United States v. Leak ( 2000 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
UNITED STATES OF AMERICA,
Plaintiff-Appellant,
v. No. 99-4722
CURTIS JAMES LEAK,
Defendant-Appellee.
Appeal from the United States District Court
for the Western District of North Carolina, at Charlotte.
Graham C. Mullen, Chief District Judge.
(CR-93-255-MU)
Argued: June 9, 2000
Decided: September 20, 2000
Before MICHAEL and TRAXLER, Circuit Judges, and
BUTZNER,* Senior Circuit Judge.
_________________________________________________________________
Reversed and remanded by unpublished per curiam opinion.
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COUNSEL
ARGUED: Frank DeArmon Whitney, Assistant United States Attor-
ney, Charlotte, North Carolina, for Appellant. Michael Smith Sco-
field, Charlotte, North Carolina, for Appellee. ON BRIEF: Mark T.
_________________________________________________________________
*Senior Judge Butzner heard oral argument in this case but did not
participate in the decision. The opinion is filed by a quorum of the panel.
28 U.S.C. § 46(d).
Calloway, United States Attorney, Brian Lee Whisler, Assistant
United States Attorney, Charlotte, North Carolina, for Appellant.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
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OPINION
PER CURIAM:
A jury found Curtis James Leak (Leak) guilty of conspiring against
the Internal Revenue Service and of income tax evasion for three
years. The district court set aside the verdict and, in the alternative,
granted Leak a new trial. See United States v. Leak, No. 3:93-CR-
255-1MU, 1999 WL 1940037 (W.D.N.C. Sept. 8, 1999). The United
States appeals. We reverse the district court and remand the case for
sentencing.
I.
On August 1, 1994, Leak and his wife, Karen, were charged in a
superseding indictment with one count of conspiracy to defraud and
impede the IRS in its collection of revenue, in violation of 18 U.S.C.
§ 371; four counts of income tax evasion for the years 1987 through
1990, in violation of 26 U.S.C. § 7201; and seven counts of structur-
ing or causing a currency transaction report not to be filed, in viola-
tion of 31 U.S.C. §§ 5324(1), 5324(3), 5322(a); 26 U.S.C. § 7203.
The district court granted Karen Leak's motion to sever her case. The
court dismissed the structuring counts on April 9, 1997, and the case
went to trial against Leak.
The government offered the following evidence. On January 17
and 18, 1991, the Leaks made thirty-three cash deposits in twenty-one
separate branches of three Charlotte-area banks. The deposits were
made in three accounts, two in Leak's name and one in Karen Leak's
name. The deposits amounted to $152,300 and ranged in size from
2
$2,500 to $5,200.1 Over six days in March and April 1991 the Leaks
made an additional fourteen cash deposits at nine different branch
locations of one of these banks, for a total deposit of $54,110. Once
again, the individual deposits were for no more than $5,000.
The IRS's Criminal Investigation Division commenced an investi-
gation after learning about these questionable deposits. After review-
ing the Leaks' financial history and records, the IRS concluded that
the deposits did not come from nontaxable income. In 1986 the Leaks
had filed for Chapter 13 bankruptcy, declaring a negative net worth
of approximately $19,000. At that time they had no cash, they were
behind on loan payments, and the mortgagee on their house was con-
sidering foreclosure. Karen Leak had asked her employer for cash
advances on several occasions in 1986. In that same year Curt Enter-
prises, a corporation owned by Leak, filed for Chapter 11 bankruptcy
and ultimately liquidated under Chapter 7. In 1987 Curtis Leak had
his car repossessed. Finally, the Leaks were under a five-year bank-
ruptcy plan to pay off their debts by 1991.
The Leaks reported only modest income on their tax returns for the
years leading up to 1991, when the structured cash deposits were
made. Specifically, for 1986 through 1990 the Leaks reported on their
joint returns a total of $123,220.52 in taxable net income, a figure that
was considerably short of the $206,410 in cash deposits made by the
Leaks in the first four months of 1991. Prior to the cash deposits the
Leaks did not have any significant source of legal nontaxable income,
such as an inheritance.
