[00:00:12] Speaker 03:
Good morning, Your Honor.

[00:00:15] Speaker 00:
May it please the court.

[00:00:16] Speaker 00:
My name is Jason Silver.

[00:00:17] Speaker 00:
I'm here in this courtroom with my client, Ryan Patterson, to my left, the appellant in this case.

[00:00:25] Speaker 00:
This is an appeal for tax evasion, but this is not a tax case.

[00:00:30] Speaker 00:
The central issue in this case is the Sixth Amendment confrontation case.

[00:00:35] Speaker 00:
The bank deposit analysis, also we refer today as the BDA, is what we cannot confront in this case.

[00:00:42] Speaker 00:
Unfortunately, we are here today because the IRS's cooperating revenue agent, Deborah Steele, did not save her analysis because she didn't have enough memory on her computer.

[00:00:53] Speaker 00:
She forgot.

[00:00:54] Speaker 02:
She gave... Counsel, normally in these cases where there's not confrontation, it's because you have something else that's relied upon by the witness, like a lab test or something else.

[00:01:05] Speaker 02:
You're complaining about her own notes, correct?

[00:01:09] Speaker 02:
And you had the opportunity to cross-examine her

[00:01:12] Speaker 02:
for a day or so, it looked like.

[00:01:15] Speaker 00:
Right.

[00:01:15] Speaker 00:
We had the opportunity to ask her questions.

[00:01:18] Speaker 00:
Unfortunately, we needed to ask her questions about her analysis.

[00:01:22] Speaker 00:
The analysis was the crux of the government's case.

[00:01:27] Speaker 00:
The government chose an indirect method of proof here.

[00:01:30] Speaker 00:
That is a bank deposit analysis.

[00:01:32] Speaker 00:
And she testified on how she did this bank deposit analysis.

[00:01:36] Speaker 00:
She took 14,000 pages, she loaded them up into the government's proprietary software,

[00:01:42] Speaker 00:
And then based upon her experience, she started taking items away from there.

[00:01:48] Speaker 00:
That's what she testified about.

[00:01:50] Speaker 00:
Then she wrote the information down in some sticky notes, which we don't even have her sticky notes.

[00:01:54] Speaker 00:
We don't have those to cross-examine.

[00:01:57] Speaker 00:
And when we started examining her, cross-examining her on these issues, she admits that she messed up.

[00:02:05] Speaker 00:
She didn't save her analysis.

[00:02:07] Speaker 00:
And because she didn't save her analysis, we weren't given the opportunity

[00:02:11] Speaker 00:
to be able to look at, for example, here's a deposit on January 15th of 2015, and this is from ABC Company, and ask her why this was not... What supporting materials for this were put into the record?

[00:02:27] Speaker 04:
Was the large, the omnibus, Excel or spreadsheet put into the record, but just not the sorting of it, or neither of those?

[00:02:38] Speaker 00:
Great question, Your Honor.

[00:02:39] Speaker 00:
Nothing was put into it.

[00:02:41] Speaker 00:
The government, typically in these types of cases, and I've seen hundreds of these cases in my career, the government would have an Excel spreadsheet.

[00:02:48] Speaker 00:
And that Excel spreadsheet would have in there all the inputs for deposits.

[00:02:54] Speaker 00:
And it would show all the deposits as she testified.

[00:02:57] Speaker 00:
It would include all the deposits.

[00:02:59] Speaker 00:
And then it would start deducting things.

[00:03:02] Speaker 00:
For example, transfers, if there was a tax refund, things like that.

[00:03:07] Speaker 00:
And we were not afforded the opportunity

[00:03:09] Speaker 00:
to go through that spreadsheet with her and go item by item on whether or not an item was included in taxable grocery receipts or excluded and the reasons for that.

[00:03:23] Speaker 00:
Now, when we did talk with her about a couple different checks, for example, service experts, the government put some selective checks in.

[00:03:31] Speaker 00:
See, we talked to her about service experts and she indicated that she included this in her analysis.

[00:03:38] Speaker 00:
We didn't have the spreadsheet, the big, huge omnibus spreadsheet to go through, but we questioned her about it.

[00:03:44] Speaker 00:
And she said, yep, I included that in my analysis.

[00:03:47] Speaker 00:
And then we went through the tax returns with her, which she said she looked at, and we showed service experts was actually an entity that Mr. Patterson was a partner in.

[00:03:58] Speaker 00:
And she acknowledged that it could have been a reimbursement or another non-taxable.

[00:04:03] Speaker 00:
She also had some other checks that she plucked from there, some checks from some third parties.

[00:04:08] Speaker 00:
And these third parties, she never interviewed these third parties.

[00:04:12] Speaker 00:
She never read any memorandums of these third parties.

[00:04:15] Speaker 00:
And she said, yep, I included all these third parties into my analysis.

[00:04:20] Speaker 00:
But we don't know if she included in her analysis or not, because we don't have the analysis.

[00:04:24] Speaker 00:
We don't have the spreadsheet.

[00:04:26] Speaker 00:
This is something that is not only required, it is needed for us to be able to cross examine her on these issues.

[00:04:34] Speaker 00:
And if this was even at a civil level, this would have not even got past the civil court, and in this case, a US tax court.

[00:04:41] Speaker 00:
It would have demanded an analysis.

[00:04:44] Speaker 00:
And then what would we have behind that?

[00:04:46] Speaker 00:
We would have the bank records, 14,000 pages of bank records.

[00:04:52] Speaker 00:
And the government, after the court initially denied putting those bank records in, the court later changed its mind.

[00:04:59] Speaker 00:
But the court acknowledged, the court stated, when it went over this,

[00:05:05] Speaker 00:
It said to say that the jury is somehow going to be moved in any way because they have got all those bank records in front of them and they can go through them and try to replicate that formula, I don't think that makes sense.

[00:05:17] Speaker 00:
That's what the court said initially when it didn't let the bank records in.

[00:05:23] Speaker 00:
And then the court went on to say when after it did let the bank records in,

[00:05:28] Speaker 00:
The trouble that the court had, and that the jury may have, is that due to the testimony of Ms.

