United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued April 4, 2011 Decided October 7, 2011
No. 10-3039
UNITED STATES OF AMERICA,
APPELLEE
v.
ABDUL KARIM KHANU,
APPELLANT
Appeal from the United States District Court
for the District of Columbia
(No. 1:09-cr-00087)
John W. Nields Jr., argued the cause for appellant. With
him on the briefs were William R. Martin and Kerry Brainard
Verdi.
Katherine M. Kelly, Assistant U.S. Attorney, argued the
cause for appellee. With her on the brief were Ronald C.
Machen Jr., U.S. Attorney, and Elizabeth Trosman and
Suzanne G. Curt, Assistant U.S. Attorneys. Roy W. McLeese
III, Assistant U.S. Attorney, entered an appearance.
Before: SENTELLE, Chief Judge, GINSBURG and BROWN,
Circuit Judges.
2
Opinion for the Court filed PER CURIAM.
Opinion concurring in part and dissenting in part filed by
Chief Judge SENTELLE.
PER CURIAM: Appellant Abdul Karim Khanu appeals his
conviction and sentence on two counts of attempted tax
evasion. He argues the Government failed to prove the
element of tax loss because it relied upon a flawed calculation
under the “cash method of proof” and attributed to Khanu
$1.9 million of alleged gain when those funds, as a matter of
law, belonged to his two corporations. Khanu challenges his
sentence to the extent it rests upon the allegedly incorrect
calculation of tax loss. We affirm the convictions and the
sentence.
Background
This appeal arises from an indictment returned in March
of 2009, charging appellant Khanu with twenty-two counts
generally related to his alleged evasion of personal income
taxes and corporate taxes arising from his operation of two
nightclubs in Washington, DC. According to the evidence
adduced at trial, appellant owned or co-owned corporations
which operated the two nightclubs from 1999 until 2003. In
preparation for establishment of the first nightclub, appellant
leased a property in northwest Washington from a landlord
who required the submission of a personal balance sheet. The
balance sheet, which became critical evidence for reasons
which will be set forth more fully below, indicated that
appellant personally had $700,000 in cash on hand and in
bank accounts as of April 12, 1999. The operation of the
nightclubs generated substantial amounts of cash from such
items as cover charges at the door and sales from the bars.
Khanu was responsible for large cash deposits in the corporate
3
bank accounts.
In October of 2003, Internal Revenue Service agents
executed a search warrant on Khanu’s home and seized
approximately $1.9 million in cash from a safe in a dead-bolt-
locked pantry. Khanu later swore an affidavit attesting that
the $1.9 million “is the property” of the corporations, which,
pursuant to a closing agreement with the IRS, then used the
money to satisfy outstanding tax liabilities of their own.
In March of 2009, the grand jury returned the twenty-two
count indictment charging: (1) conspiracy (18 U.S.C. § 371)
(Count 1); (2) three counts of attempted tax evasion related to
the filing of his individual income tax returns from 2001
through 2003 (26 U.S.C. § 7201) (Counts 2-4); (3) four counts
of aiding and assisting in the preparation and filing of false tax
returns related to the annual corporate tax returns for two
corporations of which he was an owner for the fiscal years
ending September 30, 2002 and 2003 (26 U.S.C. § 7206(2))
(Counts 5-8); and (4) fourteen counts of aiding and assisting
in the preparation and filing of false tax returns related to the
quarterly tax returns for those corporations during the same
time period (26 U.S.C. § 7206(2)) (Counts 9-22).
Before trial, the defense moved to exclude evidence of
the $1.9 million, arguing that Khanu had disclaimed any
ownership of the funds in the affidavit, and that the funds
could not be included in his net worth at the end of 2003
because the Government had seized them before the end of
that tax year. The district court denied Khanu’s motion
because, notwithstanding the putative “repayment” of the $1.9
million to the corporations, a jury could find Khanu had
exercised sufficient control over the money for it to be taxable
as personal income to him.