In the course of the IRS's investigation, agents interviewed Leak
on three occasions. He told the agents that the cash deposited in 1991
was a loan from his corporation, TKC, Inc, which ran a night club
called "Side Effects." Leak claimed that TKC's cash was stored in
safes in his house because he "did not trust banks." According to
Leak, the Leaks borrowed the cash from TKC in order to pay off their
home mortgage and to finance an addition to their home. He claimed
that he had intended to refinance his mortgage and use the proceeds
from the refinancing to repay the loan to TKC. He claimed that he
_________________________________________________________________
1 A bank must file a currency transaction report with the IRS whenever
a cash transaction exceeds $10,000. See 31 C.F.R. § 103.22.
3
made the many smaller cash deposits rather than a single deposit
because he did not want to draw attention to himself and because he
was afraid of being robbed.
In these interviews the IRS also asked both of the Leaks about the
status of TKC's tax returns. Karen Leak, an accountant for a power
company, usually prepared the couple's personal and corporate tax
returns. She told the IRS that she had already filed returns for TKC
for 1986 through 1989 and that she had filed an extension for the
1990 corporate return. At that time, however, none of the returns had
been filed.2 TKC's corporate income tax returns for 1987, 1988, and
1989 were not filed until July 22, 1991, nineteen days after the IRS's
last interview with Leak. A return for 1986 was never filed.
Several items of documentary information contradicted Leak's
claim that the 1991 cash deposits represented a loan from TKC. First,
none of TKC's corporate records mention any such loan. Second,
TKC filed its income tax return on IRS Form 1120-A, which requires
the corporation to list any "Loans to stockholders." The loan did not
appear on TKC's returns until the 1992 return, which was filed after
the Leaks had been indicted. Moreover, TKC's tax returns revealed
that TKC generated only $17,693 in total net taxable income for the
period of 1987 through 1989, a very small sum compared to the
$206,000 in cash deposits in early 1991. Third, Leak denied the exis-
tence of any loan in an interrogatory answer in a civil forfeiture pro-
ceeding arising out of these events. On June 21, 1991, the United
States instituted a civil forfeiture proceeding against the Leaks' house
and car. See United States v. Leak, 123 F.3d 787 (4th Cir. 1997). In
that action Leak answered a series of interrogatories about his
finances. One interrogatory asked him to disclose his salary and "each
and every other source of payment or income received whether earned
_________________________________________________________________
2 The IRS also requires employers to file annually a Form 940, which
reports the total amount of wages paid to employees. This information
must be provided quarterly on a Form 941. See 26 C.F.R. § 31.6011(a)-
(3), (4). TKC had filed virtually none of these employment tax forms.
From 1986 through 1995 the corporation did not file any IRS Forms 940
and filed only three quarterly IRS Forms 941. Three former Side Effects
employees testified that they were paid their salary in cash and were
never provided W-2 forms.
4
or unearned, by you from any source(s) since January 1, 1985, includ-
ing but not limited to proceeds from . . . loans, or lines of credit."
Leak did not list any loan from TKC.
Central to the government's case was the expert testimony of IRS
Agent David Walden. Agent Walden used a net worth and expendi-
ture analysis to opine that the Leaks had been underreporting their
income for several years prior to their cash deposits in early 1991.
Walden explained that "net worth and expenditure analysis" is a
"method of determining income by looking at the increase or decrease
in net worth from the beginning of a period to the end of a period, and
then . . . mak[ing] necessary adjustments for personal living expenses
and subtract[ing] out nontaxable sources of income." In a net worth
analysis it is essential to determine the initial net worth with reason-
able accuracy. The Leak case presented a particularly appropriate case
for net worth analysis because the Leaks provided a list of their assets
and liabilities under oath when they filed for bankruptcy in 1986.
