Appeal from the United States District Court for the District of Arizona. D.C. No. CR-91-423-CLH. Charles L. Hardy, District Judge, Presiding. Original Opinion Previously Reported at:,.
Before: Alfred T. Goodwin and Mary M. Schroeder, Circuit Judges, and A. Wallace Tashima, District Judge.*fn* Opinion by Judge Tashima.
Order AND AMENDED OPINION
Defendant-appellant Jack P. Kallin ("Kallin") appeals his conviction for attempted tax evasion and subscribing to a false tax return. His primary contention is that the government's extensive questioning and comments regarding his exercise of his rights to remain silent and to retain counsel constituted prejudicial error. He also contends that the district court improperly admitted copies of corporate tax returns from years in which he was not charged with tax evasion in violation of Fed. R. Evid. 404(b). Finally, Kallin contends that the district court erred in allowing a government witness to testify that he does not like Mexicans. We reverse the conviction.
Kallin owned and operated three Desert Hobbies stores in Phoenix and Tempe, Arizona. Desert Hobbies was incorporated in 1982 as Kallin Enterprises, Inc., with Kallin as president, but continued to operate as Desert Hobbies. Kallin did not report personal income of more than $6,000 for any year from 1982 through 1986. He and his wife reported a joint income of $800 for 1985, and in 1986 they did not file a return. To qualify for a home mortgage, however, Kallin submitted to the lender copies of 1982 and 1983 tax returns reporting earnings of more than $50,000 per year. He purchased a $150,000 home in 1985, purchased a Cadillac in 1985, and owned an airplane as early as 1983. For the years 1985 through 1987, Kallin signed corporate tax returns indicating net operating losses for Kallin Enterprises.
Kallin separated from his wife in 1986 and his daughter Sharla initially remained with him. Sharla eventually left to live with her mother, taking Kallin's business records with her. The district court permitted Sharla to testify that Kallin dislikes Mexicans and told her to leave the house when he discovered that she had a Mexican boyfriend. In March, 1988, Sharla furnished the Desert Hobbies business records to the Internal Revenue Service ("IRS"). These records included a spiral notebook indicating receipts in excess of those reported on the corporate tax returns. Kallin claims that Sharla sought to extort $30,000 from him and delivered the records to the IRS after he refused to pay her extortionate demand.
The IRS initiated a criminal investigation and contacted Kallin concerning the business records. Before asking any questions, IRS agents advised Kallin of his non-custodial rights, including his right to remain silent and his right to retain counsel. Kallin exercised those rights by not answering any questions and seeking the advice of an attorney. The government obtained an indictment on November 27, 1991, charging Kallin and his accountant with eight counts of attempted tax evasion under 26 U.S.C. § 7201.*fn1 Kallin was arrested by IRS agents on December 5, 1991, and given a Miranda warning. He indicated at that time his desire to consult an attorney. On March 31, 1993, a superseding indictment was returned, adding a ninth count of subscribing to a false fiscal year 1987 corporate tax return, under 26 U.S.C. § 7206(1).*fn2
At trial, the government presented evidence that the Desert Hobbies stores had two cash registers and the receipts of each were recorded separately. An expert witness testified that none of the receipts from the second registers were reported to the IRS, resulting in an under-reporting of approximately $1 million. Kallin testified that the records the government attributed to the second register were actually records of total receipts and the government was double-counting the receipts from the second register. The government rebutted this assertion with testimony that the records Kallin had identified as total receipts corresponded to the tapes from the first register.
During cross-examination of Kallin and during its closing argument, the government repeatedly commented on Kallin's retention of counsel and his failure to come forward with his explanation of the two sets of records until trial.*fn3 Defense counsel moved for a mistrial based on this line of questioning. The district court denied the motion the following day and instructed the jury to disregard the previous day's testimony concerning Kallin's silence and retention of counsel.*fn4
In closing argument, the government urged that the jury not believe Kallin:
Five years after the investigation began, Mr. Kallin came up with this story for the first time. And then he didn't wait - he waited until one week after the trial began, till the last moment of the trial. The idea, I submit to you, was to concoct a story and reveal, at the last moment, when the Government could do the least to respond to him. He's tried to fool you.
Defense counsel's timely objection to this statement was overruled.
Kallin was convicted on counts four and five (covering personal returns for 1985 and 1986) and counts seven, eight and nine (covering corporate returns for fiscal years 1986 and 1987). He was acquitted of the remaining counts. Kallin then moved for a new trial. The court denied the motion, stating, "I believe that the evidence against Mr. Kallin is overwhelming. To be honest, I really don't understand how the jury could ...