United States v. Conaway

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 92-5733

UNITED STATES OF AMERICA,
Plaintiff-Appellee,

versus

CHARLES T. CONAWAY,
Defendant-Appellant.

Appeal from the United States District Court
for the Western District of Texas

( December 17, 1993 )

Before HIGGINBOTHAM, DAVIS, and JONES, Circuit Judges.

HIGGINBOTHAM, Circuit Judge:

Charles Conaway gave the government financial records to prove

he paid his taxes. Analysis of the records led to a different

conclusion and a jury convicted him of multiple counts of tax

evasion. Conaway mounts four challenges to his convictions,

alleging that the government broke an agreement not to prosecute

him, that he produced his records during plea negotiations, that

the government incorrectly estimated his actual income, and that

the government offered insufficient proof of its estimate. We

affirm his convictions.

The U.S. Attorney for the Western District of Texas wrote

Charles Conaway on June 8, 1989, and then wrote his counsel on

September 11, 1989. The letters informed Conaway of a grand jury
investigation into a violation of currency transaction reporting

requirements he allegedly committed while buying a house in 1988,

and invited him to appear before the grand jury with certain

financial records. Conaway testified on November 17, 1989, and

turned over his records in January 1990. Subsequent IRS analysis

of his bank deposits and cash expenditures indicated that he had

understated his income from his law practice by $43,475.89 for

1985, $52,952.89 for 1986, $8,102.82 for 1987, and $69,014.17 for

1988.

A grand jury then indicted Conaway on four counts of tax

evasion1 and one count of structuring currency transactions to

evade reporting requirements.2 A jury found him guilty of

willfully attempting to evade his 1986, 1987, and 1988 income taxes

and of knowingly and willfully structuring currency transactions to

evade reporting requirements. The jury acquitted him of the tax

evasion charge for 1985. He received three concurrent prison terms

of fourteen months, followed by two years of supervised release and

two years of probation, along with an order to pay $200 in special

assessments and $1,670.40 in costs.3

1
26 U.S.C. § 2701.
2
31 U.S.C. § 5324; 18 U.S.C. § 2.
3
The court imposed imprisonment and supervised release
pursuant to the Sentencing Guidelines, as the structured
transaction and the filing of his 1987 and 1988 tax returns took
place after the Guidelines took effect. As the filing of his
1986 return predated the Guidelines, the court imposed a two year
sentence, suspended its execution, and imposed two years of
probation pursuant to 18 U.S.C. § 3651.

2
 I.

Conaway contends that the government promised not to prosecute

him for structuring if he produced certain records and testified

before the grand jury. He says the indictment should be dismissed

because the government failed to comply with the agreement. See

United States v. Melton, 930 F.2d 1096, 1098 (5th Cir. 1991).

We are not persuaded that the district court clearly erred in

concluding there was no agreement not to prosecute. See United

States v. Weiss, 599 F.2d 730, 735-36 (5th Cir. 1979). The

September 11, 1989 letter inviting Conaway to appear before the

grand jury expressly stated that the invitation did not constitute

an agreement not to prosecute. Further, Conaway received warnings

in both of the government's letters and at his appearance before

the grand jury that any statements he made or documents he produced

could be used against him. While the record indicates that the

prosecutor considered not indicting Conaway if IRS investigation of

his finances showed that he had not engaged in illegal activity, no

evidence shows an agreement not to prosecute Conaway conditioned

only on his testifying or producing records.

II.

Alternatively, Conaway argues that the district court should

have suppressed the records he turned over to the grand jury,

contending that those records deserved protection because he turned

them over as part of plea negotiations. See Fed. R. Crim. P.

11(e)(6); Fed. R. Evid. 410. This circuit uses a two-part test to

evaluate such claims. United States v. Robertson, 582 F.2d 1356

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(5th Cir. 1978) (en banc). The trial court first determines

whether the accused exhibited an actual subjective expectation to

negotiate a plea at the time of the discussion, and then determines

whether the accused's expectation was reasonable given the totality

of the objective circumstances. Id. at 1366.

