U.S. v. Abodeely, 85-2108

• Decision Date: 27 October 1986
• Docket Number: No. 85-2108,85-2108
• Citation: 801 F.2d 1020
• Parties: -567, 86-2 USTC P 9713, 21 Fed. R. Evid. Serv. 988 UNITED STATES of America, Appellee, v. Joseph ABODEELY, Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1020

801 F.2d 1020

59 A.F.T.R.2d 87-567, 86-2 USTC P 9713,

21 Fed. R. Evid. Serv. 988

UNITED STATES of America, Appellee, v. Joseph ABODEELY, Appellant.

No. 85-2108.

United States Court of Appeals,

Eighth Circuit.

Submitted June 10, 1986.

Decided Sept. 22, 1986.

Rehearing Denied Oct. 27, 1986.

Mark S. Pennington, Des Moines, Iowa, for appellant.

Richard L. Murphy, Asst. U.S. Atty., Sioux City, Iowa, for appellee.

Before ARNOLD, Circuit Judge, HENLEY, Senior Circuit Judge, and STROM, District Judge. ^*

HENLEY, Senior Circuit Judge.

Defendant Joseph Abodeely was indicted by the grand jury for two counts of criminal tax evasion in violation of 26 U.S.C. Sec. 7201 for the tax years of 1978 and 1979. Following a jury trial in the United States District Court for the Northern District of Iowa, ¹ the defendant was convicted on both counts and sentenced to two years imprisonment under Count II of the indictment, imposition of sentence was suspended on Count I, and defendant was placed on probation for three years commencing on his release from confinement. Defendant was also fined $10,000.00. Abodeely now appeals his convictions claiming that the district court erred in admitting over his objections evidence regarding Abodeely's involvement in promoting prostitution and his gambling activity in Las Vegas. This court has jurisdiction to hear the appeal. 28 U.S.C. Sec. 1291. We affirm.

Joseph Abodeely derived his income from several business ventures. These included the Unique Motel, the Food Factory (a fast food restaurant), and the Meeting Place (a bar featuring exotic dancers and located near the Unique Motel). Abodeely filed an income tax return, along with his wife, for the 1978 tax year in which he stated their net taxable income was a negative $627.00. They declared a net taxable income for 1979 of $25,443.00. The government set out to prove that Abodeely's taxable income was substantially greater than the amount he stated in his tax returns for those two years. The government utilized the "bank deposits and cash expenditures" method to demonstrate that Abodeely received more income than he reported on his tax returns.

Evidence was introduced regarding various potential sources of the unreported income. ² Among these potential sources were Abodeely's six trips to Las Vegas during 1978 and 1979. Abodeely had established credit with the MGM Grand Hotel and could receive markers from the cashier. A marker is an advance or loan which may be exchanged at the hotel's casino for chips in order to gamble. During each trip Abodeely received markers for between $12,000.00 and $16,000.00. Abodeely would then pay back these markers, in cash, on his subsequent trips. Abodeely's gambling activity was also rated by MGM. On his March, 1978 trip Abodeely was graded a B-30. The "B" indicated that Abodeely placed bets of $50.00 to $75.00 per bet. The "30" is time played in increments of fifteen minutes. Thus, "30" indicated he played seven and one-half hours. Mr. Abodeely's rating never fell below "B" for any of the six trips. This rating is used by the MGM to determine whether a player is to receive complimentary benefits. Room, food and beverage will be given if the player places a minimum of $7,500.00 in bets. Airfare will also be given if the amount of the bets exceeds $10,000.00. Abodeely received complimentary room, food, beverage and airfare on each occasion during 1978 and 1979. The records from the MGM do not disclose whether Abodeely won, lost, or broke even while gambling.

In addition to the gambling evidence, the trial court also permitted the government to introduce evidence of Abodeely's involvement in promoting prostitution. Kim Golston testified that she worked for Abodeely for between four and six weeks in 1979. Golston would use a room at the Unique Motel and Abodeely would send men to her room. Golston would split the money that she received from the prostitution sixty/forty with Abodeely, Abodeely receiving sixty per cent. Another witness testified that she overheard Abodeely tell one of the dancers who worked for him that "if she couldn't hook for him she could move out of her apartment" at the Unique Motel.

Abodeely argues that the trial court erred in admitting this testimony because it was not relevant, Fed.R.Evid. 402, or, if relevant, its probative value was outweighed by the danger of unfair prejudice. Fed.R.Evid. 403.

The standard for review of the district court's evidentiary rulings challenged by the appellant is whether the court abused its discretion. United States v. Poston, 727 F.2d 734, 739 (8th Cir.), cert. denied, 466 U.S. 962, 104 S.Ct. 2179, 80 L.Ed.2d 561 (1984). The admissibility of evidence is primarily a determination to be made by the district court, United States v. Jones, 687 F.2d 1265, 1267 (8th Cir.1982), and this court will not substitute its judgment unless there has been an abuse of discretion. United States v. Iron Shell, 633 F.2d 77, 86 (8th Cir.1980), cert. denied, 450 U.S. 1001, 101 S.Ct. 1709, 68 L.Ed.2d 203 (1981). Appellant contends that the evidence of the likely sources of income was not relevant to the government's proof of tax evasion under the bank deposits and cash expenditures method of proof.