Because of the ease in determining the Leaks' net worth at the time
of bankruptcy, Agent Walden began his analysis in 1986, when the
bankruptcy filing showed a negative net worth of $18,981.35. (Leak's
expert agreed with the accuracy of this figure.)
Walden then calculated the value of Leak's assets for each year
from 1986 through 1990. He divided the assets into two categories:
cash on hand3 and all other assets. Agent Walden estimated the cash
on hand at the end of 1990 at $194,030.93. To arrive at this figure,
Walden established that the Leaks had spent $338,419.41 in the first
four months of 1991. At the beginning of 1991 the Leaks had
$144,388.48 in funds available in bank accounts, gross receipts from
Side Effects, and Karen Leak's salary. The amount spent,
$338,419.41, less the amount in known funds available, $144,388.48,
left the amount of cash on hand at $194,030.93 at the end of 1990.
Walden said that this figure was conservative because his calculation
would not capture any hidden cash that was not spent by the Leaks.
Walden then had to estimate how much of this cash had been accumu-
lated each year. Walden explained that Leak had admitted accumulat-
ing the cash he deposited in 1991 from 1987 through 1990. The
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3 Cash on hand refers to the amount of money a person has in actual,
physical cash.
5
bankruptcy documents showed that the Leaks had no cash on hand in
1986. Leak admitted to IRS investigators that beginning from March
1987 to July 1989 he had accumulated $10,000 to $15,000 in cash on
hand. Walden took the average of these numbers and estimated that
Leak had $12,500 of cash on hand in July of 1989. Walden, therefore,
concluded that Leak had accumulated $12,500 from March 1987
through July 1989 and $181,530.93 from July 1989 through the end
of 1990. Walden's next step was allocating how much of the $12,500
was accumulated in 1987, 1988, and 1989 and how much of the
$181,530.93 was accumulated in 1989 and 1990. Walden explained
that the most accurate method of allocating these amounts was to
assume that the amounts fluctuated with the gross receipts of TKC.
In other words, the more cash Side Effects was generating, the more
cash Leak was likely to be storing in his safe. By using the gross
receipts figures that TKC reported to the North Carolina Alcohol Bev-
erage Control Board, Walden arrived at a cash on hand estimate for
Leak for the years 1987 through 1990.
Walden then calculated the value of Leak's other assets. These
assets included cars, bank accounts, and home furnishings. Walden
explained why he attributed certain assets to Leak rather than to TKC.
For example, Walden said that he attributed the value of a Porsche in
Leak's possession to Leak even though the car was titled in the name
of TKC and Karen Leak. The Porsche was attributed to Leak in part
because the car was not listed on the balance sheet in TKC's corpo-
rate tax returns and because Leak told the Porsche salesperson that the
car was for personal use. Leak also stipulated to his ownership of sev-
eral assets.
With the value of the Leak's assets calculated for each year
between 1987 and 1990, Walden's next step was to compare the value
of Leak's assets with the amount of his liabilities. After comparing
assets with liabilities, Walden calculated the increases in net worth
from 1987 through 1990. He calculated the increases as $37,538.82
for 1987, $94,902.50 for 1988, $53,022.70 for 1989, and $136,522.40
for 1990.
Walden next calculated the amount of tax underreported by Leak.
Walden calculated adjusted gross income by adding increases in net
worth to personal expenses and by subtracting nontaxable sources of
6
income. After calculating adjusted gross income for each year from
1987 through 1990, Walden was then able to show that Leak substan-
tially underreported his taxable income in each year from 1987
through 1990. Walden concluded that Leak underreported his taxable
income by $35,107.14 in 1987, $73,639.53 in 1988, $40,480.59 in
1989, and $124,260.50 in 1990.