The district court concluded that Conaway did not satisfy

either prong of the Robertson test, and we find nothing clearly

erroneous in those conclusions. See United States v. Maldonado,

735 F.2d 809, 814 (5th Cir. 1984). Conaway testified before the

grand jury about his alleged structuring offense, denying that he

was a tax evader and claiming that he had paid his taxes. The

prosecutor, impressed by his testimony, gave Conaway an opportunity

to corroborate his claims with documentary proof by furnishing his

records, reminding him on several occasions that the government

could use his statements and records against him. As any promise

of lenience the government made was conditioned on the result of

the investigation of Conaway's records, its promise imposed no

obligation when evidence of wrongdoing emerged from that

investigation. United States v. Weiss, 599 F.2d 730, 738 (5th Cir.

1979). Cf. United States v. Herman, 544 F.2d 791, 798 (5th Cir.

1977) (statements made in the course of seeking the dropping of a

murder charge in exchange for a robbery guilty plea found

inadmissible). See generally Robertson, 582 F.2d at 1365 (noting

that "not every discussion between an accused and agents for the

government is a plea negotiation"). The government had no greater

obligation in this case than if Conaway had decided to confess.

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United States v. Cross, 638 F.2d 1375, 1380 (5th Cir. 1981),

modified on other grounds, 655 F.2d 50 (5th Cir. Unit A Sept.

1981); Robertson, 582 F.2d at 1368.

III.

Conaway next contends that the government's proof of his

actual income was insufficient because it included no evidence

about his yearly net worth. A successful prosecution under 26

U.S.C. § 7201 requires proof of willfulness, the existence of a tax

deficiency, and an affirmative act of evasion or attempted evasion

of the tax. Sansone v. United States, 380 U.S. 343, 351 (1965);

United States v. Chesson, 933 F.2d 298, 303-04 (5th Cir.), cert.

denied, 112 S.Ct. 583 (1991). To prove a tax deficiency the

government must establish that the taxpayer had unreported income

and that such income was taxable. See Chesson, 933 F.2d at 306.

Proving taxable income often requires indirect methods of proof

sufficiently reliable to overcome the doubts inherent in the use of

circumstantial evidence. See United States v. Boulet, 577 F.2d

1165, 1167-68 & 1167 n.3 (5th Cir. 1978), cert. denied, 439 U.S.

1114 (1979).

Conaway argues that the government used an "expenditures"

method of proving his unreported income. This technique focuses on

a taxpayer's expenditures during a certain period as proof of

income received. See United States v. Newman, 468 F.2d 791, 793

(5th Cir. 1972), cert. denied, 411 U.S. 905 (1973). The taxpayer's

net worth is calculated for each taxable year at issue. A change

in net worth during a given year exceeding reported taxable income

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after adjustment for deductions and exemptions supports an

inference that the increase was unreported taxable income. Boulet,

577 F.2d at 1167 n.3. Based on this characterization of the

government's methodology, Conaway argues that the government failed

to prove his net worth for each year at issue, and that the judge

erred by not instructing the jury on the government's burden to

prove his net worth for each year for which it sought a conviction.

We find both claims of error groundless because the government

did not employ an "expenditures" method of proof. The government

used a different method of proving unreported income, which

analyzed Conaway's cash expenditures and bank deposits. Cash

expenditures and bank deposits exceeding reported income after

adjustment for applicable exemptions and deductions supports an

inference that the taxpayer had unreported income. Boulet, 577

F.2d at 1167; United States v. Parks, 489 F.2d 89, 90 (5th Cir.

1974) (per curiam). This method does not require proof of net

worth. See Boulet, 577 F.2d at 117 & n.3. See also United States

v. Abodeely, 801 F.2d 1020, 1024 (8th Cir. 1986). Such proof is

not required because the evidence of bank deposits suffices to

raise the inference that the taxpayer's income came from a taxable

source. See generally United States v. Penosi, 452 F.2d 217, 219

(5th Cir. 1971) ("[T]he government must establish, either directly

or inferentially, that the expenditures were made from a taxable

source of income."), cert. denied, 405 U.S. 1065 (1972). Cf.