After a three-week trial, the jury found Khanu guilty of
4
two counts of attempted tax evasion related to the filing of his
individual tax returns for 2002 and 2003 but acquitted him of
all other charges. The district court sentenced Khanu to
concurrent thirty-eight month terms of incarceration on the
two counts of conviction followed by concurrent three-year
terms of supervised release, and ordered restitution of
$951,520.00. In an amended judgment, the court reduced the
amount of restitution to $302,832.64.
The Trial
As pertinent to this appeal, critical evidence offered by
the government in the trial included an income and tax
computation presented by an expert witness and evidence of
the $1.9 million seized under the search warrant of October
2003. The government presented the computation evidence
through IRS Agent Freddie Lewis. The theory of the
government’s case as to both years, outlined by Lewis, was
based on the “cash method of proof.” This method computes
cash on hand held by the taxpayer, cash expenditures by the
taxpayer, and compares that cash total against cash from all
known sources for the years in question. The net excess of
cash expenditures over the cash from all sources is treated as
unreported income. As the government’s expert testified at
trial, the cash method of proof requires a starting point with
respect to the cash on hand. Lewis began his analysis with a
starting figure for cash on hand derived from the balance
sheets Khanu submitted to his landlord preparatory to the
lease of nightclub space in April of 1999. After making
adjustments for Khanu’s accounts at the time of the filing of
the balance sheet, Lewis calculated that the appellant had cash
on hand of $698,886.20 on the date of the balance sheet.
Using the cash method, the cash on hand remaining at the
end of 1999 ($559,554.29) was carried forward to the
beginning of 2000, the remaining cash on hand at the end of
5
2000 ($371,652.77) was carried forward to 2001, and the
remaining cash on hand at the end of 2001 ($65,507.67) was
carried forward to 2002.
Lewis then continued his calculation by determining all
identifiable sources and uses of cash by Khanu during the
years under examination. These calculations, as presented in
evidence before the jury, included the $1.9 million of cash
seized from appellant’s home in October 2003. In this final
calculation, Lewis determined that in 2002 appellant had total
cash expenditures of $609,498.90 against $156,403.85 in total
sources of cash. By subtracting the cash from known sources
from the total cash expenditures, Lewis concluded and the
government contended that appellant had $453,095.05 in
unreported income for the tax year 2002. For the tax year
2003, Lewis calculated that appellant’s total cash expenditures
exceeded his total sources of cash by $2,227,690.07. The
government contended that Khanu had underreported his
income by that amount in 2003. Particularly, the calculation
for 2003 included the $1.9 million seized from Khanu’s home.
Therefore, exclusive of the $1.9 million, Khanu’s unreported
income, as evidenced by the cash method calculation,
approximated $300,000 for that year.
Analysis
Appellant argues that the judgment of the district court
rests on reversible errors both as to the convictions and the
sentences. Appellant offers two principal arguments going to
the validity of the convictions, one as to the sentencing. One
of the alleged substantive errors affects both counts of
conviction, the other only tax year 2003. We begin with the
error asserted as to both years.
A. The Method of Proof
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To establish a violation of 26 U.S.C. § 7201, the
prosecution must establish three elements beyond a reasonable
doubt: “(1) willfulness, (2) the existence of a tax deficiency,
and (3) an affirmative act constituting an evasion.” United
States v. Smith, 267 F.3d 1154, 1165 (D.C. Cir. 2001).
Appellant asserts that the prosecution in the present case did
not present sufficient evidence to establish the second element
beyond a reasonable doubt. Therefore, the defense argues, the
district court erred in denying his motion for judgment of
acquittal. As noted above, the government’s evidence on the
element of tax deficiency rested on a “cash method” of proof.
Under this indirect method of proof, the prosecution’s
evidence “focuses on the taxpayer’s sources and uses of
income,” United States v. Hogan, 886 F.2d 1497, 1509 (7th
Cir. 1989). In using this method, the government is required
to present evidence relating to the taxpayer’s cash
expenditures. See United States v. Toushin, 899 F.2d 617, 619
(7th Cir. 1990). As Agent Lewis presented in this case,
taxable and nontaxable cash sources are added together,
including any cash accumulated and on hand at the beginning
of the tax period. To the extent that cash expenditures exceed
cash sources during the taxable period, as was evidenced in
this case, the government’s theory is that the excess may be
inferred to be unreported income. See id. at 620. The
government argues that the accounting evidence, supported by
documentary and other evidence underlying the accounting, is
sufficient to survive defense motions for judgment of
acquittal, and support the jury’s determination that the
evidence established a tax deficiency beyond a reasonable
doubt.