Leak offered a defense. He testified that the cash deposited in 1991
was the result of a loan from TKC. He said that when he got his first
job after college, he kept his salary in a football helmet, rather than
a bank, because he distrusted banks. Leak said that his distrust of
banks stemmed from his early life in the projects, where he learned
that "you wouldn't trust people." He testified that he planned to repay
TKC after he refinanced his mortgage. Leak also disputed Walden's
effort to attribute certain assets to him rather than to TKC in the net
worth analysis. For example, Leak claimed that Walden incorrectly
attributed a First Federal Savings bank account to him. Leak
explained that even though the bank account was in his personal
name, the account was TKC's. Leak presented an expert who testified
that if the disputed assets were attributed to TKC rather than to Leak,
Leak overpaid his taxes for 1987, 1989, and 1990 and minimally
underreported his income for 1988.
The jury took about six hours to find Leak guilty of conspiracy and
of tax evasion for 1988, 1989, and 1990. The jury acquitted him of
tax evasion for 1987. Thereafter, Leak made a post-verdict motion for
an acquittal, which the district court granted. The district court (on its
own motion) granted him a new trial, in the alternative.
The district court offered four reasons for granting a judgment of
acquittal. First, the district court concluded that the evidence was
insufficient to prove that the cash Leak held in his safe was income
to him in the years charged in the indictment. See Leak, 1999 WL
1940037, at *2-*3. The court said that before 1991 the evidence
showed that Leak did nothing more than hold the cash in his safe for
TKC and therefore the cash was not income to him. See id. Second,
the court concluded that Agent Walden's net worth analysis was
faulty because he allegedly used $12,500 as his starting point for cash
on hand. See id. at *4. Further, the court criticized Walden's use of
Side Effect's gross receipts rather than net income in apportioning
7
cash on hand among the years charged in the indictment. See id. at
*3. Third, the court concluded that the government failed to distin-
guish adequately between TKC's corporate and Leak's personal
assets, thereby inflating the amount of Leak's personal income. See
id. at *4. Fourth, the court held that in light of the insufficient evi-
dence to sustain the tax evasion counts, the case of Yates v. United
States, 354 U.S. 298, 311-312 (1957), mandated overturning Leak's
conspiracy conviction. See Leak, 1999 WL 1940037, at *5. The gov-
ernment appeals.
II.
When we assess the sufficiency of the evidence in a criminal con-
viction on direct review, "[t]he verdict of[the] jury must be sustained
if there is substantial evidence, taking the view most favorable to the
Government, to support it." Glasser v. United States, 315 U.S. 60, 80
(1942). We review de novo the district court's grant of a post-verdict
acquittal. See United States v. Campbell, 977 F.2d 854 (4th Cir.
1992). We are not entitled to weigh the evidence or to assess the cred-
ibility of witnesses, but we must assume that the jury resolved all con-
tradictions in favor of the Government. See United States v. Romer,
148 F.3d 359, 364 (4th Cir. 1998), cert. denied , 525 U.S. 1141(1999).
The district court erred by acquitting Leak and granting him a new
trial. We begin with the tax evasion counts. In order to prove a viola-
tion of 26 U.S.C. § 7201, the government must show beyond a rea-
sonable doubt (1) willfulness, (2) the existence of a deficiency, and
(3) an affirmative act constituting evasion or attempted evasion of tax.
See Sansone v. United States, 380 U.S. 343, 351 (1965). The district
court's first conclusion was that for the years charged in the indict-
ment the government presented insufficient evidence that the cash
Leak held in his safe was personal income because he did not spend
the cash until 1991. See Leak, 1999 WL 1940037, at *2-*3. In the
words of the district court, "The evidence presented at trial showed
that during the years for which he was convicted, Mr. Leak: 1) Was
merely holding the corporate funds in his safe; 2) Was charged with
this function as one of his corporate duties; and 3) Had not used any
of these funds for personal expenditures." Id. at *2. Finally, the dis-
8
trict court concluded that the funds were not transferred to Leak until
1991, when Leak says TKC loaned him the money.
We cannot agree with the district court. The jury could have ratio-
nally concluded that there was no loan from TKC to Leak in 1991.
