Al Capone, Assets, Networth Method of Cracking Tax Cases

Dear insansapinas,
I am watching my favorite series Bones and CSI but I could not concentrate. I was bothered by this article of Malu Mangahas about the networth method used in cracking tax cases  which she claimed to have nailed Al Capone in his tax evasion case.   Nagkakamot ako ng ulo.


This article was the basis of the headline news in the Philippine Daily Inquirer. about Al Capone and the son of the former President Gloria Arroyo, Mikey Arroyo who together with his wife Angela were charged of tax evasion..


First, the table in the article  was wrongly captioned. It says below: 

A United States Internal Revenue Services (IRS) spreadsheet containing a calculation of Capone’s wealth. The IRS used the net worth method to investigate Capone, as well as other tax evaders.  Photo courtesy of Mario Gomes, MyAlCaponeMuseum.com.

These were not calculations of Al Capone's wealth. They were expenses that were claimed as itemized deductions from the  income subject to tax. Birthday party expenses are not  asset, so are political contributions and donations. Even a novice accountant would tell you that they are expenses. Nowhere in the table would show you, the real networth of Al Capone.


As the author had written, 

In the end, it took the U.S. Treasury Department to nail Capone, and it did so through a simple audit of his fabulous expenditures that led to the filing of tax evasion charges against him, his brother Ralph ‘Bottles’ Capone, Jake ‘Greasy Thumb’ Guzik, Frank Nitti, and other mobsters. That means it is not the NETWORTH METHOD which was used against AL CAPONE. IT WAS SIMPLE AUDIT which was usually conducted in examining the deductions claimed.

In the computation of taxable  income, not all deductions are allowed or if ever they are allowed there may be restrictions and conditions like in the case of  political ontributions and charity donations. Charitable donations are allowed only when given to a non-profit organizations which are registered as tax exempt. His church donations to church amounted to several thousands which during that time and even today were considered not all deductibles.Political contributions are also limited to a certain amount. Birthday parties expenses as listed in the table are not deductible expenses. The birthday parties, holidays celebrated were not deductible  not unless they were claimed to be for entertainment and promotion but hey, he had a separate expense account for that. The hotel expenses were not acquisition of hotels. They may be travel accommodations. When Al Capone traveled, he had retinue of his bodyguards and hangers-on. Even his wardrobe were claimed as expenses like the belt and  the expensive shirts which to entertainment people may be considered as deductible. Most important of all, the expenses should be supported by documents specifically bills or receipts.


In the case of Al Capone, in claiming the deductibles which were not authorized, he lowered the taxes he paid and that was fraud. To find  out if the expenses were deductible and legitimate, the IRS conducted an audit. It was the due process observed for someone who was being charged of tax evasion. It was not purely looking at his networth.

I particularly liked the scene in the Untouchables where Kevin Costner and Andy Garcia protected the bookkeeper of Al Capone as well as the baby in the carriage. The bookkeeper was the witness in the trial. But of course because he handled the books of accounts.


Networth Method 

The writer defined the networth method as 
“Increase in net worth plus non-deductible expenses, minus non-taxable receipts, equals taxable net income.”

She failed to mention that what is taxable is not the increase in the networth  but the change in the networth at the end of the year minus the beginning  networth or the networth in the previous year.Like the Balance sheet of an entity, SALN is an on-going record of the assets, liabilities and networth of the individual. These accounts are accumulated year after year. 


To illustrate: Assuming A has just started working in the government. He filed his first SALN in year 1.


Year 1 Assets = 50,000


           Liabilities: 30,000

          Networth 20,000

His income should be more or less close to this amount.

Year 2 He filed his second SALN
            Assets = 75,000
           Liabilities = 25,000
           Networth - 50,000
Assuming that all his income is from one source-employment, the taxable income is not the 50,000 but only the 30,000 which is derived by deducting the beginning networth of 20,000 from 50,000.on the second year.


Added to the change may be expenditures which were not accounted for in the SALN like real estate that were bought except if the title is not registered under the name of the taxpayer. Strategy na nila yong ilagay sa pangalan ng holding company (holding daw pero ilang lang ang may-ari at isa lang ari-arian) o kaya sa kamag-anak, sa mistress o sa kaibigan. Ito ang mga kailangan ng audit at ng discoveries. Parang si Magellan.


Gusto ko makulong ang mga tax evaders na yan kaya sana galingan ng mga nagsasampa ng kaso. Sabi nga sa Law and Order, yes we have sufficient evidence but will they hold to the court? 


Ang acquittal ng mga akusado minsan ay hindi dahil sa hindi sila guilty kung hindi sa collective incompetence ng mga prosecutors o kaya ang kulang na paghahanda sa kaso.


Pinaysaamerika