[00:05:33] Speaker 00:
Steele, there is a lack of tying up how we get from those records at the base, the bank individual transaction records, to her ultimate conclusion, because the work isn't shown.

[00:05:46] Speaker 00:
We don't have the work to look at.

[00:05:49] Speaker 00:
That's the crux of this case.

[00:05:54] Speaker 00:
And subsequent to all our briefings in this case, Your Honor,

[00:05:58] Speaker 00:
Smith v. Arizona came out.

[00:06:00] Speaker 00:
In that case, the court, that came out on 6-21-2024, the U.S.

[00:06:05] Speaker 00:
Supreme Court, indicated the maker of the statements is Smith wasn't in the courtroom and Smith couldn't ask her any questions.

[00:06:13] Speaker 00:
Here, we couldn't ask any questions of the bank deposit analysis.

[00:06:17] Speaker 00:
Any questions at all.

[00:06:18] Speaker 00:
We functionally have the same thing that the court had in Smith, which is here in Arizona case, and the court overruled the lower courts

[00:06:28] Speaker 00:
in that matter.

[00:06:30] Speaker 00:
To make it worse, the internal revenue service cooperating revenue agent didn't follow her own manual, not only her own manual, but what has been promulgated through case law.

[00:06:43] Speaker 00:
There's no statute that says how you have to do a bank deposit analysis.

[00:06:47] Speaker 00:
The government has their internal revenue manual.

[00:06:50] Speaker 00:
It lays out how you need to do it.

[00:06:52] Speaker 00:
The first thing you have to do in a bank deposit analysis, very, very important,

[00:06:58] Speaker 00:
cash on hand.

[00:07:00] Speaker 00:
And why is cash on hand so important?

[00:07:02] Speaker 00:
Well, it's the starting point.

[00:07:04] Speaker 00:
The case laws indicated such.

[00:07:07] Speaker 00:
The government's manual indicates that it's important because the defendant may have a cash hoard.

[00:07:13] Speaker 02:
Didn't the government explain its position on why it thought that was not material?

[00:07:17] Speaker 00:
You're right.

[00:07:18] Speaker 00:
They indicated that they said it was de minimis.

[00:07:21] Speaker 00:
But how do we know it was de minimis?

[00:07:22] Speaker 00:
What is de minimis?

[00:07:23] Speaker 00:
They didn't quantify what de minimis was.

[00:07:25] Speaker 00:
We don't even know whether or not any of those cash deposits were included in a bank deposit analysis or excluded.

[00:07:33] Speaker 00:
We just don't know.

[00:07:34] Speaker 00:
The detail of the bank deposit analysis wasn't provided by the government as we indicated before.

[00:07:40] Speaker 00:
The big omnibus spreadsheet wasn't provided.

[00:07:44] Speaker 00:
But the government makes a huge deal in the case about cash.

[00:07:48] Speaker 00:
They put on Mr. Rand, who started working towards the end of 2015, subsequent to her, one of the superintendents, Mr. Lawson.

[00:07:57] Speaker 00:
And they talk about cash, cash, cash, cash, cash.

[00:08:00] Speaker 00:
I mean, there's a big, huge description about it.

[00:08:03] Speaker 00:
But yet, on the other hand, the government says cash is de minimis.

[00:08:07] Speaker 00:
It's not important.

[00:08:08] Speaker 00:
Well, that's not what the courts have said.

[00:08:10] Speaker 00:
The courts have said, as we put in our briefings, cash on hand is the starting point for each and every year.

[00:08:15] Speaker 00:
You have to look at cash.

[00:08:18] Speaker 00:
Now, Judge Collins earlier today on the first hearing was talking about the court in that case making some kind of oral findings and that there was a rule that says maybe it can't be oral findings.

[00:08:33] Speaker 00:
Well, the lower court talked about maybe an oral bank deposit analysis here.

[00:08:39] Speaker 00:
Well, I've gone through high and low civil and criminal cases.

[00:08:43] Speaker 00:
I've not found a single case that says you can have

[00:08:47] Speaker 00:
an oral bank deposit analysis.

[00:08:49] Speaker 00:
But let's just say there is such a thing, just for sake of argument.

[00:08:54] Speaker 00:
Let's do a hypothetical.

[00:08:55] Speaker 00:
Well, what would be an oral bank deposit analysis?

[00:08:58] Speaker 00:
That would be Ms.

[00:08:59] Speaker 00:
Steele going through line by line by line in an omnibus spreadsheet, as the court indicated, and indicating what was included in taxable gross receipts, what was excluded in taxable gross receipts.

[00:09:16] Speaker 00:
So even if you could have an oral bank deposit analysis, that analysis was not even done in this case.

[00:09:28] Speaker 00:
We also have some exhibits here.

[00:09:30] Speaker 00:
We have some exhibits 395 and 397.

[00:09:33] Speaker 00:
These are a couple of exhibits that were initially entered into evidence, later withdrawn by the court, correctly.

[00:09:40] Speaker 00:
But we objected to these exhibits being entered.

[00:09:43] Speaker 00:
And the reason we objected to these exhibits being entered is

[00:09:46] Speaker 00:
The case law provides that these records cannot be used as demonstrative exhibits at a closing argument unless you have the underlying documents that substantiate these charts.

[00:09:58] Speaker 00:
And what did the government do?

[00:09:59] Speaker 00:
They took the charts and they put them up in front of the jury.

[00:10:04] Speaker 00:
And they told the jury, because they knew they couldn't go back into the jury room with them, these are important.

[00:10:11] Speaker 00:
Write these numbers down.

[00:10:12] Speaker 00:
And if you need to be able to confirm them,

[00:10:15] Speaker 00:
take these numbers and look at these 14,000 pages of bank records, which we had in front of the jury, and this will prove that there is unreported income, a daunting task, even for Ms.

[00:10:30] Speaker 00:
Steele, who is a seasoned revenue agent, to do that in the approximately four hours that the jury deliberated, something that the jury could not do.

