Opinion
Case No. 3:08-cr-053.
January 5, 2011
ORDER
This matter comes before the Court on Defendant Elbert Lee Hale's Motion for an Evidentiary Hearing on Sentencing Issues. (Doc. 61.) In that motion, Defendant Elbert Hale moved for a hearing to establish, for the purposes of sentencing, the amount of loss resulting from his conduct. The Court held the requested evidentiary hearing and the parties submitted post-hearing briefs. This ORDER addresses the Court's factual findings with regard to the amount of loss associated with the counts for which Elbert Hale has been found guilty. As stated below, the Court finds that the Government's calculation of tax loss is appropriate based on the evidence presented at trial.
I. BACKGROUND
The twenty-eight count indictment (doc. 4) in this case charged Defendant Elbert Hale with criminal wrongdoing related to the operation of a business, Cheeks Gentleman's Club ("Cheeks"), owned by Elbert Hale. The Indictment charged Elbert Hale with three counts of making false statements on the corporate income tax returns for Cheeks for calendar years 2002, 2003, and 2004, all in violation of 26 U.S.C. § 7206(1). (Indictment, Counts 3-5.) Elbert Hale was also charged with twenty-three counts of structuring financial transactions to evade reporting requirements in violation of 31 U.S.C. § 5324(a)(3) (d). ( Id., Counts 6-28.) This case proceeded to trial on March 16, 2009. The jury ultimately acquitted Elbert Hale on Counts 6 through 28 and found him guilty on Counts 3 through 5.
Following receipt of a presentence investigation report ("PSR") prepared by a United States Probation Officer, Elbert Hale filed his Motion for an Evidentiary Hearing on Sentencing Issues. In that motion, Hale objects to the calculation of tax loss contained in the PSR. To determine the amount of tax loss for purposes of restitution and offense-level computation, the probation officer relied on a summary of Elbert Hale's outstanding tax obligations for calendar years 2002-2005 prepared by Special Agent Della Blunk of the Internal Revenue Service ("IRS") Criminal Investigation Division ("CID"). ( See PSR ¶¶ 40-42, 46, 56-57; Evidentiary Hr'g Tr. at 8-9; Gov't Ex. 78.) Based on Agent Blunk's calculations, the probation officer determined that the total tax loss for restitution purposes to be $961,271.42, which represents the tax loss for calendar years 2002 through 2004. (PSR ¶¶ 42, 46.) The probation officer determined the total tax loss that may be considered when calculating the offense level to be $1,311,520.55, which represents the tax loss for calendar years 2002 through 2005. ( Id. ¶¶ 42, 56-57.)
The transcript of the May 26, 2010 evidentiary hearing appears at Doc. 72.
Government Exhibit 78 is the "IRS Appendix A, Computation of Corrected Taxable Income Due and Owing for 906 Watertower Lane, Inc., DBA Cheeks Cabaret for the years 2002, 2003, 2004 2005 prepared by SA Della Blunk, IRS-Cl.," A version of Agent Blunk's computation table is reproduced at page 11 of the PSR.
Although Hale was only found guilty of making false statements on tax returns for years 2002 through 2004, the probation officer additionally considered the tax loss associated with calendar year 2005 when determining the base offense level because he considered it to be relevant conduct. Defendant does not object to the inclusion of calendar year 2005 tax loss in the base offense level calculation. Instead, Defendant objects to the manner in which the amount of tax loss was determined and the figures arrived at by Agent Blunk.
Agent Blunk testified on behalf of the Government at the evidentiary hearing. Agent Blunk has worked for the IRS for nine years, seven of which she has served as a special agent. (Evidentiary Hr'g Tr. at 5, 34.) She holds a bachelor of science in business with a dual major in accounting and finance. ( Id. at 5.) She is also a graduate of the Federal Law Enforcement Training Center in Glynco, Georgia. ( Id. at 6.) Over the course of her career with the IRS, she has been involved in approximately thirty tax-related criminal investigations. ( Id. at 7.) Two of those investigations, including the investigation undertaken in this case, involved cash-intensive businesses. ( Id. at 7, 34.)
With regard to her method of calculating the amount of tax loss, Agent Blunk testified that she began by gathering information. For example, she interviewed witnesses, including: (i) individuals employed by Cheeks during the relevant time period; (ii) business partners and associates of Elbert Hale; and (iii) Elbert Hale's personal accountant and tax preparer, Paul Alex. ( Id. at 15-16.) Agent Blunk also reviewed a large amount of documentary evidence from various sources. Numerous records were seized during the execution of search warrants for Cheeks, Elbert Hale's home, and certain vehicles. Of those records, Agent Blunk focused on a black notebook that was discovered in the trunk of Joyce Hale's vehicle, time cards seized from Elbert Hale's residence, and advertising cards found in Elbert Hale's trunk.
