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-boltlocked 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
6

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.
11

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 deficiencywould

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, Ishare 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

The majority’s footnote at page 10 does nothing to change

1

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.