Frank Worth v. Cir

FILED
NOT FOR PUBLICATION
DEC 21 2016
UNITED STATES COURT OF APPEALS MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
FRANK KENNETH WORTH, AKA No. 15-70665
Frank Worth, AKA Frank K. Worth;
HELEN LAURA WORTH, AKA Helen Tax Ct. No. 12573-09
Worth, AKA Helen L. Worth,
Petitioners-Appellants, MEMORANDUM*
v.
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.
FRANK KENNETH WORTH, AKA No. 15-70668
Frank Worth, AKA Frank K. Worth,
Tax Ct. No. 12808-09
Petitioner-Appellant,
v.
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
Appeals from a Decision of the United States Tax Court
Argued and Submitted December 6, 2016
Pasadena, California
Before: REINHARDT, TASHIMA, and PAEZ, Circuit Judges.
Frank and Helen Worth (together, “Taxpayers”) appeal from the United
States Tax Court’s determination of their tax liabilities. We have jurisdiction
under 26 U.S.C. § 7482(a)(1), and we affirm.
In 2007, Frank Worth pled guilty to willfully making and subscribing to a
false tax return for the year 2000 in violation of 26 U.S.C. § 7206(1). In his plea
agreement, he admitted that he had underreported his income from White Sands, a
chain of retail shops that he co-owned with his parents, in the years 1998, 1999,
and 2000.
In 2009, the government initiated the process of recovering unpaid taxes
from Taxpayers serving them with Notices of Deficiency. The Notices set forth
their tax deficiencies as calculated by Internal Revenue Service Agent Helen Chan.
Agent Chan had used the net worth method, an indirect method of reconstructing
unreported income used when reliable records are unavailable, and the dash
method, an assumption that cash levels remained constant over the period under
examination.
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Taxpayers petitioned the Tax Court for redetermination of their deficiencies.
Prior to trial, they filed a motion in limine to preclude Agent Chan from testifying
as an expert witness. The Tax Court denied the motion on the ground that Agent
Chan could testify as a “lay witness[]” regarding the “details of the methodology
[she] employed to determine unreported income (but not the validity of said
methodology).” Agent Chan then testified at trial as to how she used the net worth
method to calculate Taxpayers’ tax deficiencies. Accepting Agent Chan’s
calculations, the Tax Court found Taxpayers collectively liable for $214,120 in
unpaid taxes. The Tax Court also found Frank Worth individually liable for an
additional $73,403 in unpaid taxes and $215,642.25 in fraud penalties. Taxpayers
now timely appeal those determinations.
“We review decisions of the Tax Court on the same basis as decisions in
civil bench trials in district court.” Shea Homes, Inc. & Subsidiaries v. Comm’r,
834 F.3d 1061, 1066 (9th Cir. 2016) (quoting Estate of Ashman v. Comm’r, 231
F.3d 541, 542 (9th Cir. 2000) (internal quotation marks omitted)). We review
rulings on motions in limine for abuse of discretion. United States v. Alvirez, 831
F.3d 1115, 1120 (9th Cir. 2016). “[W]e review findings of fact for clear error.”
Shea Homes, 834 F.3d at 1066.
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1. Taxpayers first argue that because Agent Chan’s testimony was based
on her specialized knowledge of accounting, the Tax Court erred in allowing her to
testify without requiring the government to disclose her as an expert witness. See
Fed. R. Evid. 702; Fed. R. Evid. 701(c) (prohibiting a non-expert witness from
testifying “based on scientific, technical, or other specialized knowledge”).
Even assuming, however, that Agent Chan’s testimony was expert opinion,
the argument fails because Taxpayers have not shown prejudice. Admission of
expert testimony that was not disclosed as such is harmless error, where the
witness was “qualified to deliver the opinion testimony” and the opposing party
does not demonstrate “how or why the [outcome] would have been different if he
had been given notice” of the witness’ testimony. See United States v. Figueroa-
Lopez, 125 F.3d 1241, 1247 (9th Cir. 1997). Taxpayers do not dispute that Agent
Chan’s education and experience qualified her to apply the net worth method. Nor
have they shown that her methodology was unreliable, identified any flaws in her
calculations that were overlooked at trial, or otherwise demonstrated that
disclosing her as an expert could have made a difference to the outcome of their
case.
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2. Taxpayers also argue that the Tax Court erred in accepting Agent Chan’s
calculations because those calculations failed to account for cash that they had in
their possession at the end of 1997.
In calculating a tax deficiency using the net worth method, the
Commissioner must establish “with reasonable certainty” a taxpayer’s opening net
worth, which is his or her net worth at the beginning of the time period under
review. United States v. Greene, 698 F.2d 1364, 1372 (9th Cir. 1983). If, as of
that time, the taxpayer had “substantial cash on hand” that was not accounted for in
the calculations, the net worth method may yield an overestimate of the taxpayer’s
unreported income because “the net worth increase shown by the Government[]”
and attributed to unreported income “is in reality not an increase at all.” Holland v.
United States, 348 U.S. 121, 127 (1954).
Taxpayers claim that at the end of 1997, which is the beginning of the time
period under review, they were holding a hoard of excess cash comprised of funds
from White Sands’ operations. The Tax Court found there was no such cash hoard
and concluded that Agent Chan’s opening net worth figure had been proven to a
reasonable certainty. Whether “the ‘cash hoard’ claimed by appellant[s] was
actually in existence . . . present[s] a simple question of fact” reviewed for clear
error. See Summers v. United States, 250 F.2d 132, 135 (9th Cir. 1957). The Tax
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Court’s finding that there was no cash hoard was not clearly erroneous. The only
evidence in support of the existence of the alleged hoard was Frank Worth’s
testimony, which the Tax Court did not find credible and was not required to
accept. See Greene, 698 F.2d at 1372.
Taxpayers further argue that the Commissioner’s estimate of their opening
net worth was not reasonable, because White Sands undisputedly had some amount
of cash on hand for operations at the end of 1997, which Agent Chan did not
account for when she assumed “‘zero’ [as] the cash on hand data point” in applying
the dash method. The dash method is not, however, an assumption that the
taxpayer had no cash, but rather an assumption that the taxpayer’s cash levels
remained constant for the years under examination. See Internal Revenue Manual
§ 9.5.9.5.5.3. The fact that Taxpayers had some cash at the end of 1997 is not
inconsistent with an assumption of constant cash levels in 1998, 1999, and 2000,
and thus does not invalidate the use of the dash method. See United States v.
Giacalone, 574 F.2d 328, 331 (6th Cir. 1978) (rejecting as “fallacious” an
argument that the government failed to establish opening net worth “with
‘reasonable certainty’” because the defendant had “prov[en] the existence of cash”
but “no cash was shown” in the government’s calculations due to its use of the
dash method).
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AFFIRMED.
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