The black book found in Joyce Hale's car appeared to Agent Blunk to be an accounting ledger used to track money moving in and out of Cheeks. ( See Gov't Ex. 28.) The first portion of the book contains weekly entries starting in June 2001 and continuing through mid-2005. (Gov't Ex. 28; Evidentiary Hr'g Tr. at 17.) The columns, or categories, in the book for those entries include, from left to right: "Date", "Reg.", "Door", "Girls", "Couch", "Total", "P.Roll" or "Pay Roll", and "Bal.". (Gov't Ex. 28, Evidentiary Hr'g Tr. at 17-18.) Towards the end of the book, there are separate monthly figures entered for the categories of "Couch" and "Girls." However, there is no year marked next to each month so the time frame of those entries is unclear. (Gov't Ex. 28.) When asked about her assessment of the black book, Agent Blunk testified that during the course of her investigation, she interviewed witnesses who were present when entries were made in the book. (Evidentiary Hr'g Tr. at 18.) According to Agent Blunk, the book was maintained by Joyce Hale and penned in Joyce Hale's handwriting. ( Id.) Agent Blunk concluded the entries in the book represented the weekly gross receipts for each category of income, including: "bar, meaning the bar registers; door, being cover charges; girls, money received from the dancers; and couch, money received from the Couch Room." ( Id.)
The time cards seized from Elbert Hale's house contained similar entries. (Gov't Ex. 36; Evidentiary Hr'g Tr. at 17, 19). However, unlike the black book, the time cards did not contain records for multiple years. Rather, the majority of the time cards were from 2003. (Evidentiary Hr'g Tr. at 19.) Blunk found that the time cards, for the most part, correspond to the entries in the black book for calendar year 2003. ( Id. at 19.) Agent Blunk also considered advertising cards found in Elbert Hale's truck. ( Id. at 31.) The advertising cards appeared to have been used in the same manner as the time cards and contained financial information similar to that recorded in the black book. ( Id. at 32.)
Paul Alex provided Agent Blunk with a number of additional documents, such as copies of tax returns he had prepared for Elbert Hale and the supporting documentation used in preparing the returns. ( Id. at 16, 20.) Agent Blunk compared those records with the records seized during the searches. From that comparison. Agent Blunk found that the figures reported in the black book were substantially higher than those reported to Alex. (Evidentiary Hr'g Tr. at 20.) Additionally, certain categories of income reflected in the black book — specifically, the categories of girls and couch — were entirely omitted from the information given to Alex. ( Id.)
Elbert Hale had provided Alex with business receipts and other information, from which Alex created summaries and financial statements.
Agent Blunk's goal in examining that evidence was to determine the amount of unreported "income." ( Id. at 22.) "Income" is a broader category than "gross receipts." "Gross receipts," from the IRS's perspective, refers to total business or other taxable receipts for a given period, whereas "income" encompasses funds received from any source, whether taxable or nontaxable. ( Id. at 15, 22.) The IRS recognizes various techniques for determining an individual's or a business entity's income. ( Id. at 22-23.) Those techniques or methodologies fall into two basic categories: the direct method and the indirect method. ( Id. at 23.) According to Agent Blunk, the direct method is used where there is direct evidence to support the computation. Under that method, agents use a specific item technique to prove the total income. ( Id.) In contrast, the indirect method is applied where there are no documents or other forms of evidence that directly support a computation. ( Id.) As indicated in both the Internal Revenue Manual and the Criminal Tax Manual, the method preferred by the IRS is the direct method. ( Id.)
