2842. Determining Income: Net Worth Method

In this case, the People are using what is called the net worth method to try to prove that the defendant had unreported taxable income. I will now explain the net worth method.

On any given date, a person's net worth is the value of everything that person owns minus the value of all that person's debts and financial obligations. It is the difference between what a person owns and what that person owes. The value of any item that a person owns is measured by what it was worth when it was acquired, not its current market value.

If the People prove that the defendant's net worth increased during <insert year alleged>, then you may but are not required to conclude that the defendant received money or property during that year.

In order to prove that the money or property received was taxable income, the People must also prove that: (1) the defendant had one or more sources of taxable income, and (2) the money or property the defendant received during the year did not come from nontaxable sources. Nontaxable sources of income include gifts, inheritances, loans, or redeposits or transfers of funds between bank accounts.

If the People have proved that: (a) the defendant's net worth increased during <insert year alleged>, (b) the defendant had one or more sources of taxable income, and (c) the money or property the defendant received during that year did not come from nontaxable sources, then you may but are not required to conclude that the money or property received was taxable income to the defendant. If you have a reasonable doubt about whether the People have proved (a), (b), or (c), you must find that the People have not proved under the net worth method that the defendant had unreported taxable income.

In order to prove that the defendant had unreported taxable income [using the net worth method], the People must also prove that the defendant's net worth increased by an amount that was substantially greater than the income that the defendant reported on (his/her) tax return for <insert year alleged>.

[There is another factor you may consider in deciding whether the People have proved that the defendant had unreported taxable income under the net worth method. If the People have proved beyond a reasonable doubt that: (1) during the year, the defendant spent money in ways that did not change (his/her) net worth at the end of the year and (2) those expenditures would not be valid tax deductions, then you may but are not required to conclude that the defendant received money or property during the year. If the People also prove beyond a reasonable doubt that the money or property received did not come from nontaxable sources, then you may but are not required to conclude that the money or property was also taxable income. If you have a reasonable doubt about whether the People have proved any of these factors, you may not take the expenditures into account in applying the net worth method.]

In order to rely on the net worth method of proving income, the People must prove the defendant's net worth at the starting point with reasonable certainty. Here the starting point is January 1, <insert year alleged>. The People are not required to prove the exact value of each and every asset the defendant owned at the starting point. However, the People must prove beyond a reasonable doubt that all the assets the defendant owned at the starting point were not enough to account for any proven increase in (his/her) net worth during the year.

In deciding whether the defendant's net worth at the starting point has been proved with reasonable certainty and whether the People have proved that any money or property the defendant received during the year did not come from nontaxable sources, consider whether law enforcement agents sufficiently investigated all reasonable "leads" concerning the existence and value of other assets and sources of nontaxable income. Law enforcement agents must investigate all reasonable leads that arise during the investigation or that the defendant suggests regarding assets and income. This duty to reasonably investigate applies only to leads that arise during the investigation or to explanations the defendant gives during the investigation. Law enforcement agents are not required to investigate every conceivable asset or source of nontaxable funds.

If you have a reasonable doubt about any of the following:

A. Whether the investigation reasonably pursued or refuted the defendant's explanations or other leads regarding defendant's assets or income during the year,

B. Whether the People have proved the defendant's net worth at the beginning of <insert year alleged> to a reasonable degree of certainty,

OR

C. Whether the People have proved that any increase in the defendant's net worth[, together with any nondeductible expenditures the defendant made during the year,] was substantially more than the income that the defendant reported on (his/her) tax return for <insert year alleged>, then you must find that the People have not proved under the net worth method that the defendant had unreported taxable income.

[If, on the other hand, you conclude that the defendant did have unreported taxable income, you must still decide whether the People have proved all elements of the crime[s] charged [in Count[s] ].]

Bench Notes

Instructional Duty

If the prosecution is relying on the net worth method, the court has a sua sponte duty to give this instruction. (Holland v. United States (1954) 348 U.S. 121, 129 [75 S.Ct. 127, 99 L.Ed. 150]; United States v. Hall (9th Cir. 1981) 650 F.2d 994, 998.)

The court must also give the appropriate instruction on the elements of the offense charged.

Give the bracketed sentence that begins with "If, on the other hand, you conclude" in every case, unless the court is giving CALCRIM No. 2846, Proof of Unreported Taxable Income: Must Still Prove Elements of Offense.

Authority

Net Worth Method Explained. Holland v. United States (1954) 348 U.S. 121, 129 [75 S.Ct. 127, 99 L.Ed. 150]; see also Pattern Jury Instructions of the District Judges Association of the Eleventh Circuit, Offense Instruction No. 93.2 (2003); Federal Jury Practice and Instructions, Criminal (5th ed.) § 67.05.

sua sponte Duty to Instruct on Method. Holland v. United States (1954) 348 U.S. 121, 129 [75 S.Ct. 127, 99 L.Ed. 150]; United States v. Hall (9th Cir. 1981) 650 F.2d 994, 998.

Requirements for Proof. Holland v. United States (1954) 348 U.S. 121, 129-138 [75 S.Ct. 127, 99 L.Ed. 150]; see also United States v. Sabino (6th Cir. 2001) 274 F.3d 1053, 1071.

(New January 2006)