Appellant argues that the prosecution’s evidence is not
sufficient to establish a deficiency under the cash method.
This argument rests on the proposition that under this method,
7
“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.” United States v. Conaway,
11 F.3d 40, 44 (5th Cir. 1993) (emphasis added). Appellant
argues that the government’s figure of $698,886.20 was not
established with reasonable certainty, nor all other sources of
nontaxable income negated. Appellant contends that he might
well have understated his cash on hand for business reasons at
the time of the preparation of the balance sheet relied upon by
the government’s accountant. He further contends generally
that there might have been other sources of nontaxable income
that the government did not negate. We find neither of these
arguments convincing.
While it is true that appellant might have understated his
cash on hand in his business transactions, this goes to the
weight of the evidence, not its legal sufficiency. Likewise, it
is also true that despite the government’s evidence that it
could locate no sources of nontaxable income, there may have
been some. The difficulty with appellant’s arguments is not
that they are without reason, but that they prove far too much.
It is always the case that the government’s accounting figures
in a cash method tax computation might be refuted, either as
to the beginning amount or to the possibility of nontaxable
sources. If the government had to establish with absolute
certainty a beginning number and an impervious bar to
nontaxable sources, indirect methods of proof of income could
never be used. No matter how the government proved the
beginning number, the defendant could always argue after
judgment that the government had not negated the possibility
that he had some other money hidden somewhere or that some
other source existed. It is not improperly shifting the burden
of proof to the defendant to say that unrebutted evidence of
the government is sufficient to survive a motion under Rule
8
29 and to sustain a conviction. To adopt the appellant’s
argument would be to hold that indirect methods of proof can
never be used to establish deficiencies in income tax
prosecutions—a proposition long ago rejected. For example,
in United States v. Johnson, 319 U.S. 503 (1943), the
Supreme Court upheld the tax evasion convictions of a
defendant engaged in an illicit gambling business, observing
that “[i]t is not to be expected that the actual financial
transactions of such a vast illicit business would appear by
direct proof.” Id. at 517. In Johnson, as in the case before us,
the government proved the existence of a deficiency by an
indirect method—in this case by the “cash method,” in
Johnson by the similar “cash expenditures method.”
In short, we find no error in the district court’s denial of
the defendant’s motions for judgment of acquittal.
B. The $1.9 Million
Khanu has, from the outset, argued the $1.9 million
seized from his safe should have been “excluded” from the
Government’s evidence of tax loss. In his pretrial “Motion to
Exclude the $1.9 Million,” Khanu said the money was not
income to him because it was the “property” of the
corporations, for which he acted only as a custodian. Khanu
renewed this argument after trial, pointing to evidence the
nightclubs brought in nearly $1 million in cash from a party
just two weeks before the raid. The district court rejected
Khanu’s argument because, it held, the money would still
count as income to Khanu if he exercised sufficient control
over it and intended to put it to his personal use; whether he
did so was for the jury to determine.
On appeal, however, Khanu does not press the point
about control and ownership of the funds while they were in
his custody; rather, he contends his “return” of the funds,
9
regardless of his prior actions or intent, nullifies any liability
on his part for the income tax on those funds. Citing cases
about the tax consequences of embezzlement, he says he had
no obligation to report the $1.9 million on his 2003 tax return
because he “lost control of the funds” to the IRS or at least
“disclaimed any ownership interest” in the money when he
signed the affidavit. See James v. United States, 366 U.S.
213, 220 (1961) (dictum) (“if, when, and to the extent that the
victim recovers back the misappropriated funds, there is of
course a reduction in the embezzler’s income’”); Gilbert v.