Agent Blunk used the direct method in this case. ( Id. at 24.) In particular, she applied the specific item technique, relying primarily on the black book, the time cards seized from Elbert Hale's residence, and the records submitted to Hale's accountant. ( Id.) Based on her examination of that evidence, she prepared a Computation of Corrected Taxable Income Due and Owing for Cheeks (hereinafter referred to as "IRS Tax Computation") (Gov't Ex. 78), the following version of which is included in paragraph 42 of the PSR:
Calendar Calendar Calendar Calendar Year 2002 Year 2003 Year 2004 Year 2005
Gross receipts reported on $729,783.00 $682,553.00 $962,904.00 $952,417.00 tax return Plus: Unreported gross $786,002.50 $966,649.00 $1,351,025.65 $1,026,081.48 receipts Corrected gross receipts $1,515,785.50 $1,649,202.00 $2,313,434.65 $1,978,498.48 Less: Cost of goods sold $197,017.00 $192,072.00 $270,771.00 $258,567.00 Equals: Gross profit $1,318,768.50 $1,457,130.00 $2,042,663.65 $1,719,931.48 Plus: Other income $1,544.00 — 0 — — 0 — — 0 — Equals: Total income $1,320,312.50 $1,457,130.00 $2,042,663.65 $1,719,931.48 Less: Total deductions $510,647.00 $511,353.00 $679,644.00 $656,102.00 Less: Additional payroll $65,425.50 $65,866.75 $149,462.79 $20,946.75 deduction Equals: Corrected taxable $744,240.00 $879,910.25 $1,213,556.86 $1,042,882.73 income Corrected tax amount due $253,041.60 $299,169.49 $412,609.33 $354,580.13 Less: Tax paid per return $3,549.00 — 0 — — 0 — $4,331.00 Additional tax due and $249,492.60 $299,169.49 $412,609.33 $350,249.13 owingLooking at calendar year 2002 as an example, Blunk first recorded the total gross receipts as reported on Cheeks' tax return as $729,783.00. (Evidentiary Hr'g Tr. at 26.) She then determined that there was an additional $786,002.50 in unreported gross receipts that year. ( Id.) Agent Blunk testified that she arrived at that amount by comparing the income reported in the black book with the records submitted to Hale's accountant. ( Id.) The next item on the chart, titled "Corrected gross receipts," reflects the addition of the reported and unreported gross receipts. The next row contains a deduction for "[c]ost of goods sold," which Agent Blunk based on Cheeks' tax returns. ( Id.) The "[g]ross profit" in the next row reflects the corrected gross receipts minus the cost of goods sold. As reflected in the chart above, Agent Blunk calculated the gross profit for 2002 to be $1,318,768.50. The following row, titled "Other income," reflects additional income, if any, reported on the tax returns. ( Id.) Agent Blunk then added the "[o]ther income" to the "[g]ross profit" to determine the "[t]otal income" as reflected in the next line.
The next two rows deal with deductions that either were claimed or could have been claimed on the tax returns. The row, "Less: Total deductions" reflects all deductions actually claimed on the tax returns. ( Id. at 27.) The row, "Less: Additional payroll deduction," reflects an additional deduction for payroll expenses that the evidence suggested could have been but was not claimed. ( Id. at 39.) Testimony at trial suggested that Hale had used a portion of the allegedly unreported cash income to cover certain payroll expenses. ( Id.) Hale did not claim those payroll expenses as a deduction on his tax returns. ( Id.) With that testimony in mind, Agent Blunk considered the figures in the black book listed under the heading of "payroll" to be deductible business expenses and calculated an additional deduction based on those figures. ( Id.)
Agent Blunk generally followed the same procedure to determine additional tax owed for calendar years 2003, 2004, and 2005, although she relied on additional or different evidence to determine the amount of unreported gross receipts for certain year. For example, in determining the unreported gross receipts for calendar year 2003, Agent Blunk relied on the time cards found in Elbert Hale's house in addition to the black book and Elbert Hale's tax returns. Agent Blunk presumably could not rely on those time cards when calculating the gross receipts for other years because the majority of the time cards were from 2003. ( See id. at 19, 28.) With regard to calendar year 2005, the black book contained figures for only a portion of the year. ( Id. at 31.) Accordingly, Agent Blunk also relied on the figures recorded on the advertising cards seized from Elbert Hale's truck to determine the gross receipts for that year. ( Id. at 31-32.)
Ultimately, Agent Blunk determined that Hale owed an additional $249,492.60 for calendar year 2002, $299,169.49 for calendar year 2003, $412,609.33 for calendar year 2004, and $350,249.13 for calendar year 2005. After Agent Blunk completed the tax computation, she asked an employee from the Civil Division of the IRS to review the accuracy of the computation. ( Id. at 22.)
Agent Blunk's analysis of the tax loss is based in large part on her conclusion that the numbers recorded in the black book reflect actual income. ( Id. at 36-37.) Agent Blunk admitted during cross-examination that if the numbers recorded in the black book and on the time cards were projections rather than a record of actual income, her calculation of unpaid taxes would be incorrect. ( Id. at 37.) However, she maintained that she did not accept the theory that the numbers reflected mere projected income. ( Id.)
After Agent Blunk testified, Defendant Hale called his expert witness, Candice DeClark Peace, to the stand. DeClark Peace is a partner with the accounting firm of Clark, Schaefer, Hackett Company ("CSH"). ( Id. at 74.) She holds a bachelor degree in business administration with a major in accounting, a master degree in finance, and a juris doctorate degree. ( Id. at 74-75.) DeClark Peace spent the first six years of her career with the IRS in Cincinnati, where she worked as a field agent. ( Id. at 75.) She left the IRS in 1978 and began her career with CSH shortly thereafter. ( Id. at 75-76.) She has been a certified public accountant since 1979. ( Id. at 74-75.) Due to her legal education and IRS experience, she handles much of CSH's representation of clients facing IRS audits. ( Id. at 76.) She has on several occasions been asked to prepare the tax filings of individuals who have been charged with crimes and who failed to keep proper financial records. ( Id.) Working with staff, she has used both direct and indirect methods to reestablish the income of those individuals in order to determine their tax liability. ( Id. at 76-77.) She currently handles approximately twenty-five audits per year. ( Id. at 77.)
