662 F.3d 1226
D.C. Cir.2011Background
- Khanu was indicted in March 2009 on 22 counts related to alleged evasion of personal and corporate taxes from two Washington, DC nightclubs.
- Evidence showed Khanu controlled cash deposits and had substantial cash from nightclub operations.
- In Oct 2003, IRS agents seized about $1.9 million in cash from Khanu's home safe.
- Khanu affidavit stated the $1.9 million was the property of his corporations; IRS used it to satisfy corporate tax liabilities.
- The government used a cash method of proof to compute tax loss for 2002 and 2003, including the seized funds.
- Khanu was convicted on two counts of attempted tax evasion and sentenced to concurrent terms with restitution; final restitution amount was later reduced.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Sufficiency of cash method proof | Khanu argues cash method fails to prove tax deficiency beyond reasonable doubt. | Khanu contends the government did not negate alternative nontaxable income or establish beginning cash with certainty. | No reversible error; evidence support tax deficiency beyond a reasonable doubt. |
| Inclusion of the $1.9 million in tax loss | Khanu argues the $1.9 million could not be included as income since it was corporate property. | Government contends Khanu controlled the funds and could be taxed on it; inclusion supported by accounting evidence. | Majority approves inclusion of $1.9 million in the tax loss calculation. |
| Effect of the $1.9 million on sentencing | Khanu argues the amount should not inform sentencing since it was repaid to corporations. | Government contends tax loss for sentencing includes all acts during offense, not offset by repayments. | Sentence affirmed; tax loss for sentencing includes the $1.9 million under guidelines. |
| Standard of review for the $1.9 million issue | Khanu asserts legal error; argues de novo review for legal questions. | Government maintains standard of review depends on whether the issue is evidentiary or legal. | Court treated the question as a sufficiency/legal issue and reviewed accordingly. |
Key Cases Cited
- United States v. Johnson, 319 U.S. 503 (1943) (indirect proof may establish deficiency when direct evidence is unavailable)
- James v. United States, 366 U.S. 213 (1961) (emphasizes that restitution of embezzled funds reduces the embezzler's income)
- United States v. Hogan, 886 F.2d 1497 (7th Cir. 1989) (cash method proofs rely on beginning cash and sources/uses of cash)
- United States v. Toushin, 899 F.2d 617 (7th Cir. 1990) (cash expenditures method in tax deficiency cases)
- Conaway v. 11 F.3d 40, 11 F.3d 40 (5th Cir. 1993) (standard of proof and sufficiency in tax deficiency context)
- James v. United States, 366 U.S. 213 (1961) (emphasizes embezzlement restitution effect on income)
- Gilbert v. Commissioner, 552 F.2d 478 (2d Cir. 1977) (repayment of embezzled funds within year negates income)
- Mais v. Commissioner, 51 T.C. 494 (1968) (embezzled funds repaid during the tax year are not income)