Leak acknowledged that there was no loan in answering an interroga-
tory in January 1992 in the civil forfeiture proceeding. TKC's corpo-
rate balance sheets did not reveal a loan. TKC's tax returns did not
mention any loan to a stockholder until the 1992 return was filed in
November 1994, after the Leaks had been indicted. The suspicious
manner in which Leak made the deposits is also evidence that there
was never a loan.
Once the jury concluded that there was no loan in 1991, the jury
could then have rationally concluded that the cash hoarded by Leak
in his personal safes was personal income in 1988, 1989, and 1990,
even if Leak did not spend any of this money until 1991. The ultimate
issue in determining whether corporate funds become personal
income is "control," not "expenditure." United States v. Toushin, 899
F.2d 617, 624 (7th Cir. 1990). As the Fifth Circuit has explained,
"The burden . . . does not lie upon the Government . . . to show how
the funds were spent. Once a taxpayer has taken control of funds
diverted from a corporation and then fails to report such funds as
income or to make any adjustment in the corporate books to reflect
a return of capital, that is sufficient to imply willful intent to evade
taxes." United States v. Thetford, 676 F.2d 170, 175 (5th Cir. 1982).
Leak admitted to accumulating the cash he spent in 1991 from
1987 through 1990.4 Leak's substantial expenditures in 1991 are evi-
dence that Leak treated the cash he hoarded as his and not TKC's. In
other words, the jury could have concluded that Leak's decision to
spend corporate funds for personal use did not originate with his
expenditures in 1991 but rather with his storing of cash in his safes
beginning in 1987. The fact that Leak stored this cash in his personal
safes rather than a bank account is evidence that Leak treated this
cash as his own. The jury could have rationally disbelieved Leak's
claim that he was storing TKC's cash in his safes rather than in a bank
_________________________________________________________________
4 Agent Walden estimated that Leak accumulated $132,517.58 in 1990,
$53,388.35 in 1989, and $5,500.00 in 1988.
9
because he distrusted banks. Indeed, Leak did not give consistent tes-
timony regarding his alleged distrust of banks. Leak vigorously
argued at trial that a bank account containing a balance of $84,324 in
December 1988 was TKC's, even though the amount was in his name.5
The jury could have concluded that by arguing that this $85,000 bank
account was really TKC's, his claim that he distrusted banks was not
genuine. We also note that there was evidence that Leak spent some
of TKC's cash prior to 1991 as the Leaks spent significantly more
than their reported income in 1988, 1989, and 1990.
The district court also acquitted Leak for the tax evasion charges
because the court concluded that the government had introduced
insufficient evidence to prove that certain assets were Leak's as
opposed to TKC's. See Leak, 1999 WL 1940037, at *4. While it is
true that Agent Walden's conclusions hinged on identifying certain
assets as Leak's rather than TKC's, Walden explained to the jury why
those assets should be attributed to Leak. For example, Leak argued
that a bank account at First Federal was TKC's and not his. Walden
treated the bank account as Leak's because the bank account was in
Leak's name and not TKC's. Moreover, Leak's failure to file tax
returns for TKC or to maintain complete corporate records discredits
his claim that certain assets were not his. Thus, the jury could have
rationally concluded that the disputed assets were Leak's and not
TKC's.
Finally, the district court erroneously concluded that Agent Wal-
den's net worth analysis was sufficiently faulty to warrant an acquit-
tal. The district court stated that Walden's analysis was flawed
because he "arbitrarily" chose $12,500 as his starting point for calcu-
lating cash on hand. See id. In fact, Walden used zero as his starting
point.6 The $12,500 figure was used in 1989, not as the starting point
in 1987. The district court also criticized Walden for using Side
Effect's gross receipts, as opposed to net income, in apportioning the
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5 At trial when Leak was asked about this account, not only did he not
mention his distrust of banks, but he said he put TKC's money in the
bank to earn interest.
