Admissibility
1 Page1
7203:
Willful Failure to File Return, Supply Information, or Pay Tax:
Evidence: Admissibility
Part
1
[2005-2 USTC ¶50,549]
United States of America
, Plaintiff-Appellee v. Abel Habib Iskander, Defendant-Appellant.
U.S.
Court of Appeals, 4th Circuit; 04-4188, May 9, 2005.
Affirming in part, vacating in part, and remanding an unreported DC Md.
decision.
[ Code
Sec. 7201]
District court: Failure to pax tax: Evidence: Sentencing. --
Evidence
was properly admitted at trial and was sufficient to convict an
individual of willful failure to pay tax, but the wrong sentence was
imposed. The exclusion of the individual's expert testimony was not
arbitrary or irrational as the testimony's probative value was
outweighed by the potential for confusion. The jury also had the
opportunity to consider the individual's evidence of good faith error.
However, the individual's sentence was reversed and the case was
remanded to the district court for resentencing. The the trial court
relied upon mandatory sentencing guidelines that were found to be
unconstitutional and declared to be only advisory by the Supreme Court.
Jonathan Mark Mastrangelo, Jennifer C. Smith, Assistant United
States Attorneys, for plaintiff-appellee. Rhonda Anne Anderson, for
defendant-appellant.
Before: Wilkinson and Gregory, Circuit Judges, and Stamp, Jr., * District
Judge.
OPINION
GREGORY, Circuit Judge: This case arises out of an investigation of Adel
Habib Iskander ("defendant" or "Iskander"). The
United States
("government") alleges he systematically skimmed cash receipts
and corporate checks received by two hotels he owned and operated, while
simultaneously paying no federal corporate or individual income tax.
Iskander was indicted, and after a three week trial, a jury found him
guilty of three counts of tax evasion and one count of structuring
financial transactions to evade reporting. The district court
subsequently sentenced Iskander to a term of imprisonment of forty-one
months and ordered him to pay a $800,000 fine. On appeal, Iskander
challenges the district court's evidentiary rulings, the sufficiency of
the evidence, and his sentence. We find, after careful review, no
reversible error in the district court's evidentiary rulings, and that
the evidence in this case was sufficient to support the convictions.
However, in following United States v. Hughes, 401 F.3d 540 (4th
Cir. 2005), our recently published opinion giving guidance to the
application of United States v. Booker, 125 S.Ct. 738 (2005), we
find plain error in Iskander's sentencing, exercise our discretion to
notice the error, vacate the sentence, and remand to the district court
for resentencing. Thus, we affirm in part, vacate, and remand in part.
I.
Defendant was originally charged in a fifteen-count indictment with
conspiracy, tax evasion, and structuring currency transactions, in
violation of 18 U.S.C. §371, 26 U.S.C. §7201,
and 31 U.S.C. §5324(a)(3), respectively. A superseding indictment was
filed one month before trial, charging defendant and his wife, Cynthia
Lafon Iskander, with one count of conspiracy to structure transactions
so as to evade reporting requirements in violation of 31 U.S.C. §5324(a)(3),
and eleven counts of structuring financial transactions to evade
reporting requirements in violation of 31 U.S.C. §5313(a)(3). The
superseding indictment also charged Iskander individually with three
counts of tax evasion in violation of 26 U.S.C. §7201.
All the foregoing conduct allegedly occurred in 1994, 1995, and 1996.
During the relevant time period, Iskander controlled two corporations,
Ocean Properties, Inc., and Fenwick Properties, Inc. ("Ocean
Properties" and "Fenwick Properties"), each of which
operated a hotel. For most times relevant to the indictment Iskander was
the sole shareholder of both companies. At trial the government alleged
that between 1993 and 1996 defendant deposited approximately $780,000 in
currency into personal accounts under his control for his benefit and
the benefit of his family. The government provided evidence that
defendant and his wife at various times deposited approximately $935,000
worth of corporate checks into personal investment accounts they held
with Merrill Lynch and T. Rowe Price. In furtherance of the scheme, the
government demonstrated, through bank records, that Iskander
systematically structured cash deposits to banks to be under $10,000 to
avoid the respective financial institutions' federal currency
transaction reporting requirements. During this time, defendant reported
no taxable income for either of the corporations, or for himself
individually --thus, zero tax was paid to the federal government.
