Tax Conviction and Sentence Affirmed Under Unusual Circumstances (12/3/12)

In United States v. Moore, 2012 U.S. App. LEXIS 24621 (4th Cir.  11/28/12) (unpublished), here, the defendant raised many arguments, but I address only two here.

1.  Error in Computing Tax Due at Trial then Conceded at Sentencing.

The prosecutors used the modified bank-deposits method of proof but failed to take into account some expenditures in prosecuting the defendant for tax perjury (Section 7206(1)).  By sentencing, the Government realized the mistake and reduced the tax loss for sentencing by the amounts erroneously not considered before.  The defendant argued that the reduction was newly discovered evidence entitling him to a new trial under Rule 33, FRCrP, here.   The Court rejected the argument on the basis that the defendant  had not shown that the new evidence would have affected the verdict.  Here are the key excerpts of the opinion:

Moore also seeks a new trial based on newly discovered evidence. He argues that, at trial, the government's bank- deposits analysis overstated his taxable income for 2005 through 2007 by $191,236 because he had paid that amount in local and state taxes but did not deduct that amount from gross receipts. By the time of sentencing the government agreed that Moore should be credited with these payments, but at trial it had admitted only that the number should be decreased by about $92,000. Moore argues that Agent Rager's eventual concession at sentencing that the original calculation of Moore's unpaid tax liability was incorrect constituted newly discovered evidence, entitling him to a new trial. We disagree that this development merited a new trial.

* * * * 

Moore argues that Rager's failure to concede her erroneous failure to credit Moore with the unclaimed deductions for state and local taxes was newly discovered evidence, because she did not make the concession until after Moore was convicted. Moore argues he was diligent in pursuing this "evidence" because his counsel vigorously cross-examined Rager, and recalled Jonson (who had testified for the government but then agreed that the government's calculation was off by $191,236). Moore argues that had Rager admitted the error earlier, "there is a substantial likelihood that the jury would have viewed the government's evidence differently, would have viewed the IRS agent's testimony differently, and [would have] found that reasonable doubt existed on the tax counts." Moore Br. 21. 

The government responds that Moore's claim fails because the concession at sentencing (1) was not newly discovered evidence; (2) was merely cumulative or impeaching; and (3) would not have impacted the verdict. 

We need not decide whether Rager's testimonial admission at sentencing constitutes "newly discovered evidence" for purposes of Rule 33 because Rager's concession was "merely cumulative or impeaching," and we cannot say that had the jury heard it, the testimony would have "probably produce[d] an acquittal." See Custis, 988 F.2d at 1359. First, the jury heard testimony that Rager's calculation was erroneous from one of the government's own witnesses: Moore's accountant, Jonson. Thus, Rager's concession would have been cumulative. Second, even accounting for the adjustment for local and state taxes, Moore still under-reported his gross income for each of the years in question. Third, the government's bank-deposits analysis was conservative; it assumed that cash on hand of any denomination was available to fund the ATMs, even though the ATMs only dispensed $20 bills, and it did not attribute any  [*31] income to Moore for personal cash expenditures, though the bank-deposits method permits the government to include such expenditures. See, e.g., Boulet, 577 F.2d at 1167. 

We thus reject Moore's argument that the district court abused its discretion in denying the motion for a new trial based on Rager's delayed concession that Moore should have been credited with $191,236.

2.  Tax Loss at Sentencing

At sentencing, the district court found that the tax loss exceeded $400,000, a key break point in the Tax Table moving to a  higher Base Offense Level.  The prosecutor did something I have never encountered before.  The prosecutor  presented at sentencing alternative tax loss calculations -- a "conservative" calculation of $321,000 (better for defendant) and an "aggressive" calculation of $458,606 (worse for defendant).  I think it is odd that the Government did not pick one sustainable number and go with that number.

The Government's more aggressive method is interesting.  The background is that the defendant was a club owner.  The entertainment included lap dances.

First, Moore employed a "dancewatcher," whose responsibility was to tally the number of lap dances each dancer performed each night. With this information Moore sought to ensure that each dancer turned over Moore's cut of each lap dance fee, and also to enforce his minimum-dance requirement, under which a dancer who failed to perform a certain number of dances paid him a "fine." During the February 2008 raid of the Club, the RPD seized (and later turned over to the IRS) dancewatcher notebooks for July and August 2005, and December 2007 through February 2008. Some pages tallied the number of dances performed,some showed dancers' hours, and others tracked fines the dancers owed and/or paid.