[00:10:50] Speaker 00:
The government then makes some arguments in this case, well, you could have brought forth Ms.

[00:10:57] Speaker 00:
Steele and you could have examined or cross-examined her on the special agent's report or the appendices to the special agent's report.

[00:11:07] Speaker 00:
Or you could have brought forth the IRS special agent, Jake Pennell, and you could have questioned him on that because you made a 2E request to have him as a witness.

[00:11:17] Speaker 00:
Your Honors, that's not our burden of proof.

[00:11:19] Speaker 00:
That's the government's burden of proof.

[00:11:21] Speaker 00:
It was coming upon them to put forth the witnesses they thought they could have taken on redirect.

[00:11:29] Speaker 00:
They could have taken Ms.

[00:11:30] Speaker 00:
Steele and they could have attempted to put a special agents report into evidence.

[00:11:34] Speaker 00:
It's not in evidence or the appendices in evidence.

[00:11:37] Speaker 00:
Those are also not evidence.

[00:11:39] Speaker 00:
It could have done this with Mr. Jake Pinnell, the special agent.

[00:11:42] Speaker 00:
They also didn't do that.

[00:11:49] Speaker 00:
We then get our verdict.

[00:11:51] Speaker 00:
And after the verdict, after several hearings on sentencing, the judge does something very unusual.

[00:12:00] Speaker 00:
After he sentenced Mr. Patterson to 20 months, he asked for an oral motion at that time.

[00:12:09] Speaker 00:
And he asked whether or not we think Mr. Patterson should be released pending appeal.

[00:12:15] Speaker 00:
Sides made their arguments.

[00:12:18] Speaker 00:
under 18 USC 3143B, which the second part of it says that the appeal can't be done for delay and it raises substantial questions of law or fact likely to result in reversal, order of a new trial, a reduced sentence, or no sentence at all.

[00:12:40] Speaker 00:
And the court did something that I've never seen or any of my colleagues have ever seen.

[00:12:45] Speaker 00:
The court granted our motion.

[00:12:47] Speaker 00:
and allowed Mr. Patterson to be released pending his appeal.

[00:12:53] Speaker 00:
We asked this court to grant a Rule 29C motion that we filed in this case, because the government did not prove an additional tax due in owing.

[00:13:06] Speaker 00:
They picked their method of proof here.

[00:13:08] Speaker 00:
We didn't pick it.

[00:13:09] Speaker 00:
They picked it.

[00:13:10] Speaker 00:
They went after him for evasion.

[00:13:12] Speaker 00:
And one of the key elements of evasion is an additional tax due in owing.

[00:13:17] Speaker 00:
They didn't have his books and records, so they had to take the bank records.

[00:13:23] Speaker 00:
And we don't have the omnibus spreadsheets for the analysis.

[00:13:28] Speaker 00:
And because we don't have that, any documents that they have would be hearsay as it relates to that.

[00:13:34] Speaker 00:
Ms.

[00:13:34] Speaker 00:
Steele, her testimony should have all been stricken.

[00:13:39] Speaker 00:
And the court should have granted our Rule 29C motion and should have quitted Mr. Patterson.

[00:13:45] Speaker 00:
I'll reserve the rest of my time for rebuttal.

[00:13:46] Speaker 03:
Thank you, Counsel.

[00:13:47] Speaker 00:
Thank you, Your Honor.

[00:13:48] Speaker 03:
We'll hear from the government.

[00:14:03] Speaker 01:
Good morning, Your Honors.

[00:14:04] Speaker 01:
May it please the Court, Aaron Ketchel for the United States.

[00:14:08] Speaker 01:
There are a number of issues conflated here, so I'd like to try and distill them a little bit from Appellant's opening argument.

[00:14:15] Speaker 01:
The primary argument made here is a sufficiency of evidence argument.

[00:14:19] Speaker 01:
This is something that the court reviews de novo, and I think there's a fairly straightforward approach that the court can use here, because the court evaluates all the evidence that was admitted at trial and could be considered by the jury.

[00:14:31] Speaker 03:
Counsel, opposing counsel says that there was no evidence admitted into the record that showed the agent's work.

[00:14:39] Speaker 03:
What's your response?

[00:14:41] Speaker 01:
Very straightforward, Your Honor.

[00:14:42] Speaker 01:
Let me even set aside her testimony about her analysis, which I will submit is supported by the case law.

[00:14:49] Speaker 01:
Defense argues that once Exhibit 397, which is at 9 ER 1843, was excluded, there was no evidence.

[00:15:04] Speaker 01:
Defendant admitted the exact same evidence.

[00:15:07] Speaker 01:
That is at SER 84.

[00:15:10] Speaker 01:
And if the court compares

[00:15:12] Speaker 03:
determined to be demonstrative evidence, ultimately?

[00:15:16] Speaker 01:
No, Your Honor.

[00:15:16] Speaker 01:
No.

[00:15:16] Speaker 01:
No.

[00:15:17] Speaker 01:
Under cross-examination, and this was done at 6ER 1099, under cross-examination of Ms.

[00:15:25] Speaker 01:
Steele, the defendant admitted a 4549 report.

[00:15:30] Speaker 01:
This is at SER 84.

[00:15:32] Speaker 01:
And if you compare... Was that prepared by her?

[00:15:37] Speaker 01:
Yes, it was, as an official IRS tax document showing tax due and owing.

[00:15:42] Speaker 01:
And in this document, it shows the tax due and owing, the additional tax due and owing, or the unreported income.

[00:15:49] Speaker 03:
But his objection is that how she arrived at that amount, no evidence was presented showing how she arrived at that number.

[00:16:01] Speaker 03:
So what's your response to that?

[00:16:03] Speaker 01:
So I think that's a slightly different argument, Your Honor, because I don't think it's sufficiency of evidence.

[00:16:08] Speaker 01:
The sufficiency of evidence, he admitted a document that showed the tax due in knowing.

[00:16:12] Speaker 03:
But I'm asking you to answer a specific question, a specific statement that he made.

[00:16:16] Speaker 03:
His statement was that there was no evidence put into the record that would show how she arrived at her conclusion.

