Court Opinion

ID: 9484860
Source: CourtListenerOpinion
Date Created: 2023-08-05 10:14:40.85726+00
Date Added: 2024-06-11T17:50:31.811076
License: Public Domain

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 38-39.
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 as*40sume 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 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
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, 81 S.Ct. 1052, 6 L.Ed.2d 246 (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, 81 S.Ct. 1052 (quoting the brief of the United States). While the opinion in James is a *41plurality 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. 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 38 (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 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 *42could, 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.

. The majority's footnote at page 38 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.