6 Actually, using $12,500 rather than zero would have benefitted Leak
because a higher starting point would have yielded a lower increase in
net worth.
10
amount of cash Walden accumulated from 1987 to 1990. See id. at *3.
While taking expenses into account might have yielded a more accu-
rate apportionment, there is no evidence that the amount of expenses
varied disproportionately with the amount of gross receipts during the
relevant years. We cannot conclude that Walden's analysis was preju-
dicial. See United States v. Terrell, 754 F.2d 1139, 1146 (5th Cir.
1985) (stating that cash on hand "need not be proved with mathemati-
cal exactitude, but . . . must be established with reasonable certainty").
The evidence, when taken in the light most favorable to the govern-
ment, is sufficient for the jury to have concluded that Leak evaded his
income taxes in 1988, 1989, and 1990. The district court therefore
erred in granting Leak a post-verdict judgment of acquittal on the tax
evasion counts.
We now turn to the conspiracy conviction, which the district court
also overturned. The jury found Leak guilty of conspiring with his
wife, Karen, to evade the payment of income taxes. The conspiracy
was accomplished, according to the government's proof, by the actual
tax evasion in 1988-90 charged in the substantive counts and by the
Leaks' activities in 1991, including the elaborate scheme of many
small bank deposits. The district court decided that a judgment of
acquittal was required on the conspiracy count because of the
Supreme Court's opinion in Yates v. United States, 354 U.S. 298(1957). See Leak, 1999 WL 1940037, at *5. In Yates the Court held
that a verdict must be set aside "where the verdict is supportable on
one ground, but not on another, and it is impossible to tell which
ground the jury selected." Id. at 311-12. The district court reasoned
that because the evidence was insufficient to convict Leak on the tax
evasion counts, there was a significant risk that the jury convicted
Leak for conspiracy based on its verdicts of guilt on the tax evasion
counts covering 1988 through 1990. Therefore, even though there was
other evidence, such as the deposit and spending activity in 1991 to
support the conspiracy conviction, the conviction could not stand.
We reverse the district court for several reasons. First, because the
tax evasion counts are supported by sufficient evidence, there is no
concern about juror confusion. Second, the district court misapplied
Yates. Yates has been limited to cases where the impermissible
ground on which the jury might have relied was constitutional or legal
11
error rather than sufficiency of the evidence. A general verdict of guilt
is not to be set aside "because one of the possible bases of conviction
. . . [is] merely unsupported by sufficient evidence." Griffin v. United
States, 502 U.S. 46, 56 (1991). Therefore, even if there was insuffi-
cient evidence to support the tax evasion counts, Yates would be inap-
plicable. Rather, the question would be whether there was sufficient
evidence apart from the alleged tax evasion in 1988, 1989, and 1990
to sustain the conspiracy conviction. The Leaks' activities in 1991
would clearly support a conspiracy conviction. The jury could have
rationally believed that there was no loan from TKC and that the
Leaks agreed to (and did) undertake the extensive series of smaller
deposits to conceal their use of over $206,000 in corporate funds for
personal use. The jury could also have rationally concluded that the
Leaks did this in order to impede or defraud the IRS in its collection
of revenue. The 1991 activity is distinct from the tax evasion in prior
years because, to establish the conspiracy, the government is not
required to prove that Leak treated this cash as his own prior to 1991.
As a result, both the tax evasion in 1988-90 and the Leaks' activities
in 1991 independently support the conspiracy conviction. For these
reasons, the district court also erred in granting Leak a judgment of
acquittal on the conspiracy count.
III.
This case is simply about the strength of the government's evi-
dence. Because the evidence is sufficient to support Leak's conviction
on the three counts of income tax evasion and the one count of con-
spiracy, there was no basis for the district court (on its own motion)
to grant Leak a new trial. We reverse the judgment of acquittal and
reinstate the jury's verdict. The case is remanded for sentencing.
REVERSED AND REMANDED
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