[00:16:27] Speaker 01:
Yes, Your Honor.

[00:16:28] Speaker 03:
What's your response to that?

[00:16:29] Speaker 01:
It was her hours of testimony describing on how she arrived at her conclusion.

[00:16:33] Speaker 04:
The problem is we have a mass of raw data, because the records are introduced, and then she sorts them, one pile, another pile, another pile, another pile, adds them up.

[00:16:49] Speaker 04:
But we have no idea how she sorted them.

[00:16:52] Speaker 04:
None at all, as I understand it.

[00:16:55] Speaker 04:
Is that correct that there's nothing in the record that shows like

[00:17:00] Speaker 04:
these entries went into this pile, these went into this, these records went here.

[00:17:05] Speaker 04:
We just have the massive raw data and her general description of the methodology and the conclusion, but no work in between.

[00:17:14] Speaker 01:
The precise numbers, Your Honor, you're correct.

[00:17:16] Speaker 01:
But let me just clarify something because Judge Collins, you asked a question about what data was in the record.

[00:17:22] Speaker 01:
There were two steps done.

[00:17:24] Speaker 01:
As Your Honor pointed out, the raw bank data was ingested into an Excel platform, which then Ms.

[00:17:31] Speaker 01:
Steele testified she sorted into income deposits and non-income deposits.

[00:17:37] Speaker 04:
And that sorting is not in the record?

[00:17:39] Speaker 01:
Correct.

[00:17:40] Speaker 01:
The sorting sheet is not in the record.

[00:17:42] Speaker 04:
Did the tax court accept this in a civil case?

[00:17:45] Speaker 04:
Take my word for it.

[00:17:46] Speaker 04:
I sorted it.

[00:17:47] Speaker 04:
Here it is.

[00:17:49] Speaker 01:
Two points, Your Honor.

[00:17:50] Speaker 01:
One, as a legal standard, I think this meets the legal standard that was set forth in the BDA cases from this court, including Solware, Shields, Stone.

[00:18:00] Speaker 04:
Solware, for example, was... Those are also no show-your-work cases?

[00:18:05] Speaker 01:
All of those cases refer to testimony alone.

[00:18:07] Speaker 01:
There is no case law that says that a summary agent has to reduce their intermediate steps.

[00:18:16] Speaker 04:
It puts the whole trial into take the agent's word for it.

[00:18:21] Speaker 04:
The jury has no ability to independently assess the facts.

[00:18:25] Speaker 04:
It's just agents sounded good, I guess.

[00:18:29] Speaker 04:
That's it.

[00:18:29] Speaker 04:
I mean, there's no independent ability to weigh this.

[00:18:33] Speaker 01:
A few points on this, Your Honor, if I may.

[00:18:35] Speaker 04:
Unless what?

[00:18:35] Speaker 04:
It's supposed to go through the mass of financial records themselves?

[00:18:38] Speaker 01:
No, I think they could.

[00:18:39] Speaker 01:
Part of the examination is, and this was extensive examination, both on direct and cross, on her methodology and what categories she looked at.

[00:18:48] Speaker 01:
This is also not a complex calculation, and defense said to the jury in opening... But that's why it's kind of incredible that she doesn't save the work.

[00:18:57] Speaker 04:
It's not that hard to mark in an Excel sheet particular entries and then have them sorted out.

[00:19:03] Speaker 04:
It's not that hard to do, and it wasn't done.

[00:19:06] Speaker 04:
And then it becomes a take my word for a trial.

[00:19:09] Speaker 01:
Well, Your Honor, part of the reason why this is really a red herring is because the work was done.

[00:19:14] Speaker 01:
And the defense had all of the work.

[00:19:17] Speaker 01:
That was in the special agent report.

[00:19:20] Speaker 01:
There are two kind of processes done in parallel.

[00:19:23] Speaker 01:
There was a special agent report that contained 50 schedules.

[00:19:27] Speaker 01:
And Ms.

[00:19:27] Speaker 01:
Steele testified that she worked on the 50 schedules.

[00:19:32] Speaker 01:
And she described the work that she did with the case agent on the 50 schedules

[00:19:36] Speaker 01:
all of which were included in the special agent report and detailed in the precise detail that your honor is asking about.

[00:19:45] Speaker 01:
And the reason we know that is because the defendant's own expert stated just that.

[00:19:51] Speaker 01:
And that is in his report, which we submitted as part of the PSR submission.

[00:19:59] Speaker 04:
But if you had the sorting analysis done, why didn't it go into

[00:20:06] Speaker 04:
evidence in the record of this case.

[00:20:09] Speaker 04:
The jury would see how the numbers were actually derived.

[00:20:13] Speaker 01:
Right, but the cross-examination was, part of the cross-examination here is looking at what non-income deposits there can be.

[00:20:21] Speaker 01:
And in certain cases, that can be a complex question.

[00:20:24] Speaker 01:
There could be a lot of cash generation which is deposited, and you have to explain why the cash that was deposited was not previously cash on hand that was non-income deposits.

[00:20:35] Speaker 01:
There could be complex loan transactions, like in the Morse case.

[00:20:38] Speaker 01:
There can be complexity to this, but this is not that case.

[00:20:43] Speaker 01:
What Ms.

[00:20:43] Speaker 01:
Steele testified to, categorically, she saw no gifts.

[00:20:47] Speaker 01:
She said that categorically.

[00:20:49] Speaker 01:
Categorically, she saw no inheritances.

[00:20:52] Speaker 01:
She saw de minimis cash deposits.

[00:20:56] Speaker 01:
There was testimony about cash, but that was cash collected from customers and used to pay off contractors, never deposited.

[00:21:04] Speaker 01:
So that is not inconsistent with her testimony that she saw de minimis cash deposits.

[00:21:10] Speaker 01:
She also said she saw very few loans and that she testified about what those loans were.

[00:21:16] Speaker 01:
Those were loans that the defendant used to buy a home in 2016 despite reporting negative income that year.

[00:21:23] Speaker 01:
So she testified and all of those things could have been tested on cross-examination.