The government alleged that Iskander's tax evasion scheme involved
skimming cash and credit card proceeds from both hotel properties and
under-reporting the gross receipts actually earned by the two hotels
--allowing him to conceal the diversion of funds. On his corporate tax
returns, defendant claimed that the two hotels were losing money. In
fact, he personally "wrote off" alleged loans he made to one
of the hotels based on an assertion that the investment represented a
"bad" ( i.e., uncollectible) debt. At trial, the
government presented evidence showing that the gross receipts of the
hotels exceeded the amounts stated on defendant's corporate tax returns
by hundreds of thousands of dollars --thus, showing that the hotels were
likely profitable and capable of repaying the alleged loans.
The government also provided evidence that Iskander attempted to
establish an explanation for the skimming and for hiding his tax evasion
scheme, by placing shareholder loan balances on the corporate tax
returns. Doing that allowed him to characterize the skimmed receipts as
non-taxable repayments of loans. According to the government, these
stated loan balances were patently false and the diverted funds were
taxable income.
The government contended that Iskander was trained in business and
accounting in his native Egypt and taught business classes in Egypt
before emigrating to the United States. The government called one of
Iskander's former hotel desk clerks, Sam Soliman ("Soliman"),
who testified that Iskander had told him that he had been trained as an
accountant. Iskander's accountant, John Vardavas ("Vardavas"),
also testified that defendant rescinded a statement he had previously
made to Vardavas averring that defendant had been a CPA in Egypt. The
government also presented documentary evidence, in the form of a Dun
& Bradstreet report and an affidavit, listing defendant's employment
history as an accountant and as a controller. The report was admitted
over defendant's hearsay objections. In rebuttal, defendant put forth
testimony from Vardavas, who stated that defendant's record keeping
skills were poor and that the records seized upon execution of the
search warrant were incomplete and disorganized.
After a three week trial, a jury found Iskander guilty of three counts
of tax evasion and one count of structuring financial transactions to
evade reporting. Mrs. Iskander was acquitted. 1 Iskander
timely filed this appeal.
II.
We review the district court's decision as to admissibility of evidence
for abuse of discretion, and we will not find an abuse unless a decision
was "arbitrary and irrational." United States v. Weaver,
282 F.3d 302, 313 (4th Cir. 2002) (discussing abuse of discretion
standard in context of "decisions as to admissibility of
evidence").
To prevail on a sufficiency of the evidence claim, Iskander must show
that when evidence is viewed in the light most favorable to the
government, see United States v. Stewart, 256 F.2d 231, 251 (4th
Cir. 2001), no "rational trier of fact could have found"
beyond a reasonable doubt, that he acted willfully, see Jackson v.
Virginia, 443 U.S. 307, 319 (1979).
In light of the new sentencing scheme announced in Booker, we
state in Hughes that we will review Sixth Amendment sentencing
challenges, raised for the first time on appeal, under plain error
analysis. 401 F.3d at 547.
III.
Iskander challenges two evidentiary rulings made by the district court
and the sufficiency of the evidence. First, he argues that the district
court erred in excluding defendant's evidence supporting his defense, 2
specifically by refusing to allow defendant's expert to testify about
unclaimed depreciation deductions he alleges were available to his
hotels; defendant asserts that such testimony would have rebutted both
the government's tax witness, who testified that the
"bad-debt" deductions taken on defendant's personal tax
returns were improper and therefore taxable income, as well as the
government's evidence that the appellant was a sophisticated accountant,
and therefore "willfully" violated 26 U.S.C. §7201
and 31 U.S.C. §5324(a)(3). Second, Iskander argues that the district
court erred by admitting a Dun & Bradstreet report that contained
information regarding the defendant's educational background and
employment history. 3 Third,
defendant contends that the government's evidence was insufficient to
support the three tax evasion convictions.
In addition, Iskander makes two related challenges to his sentence.
First, he alleges that the district court did not make the required
factual findings necessary to support the $800,000 fine imposed at
sentencing. Second, defendant asserts that under Blakely v.