Comm’r, 552 F.2d 478, 481 (2d Cir. 1977) (“if [an embezzler]
repays the money during the same taxable year, he will not be
taxed”); Han v. Comm’r, 83 T.C.M. 1824, 2002 WL 1298745,
at *23 (2002) (“Funds over which a taxpayer has obtained
dominion and control, lawfully or unlawfully, are not taxable
to him to the extent they are repaid before year end”); Mais v.
Comm’r, 51 T.C. 494 (1968) (funds seized from embezzler by
police not taxable to him in the year repaid).
If we are to consider this late-raised but intriguing
argument, then we must first determine the appropriate
standard of review, which in turn depends upon the nature of
the error Khanu has assigned. In his opening brief Khanu
argued “it was error to permit the government to include the
$1.9 million in its [c]hart,” which went to the jury. Br. of
Appellant at 40. To this the Government understandably
responded that the district court “properly admitted” evidence
of the $1.9 million. Br. of Appellee at 17. Although the
dispute thus seemed to have been neatly framed in terms of
admissibility, Khanu in his reply brief (at page 5) then
informed us that, contrary to the Government’s understanding
(and ours), “[his opening] brief on appeal makes no argument
about admissibility of evidence in connection the $1.9 million
at all.”
Khanu’s emphatic reply does not clarify matters; quite the
10
opposite. Accusing the Government of “mischaracterizing”
his argument does not thereby entitle Khanu to review of the
claim on his terms, to wit, as a bare question of law we may
resolve without considering how, when, or whether he
presented the claim to the district court. If there is a
distinction between Khanu’s argument against “permitting the
inclusion” of evidence and a conventional argument against
“admission” of the same, then it eludes us. According to
Khanu, however, the difference lies in the standard of review:
Whereas questions of admissibility are reviewed only for
abuse of discretion, see United States v. Warren, 42 F.3d 647,
655 (D.C. Cir. 1994), his claim, which raises the purportedly
different, legal question of “includability,” should be reviewed
de novo.
Khanu is confused as well as confusing. In order to
pursue an objection based upon “erroneous evidence,” Br. of
Appellant at 39, he must identify an erroneous evidentiary
ruling, whether the underlying error is one of law, fact, or
judgment. Khanu, however, waived any objection to the
admission of evidence, as we explained above, and has
identified no other evidentiary ruling as the subject of his
argument. *
Assuming Khanu’s argument is aimed at something, we
*
Khanu first cited the dictum in James v. United States, 336 U.S. 213
(1961), and the decisions of the tax court described in the dissenting
opinion, at the sentencing phase of this case. We think Khanu’s objection
under James rests upon a theory of embezzlement that he did not present
in his pretrial motion, in which he argued he was merely the custodian of
the $1.9 million, and that he effectively repudiated when he moved for a
judgment of acquittal; in that motion he maintained he had “freely and
transparently” borrowed cash from the corporations and “there was not
one shred of evidence” of skimming. Therefore, were we to review the
district court’s ruling on a “pure question of law” arising under James, we
would do so only for plain error, and under that standard we would hold
the district court did not commit reversible error.
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think it is the sufficiency of the evidence that he willfully
attempted to evade taxes; to wit, he says, “there is no criminal
tax evasion with respect to the $1.9 million,” because under
the dictum in James “there was no tax due and owing on those
funds.” Br. of Appellant at 35. When we address the
sufficiency of the evidence underlying a conviction, we view
the evidence in the light most favorable to the Government
and ask whether “any rational trier of fact” could, based upon
the evidence at trial, find the element of tax loss beyond a
reasonable doubt. Jackson v. Virginia, 443 U.S. 307, 319
(1979).
Khanu concedes the Government’s chart, which he
identified as the target, if not the underlying subject, of this
argument, showed unreported income of $300,000 in addition
to the $1.9 million in dispute. One would think that an end to
the matter. Khanu nevertheless contends the verdict cannot be
assumed to rest upon the tax owing on the $300,000 because
the inclusion of the $1.9 million on the chart “severely
prejudiced” the jury’s deliberations. The objective standard
prescribed in Jackson, however, requires us to consider
whether “any rational trier of fact” could convict Khanu, not
whether the jury that actually convicted him might have voted
differently under other circumstances. Because a rational trier
of fact could find beyond a reasonable doubt a tax was due
and owing on $300,000 of income, we leave for another day
how best to interpret the dictum in James.