[00:21:28] Speaker 01:
Defense counsel asked her under cross-examination, didn't you see a high number of inter-account bank transfers?

[00:21:34] Speaker 01:
She said yes.

[00:21:36] Speaker 01:
So her methodology could be tested.

[00:21:39] Speaker 01:
And what you see in all of these cases, Solware, Shield, Solware is a good example.

[00:21:44] Speaker 01:
In Solware, the agent who testified was not even the agent who did the work.

[00:21:53] Speaker 01:
This was a second agent who came in and talked about the work done by another agent and they used summary charts and in soleware and in most of these cases the court recognized that the records were incomplete.

[00:22:08] Speaker 01:
And what the court has said repeatedly is that the precise amount of tax loss is irrelevant.

[00:22:15] Speaker 01:
That is not the question.

[00:22:16] Speaker 01:
The question is whether

[00:22:18] Speaker 01:
the investigation was sufficient to adequately support an inference that the unexplained excess in receipts was attributable to taxable income.

[00:22:32] Speaker 01:
There were no other sources of income here.

[00:22:33] Speaker 01:
There was a large amount of unreported receipts, which was conceded by defense counsel in opening that tax records did not hit the books.

[00:22:45] Speaker 01:
This was a case all about

[00:22:47] Speaker 01:
unreported expenses.

[00:22:48] Speaker 01:
That was what the defense was going to be, is that there were unreported expenses that washed out the unreported revenue.

[00:22:57] Speaker 01:
And that is why, you know, initially we admitted the summary charts, the 395 and 397, those were admitted without objection.

[00:23:07] Speaker 01:
because, and those have been shared with defense counsel prior to trial and they were admitted without objection because that really wasn't the crux of the case.

[00:23:14] Speaker 01:
They were conceding that there was unreported revenue is what those charts showed and what defendant ultimately admitted himself in exhibit 487 was showing unreported revenue.

[00:23:25] Speaker 01:
And what the cases have said is that at the point that the government shows unreported revenue and creates an inference that there was unreported revenue that was not reported on taxes, it then becomes the defendant's

[00:23:37] Speaker 01:
burden to speak up and explain the unreported revenue.

[00:23:41] Speaker 01:
Defendant discusses it as a burden shifting, but it actually is a foundation of this BDA analysis.

[00:23:49] Speaker 01:
And I think the reason for that is because the reason you get to a BDA analysis to begin with is because the taxpayer doesn't have the records that they're required to have.

[00:24:00] Speaker 01:
Taxpayers are required to keep their records under law.

[00:24:04] Speaker 01:
But when the records are not available to the government, like in this case there was a suspicious flooding incident that eradicated all of the records, then the government has to do a bank deposit analysis in order to determine whether there was unreported revenue.

[00:24:21] Speaker 01:
Of course, the government only has limited visibility as to what all of the deposits are.

[00:24:26] Speaker 01:
They do their best.

[00:24:27] Speaker 01:
They testify about their best efforts to do this, and they are allowed to testify in a summary fashion about what they did.

[00:24:33] Speaker 01:
Their methodology can be tested.

[00:24:36] Speaker 01:
The fact that she didn't save her work was tested in length on cross-examination.

[00:24:44] Speaker 01:
Council started here by talking about the Sixth Amendment.

[00:24:47] Speaker 01:
And I think, Judge Fitzwater, you put it correctly, when under Owens, under the Supreme Court case, the test for the Sixth Amendment is whether there is an unrestricted ability to cross-examine a witness.

[00:25:03] Speaker 01:
That's what occurred here.

[00:25:04] Speaker 01:
There was no restrictions placed on their ability to cross-examine Ms.

[00:25:08] Speaker 01:
Steele.

[00:25:08] Speaker 01:
They made great hay about the fact that she did not save for work.

[00:25:13] Speaker 01:
and in parts of her methodology, and they also made great hay about the fact that she did not account for unreported expenses, which she had conceded she did not.

[00:25:22] Speaker 01:
She took defendants word based on the expenses that he reported in his own return.

[00:25:31] Speaker 01:
The Sixth Amendment was satisfied under Owens.

[00:25:33] Speaker 01:
Under Owens, the case was a witness who said that they could not recall a hearsay statement that they made out of court.

[00:25:42] Speaker 01:
They had made an ID out of court statement, which is hearsay.

[00:25:47] Speaker 01:
And at trial, the witness said they could not recall having made that statement.

[00:25:53] Speaker 01:
That's pretty critical evidence.

[00:25:55] Speaker 01:
And yet, under Owens, the Supreme Court said that is not violative of the Sixth Amendment because

[00:26:00] Speaker 01:
counsel had an opportunity to cross-examine and point out those issues.

[00:26:05] Speaker 01:
In this case, the district court made a finding that the defendant had an opportunity to cross-examine Ms.

[00:26:12] Speaker 01:
Steele about the warts, as he put it, in the bank deposit analysis.

[00:26:19] Speaker 01:
But there is no legal standard that requires the government to reduce its intermediate steps in a bank deposit analysis to writing.

[00:26:28] Speaker 01:
That is not what the case law says.

[00:26:31] Speaker 04:
And what the courts have repeatedly said is that... Do you have a case that specifically says you don't have to do that?

[00:26:38] Speaker 01:
Well, I think it's inherent in these cases.

[00:26:41] Speaker 04:
I mean, and Solware... The cases don't seem to address whether or not the intermediate work was shown one way or the other.

[00:26:49] Speaker 01:
Well, they refer to the testimony.

[00:26:52] Speaker 01:
I mean, that is the testimony.

[00:26:54] Speaker 04:
It could be that, from all you can tell from reading the facts as described, it could be that it was there.

[00:27:01] Speaker 04:
And then there was testimony about it.

[00:27:03] Speaker 01:
It's possible, Your Honor, but in Solware, there was actually one of the issues in Solware was about demonstrative charts that were used.

[00:27:10] Speaker 01:
So these are demonstrative summary charts as similar here, where the court discussed the propriety of the demonstrative summary charts and how they were used.