Washington, 124 S.Ct. 2531 (2004) and Booker, the district
court's sentence violated his right to a jury trial insofar as it rested
on factual findings made by the judge at the sentencing hearing. We
address each of defendant's arguments in turn.
A.
Defendant contends that the district court abused its discretion in
excluding evidence that supported his defense. In an effort to rebut the
government's expert, defendant retained an accounting expert, Ivan B.
Mehler ("Mehler"). The defense proffered, fourteen days into
trial, that Mehler's testimony would show that Iskander had failed to
use the depreciation schedules to which he was entitled and "as a
result, utilizing any accounting or reconstruction method the government
preferred, no tax was owed." Appellant's Br. at 23. According to
defendant, Mehler's testimony would have shown that contrary to the
government's assertions, "defendant was not cheating the IRS; [he]
was not a sophisticated accountant, and that any inaccuracies in his tax
returns had worked to his disadvantage more so than to the IRS[']."
Id. at 24. Additionally, defendant contends that Mehler would
have testified and used summaries of the depreciation schedules to show
that the government overstated the income from the corporations and
would have demonstrated that "repayments of the principal on loans
or return of capital contributions are not, as the Government's theory
alleged, taxable income that must be reported on a tax return." Id.
The government objected to Mehler's summaries, on grounds of hearsay,
relevance, and timeliness, and moved to exclude five of them. The
summaries were based on specific valuations of furnishings and other
property at the hotel. The district court found that portions of the
defendant's expert testimony relating to the specific summaries and
details regarding the depreciation schedules were irrelevant and that
the probative value of the challenged evidence was therefore outweighed
by its potential to cause jury confusion. 4
Specifically, the court stated:
This whole question of
depreciation it seems to me truly is a red herring in this case.
....
I fail to see the connection
between depreciation that was not taken on the corporate tax returns and
the failure of the defendant, if it was a failure, to declare on the tax
returns that were filed income taken from the corporations.
J.A. 1302, 1304. Thus, the district court excluded the depreciation
schedules, summaries, and Mehler's testimony regarding them.
Trial courts have considerable discretion to determine whether to admit
expert testimony. See Hamling v. United States, 418 U.S. 87, 108
(1974); see also United States v. Jones, 913 F.2d 174, 177 (4th
Cir. 1990) ("A reviewing court should not disturb a trial court
determination to admit evidence unless the trial court has acted
'arbitrarily or irrationally.'") (quotation and citation omitted).
Rule 403 states that:
Although relevant, evidence
may be excluded if its probative value is substantially outweighed by
the danger of unfair prejudice, confusion of the issues, or misleading
the jury, or by considerations of undue delay, waste of time, or
needless presentation of cumulative evidence.
Fed. R. Evid. 403.
The excluded portion of Mehler's testimony relating to the detailed
summaries and depreciation schedules may have shown that Iskander's
corporations were entitled to take additional corporate paper
deductions. Such a showing might have been relevant if the defendant was
charged with corporate tax evasion. However, the grand jury charged
Iskander with evading personal income tax by skimming receipts
from his businesses and then converting those receipts to his own use
without reporting any income on his personal tax returns. The
government referred to the corporate returns to prove that Iskander
under-reported the gross receipts from his hotels, because that fact
supports their skimming theory and relates to their argument that the
bad-debt deductions, taken on his personal tax returns, were wilfully
false. The availability of the depreciation deductions does not affect
the gross receipts of the corporations. Neither does the existence of
those deductions undermine the government's "bad-debt" theory.
Fenwick Properties was profitable based on the actual gross receipts
presented by the government to the jury. Therefore, the government used
the corporate tax returns solely to show the defendant's claimed
bad-debt deduction on his personal tax return was wilfully false,
because he falsely asserted, as demonstrated on his corporate tax
returns, that Fenwick Properties was losing money, a necessary predicate
to claiming the bad-debt deduction. Consequently, the presentation of
detailed valuation summaries and depreciation schedules for the
corporations was irrelevant and potentially confusing to the jury.