The Sentencing
Appellant also contends, unsurprisingly, that the district
court erred in considering the tax due on the $1.9 million in
determining his sentence. We affirm the sentence because the
district court made sufficient factual findings at sentencing to
support the inclusion of the $1.9 million in the calculation of
tax loss. See U.S.S.G. § 2T1.1(c)(5) (“the tax loss is the total
12
amount of loss that was the object of the offense”).
* * *
In sum, the judgment of the district court is in all respects
Affirmed.
No. 10-3039 – United States v. Khanu
SENTELLE , Chief Judge, concurring in part and dissenting
in part: While I am pleased to join in my colleagues’ affirmance
of the judgment of conviction on Count 3, I find myself unable
to join the opinion or the result as to Count 4.
I accept the majority’s statement of the underlying facts
respecting the $1.9 million. Briefly, government agents
discovered the $1.9 million in cash in Khanu’s possession
during the relevant tax year. Khanu identified the money as that
of his corporation, disavowed ownership, paid the money over
to the IRS in settlement of corporate tax obligations, and did not
possess it at the end of the tax year. Unlike the majority, I
cannot, however, conclude that those facts support the inclusion
of the $1.9 million in the computation of the deficiency element
of tax evasion. Unlike the majority, I find appellant’s argument
on this point neither confusing nor confused, nor do I find the
distinction between “‘permitting the inclusion’ of evidence and
a conventional argument against ‘admission’ of the same,”
elusive. Maj. Op. at 10.
To me, the distinction is plain. Appellant does not contend
that the evidence was not admissible for some purpose, only that
the $1.9 million amount could not be included in the expert
witness’s computation upon which the deficiency element of tax
evasion was based. It would seem reasonable, indeed
commonplace, to assume that use of a cash method or other
circumstantial evidence method of establishing deficiency would
always involve accounting which would include cash flow and
cash amounts that would pass through the expert witness’s
computations but not be included in the final deficiency at the
conclusion of those computations. Any nontaxable source of
cash to the taxpayer would certainly enter the expert witness’s
computation, but such amount would not be included at the end.
For example, it would not be error for the court to admit
2
evidence of a taxpayer’s bank account swelling by $100,000 due
to a nontaxable gift, and yet it would be error for the same court
to permit the expert witness to testify to the jury that that
$100,000 was included in the shortage upon which the expert
witness bases his conclusion of reported income deficiency. Just
so here.
Unlike the majority, I share appellant’s understanding of the
appropriate standard of review. Certainly, admissibility of
evidence is generally reviewed for abuse of discretion, see
United States v. Warren, 42 F.3d 647, 655 (D.C. Cir. 1994).
However, the tax consequences of a particular transaction would
seem to be a rather pure question of law which we would review
de novo for legal error.
Finally, I do not accept the majority’s description of this
argument as “late raised.” Khanu filed his “motion to exclude
$1.9 million from government’s calculations . . .” on August 3,
2009. The district court entered its denial of that motion on
October 14, 2009. Both of these occurred before the
commencement of the trial. In this court, the first point argued
by appellant in his opening brief is that “the $1.9 million was, as
a matter of law, not taxable income to Mr. Khanu.” I see no
sense in which the argument is late raised. Therefore,
concluding that the standard of review is for legal error, the
remaining question is whether it was in fact error. It was.1
1
The majority’s footnote at page 10 does nothing to change
this fact. The most the majority can assert is not that Khanu did not
raise the objection in the district court, but that he did not cite the
appropriate case. I know of no precedent or other rule of law
requiring a litigant to cite a particular case in order to preserve an
error.
3
In the court below, and before us, appellant has consistently
contended that the $1.9 million could not be included in the
computation of his cash expenditures, as it was held by him only
in safekeeping for the corporations. The government argued at
trial, and argues on appeal, that it was a factual issue for the jury
to resolve as to whether he was in fact holding the cash for the
corporations, or had taken it for his personal use. If the $1.9
million was properly included in the accountant’s computation,
the government contends, then it was for the jury to decide
whether it was cash he held and expended upon its seizure, or
cash he held for the corporation which was not includable. The
difficulty with the government’s case is that it should not have
been included in his unreported income under either
circumstance.