[00:27:20] Speaker 01:
So that suggests further to me that there was not... You say Solware, do you mean

[00:27:26] Speaker 04:
There's a bulware, you cite, and a Soulard.

[00:27:30] Speaker 01:
I'm sorry, Your Honor.

[00:27:30] Speaker 01:
I'm Soulard.

[00:27:31] Speaker 01:
It's Soulard.

[00:27:32] Speaker 01:
Yes, I'm sorry.

[00:27:33] Speaker 01:
I'm sorry.

[00:27:34] Speaker 01:
I was confusing the two names.

[00:27:35] Speaker 01:
Yes, Soulard, Your Honor.

[00:27:36] Speaker 01:
And so in Soulard, not only was it a secondary person testifying who did not do the work themselves, but they also were discussing demonstrative summary exhibits that were not admitted pursuant to 1006.

[00:27:48] Speaker 01:
But again, I think if it's a sufficiency of evidence argument, Your Honor, I think all you have to look at is exhibit 487.

[00:27:56] Speaker 01:
Exhibit 47 went back to the jury, admitted by the defendant, and showed Ms.

[00:28:02] Speaker 01:
Steele's conclusions that there was unreported revenue.

[00:28:07] Speaker 01:
If it's a question of whether there was a Sixth Amendment violation, I think under Owens we see that there's no Sixth Amendment violation.

[00:28:13] Speaker 01:
If it's a question about whether Ms.

[00:28:15] Speaker 01:
Steele's testimony should have been admitted as lay opinion testimony,

[00:28:21] Speaker 01:
despite not having saved her work, I think that's a distinct analysis, one that would be looked at for either plain error or abusive discretion, depending on if it was preserved.

[00:28:33] Speaker 01:
And there I think there's no question that Ms.

[00:28:35] Speaker 01:
Steele was permitted to describe her process, describe what action she took, and all of those were tested.

[00:28:45] Speaker 01:
And I would just point the court

[00:28:46] Speaker 01:
back to the defense experts submission in his written report where he said, the BDA is presented in the government SAR.

[00:29:00] Speaker 01:
That's his report at two.

[00:29:02] Speaker 01:
He goes on to say, the BDA includes a detailed description of deposits to the Patterson's companies and Patterson's bank accounts, which concludes with revised taxable revenues for those entities.

[00:29:15] Speaker 01:
SAR appendices C1 through C9 segregate the sources of non-taxable deposits by individual bank accounts.

[00:29:24] Speaker 01:
Therefore, the BDA permits us to determine net deposits by entity by year.

[00:29:30] Speaker 01:
That's at 11.

[00:29:32] Speaker 01:
They had it.

[00:29:33] Speaker 01:
They had the data.

[00:29:34] Speaker 01:
They had detailed schedules that showed them all of this.

[00:29:38] Speaker 01:
Ms.

[00:29:38] Speaker 01:
Steele explained that she did kind of a parallel process where she, in order to create the summary charts,

[00:29:45] Speaker 01:
She segregated this data, it seems like she did it again, and created the summary charts on their own, and she did not save that work.

[00:29:54] Speaker 04:
Was the process that she's describing the process that was used to generate the SAR attachments, or did she do a second sort of, I'm doing my own check and that's what I'm testifying to?

[00:30:09] Speaker 01:
What she testified is that she helped with the SAR documents, so she did collaborate on that, but it also seems like she did an independent second way to do the summary documents, but... And that's the thing that she testified.

[00:30:21] Speaker 04:
That's the process she's testified.

[00:30:22] Speaker 01:
Well, it was both, Your Honor, because they were consistent.

[00:30:25] Speaker 01:
And what Mr. White said when we were cross-examining him is that there was no inconsistency between the SAR and her testimony.

[00:30:34] Speaker 01:
There has never been a showing that any of her analysis is inaccurate in any material way.

[00:30:42] Speaker 01:
The experts testify that he spent 600 hours reviewing these files and wrote an 833 page report.

[00:30:51] Speaker 01:
There is no indication that any of Ms.

[00:30:53] Speaker 01:
Steele's work is inaccurate in any material respect.

[00:30:58] Speaker 01:
And the case law makes clear that the precise amount of loss is irrelevant.

[00:31:04] Speaker 01:
It's whether there is an inference that there was unreported tax revenue, or tax, excuse me, taxable income, and that was clearly established.

[00:31:15] Speaker 01:
Defendant elected to remain silent, and under the case law for the BDA, I mean, as the Second Circuit and Slutsky pointed out, once the existence of unreported receipts is established, the defendant remains quiet at his peril.

[00:31:34] Speaker 01:
That is what the defendant did here.

[00:31:39] Speaker 01:
Unless the court has any further questions, I'm prepared to submit.

[00:31:42] Speaker 03:
Thank you, counsel.

[00:31:43] Speaker 03:
It appears not.

[00:31:45] Speaker 03:
Rebuttal.

[00:31:53] Speaker 00:
Thank you, your honor.

[00:31:55] Speaker 00:
I think the court hit it right in the head.

[00:31:57] Speaker 00:
We are going from A to C. Here are the bank records.

[00:32:02] Speaker 00:
Here's the final result.

[00:32:05] Speaker 00:
We don't have the middle.

[00:32:06] Speaker 00:
We don't have B. Mr. Ketchel talks about that Ms.

[00:32:12] Speaker 00:
Steele had the ability and worked with the special agent and put together all these charts and everything else.

[00:32:19] Speaker 00:
Well, I think it's really interesting that some of the first questions we asked her regarding this analysis, if you look at exhibit 56, which isn't in evidence, we asked her, do you recognize this document?

[00:32:31] Speaker 00:
No.

[00:32:33] Speaker 00:
Did you prepare this document?

[00:32:34] Speaker 00:
No.

[00:32:35] Speaker 00:
Do you know who prepared this document?

[00:32:36] Speaker 00:
No.

[00:32:37] Speaker 00:
This was the bank deposit analysis.

[00:32:40] Speaker 00:
This was just a schedule that the government had that was attached to their special agency report.

[00:32:46] Speaker 00:
It wasn't mined evidence.

