a 
good impression on both judge and jury.  This does not mean that 
unreasonable efforts need to be expended, however, since "once expenditures 
are established, the government cannot be expected to conduct an exhaustive 
nationwide investigation when the defendant supplies no relevant leads as to 
where he got the money he admittedly spent."  United States v. 
Penosi, 452 F.2d 217, 220 (5th Cir. 1971).  See also Section 
31.12, supra.  Yet, if the investigation can include both approaches, 
the government's case will be that much stronger.


32.03[6] Summary Exhibits

      In an expenditures case, the government is not required to include the 
defendant's version of the facts in its summary exhibits.  United States 
v. Radseck, 718 F.2d 233, 239 (7th Cir. 1983).  This is also true in net 
worth cases.  See Section 31.14, supra.

                     
                     32.04 JURY INSTRUCTIONS

      In an expenditures case, as in a net worth case, it is essential that 
the charge to the jury "should be especially clear, including, in addition 
to the formal instructions, a summary of the nature of the net worth 
[expenditures] method and the assumptions on which it rests, and the 
inferences available both for and against the accused."  Holland v. 
United States, 348 U.S. 121, 129 (1954).  Accord United States 
v. Hall, 650 F.2d 994, 998 (9th Cir. 1981); United States v. 
Tolbert, 367 F.2d 778, 780-81 (7th Cir. 1966); United States v. 
O'Connor, 237 F.2d 466, 472-73 (2d Cir. 1956).  See also 
United States v. Meriwether, 440 F.2d 753, 756-57 (5th Cir. 1971) 
(reversing section 7201 conviction because trial court failed to instruct 
jury on method of proof).

      A conviction on one count was reversed in United States v. 
Carter, 721 F.2d 1514 (11th Cir. 1984), where the court held that it was 
plain error to fail to instruct the jury on the expenditures method of 
proof:

       We find that the omission of the required explanatory instructions 
       concerning the cash expenditures method of proof in this case "goes 
       to the very basis of the jury's ability to evaluate the evidence," 
       Hall, 650 F.2d at 999 [United States v. Hall, 650 F.2d 
       994 (9th Cir. 1981)], and to the very core of the deliberative 
       process necessary to guarantee the fairness of the proceedings.  We 
       therefore hold that the omission of the explanatory instructions 
       required by Holland concerning the cash expenditure method of 
       proof constituted plain error affecting appellant's substantial 
       rights.

Carter, 721 F.2d at 1539 (citations omitted).
   therefore hold that the omission of the explanatory instructions 
       required by Holland concerning the cash expenditure method of 
       proof constituted plain error affecting appellant's substantial 
       rights.

Carter, 721 F.2d at 1539 (citations omitted).