Appellant argues, and I agree, that under the principle of
taxation announced by the Supreme Court in James v. United
States, 366 U.S. 213 (1961), even if Khanu took the money from
the corporations for his personal use—whether that is called
embezzling or skimming—it could not under the facts of this
case be included in his taxable income. In James, the Court
accepted with approval the government’s proposition that “‘if,
when, and to the extent that the victim recovers back the
misappropriated funds, there is of course a reduction in the
embezzler’s income.’” Id. at 220 (quoting the brief of the
United States). While the opinion in James is a plurality
opinion, neither of the separate opinions questioned the
judgment of the plurality on this point. While neither the
Supreme Court nor this court has clearly spoken to the question
since James, other lower courts have reiterated the Supreme
Court’s point. In Gilbert v. Commissioner of Internal Revenue,
552 F.2d 478 (2d Cir. 1977), the Second Circuit held that “if [an
embezzler] repays the money during the same taxable year, he
will not be taxed.” Id. at 481 (citing James). Likewise, the Tax
Court has followed James. In Han v. Commissioner, 83 T.C.M.
4
1824 (2002), that court declared, “[f]unds over which a taxpayer
has obtained dominion and control, lawfully or unlawfully, are
not taxable to him to the extent they are repaid before year end.”
Id. at 23 (emphasis added).
Very directly on point to the issue before us, in Mais v.
Commissioner, 51 T.C. 494 (1968), the Tax Court held that
embezzled money turned over “to the New York Police
Department for restitution to” the victim would not be “treat[ed]
as income” to the embezzler in the year of the embezzlement.
Id. at 497. Language of Mais applies perfectly to the case before
us. The United States on appeal is unable to dispute the
correctness of defendant’s interpretation that money gained by
embezzlement but repaid during the tax year does not generate
tax liability for the embezzler. Citing Mais, the government
argues that Khanu should have reported the $1.9 million then
deducted it. I am at a loss as to how this would fill in the
necessary element of deficiency. The zero income shown by not
reporting the $1.9 million is precisely the same as the zero that
would be shown by reporting then deducting it. In any event,
nothing in James compels the “report then deduct” procedure
the government would impose, nor do I see any way in which
willful criminal conduct could be found on the part of the
defendant for not complying with such an apparently frivolous
accounting procedure.
Finally, the government contends, and the majority argues,
that if the inclusion of the $1.9 million in the tax accounting was
error, it was harmless. Its argument is that because there was
other accounting evidence of over $300,000 of unreported
income in 2003, on which an additional $75,000 was due in
owing, the inclusion of the $1.9 million did not prejudice the
defendant. This argument fails for two reasons. First, the
potential prejudice from a properly evidenced $300,000
understatement enhanced by a $1.9 million improper inclusion
5
would seem evident. The government went to the trouble of
including the $1.9 million in its accounting, defended it against
motions to exclude at trial, and argued the $2.2 million figure to
the jury. I do not believe we can hold with confidence that this
change in the magnitude of evidence by the improper inclusion
did not prejudice the minds of the jury. Perhaps equally
importantly, if not more so, we cannot know that the jury did not
entirely base its guilt verdict on the $1.9 million while
disbelieving or being unconvinced as to the smaller figure in the
accounting. Nonetheless, the government is correct that the
$300,000 was properly in evidence. Therefore, we should not
reverse the district court’s denial of defendant’s motion for
judgment of acquittal, but rather should vacate the judgment and
remand this count for retrial.
I note again that I would not hold, nor did appellant
contend, that the seizure of the $1.9 million could not come into
evidence—only that it could not be included as part of the
unreported income. It may be that the evidence would go to the
intent of the defendant or to his method of operation. It is likely
that the $1.9 million could, indeed perhaps should, be part of the
accountant’s computation as a source of cash, then offset by an
expenditure at the time of the seizure and the return to the
corporation.
For the reasons set forth above, I dissent from the court’s
affirmance of the conviction and sentence on Count 4.