[00:32:49] Speaker 00:
She didn't help create these SAR documents.

[00:32:52] Speaker 00:
She didn't do that.

[00:32:54] Speaker 00:
She didn't create any of these SAR documents.

[00:32:56] Speaker 00:
That is a special agency report.

[00:32:58] Speaker 00:
She prepared an analysis.

[00:33:00] Speaker 00:
She wrote some numbers down and some sticky notes, but she didn't save it.

[00:33:06] Speaker 00:
The government does it at their own peril.

[00:33:08] Speaker 00:
I think Judge Collins indicated even in a civil case, this wouldn't have been get past first base.

[00:33:13] Speaker 00:
The tax court would have kicked this case out and would have found for the taxpayer.

[00:33:17] Speaker 00:
The government cites to the 4549 of the IRS.

[00:33:21] Speaker 00:
The document was put in evidence.

[00:33:23] Speaker 00:
It's just a calculation.

[00:33:25] Speaker 00:
It's a summary number.

[00:33:27] Speaker 00:
It's nothing.

[00:33:28] Speaker 00:
It's not the analysis.

[00:33:31] Speaker 00:
The government says this is not a complex case.

[00:33:35] Speaker 00:
Is it or isn't it?

[00:33:36] Speaker 00:
We don't know, because we don't have the analysis.

[00:33:39] Speaker 00:
The government never provided to us.

[00:33:41] Speaker 00:
He says she talks about, well, she didn't include loans, she didn't include this, she didn't include that.

[00:33:47] Speaker 00:
We don't know.

[00:33:47] Speaker 00:
No analysis provided by the government, so we don't know if it was included.

[00:33:53] Speaker 03:
Counsel, what's our standard of review?

[00:33:56] Speaker 00:
De novo.

[00:33:57] Speaker 03:
Why is it de novo?

[00:33:58] Speaker 00:
Because we're dealing with the Sixth Amendment Confrontation Clause, dealing with the Constitution, and therefore it's a de novo review.

[00:34:05] Speaker 03:
But if you were given the opportunity to cross-examine, excuse me, how is that a violation of the Confrontation Clause?

[00:34:11] Speaker 00:
I'm sorry, I didn't quite understand the question.

[00:34:13] Speaker 03:
If you were afforded an opportunity to cross-examine thoroughly, the witness, why is there a violation of the Confrontation Clause?

[00:34:23] Speaker 00:
Because we weren't able to cross-examine this omnibus spreadsheet that may have been prepared, may not have been prepared.

[00:34:32] Speaker 03:
You don't cross-examine a document.

[00:34:35] Speaker 00:
Well, we would cross-examine Ms.

[00:34:36] Speaker 00:
Steele about her document that she prepared and whether or not a certain deposit was included or not included in taxable gross receipts.

[00:34:47] Speaker 00:
We were never afforded that.

[00:34:48] Speaker 00:
We needed to ask those questions.

[00:34:51] Speaker 00:
Just like when we asked her questions about the service expert's checks, she admitted that those could be non-taxable.

[00:34:57] Speaker 00:
We should have been afforded that ability to do on every single other deposit.

[00:35:00] Speaker 03:
What case do you have that supports the proposition that

[00:35:04] Speaker 03:
It's a violation of the confrontation clause if you are not able to cross-examine regarding a work product.

[00:35:13] Speaker 03:
What case says that?

[00:35:15] Speaker 00:
I don't have anything right at the tip of my tongue right now, but I think we did brief that in our cases.

[00:35:24] Speaker 00:
And the government talks about

[00:35:26] Speaker 00:
all these cases, and Judge Collins even indicated, well, we talk about all these cases, but all these cases, I think they all have something in common.

[00:35:33] Speaker 00:
There was actually an analysis there.

[00:35:36] Speaker 04:
We don't know.

[00:35:38] Speaker 04:
I mean, it doesn't say whether or not this kind of an actual line-by-line breakdown was present in those cases either, so far as I could tell.

[00:35:47] Speaker 00:
You're right, Your Honor.

[00:35:48] Speaker 00:
It's not clear, but I think it's such a

[00:35:54] Speaker 04:
I mean, to follow up on Judge Rollins' point, it's not a confrontation clause issue, because the witness is on the stand.

[00:36:01] Speaker 04:
You can ask the witness anything you want.

[00:36:03] Speaker 04:
It's really more of a foundation question or something of that nature.

[00:36:09] Speaker 04:
Did you move to exclude the testimony for lack of foundation?

[00:36:13] Speaker 00:
We moved to exclude it for various reasons, including foundation.

[00:36:16] Speaker 03:
Specifically for foundation?

[00:36:19] Speaker 00:
I believe we made various foundation objections.

[00:36:22] Speaker 03:
Overruled?

[00:36:23] Speaker 00:
Yes.

[00:36:26] Speaker 00:
They're all throughout the record.

[00:36:28] Speaker 03:
That's an abuse of discretion standard review.

[00:36:31] Speaker 00:
For that, I agree with you.

[00:36:32] Speaker 00:
But what we didn't have here, Your Honor, it's clear.

[00:36:37] Speaker 00:
We didn't have the ability to talk to Ms.

[00:36:42] Speaker 00:
Steele.

[00:36:42] Speaker 00:
She is the one who prepared this analysis.

[00:36:46] Speaker 00:
And she was embarrassed that she didn't save her analysis.

[00:36:49] Speaker 00:
First, it was, I didn't have enough memory.

[00:36:51] Speaker 00:
Then, as I forgot,

[00:36:52] Speaker 00:
Whichever, it doesn't matter.

[00:36:54] Speaker 00:
She was embarrassed that she didn't save her analysis because she knows she's done over a thousand of these.

[00:36:59] Speaker 00:
She's a seasoned IRS revenue agent.

[00:37:01] Speaker 00:
And the confrontation portion is we didn't have the ability to go through each and every item.

[00:37:07] Speaker 00:
This is an indirect method of proof.

[00:37:09] Speaker 00:
The government chose it.

[00:37:09] Speaker 00:
We didn't choose it.