With that, here is how the court of appeals affirmed the $400,000+ sentencing finding (footnotes omitted):

The government's second calculation was more aggressive, and yielded a loss of $458,606. The government reached this figure by extrapolating from the five months of records contained in the dancewatcher notebooks. Leaving out some additional potential sources of income, the government calculated that in these five months, the total unreported income was $96,988 in lap dance fees and recorded fines, and $51,030 in minimum dance fines. This produced a monthly average of $19,416 in unreported lap dance fees and recorded fines, and $10,206 in unreported minimum dance fines. The government then multiplied these average numbers by the number of months between March 2005 and February 2008 for which there was no dancewatcher data, and added to the unreported income amounts for the five months for which data existed. This produced a 36-month total of $1,065,742 in unreported income. The government then calculated the total federal and state tax loss from 2005 to 2007 by adding the $1,065,742 in unreported income to the income Moore reported on his 2005, 2006, and draft 2007 returns, and then calculating the resulting additional tax due. This resulted in a total tax loss of $458,606. 

Moore argues that this analysis suffered from five flaws, but we are not persuaded by his arguments. First, Moore argues that "the data sample was too small." Id. Moore is correct that the government relied only on dancewatcher notebook tallies from July 2005, 10 days in August 2005, December 2007, January 2008 and part of February 2008, and then extrapolated the data from those five months to the remaining 31 months. But this was a reasonable methodology, especially because the government expressly excluded several categories of income in order to err on the side of underestimating Moore's unreported income. 

Second, Moore finds error in the fact that part of the sample was from January and February 2008, rather than the years for which Moore was prosecuted. This argument erroneously assumes that there was something about January and February 2008 that rendered the Club's income non-probative of the Club's pre-2008 income. There was nothing inherently wrong about using dancewatcher tallies from 2008 to estimate the Club's monthly income in previous years. 

Third, Moore argues that the income in some of the months included in the calculation was not representative, and that the government should have included data from 2008 to 2010. But Moore has not shown that the district court's adoption of the government's calculation was clearly erroneous. Similarly, the court did not clearly err in declining to consider income amounts for the remainder of 2008. As the government explains, "the trial evidence showed that the change in defendant's reporting practices was the result of the search of Club Velvet and, moreover, even though the amounts defendant reported increased, business volume actually declined following the search." Gov't Br. 52.

Fourth, Moore argues that the government's method of proof erroneously failed to deduct from his gross income certain business expenses, namely cash payments to waitresses, dancers, cover charge collectors, and doorwatchers. Although he did not claim these as deductions on his tax returns, he argues the district court erred in failing to deduct these expenses in calculating his total taxable income for sentencing purposes. 11 The government offers two arguments in response. First, the government argues Moore's position is "unsupported by the record" because Moore "fails to point to any evidence demonstrating the timing or amount of these purported cash expenditures." Gov't Br. 53. Second, in reliance on United States v. Delfino, 510 F.3d 468 (4th Cir. 2007), the government argues that "the district court was not required to consider any deductions attributable to cash expenditures that [Moore] never claimed on a filed tax return." Gov't Br. 53. 12

If the district court had to take into account potential, but unclaimed, deductions, the burden is on Moore to prove he was entitled to those deductions. United States v. Gordon, 291 F.3d 181, 187 (2d Cir. 2002). Thus, Moore is arguing (1) as a legal matter, tax loss must account for unclaimed but proven deductions, and (2) he met his burden to show that he was entitled to deduct from his gross income cash he paid to employees. The government responds that (1) as a legal matter, a taxpayer convicted of tax evasion or filing a false return is not entitled to unclaimed deductions in calculating tax loss under U.S.S.G. § 2T1.1, and (2) even  [*60] if tax loss should be reduced by the amount of unclaimed deductions, Moore did not prove he was entitled to any unclaimed deductions for cash paid to employees. 

Moore's argument is mostly, but not entirely, foreclosed by Delfino. There, however, the defendants did not file any tax returns, whereas Moore filed tax returns for 2005 and 2006, and for most purposes the government treated Moore as if he had also filed a tax return for 2007. We decline to determine whether this distinction renders Delfino distinguishable, because Moore's claim fails for another reason: he has not presented any evidence demonstrating the timing or amount of the expenditures purportedly giving rise to unclaimed deductions. In other words, Moore failed to prove he was entitled to a deduction (albeit unclaimed) for business expenses based on cash expenditures to dancers and other employees. 

Fifth and finally, Moore argues that the government failed to reduce the alleged unreported income by the $359,000 in deposits he made from his personal account to the L.A. Diner account. This argument fails for the reasons discussed above. 

The district court thus did not err in finding a tax loss greater than $400,000.

I previously blogged on the Delfino case referred to by the Court at Sentencing Tax Loss, Unfiled Returns and Deductions (Federal Tax Crimes Blog 9/15/10), here.