Importantly, the court's exclusion of parts of Mehler's testimony did
not impact defendant's ability to argue that his failure to claim all
depreciation deductions available to the corporations showed his lack of
sophistication in tax and financial matters. During the cross
examination of Vardavas, defense counsel had already elicited testimony
that Vardavas believed that Iskander had understated the corporate
depreciation those businesses were entitled to take. Furthermore, Mehler
was allowed to testify to the general fact that, in his opinion,
Iskander had not taken all the depreciation to which the hotels were
entitled.
The district court also ruled that Iskander failed to present to the
government, in a timely fashion, the name of the expert and the evidence
on which the expert planned to rely. The depreciation deduction
testimony was based in significant part on Mehler's expert opinion
concerning property valuations and depreciations. The government
requested notice of the defendant's intent to offer expert opinion
evidence at trial and Iskander failed to provide timely notice of his
intent to introduce expert testimony on the matters of property
valuations and depreciations or the basis of his expert's opinions. 5 Rule 16
of the Federal Rules of Criminal Procedure required Iskander to do both.
The rule provides that:
(C) Expert witnesses. The
defendant must, at the government's request, give to the government a
written summary of any testimony that the defendant intends to use under
Rules 702, 703, or 705 of the Federal Rules of Evidence as evidence at
trial, if --
(i) the defendant requests
disclosure under subdivision (a)(1)(G) and the government complies; or
(ii) the defendant has given
notice under Rule 12.2(b) of an intent to present expert testimony on
the defendant's mental condition.
This summary must describe
the witness's opinions, the bases and reasons for those opinions, and
the witness's qualifications
Fed. R. Crim.
P. 16.
Iskander does not deny that he failed to fully comply with the rules
concerning expert discovery. Instead he argues that within the context
of the government's "late" superseding indictment, timeliness
should not be an issue for the government and that the government did
not need time to prepare for Mehler's testimony. The district court did
not agree. 6 Based on
an abuse of discretion standard of review and the facts related above,
we cannot find that the court's decision to exclude a portion of
defendant's expert witness' testimony was arbitrary and irrational. See
Fed. R. Crim. P. 16(d)(2)(C). ("Failure to Comply. If a party fails
to comply with this rule, the court may: ... prohibit that party from
introducing the undisclosed evidence; or enter any other order that is
just under the circumstances.").
B.
Next, Iskander argues that the district court's ruling, admitting a Dun
& Bradstreet report as a business record, was error. The report
supported the government's assertion that Iskander's educational
background in Egypt and work experience involved accounting. Defendant
avers that the "Dunn [sic] & Bradstreet Affidavit contains
uncorroborated, hearsay information from an unknown source."
Appellant's Br. at 34. Defendant contends that the affidavit was
inadmissable hearsay, which should have been excluded, because it was
used "as a basis to show an essential element of the offenses: an
accused's willful intent to commit a tax evasion offense or
structuring." Id. at 36.
During trial, Iskander made a Confrontation Clause type objection,
asserting that the Dun & Bradstreet report was improperly admitted
because he did not have the opportunity for cross-examination. The
Supreme Court held in Crawford v. Washington, "[w]here
testimonial statements are at issue, the only indicium of reliability
sufficient to satisfy constitutional demands is the one the Constitution
actually prescribes: confrontation." 541 U.S. 36, 68-69 (2004). The
Court in Crawford divided out-of-court statements into two
categories, those that are testimonial in nature and those that are not,
asserting that testimonial hearsay is the "primary," if not
the only, object of the Confrontation Clause. See id. at 53. It
then held that the testimonial statement of a person who does not appear
as a witness at the trial may not be admitted against the accused to
prove the truth of the statement unless the declarant is unavailable to
appear as a witness and the accused had a prior opportunity for
cross-examination. Id.
We find that we need not reach the issues of whether the Dun &
Bradstreet report qualifies as a business record or whether the
admission of the report violates the Confrontation Clause, as set out in
Crawford, because the Dun & Bradstreet report was merely
cumulative of other testimony establishing that Iskander had accounting
and business experience. We articulated in Cooper v. Taylor, 103
F.3d 366, 370 (4th Cir. 1996), the standard to determine if a trial
court error is harmless. We stated that:
In order for an error to
have a substantial and injurious effect or influence, it must have
affected the verdict. Because juries have a limited number of responses
to give in a criminal trial --guilty, innocent, or cannot decide --an
error is harmless when the error did not substantially sway or
substantially influence the response.