[00:37:11] Speaker 00:
They chose this indirect method of proof for whatever reason they chose it.

[00:37:14] Speaker 00:
That's not really before the court.

[00:37:16] Speaker 03:
But, Counsel, may I ask you this?

[00:37:17] Speaker 03:
What's your response to opposing counsels

[00:37:20] Speaker 03:
position that the amount of the tax loss is irrelevant, just the fact that there was tax evasion.

[00:37:27] Speaker 03:
If that's established, then the amount is not critical.

[00:37:31] Speaker 03:
What's your response to that?

[00:37:33] Speaker 00:
Thank you for asking that, Your Honor.

[00:37:36] Speaker 00:
Under 26 USC 7201, it requires an additional tax due in owing.

[00:37:43] Speaker 00:
It doesn't, even $1.

[00:37:46] Speaker 03:
Does it require an amount due in owing?

[00:37:48] Speaker 00:
It just requires an additional amount.

[00:37:50] Speaker 00:
The government didn't even establish one additional amount of additional tax.

[00:37:55] Speaker 03:
Your testimony wasn't sufficient to show that there were additional taxes due in owing?

[00:38:01] Speaker 00:
No, like your honor has indicated.

[00:38:03] Speaker 00:
Just take my word for it.

[00:38:04] Speaker 00:
My analysis is right.

[00:38:05] Speaker 00:
I took out the things that shouldn't be taxable.

[00:38:07] Speaker 00:
All the rest of it that we left in is taxable.

[00:38:10] Speaker 00:
Take my word for it.

[00:38:11] Speaker 00:
You don't have the ability to cross-examine me on this.

[00:38:13] Speaker 03:
They could have taken her word for it, or they could have rejected her testimony, correct?

[00:38:18] Speaker 00:
They shouldn't have ever heard it in the first place.

[00:38:20] Speaker 03:
Well, but I'm just saying, your argument was take my word for it, and the jury could take her word for it, or they could reject her testimony and acquit.

[00:38:29] Speaker 00:
They could have taken her word for it.

[00:38:32] Speaker 00:
They could have not taken her word for it.

[00:38:34] Speaker 03:
But we were never given... We're left with what the jury actually

[00:38:37] Speaker 03:
determined.

[00:38:38] Speaker 03:
And the issue is, is there sufficient evidence to support that verdict?

[00:38:42] Speaker 00:
There is not sufficient evidence.

[00:38:45] Speaker 00:
The evidence would have been the bank deposit analysis in and of itself, and they don't have that.

[00:38:49] Speaker 03:
Is there a case that says the only sufficient evidence is the base documents that go into doing an analysis?

[00:38:59] Speaker 00:
The case law discusses that in order to determine additional tax due and owing, you have to come up with some method, whether that be

[00:39:06] Speaker 00:
an indirect method of proof, whether that be a bank deposit analysis or net worth, or a direct method of proof, which could be specific items.

[00:39:12] Speaker 03:
They did that.

[00:39:13] Speaker 03:
They said they used the bank deposit analysis.

[00:39:15] Speaker 00:
Right.

[00:39:16] Speaker 03:
And so is there a case, and I'm back to the fact that there, I don't think there's a case that says all of the work that goes into that analysis has to be put into evidence for that analysis to be presented to the jury.

[00:39:31] Speaker 00:
There was no evidence that was put into

[00:39:33] Speaker 03:
the record in this case on what the bank did.

[00:39:37] Speaker 00:
Well, her testimony is hearsay.

[00:39:39] Speaker 03:
The bank deposit analysis… She said what she did.

[00:39:43] Speaker 00:
Well, she said what she did generally.

[00:39:46] Speaker 02:
She said, I took the 14,000 pages, I put it into our proprietary software… So hearsay was the business record exception used to admit it?

[00:39:56] Speaker 00:
To admit the bank records?

[00:39:59] Speaker 00:
I believe, uh, I don't recall exactly what the court said as far as admitting it.

[00:40:03] Speaker 00:
Um, but I can check the record.

[00:40:06] Speaker 00:
Okay.

[00:40:06] Speaker 00:
So the court admitted the bank records, but the bank records are just raw data.

[00:40:10] Speaker 00:
Okay.

[00:40:11] Speaker 00:
Without the analysis, taking the raw data and based on her, her knowledge, we have to take the raw data.

[00:40:19] Speaker 00:
And then we have, and she indicated based on what she did is she started doing deductions, but we don't know what those deductions are.

[00:40:25] Speaker 03:
We understand your argument council.

[00:40:26] Speaker 03:
Could you sum up please?

[00:40:28] Speaker 00:
Okay, thank you, Your Honor.

[00:40:29] Speaker 00:
So, unfortunately, we live in a society where the public fears the IRS.

[00:40:37] Speaker 00:
And if you allow the IRS in this case, which is the agency that did an investigation here, to go and bring forth somebody for criminal indictment and not have to show their work.

[00:40:50] Speaker 00:
Just take my word for it.

[00:40:52] Speaker 00:
All these numbers are good.

[00:40:53] Speaker 00:
These are all really good numbers.

[00:40:55] Speaker 00:
I did a lot of work.

[00:40:57] Speaker 00:
But you can't examine or cross-examine on any of this.

[00:41:00] Speaker 00:
That would have a chilling effect.

[00:41:01] Speaker 03:
But you made this argument to the jury, right?

[00:41:04] Speaker 03:
That they shouldn't believe her because the work wasn't shown.

[00:41:07] Speaker 03:
You made that argument to the jury?

[00:41:08] Speaker 00:
That's one of the arguments we made.

[00:41:10] Speaker 03:
Okay.

[00:41:10] Speaker 03:
All right.

[00:41:10] Speaker 03:
Thank you, counsel.

[00:41:11] Speaker 03:
Thank you, your honor.

[00:41:12] Speaker 03:
Thank you to both counsel.

[00:41:13] Speaker 03:
The case is submitted for decision by the court that completes our calendar for the day and for the week we are adjourned.

[00:41:34] Speaker 03:
this morning.