Defendant Elbert Hale retained DeClark Peace in this case to provide an opinion as to his taxable income or tax liability for calendar years 2002 through 2004. ( Id.) According to DeClark Peace, there were not sufficient records available to conduct a full financial audit. ( Id.) Accordingly, she agreed to perform the following specific procedures:
1. Determine the cash deposited into bank accounts owned and/or controlled by the defendant; confirming the accuracy and completeness of this information through third party verification or interviews as deemed necessary;
2. Determine the total non-taxable income sources of the defendant and the manner in which these sources were employed (ie: deposited into the defendant's bank accounts or paid directly toward the application of the defendant's business expenses, personal living expenses or acquisition of business or personal capital assets);
3. Determine the taxable income of the defendant for the years 2002 through 2004;
4. Determine the federal income tax liability of the defendant for the years 2002 through 2004.
(Def. Ex. C-2 at Cover Letter pg. 2.)
DeClark Peace worked with one of CSH's associates, Matt Scar, also a CPA. ( Id. at 78.) They devoted approximately 135 hours to the case. ( Id. at 79.) They utilized the methodologies commonly accepted by the IRS. ( Id.) DeClark Peace testified that she agrees with Agent Blunk that the direct method is preferable, but noted her belief that the direct method should only be used where the credibility of the documents or other evidence of income can be independently verified through third-party records. ( Id. at 80.) She described the direct method specific item technique used by Agent Blunk as typically applicable in situations wherein there is a specific "item unto itself that is easily sourced and you can easily look for it on the tax return, an omitted stock sale, an omitted real estate sale, a charitable contribution that either was or wasn't made that would have fraudulent intention claiming something or not reporting something." ( Id. at 81.)
According to DeClark Peace, where there is no specific item or items, most professionals and the IRS use one of two other methods to establish income. ( Id. at 81.) One is a bank deposits method, which requires that substantially all of the taxpayer's financial activities are conducted through bank accounts, credit cards, wire transfers, or other traceable transactions. ( Id.) An accountant applying the bank deposits analysis essentially looks at all of the deposits made into a taxpayer's accounts and compares those deposits to the income reported on the tax return. ( Id.) Where the bank deposits exceed the reported income, the taxpayer has the burden to demonstrate why certain income was not reported. ( Id. at 81-82.) The second technique is the source and application of funds method. ( Id. at 82.) Under that method, an accountant or investigator would look at all of the different sources of funds available to the taxpayer, whether taxable or nontaxable, legal or illegal. ( Id.) For example, those funds might include loan proceeds, proceeds from sales of assets, spousal support, or child support. ( Id.) After calculating all available funds, the accountant or investigator would next calculate all expenditures, including business expenditures, acquisition of assets, and living expenses. ( Id.) The goal is to determine whether the taxpayer has the sources to be able to fund or be able to support the expenses they are incurring. ( Id.)
DeClark Peace applied the source and application of funds method to her analysis of Hale's income. ( Id. at 83.) In her opinion, the specific item method could not be applied due to the absence of any independently verified records of specific income, and the bank deposits method could not be used because Cheeks was a cash-intensive business. ( Id.) Specifically. DeClark Peace found the black book to be an unreliable record of taxable income. One of the reasons for that conclusion, she testified, was the figures recorded in the black book conflicted with two witnesses' trial testimony regarding Hale's expenditures.
DeClark Peace testified that she reviewed the trial testimony. However, only portions of the trial were transcribed. While testifying, DeClark Peace specifically referred to the trial testimony of Rex Gibson, an investor who became involved with Cheeks in late 2003, and John Stegall, a former employee of Cheeks who served as an informant in this case. (Evidentiary Hr'g Tr. at 83.) The extent to which she reviewed any other portions of the trial is unclear.
The first witness, Rex Gibson, first became involved with Cheeks in late 2003 after he approached Hale about the possibility of purchasing the club. (Testimony of William R. Gibson, Trial Tr. at 3-6 (March 18, 2009).) Gibson planned to obtain funding from his investment group, the Butler Funding Group, in order to effectuate the purchase. ( Id. at 6.) The purchase price would have been approximately $2,000,000. For reasons that remain unclear, the deal changed at some point. Rather than buying Cheeks, the Butler Funding Group loaned $1,000,000 to an entity known as the Gibson Group, which in turn loaned $1,000,000 to Hale in November 2003. ( Id. at 7-9.) According to Gibson, his plan was to eventually buy the bar and turn the loan into a down payment. ( Id. at 9.) In the meantime, the terms of the loan required that the Gibson Group be paid interest payments on a weekly basis. ( Id.) According to Gibson, he received a fifty percent "cut" of Cheeks' net profits each week. ( Id. at 16.) He estimated that during 2004, Hale made cash payments to him of approximately $6,000 or $7,000 per week. ( Id. at 16-17.)