Thus, if the evidence is not
merely sufficient, but so powerful, overwhelming, or cumulative that the
error simply could not reasonably be said to have substantially swayed
the jury's judgment, then the error is not harmful. On the other hand,
if the federal court is in grave doubt about whether the trial error had
a substantial and injurious effect or influence on the verdict and
therefore finds itself in virtual equipoise about the issue, the error
is not harmless.
Id. at 370 (citations and internal quotation marks omitted).
The government presented testimony by Soliman and Vardavas establishing
that Iskander had knowledge of accounting practices and was a
sophisticated businessman. Further, the government presented evidence to
show that he acted with the requisite willful intent through evidence
exposing the evasion scheme itself. The government provided both
documentary and testimonial evidence showing that Iskander deliberately
under-reported his corporate receipts and then took affirmative steps to
conceal the diversion of those funds --funds he used to his own benefit.
Thus, we find that any error caused by the admission of the Dun &
Bradstreet report was cumulative and therefore harmless.
C.
Iskander contends, in his third argument, that the evidence presented at
trial was insufficient to prove willful tax evasion. Iskander focuses on
the evidence the government introduced to show that he was aware of
accounting principles to support its assertion that he acted willfully.
Defendant describes that evidence as insubstantial, hearsay, and
conjecture. Thus, in essence, Iskander asserts that the government
failed to carry its burden.
As discussed supra, the government presented testimonial evidence
during the trial to support its assertion that Iskander was familiar
with principles of accounting and business. In addition, the government
introduced evidence regarding Iskander's knowledge that the monies he
was taking from the hotels did not represent repayments of shareholder
loans and that the then-claimed bad-debt deductions on his personal tax
returns were based on false representations that Fenwick Properties was
unprofitable. 7 This
evidence is substantial and would allow a rational trier of fact to find
that defendant deliberately evaded his personal income tax.
In the alternative, Iskander avers that he had a good faith belief,
although it may have been unreasonable, that he was complying with the
tax laws. Defendant cites Cheek v. United States [ 91-1
USTC ¶50,012], 498 U.S. 192, 201 (1991), for the proposition
that a belief, in good faith, that one has complied with the tax laws
negates willfulness and is therefore a defense, even if the belief is
unreasonable. The Court in Cheek did find that the courts below
were wrong to hold that "a good-faith misunderstanding of the law
or a good-faith belief that one is not violating the law, if it is to
negate willfulness, must be objectively reasonable." Id.
However, the taxpayer's subjective beliefs regarding his "ignorance
of the law" or his "misunderstanding of the law" is a
question for the jury. Id. at 203.
In the case at bar, Iskander had the opportunity to present evidence
regarding his good faith belief or ignorance of the tax laws.
Nevertheless, the jury found him guilty on Counts Two, Three, and Ten
which state that the defendant "did willfully attempt to evade and
defeat a large part of the income tax due." J.A. 32, 33, 35. In
other words, the jury found beyond a reasonable doubt that Iskander did
not have a subjective belief, irrational or otherwise, that he was not
violating the law when he took cash from the hotel properties and did
not declare those monies as income and when he subsequently wrote the
loans off as an uncollectible bad-debt on his personal tax returns.
Defendant does not assert that the district court did not properly
instruct the jury on the good faith defense or on the government's
burden of proof. Therefore, we find that viewed in a light most
favorable to the government, there was sufficient evidence to support
the jury's verdict.
D.
Finally, Iskander challenges his sentence. His most persuasive argument
is that because the district court enhanced his sentence based on its
finding that he used sophisticated means to commit tax evasion, and not
the jury's verdict, his sentence violates the Sixth Amendment.
The district court, in computing Iskander's offense level, relied on the
1995 Sentencing Guidelines, 8 which
allow for the grouping of the offenses 9 when the
offense level is largely determined by the total amount of harm or loss.
