## Facts

- Joseph Abodeely was indicted in the Northern District of Iowa on two counts of criminal tax evasion under 26 U.S.C. § 7201 for tax years 1978 and 1979.
- Abodeely received income from several connected businesses, including the Unique Motel, the Food Factory (a fast-food restaurant), and the Meeting Place (a bar with exotic dancers located near the motel).
- Abodeely and his wife filed joint federal income tax returns reporting net taxable income of negative $627 for 1978 and $25,443 for 1979.
- The government alleged that Abodeely substantially underreported taxable income for both years.
- At trial, the government used the bank-deposits-and-cash-expenditures method to reconstruct income by comparing bank deposits and cash spending against reported income and known non-taxable sources.
- To show that the unexplained deposits and expenditures likely came from taxable sources, the government introduced testimony about prostitution-related activity associated with Abodeely’s operations at the Meeting Place and nearby motel.
- The government also introduced evidence of Abodeely’s Las Vegas gambling activity, including multiple trips, established credit at the MGM Grand, and the use of casino “markers” (advances/loans) of roughly $12,000 to $16,000 per trip.
- Evidence indicated Abodeely repaid markers in cash on later trips, and the casino rated his play (including documentation reflecting substantial betting and time played).
- Abodeely objected that the prostitution-related and gambling evidence was irrelevant to the tax charges and that any probative value was substantially outweighed by unfair prejudice under Federal Rule of Evidence 403.
- The jury convicted Abodeely on both counts. The district court sentenced him to two years’ imprisonment on Count II, suspended imposition of sentence on Count I, imposed three years’ probation to begin after release, and assessed a $10,000 fine.
- Abodeely appealed, challenging the admission of the prostitution-related and gambling evidence.

## Issues

1. Whether, in a § 7201 tax-evasion trial using the bank-deposits-and-cash-expenditures method, the district court erred by admitting evidence of prostitution-related activity and Las Vegas gambling as proof of unreported taxable income.
2. Whether the district court abused its discretion under Federal Rule of Evidence 403 by admitting that evidence despite the risk of unfair prejudice.

## Decision

- The Eighth Circuit affirmed Abodeely’s convictions and sentence.
- The court held the challenged evidence was relevant because it tended to identify possible taxable sources of funds and to explain cash flow inconsistent with Abodeely’s reported income.
- The court held the district court did not abuse its discretion under Rule 403; the probative value of the evidence was not substantially outweighed by the danger of unfair prejudice.
- The court emphasized the deference owed to trial courts on Rule 403 balancing and credited the trial court’s handling of the evidence, including limiting instructions directing the jury to use the evidence only for proper purposes.

## Legal Principles

- A conviction under 26 U.S.C. § 7201 requires proof of a tax deficiency, an affirmative act of evasion, and willfulness.
- When the government uses an indirect method such as the bank-deposits-and-cash-expenditures method, it may offer evidence identifying likely taxable sources for unexplained deposits and spending.
- Evidence of other misconduct can be admissible when offered to show the existence and source of unreported income (and not offered simply to show bad character).
- Under Federal Rule of Evidence 403, relevant evidence may be excluded only if the danger of unfair prejudice substantially outweighs its probative value.
- Appellate review of a district court’s Rule 403 ruling is for abuse of discretion, with substantial deference to the trial judge’s on-the-scene evaluation of probative value, prejudice, and the effectiveness of limiting instructions.

## Conclusion

United States v. Abodeely upheld a tax-evasion conviction where the government reconstructed income using the bank-deposits-and-cash-expenditures method and introduced prostitution-related and gambling evidence to show likely taxable sources and access to significant cash. The Eighth Circuit ruled the evidence was relevant to proving a tax deficiency and that the district court acted within its discretion in concluding the probative value was not substantially outweighed by unfair prejudice under Rule 403.


United States v. Abodeely, 801 F.2d 1020 (1986)