In order to obtain a conviction for income tax evasion under 26 U.S.C. Sec. 7201, the government must prove, beyond a reasonable doubt, the following elements:

(1) That there is a tax deficiency for the relevant year that is due and owing;

(2) That the defendant knowingly and wilfully failed to pay; and

(3) That the failure to pay was in an attempt to evade or defeat the tax due.

United States v. Grasso, 629 F.2d 805, 807 (2d Cir.1980); United States v. Goichman, 547 F.2d 778, 781 (3d Cir.1976). Abodeely's claims of error do not challenge the government's proof of the second and third elements. Defendant challenges the introduction of evidence as it relates to the first element--proof of a tax deficiency.

In order to prove a tax deficiency, " 'the government must show first that the taxpayer had unreported income, and second, that the income was taxable.' " United States v. Fogg, 652 F.2d 551, 555 (5th Cir. Unit B 1981), cert. denied, 456 U.S. 905, 102 S.Ct. 1751, 72 L.Ed.2d 162 (1982) (quoting United States v. Hiett, 581 F.2d 1199, 1200 (5th Cir.1978)); see United States v. Vannelli, 595 F.2d 402, 405-06 (8th Cir.1979) ("In a tax evasion prosecution it is necessary to show that an individual received more income than he reported. In order to do this, the government must establish potential sources from which this unreported income was derived."). Proof of unreported taxable income by direct means is extremely difficult and often impossible. By the very fact that a taxpayer has failed to report the income, it behooves him to obscure any trace of its existence. Therefore, direct methods of proof, which depend on the taxpayer's voluntary retention of records of the income, fail. Accordingly, the government has armed itself with an arsenal of indirect methods of proof which rely on circumstantial evidence to disclose unreported taxable income. These methods include:

(1) "Net worth," Holland v. United States, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150 (1954);

(2) "Cash expenditures," Taglianetti v. United States, 398 F.2d 558 (1st Cir.1968), aff'd per curiam, 394 U.S. 316, 89 S.Ct. 1099, 22 L.Ed.2d 302 (1969); and

(3) "Bank deposits," United States v. Esser, 520 F.2d 213 (7th Cir.1975), cert. denied, 426 U.S. 947, 96 S.Ct. 3166, 49 L.Ed.2d 1184 (1976).

The government may choose to proceed under any single theory of proof or a combination method, including a combination of circumstantial and direct proofs. H.G. Balter, Tax Fraud and Evasion, p 13.03 (4th ed. 1976). The government denominates the method it used at trial in this case as the "bank deposits and cash expenditures" method. The "bank deposits" or "bank deposits and cash expenditures" method has been variously defined. The foundation of the method requires that the government "initially introduce evidence to show (1) that, during the tax years in question, the taxpayer was engaged in an income producing business or calling; (2) that he made regular deposits of funds into bank accounts; and (3) that an adequate and full investigation of those accounts was conducted in order to distinguish between income and non-income deposits." United States v. Morse, 491 F.2d 149, 152 (1st Cir.1974) (citations omitted); see also Esser, 520 F.2d at 217; Gleckman v. United States, 80 F.2d 394 (8th Cir.1935), cert. denied, 297 U.S. 709, 56 S.Ct. 501, 80 L.Ed. 996 (1936). All non-taxable deposits are then excluded from the gross deposits and amounts on deposit from prior years are not included. Morse, 491 F.2d at 152. The figure arrived at after this "purification," United States v. Boulet, 577 F.2d 1165, 1167 (5th Cir.1978), cert. denied, 439 U.S. 1114, 99 S.Ct. 1017, 59 L.Ed.2d 72 (1979), is the net taxable bank deposits. Under a "pure" bank deposits approach, no further proof is necessary and "the jury is entitled to infer that the difference between the balance of deposited items and reported income constitutes unreported income." Esser, 520 F.2d at 217 (footnote omitted). The bank deposit method requires that the taxpayer's income be circulated through his bank accounts. If the income is simply received or converted into cash exclusive of his bank accounts and subsequently spent, its existence is not reflected in the bank deposits analysis. Likewise, unless the unreported income is converted into durable or investment property (automobiles, real estate, etc.), it will not be discovered in a net worth analysis. Taglianetti, 398 F.2d at 562. Therefore, the bank deposits and cash expenditures method, an augmentation of the bank deposits method, is sometimes used by the government to prove the existence of unreported income.

Under this augmented approach the underlying bank deposits foundation must be laid to...