The transcript of Gibson's testimony was filed as Doc. 50.
DeClark Peace performed an analysis of Hale's potential income for calendar year 2004 based on Gibson's testimony. (Evidentiary Hr'g Tr. at 83; Def. Ex. C.) When she compared that analysis to the figures recorded in the black book, she found a wide disparity. (Evidentiary Hr'g Tr. at 84.) Essentially, she determined that if Gibson was receiving $6,000 to $7,000 per week, and that was roughly fifty percent of the total net income for Cheeks, then the remaining net income for Cheeks would also be $6,000 to $7,000 per week, or approximately $338,000 per year. ( Id. at 85.) DeClark Peace then subtracted from that $338,000 the expenses that related only to Cheeks and not to the joint venture, including expenses such as Elbert Hale's salary and the payroll taxes for Elbert Hale. According to that analysis, Cheeks' taxable income for calendar year 2004 was $252,000 and the total tax owed would be $79,000. ( Id.) DeClark Peace then did a regression analysis based on those numbers to determine the approximate taxable income for calendar years 2002 and 2003, and determined that if Gibson's testimony was credible, Cheeks' unpaid tax liability for calendar years 2002 through 2004 would have been $165,853. ( Id. at 85-86.)
DeClark Peace performed a similar analysis based on the trial testimony of John Stegall, a former employee of Cheeks who served as an informant in this case. Stegall had testified that he believed the net income going to both Gibson and Cheeks or Hale on a weekly basis was between $11,870 and $10,400. ( Id. at 89.) DeClark Peace did the same type of analysis as described above, using the average of the two figures, which was $11,135. ( Id.) Based on that analysis, she determined that if Stegall's testimony is to be believed, Cheeks' unpaid tax liability for calendar years 2002 through 2004 would have been $552,000. ( Id. at 89-90; Def. Ex. C-1.)
Both of those calculations differed greatly from the $961,271.42 figure that Agent Blunk arrived at relying primarily on the black book. As a result, DeClark Peace determined that a single item methodology centered on the black book was not appropriate in this case. (Evidentiary Hr'g Tr. at 87-88.) Instead, DeClark Peace conducted a source and application of funds analysis, beginning with a review of the bank accounts that were under Hale's control or that were accessible to him. ( Id. at 92-93.) She reviewed all bank statements received from Hale and his counsel as well as additional statements that she obtained directly from the bank. ( Id. at 93.) She added to the bank deposits other documented sources of income that did not run through the bank accounts but were found in other records such as Hale's tax returns. ( Id. at 93, 97.) The other sources of income included Hale's wages, interest income, proceeds from sales of assets, pension distributions, and income from rents, royalties, or partnerships. ( Id. at 97.) Ultimately, she determined that for calendar year 2002, Hale had total sources of approximately $240,308. There were no nontaxable sources of income for 2002. ( Id. at 100.) DeClark Peace then calculated Hale's monthly expenditures or "applications," including the business expenses of Cheeks, Hale's state and local tax payments, and living expenses. ( Id. at 97-98.) The total applications for 2002 amounted to $233,360, resulting in an excess of only $6,948 in source funds. ( See Def. Ex. C-2 at Report pg. 4.)
DeClark Peace performed the same analysis to determine the source and application of funds for calendar year 2003 and 2004. (Evidentiary Hr'g Tr. at 98.) The total sources for 2003 were $1,309,496, and the total applications were $661,177, leaving an excess of $648,319. ( Id. at 100; Def. Ex. C-2 at Report pg. 4.) She noted several sources of nontaxable income in 2003, including the $1,000,000 loan from the Gibson Group and income from the refinancing of Hale's residence. (Evidentiary Hr'g Tr. at 98.) The non-taxable income resulted in a much higher figure for total sources for calendar year 2003. The total sources for 2004 were $468,251, and the total applications were $235,792, resulting in an excess of $232,459 in source funds. (Def. Ex. C-2 at Report pg. 4.)
Due to inconclusive records related to income not deposited in banks accounts, DeClark Peace was not able to conclusively determine Defendant's taxable income or tax liability for calendar years 2002 through 2004. (Def. Ex. C-2 at Report pg. 3.) However, based on the source and application of fund analysis she performed, DeClark Peace determined that:
The conclusion of our report is that the defendant had adequate income (sources), taxable and non-taxable, to fund the expenditures (applications) for his business and his personal lifestyle; that substantially all of the defendant's income during the years in question was reported on his federal income tax returns; and that neither a review of his expenditures nor an analysis of his net worth suggest any significant unreported income.