Marcus v. United States, 422 F.2d 752, 755 (5th Cir. 1970)

(reversing a conviction because "[t]he Government failed to lay any

6
foundation to indicate that the expenditures came out of current

income"). We find no deficiency in the government's proof or the

court's instruction.

IV.

Conaway's fallback position is that the government's evidence

was insufficient to convict him under the bank deposits and

expenditures method. We examine this argument bearing in mind the

different burdens and presumptions at work in this type of tax

evasion prosecution. The government must prove to the jury the

elements of section 7201 beyond a reasonable doubt. E.g., Boulet,

577 F.2d at 1168. To do so, the government must establish the

defendant's cash on hand at the beginning of each of the disputed

years with reasonable certainty, while negating all other sources

of nontaxable income during the same period. It may negate other

income sources by proving that an adequate investigation did not

disclose nontaxable sources of income. Id. If the trial judge

does not believe the government has met these burdens, it can take

the case from the jury because the government has not demonstrated

the reliability of the circumstantial evidence upon which the jury

would base its decision. Id. at 1170. However, if the government

satisfies those burdens, and does so in a way free of reasonable

doubts, "the defendant remains silent at his peril" and the jury

may find the defendant guilty. United States v. Holland, 348 U.S.

121, 138-39 (1954); Boulet, 577 F.2d at 1170.

Conaway first challenges a key piece of evidence in the

government's proof of his cash on hand. During the disputed years,

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Conaway deposited some cash from his law practice into a safe

deposit box, writing the amount of cash in the box on the deposit

dates on a business card he kept in the box. The government used

this card as the basis for its determination of his yearly cash on

hand. The amounts on the back of the card were listed with

corresponding dates and years. The eight entries on the back of

the card include one for 1985, six in chronological order for 1986,

and one in 1987. On the front of the card, seven entries without

corresponding years appear in a chronological order running from

February 25 to November 18. Conaway challenges the government's

contention that the notations without corresponding years listed on

the front of the card fell in 1985.

The jury acquitted Conaway of tax evasion for 1985, so the

accuracy of the government's estimated cash on hand for the

beginning of 1985 is no longer important. The question is whether

without the dates on the front of the card the government's

estimates of cash on hand at the beginnings of 1986, 1987, and 1988

are sufficiently certain.

We conclude that they are sufficiently certain. The six

entries dated 1986 were made in chronological order and cover the

period from January 20, 1986 to December 8, 1986. None of the

notations without corresponding years fall closer to December 31,

1985 than the entry for January 20, 1986, and none fall closer to

December 31, 1986 than the entry for December 8, 1986. The IRS

could base its estimates of cash on hand at the beginning of 1986

and 1987 on this series of entries with reasonable certainty. See

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generally Boulet, 577 F.2d at 1170 (noting that "[t]he prosecution

was not required to prove the opening cash figure with mathematical

exactitude").

As for 1988, the IRS had complete safe deposit box access

records for the period from April 22, 1987, through May 22, 1989,

and none of the dates on the front of the card corresponded to any

access date during that period. A reasonable estimate of cash on

hand at the beginning of 1988 could thus exclude the series of

entries on the front of the card from the calculation.

Conaway also contests sufficiency by arguing that the

government did not investigate other sources of cash on hand.

However, he does not show that he offered the government any

information about cash sources besides the safe deposit box. We

cannot reasonably expect the government to find secret cash hoards

without taxpayer assistance. See United States v. Normile, 587

F.2d 784, 786 (5th Cir. 1979). See also United States v. Johnson,

319 U.S. 503, 518 (1943) (declining to hold that "concealment is an

invincible barrier to proof"). The IRS agent's investigation of

the safe deposit box in this case satisfied the government's

burden.

AFFIRMED

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