See U.S.S.G. §3D1.2(d). The guideline range for violation of 26 U.S.C. §7201
is found in U.S.S.G. §2T1.1(a)(1), and calls for a base offense level
of 17 based on a tax loss of $363,859. 10 Because
the court determined that sophisticated means were used to impede
discovery of the existence or extent of the offense, two levels were
added, pursuant to U.S.S.G. §2T1.1(b)(2), bringing the offense level to
19. In computing Iskander's criminal history, the PSR notes that
defendant had a previous conviction of child endangerment and was on
probation at the time the instant offense was committed, resulting in a
total of three criminal history points. According to the Sentencing
Guidelines' Table, three criminal history points constitute a criminal
history category of II. Consequently, the district court sentenced
defendant within the Sentencing Guidelines' range of 33 to 41 months of
imprisonment, when it imposed the sentence of 41 months. Absent the two
point enhancement, Iskander's guideline range would have been 27-33
months.
In Booker, the Supreme Court held that the mandatory manner in
which the federal Sentencing Guidelines required courts to impose
sentencing enhancements based on facts found by the court, by a
preponderance of the evidence, violated the Sixth Amendment. See
Booker, 125 S. Ct. at 756-57. The Court remedied the constitutional
violation by severing two statutory provisions, thereby making the
Sentencing Guidelines advisory. Id. at 764. Thus, we recognized
in Hughes, that "there are two potential errors in a
sentence imposed pursuant to the pre-Booker mandatory guidelines regime:
a Sixth Amendment error, ... and an error in failing to treat the
guidelines as advisory." 401 F.3d at 552. Because these issues were
not clearly raised during the sentencing hearing, we review the district
court's sentence for plain error. Id. at 547 ("Because issue
was not advanced in the district court, we review the district court
decision for plain error.").
The district court clearly made a two point enhancement, when it found
that Iskander had used sophisticated means. This finding was based on a
preponderance of the evidence standard and lay outside of the jury's
verdict. Therefore, under Booker, the court erred in imposing a
sentence on Iskander based on the two point enhancement, 11 because
his sentence then exceeded the maximum sentence authorized by the facts
found by the jury alone. Id. at 547-48. 12
Following this court's reasoning in Hughes, we find that the district
court's error was plain and prejudicial, and we vacate Iskander's
sentence and remand for resentencing "consistent with the remedial
scheme set forth in Justice Breyer's opinion for the Court in
Booker." Id. at 544.
IV.
Based on the foregoing, we affirm Iskander's convictions, vacate his
sentence, and remand to the district court for resentencing, in
accordance with this opinion.
AFFIRMED IN PART, VACATED IN PART, AND REMANDED.
* United
States District Judge for the Northern District of West Virginia,
sitting by designation.
1 At the
close of the government's case in chief, the trial court granted Mrs.
Iskander's Motion for Judgment of Acquittal as to Count One of the
superseding indictment. As there were no unknown coconspirators alleged,
the trial court then granted defendant judgment of acquittal as to the
same conspiracy count. After deliberating, the jury acquitted Mrs.
Iskander on Counts 4, 5, 7, 9, and 10, and was unable to reach a verdict
on Counts 6, 8, 11, 12, and 13.
2 Iskander
argues that:
The trial court's ruling "gutted" the Appellant's case,
stripping him of the ability to confront the additional tax returns
beyond those charged in the indictment that the Government entered into
evidence in an effort to show that the Appellant acted
"willfully." As a result the trial court's ruling was an abuse
of discretion because it failed to liberally interpret relevance, or
permit the Appellant to rebut that his under-reporting and/or improper
bad debt deductions were done willfully, in bad faith or with evil
intent.
Appellant's Br. at 34.
3 Relying
on an affidavit provided by a Dun & Bradstreet custodian of records,
the district court allowed the government to introduce the report as a
business record pursuant to Fed. R. Evid. 803(6) and 902(11).
4 The
court stated that:
the evidence is excluded both because it is irrelevant, and, to the
extent that it is marginally relevant under Rule 403, the waste of time
and judicial resources and the confusion of the issues that would be
attended to try to make sense of all this retrospective redoing of the
corporate tax returns seriously undermines the Court's legitimate
interest in getting this case concluded in an orderly fashion.
J.A. 1304.
5 The
government did not offer its federal tax accountant as an expert.