( Id. at Cover Letter pg. 3; see also Evidentiary Hr'g Tr. at 105.) While testifying, DeClark Peace noted that the deal Hale crafted with Gibson Group and the fact that he refinanced his home suggested that he did not have stockpiles of cash. (Evidentiary Hr'g Tr. at 101.) According to DeClark Peace:
My experience over 31 years in public accounting, clients or taxpayers don't like to give up equity. Why would you give up a half of the equity in your business, a half of the cash flow, in lieu of paying interest or in lieu of paying cash on which if invested would yield a much, much smaller amount.
As you indicated this morning, the effective rate of return on that million dollars was in excess of 30 percent. When you can borrow funds at significantly less or if you can use a cash hoard or cash excesses that you have, you'd be much — it would be a much better financial move to do that.
( Id. at 101-102.) DeClark Peace also noted that shortly after 2004, Hale lost one of his properties in a foreclosure proceeding. In her opinion, Hale would not have allowed his property to slip into foreclosure if he had access to an abundance of cash.
On cross examination, the Government asked DeClark Peace to once again consider the black book. Specifically, the Government asked DeClark Peace whether, in her opinion, it would be appropriate to conduct a specific item analysis using the black book if the black book is in fact a summary of gross receipts for Cheeks. ( Id. at 108.) DeClark Peace responded that the black book, if found to be an actual ledger of gross receipts, would be indicative of gross income but not of net income. ( Id. at 109.) She also indicated that under those circumstances Agent Blunk's method of relying on the black book to calculate gross income would be the preferred method of calculation. ( Id.) However, she refused to agree that reliance on the black book would necessarily yield the correct taxable income, noting that the Government made too many assumptions when conducting its analysis. ( Id.)
The Government also challenged the basis for DeClark Peace's ultimate conclusion that Hale had not substantially underreported his income. The Government asked DeClark Peace, for example, whether she had ever worked with clients who did not pay their taxes and did not live extravagant lifestyles, and she indicated that she had. ( Id. at 120-121.) She also admitted that with regard to the foreclosure of Hale's property, Hale may not have come forward with cash if he was trying to hide that cash from the IRS. ( Id. at 121.)
II. LEGAL STANDARD
Where a dispute exists regarding the presentence report or any other sentencing-related matter, Federal Rule of Criminal Procedure 32(i)(3)(B) requires that a district court "rule on the dispute or determine that a ruling is unnecessary either because the matter will not affect sentencing, or because the court will not consider the matter in sentencing." The dispute in this case concerns the calculation of tax loss. Under the Sentencing Guidelines, "tax loss is the total amount of loss that was the object of the offense (i.e., the loss that would have resulted had the offense been successfully completed)." U.S.S.G. § 2T1.1(c)(1). Note A to U.S.S.G. § 2T1.1(c)(1) provides that "[i]f the offense involved filing a tax return in which gross income was underreported, the tax loss shall be treated as equal to 28% of the unreported gross income (34% if the taxpayer is a corporation) plus 100% of any false credits claimed against tax, unless a more accurate determination of the tax loss can be made."
The Sixth Circuit has indicated that in determining the amount of tax loss, the Government bears the burden of establishing the loss by a preponderance of the evidence standard. See United States v. Daulton, 266 F. App'x 381, 388 (6th Cir. 2008); United States v. Hart, 70 F.3d 854, 863 (6th Cir. 1995). However, "`[l]oss need not be determined with precision.'" Daulton, 266 F. App'x at 387 (quoting United States v. Milligan, 17 F.3d 177, 183 (6th Cir. 1994)). The district court need only "make a `reasonable estimate' of the amount of the loss that defendant intended to inflict, not the actual amount of the government's loss." United States v. Kraig, 99 F.3d 1361, 1370 (6th Cir. 1996); see also Daulton, 266 F. App'x at 387; United States v. Kosinski, 127 F. App'x 742, 749 (6th Cir. 2005) ("`When a district court calculates the amount of loss caused by a crime involving fraud or deceit, the court need not determine the amount of loss with precision. The guidelines require a district court to make a reasonable estimate . . .'" (quoting United States v. Kohlbach, 38 F.3d 832, 835 (6th Cir. 1994))).
III. ANALYSIS
Defendant Elbert Hale's primary argument is that Agent Blunk's calculation of tax loss using the specific item method is unreliable because there is insufficient evidence to show that the figures in the black book represent actual income or to verify the accuracy of those figures. Throughout this case, Defendant has argued that there is no evidence showing that the figures recorded in the black book found in Joyce Hale's car represent actual income. Rather, Defendant has suggested that the figures may have been projections. As a result, Hale argues, the analysis performed by DeClark Peace provides the most accurate picture of the tax loss in this case and the Court should accept her conclusion that there was no substantial underreporting of Cheeks' income. In addition, in his post-hearing brief, Defendant Elbert Hale admits that he failed to report various items of gross income received by Cheeks, but claims that most if not all of that cash income was pooled and divided as compensation for individuals working at the club. Therefore, consistent with DeClark Peace's conclusions, the unreported business expenses of the club would offset any unreported income resulting in little to no tax loss.
The Government, in response, argues that it has established the amount of tax loss by a preponderance of the evidence and that Agent Blunk's reliance on the black book as a record of income for Cheeks was sound. The Government also argues that neither Agent Blunk nor this Court has a duty to consider every possible unclaimed tax deduction when determining that tax loss.
With regard to Defendant's primary argument, the Court finds that the black book is a ledger that was used by Joyce Hale to keep track of the weekly income of Cheeks. As described in greater detail in this Court's Order Denying Elbert Lee Hale's and Joyce Hale's Motions to Suppress Evidence, government agents found the black book on May 12, 2006. On that morning, Agent Blunk and other state and federal law enforcement agents executed a search warrant for Cheeks. During that search, IRS Special Agent Laurel Vant interviewed Joyce Hale, who the IRS agents believed to be the bookkeeper for Cheeks. Agent Vant asking her about her methods of bookkeeping and accounting, specifically asking about the existence of a black book that undercover agents had previously observed Hale placing in the trunk of her car. Hale denied knowledge of the book. Hale also denied knowledge of records or receipts from couch dances and VIP sessions at the club. At the conclusion of the interview, Dayton Police Detective William Myers discovered the black notebook in the trunk of Joyce Hale's car. Following the discovery of the book, Joyce Hale became visibly agitated and admitted that the handwriting in the book was hers.
Joyce Hale ultimately was charged in this case with two counts of making false statements in violation of 18 U.S.C. § 1001 in connection with the May 12, 2006 interview. The Jury found Joyce Hale not guilty on the first count, in which she was accused of "knowingly and willfully mak[ing] a false material representation, to wit: that she was personally unaware of how business receipts and other income generated by female dancers who performed in the Couch Room and VIP Room of the Cheeks Gentleman's Club . . . were accounted for." (Indictment, Doc. 4 at 1.) However, the jury convicted Joyce Hale on the second count, in which she was accused of falsely representing "that she was personally unaware of the existence of any accounting books or ledgers established and maintained to record the business income and receipts of the Cheeks Gentleman's Club." Although the second count does not explicitly mention to the black book, it implicitly refers to the statement Hale made during the May 12, 2006 interview denying any knowledge of the black book. Additionally, there was no other ledger or accounting book so emphasized throughout the trial as the black book. There simply is little, if any, possibility that the Jury could have had anything other than the black book in mind when finding Joyce Hale guilty on Count 2 of the Indictment. As such, the jury must have found that the black book was an "accounting book[] or ledger[] establishing and maintaining to record the business income and receipts" of Cheeks.
Indeed, there is sufficient evidence to support such a finding. For example, Joyce Hale's nervous reaction upon the discovery of the black book signifies that it contained more than mere projections. In addition, the numbers in the book are highly detailed, recording specific values down to the cents, and vary widely from week to week. Defendant Elbert Hale has offered no explanation for why those figures, if truly projections rather than tallies of actual income, would be so detailed. Nor has he offered any explanation of what the basis for such "projections" might be. Rather, the only reasonable conclusion is that Joyce Hale used the black book to keep track of Cheeks' cash income.
At trial, John Stegall testified that each morning he, Joyce Hale, and Elbert Hale counted the cash taken in the night before. (Testimony of Johnie Stegall, Trial Tr. at 23-24 (March 18, 2009).) Joyce Hale recorded the counts for each source of income, such as register, door, or girls, on weekly time cards, a portion of which were retrieved from Elbert Hale's residence during the May 12, 2006 search. ( Id. at 24-25; Evidentiary Hr'g Tr. at 10-11, 17, 19; Gov't Ex. 36.) Similar information was also sometimes recorded on the backs of old fliers. (Stegall Tr. at 25.) Every Friday, according to Stegall, Joyce Hale entered the tally from the time cards into a ledger, identified alternatively by Stegall as the black book or Government Exhibit No. 28. ( Id. at 26, 34-35, 50.) Stegall testified that Joyce and Elbert Hale began recording the tallies in the ledger in order to keep track of the funds generated by Cheeks each week. ( Id. at 27.) Stegall further testified that Joyce Hale maintained the ledger, and that she typically kept the ledger in the trunk of her car. ( Id. at 50.) When asked why Joyce Hale kept the Ledger with her rather than leaving it at the club, Stegall responded:
The transcript of Stegall's testimony, which was filed as Doc. 62, will hereinafter be referred to as "Stegall Tr."
At one point in time, it was kept at the club in the top safe. But in 2001 there was a — there was a raid on one of his businesses over a shooting that had happened the night before, and when that happened, it spooked Joyce. And, in fact, she had shredded the old ledger and —
Because she was at Cheeks and had got a phone call that the FBI, DEA, or whoever, had went into the other club on the north end of town — they weren't sure what it was about at that time — and because she was nervous, she shredded the book.
( Id.) Finally, Stegall maintained throughout his testimony that the numbers recorded in the black book represented actual income figures and were not projections. ( Id. at 32, 36-37, 55, 86.)
It is unclear why Joyce Hale would have felt the need to shred the old version of the ledger if it was merely a book of projections.
Defendant argues that the numbers in the black book cannot be used to determine the gross receipts of Cheeks because those numbers conflict with Gibson and Stegall's testimony as to how much money Elbert Hale gave to the Gibson Group each week. If, Defendant contends, the Court believes the testimony of either Stegall or Gibson as to what the fifty-fifty split of the net proceeds was between Hale and the Gibson group, then one of two conclusions must be drawn: The first possible conclusion is that the numbers in the black book are grossly overstated estimates or projections and do not represent the actual income. The second possible conclusion is that the numbers in the black book may represent gross receipts but do not accurately reflect net profits because they do not show all of the business expenses.
For reasons stated above, the first conclusion is neither reasonable, nor supported by the evidence. The second conclusion is a possibility, but does not render Agent Blunk's reliance on the black book improper or her analysis of the tax loss inaccurate. In determining the amount of tax loss for sentencing purposes, the Government has no duty to ferret out all possible deductions that Hale could have claimed. See United States v. Yip, 592 F.3d 1035, 1041 (9th Cir. 2010) (no entitlement to consideration of unclaimed deductions when determining tax loss); United States v. Gordon, 291 F.3d 181, 187 (2d Cir. 2002) (holding that courts may factor in additional deductions, but that the defendant bears the full burden of proof with regard to such deductions); United States v. Chavin, 316 F.3d 666, 679 (7th Cir. 2002). Referring back to Note A to U.S.S.G. § 2T1.1(c)(1), the tax loss is to be treated in this case as equal to 34 percent of the "unreported gross income . . ., unless a more accurate determination of the tax loss can be made." Agent Blunk's analysis tracks that instruction. She first determined, based primarily on the black book, the total gross unreported income. Then, in order to arrive at what she believed to be the most accurate determination of tax loss, she factored in the only additional unclaimed deduction that she found to be supported by the evidence — the payroll expenses recorded in the black book.
It appears to this Court that the question of whether an unclaimed tax benefit may ever offset tax loss remains undecided in the Sixth Circuit. Relying on the latter clause of Note A to U.S.S.G. § 2T1.1(c)(1), the Second Circuit has concluded that tax loss should be adjusted for "`legitimate but unclaimed deductions.'" Gordon, 291 F.3d at 187 (quoting United States v. Martinez-Rios, 143 F.3d 662, 671 (2d Cir. 1998)); see also United States v. Petersen, 306 F. App'x. 329, 330-31 (8th Cir. 2009) (citing Gordon and suggesting that it may be proper for a court to consider unclaimed deductions where the defendant has shown they are appropriate). However, several other circuits disagree. See Yip, 592 F.3d at 1041 (9th Cir. 2010) (no entitlement to consideration of unclaimed deductions when determining tax loss); United States v. Clarke, 562 F.3d 1158, 1164 (11th Cir. 2009), cert. denied, ___ U.S. ___, 130 S.Ct. 809 (2009); United States v. Delfino, 510 F.3d 468, 472 (4th Cir. 2007), cert. denied, ___ U.S. ___, 129 S.Ct. 41 (2008); United States v. Phelps, 478 F.3d 680, 681-82 (5th Cir. 2007) (per curiam); Chavin, 316 F.3d at 677 (7th Cir. 2002); United States v. Spencer, 178 F.3d 1365, 1368 (10th Cir. 1999). In this case, the Government has factored into its analysis of tax loss an unclaimed deduction for payroll expenses and Defendant has not objected. Therefore, in light of the fact that the Sixth Circuit has yet to determine how Note A to U.S.S.G. § 2T1.1(c)(1) should be applied, the Court will allow the additional deduction included by the Government. See United States v. Bennett, 341 F. App'x 776, 780 (3d. Cir. 2009).
Based on the abundance of evidence showing that the black book was a ledger used to record the gross receipts of Cheeks, the Court finds that Agent Blunk's use of the specific items method of proof to determine the tax loss was a correct application of direct methodology. Defendant's expert witness, DeClark Peace, admitted that the black book, if found to be an actual ledger of gross receipts, would in this case be indicative of gross income. Moreover, the Court finds that Agent Blunk appropriately based her determination of the tax loss on an analysis of the gross underreported income, as reflected in the black book. As discussed above, Defendant is not entitled to a full consideration of all possible deductions that may have been claimed had all of Cheeks' income been reported, particularly given the fact that Defendant has offered little if any proof of the alleged offsets.
IV. CONCLUSION
For the reasons set forth above, the Court finds that the Government has accurately calculated the tax loss and the Court will rely on those calculations at sentencing.
IT IS SO ORDERED.