United States v. Morse, No. 73-1248.

• Decision Date: 05 February 1974
• Docket Number: No. 73-1248.
• Citation: 491 F.2d 149
• Parties: UNITED STATES of America, Appellee, v. John R. MORSE, and Alice Morse, Appellants.
• Court: U.S. Court of Appeals — First Circuit

491 F.2d 149 (1974)

UNITED STATES of America, Appellee, v. John R. MORSE, and Alice Morse, Appellants.

No. 73-1248.

United States Court of Appeals, First Circuit.

Argued December 4, 1973.

Decided February 5, 1974.

COPYRIGHT MATERIAL OMITTED

Robert D. City and Murray H. Falk, Boston, Mass., with whom Moulton, Looney, Mazzone, Falk & Markham, Boston, Mass., was on brief, for appellants.

Alan R. Hoffman, Asst. U. S. Atty., with whom James N. Gabriel, U. S. Atty., was on brief, for appellee.

Before COFFIN, Chief Judge, ALDRICH and McENTEE, Circuit Judges.

McENTEE, Circuit Judge.

Defendants were convicted of willful evasion of federal income taxes, in violation of 26 U.S.C. § 7201 (1970), and of making materially untrue and incorrect tax returns, in violation of 26 U.S.C. § 7206(1) (1970), and were sentenced accordingly.¹ On this appeal, defendants urge a considerable number of grounds for reversal, but their primary contention concerns certain evidentiary matters relating to the government's use of the bank deposits method of reconstructing gross income.

Despite the fact that all taxpayers are under an affirmative statutory duty to maintain adequate records for tax purposes, 26 U.S.C. § 6001 (1970), Treas.Reg. § 1.6001-1(a) (1973), this requirement has not always been complied with. In a situation where adequate records do not exist or access to them is not available, the government, in attempting to establish a violation of the income tax laws, may reconstruct a taxpayer's taxable base by any reasonable method. United States v. Firtel, 446 F.2d 1005, 1006-1007 (5th Cir. 1971) (per curiam). Among the methods which have received consistent judicial approval is the bank deposits theory of gross income calculation. See United States v. Lacob, 416 F.2d 756 (7th Cir. 1969), cert. denied, 396 U.S. 1059, 90 S.Ct. 755, 24 L.Ed.2d 754 (1970) rehearing denied, 397 U.S. 1003, 90 S.Ct. 1114, 25 L.Ed.2d 415 (1970); Morrison v. United States, 270 F.2d 1 (4th Cir.), cert. denied, 361 U.S. 894, 80 S.Ct. 196, 4 L.Ed.2d 150 (1959).² In order to legitimately avail itself of this approach, the government must initially introduce evidence to show (1) that, during the tax years in question, the taxpayer was engaged in an income producing business or calling; (2) that he made regular deposits of funds into bank accounts; and (3) that an adequate and full investigation of those accounts was conducted in order to distinguish between income and non-income deposits. United States v. Frank, 151 F.Supp. 866, 868 (W.D.Pa.1956), aff'd, 245 F.2d 284 (3d Cir.), cert. denied, 355 U.S. 819, 78 S.Ct. 25, 2 L.Ed.2d 35 (1957); Gleckman v. United States, 80 F.2d 394, 399 (8th Cir. 1935), cert. denied, 297 U.S. 709, 56 S.Ct. 501, 80 L.Ed. 996 (1936). Once this preliminary foundation has been laid, the government totals all bank deposits, and, after the non-income deposits are excluded, United States v. Lacob, supra, 416 F.2d at 759, and the amounts on deposit prior to the tax years in question have been deducted, see Price v. United States, 335 F.2d 671, 677 (5th Cir. 1964), the circumstantial inference properly permitted to arise is that all remaining deposits constitute taxable income. United States v. Doyle, 234 F.2d 788, 793 (7th Cir.), cert. denied, 352 U. S. 893, 77 S.Ct. 132, 1 L.Ed.2d 87 (1956). The government then includes any additional income which the taxpayer received during the tax year but did not deposit in any bank account, and the resulting total would be the taxpayer's reconstructed gross income. From this amount, the appropriate tax deductions, exclusions, exemptions and credits to which the taxpayer is entitled are taken, leaving a net income upon which is computed the amount of tax due. This is then compared with the actual tax paid in the years in question. See Percifield v. United States, 241 F.2d 225, 229-230 n. 7 (9th Cir. 1957); Morrison v. United States, supra, 270 F.2d at 2-3.

In the instant case, due to the inadequacy of defendants' records, the government resorted to the bank deposits method in order to prove that defendants' gross income for the tax years in issue had been substantially and knowingly understated on their returns.³ After satisfying all the preliminary requirements for adoption of this approach, United States v. Frank, supra, the government introduced bank records, deposit slips, balance statements, and certain customer checks, to establish the total amounts which the defendants had deposited in their six bank accounts. Internal Revenue Service Special Agent Arthur Ansbigian, who conducted the bank deposits investigation, was called to testify concerning these records. His summaries of this and other evidence were exhibited to the jury in the form of several chalks.⁴ After testifying with respect to the total bank deposits, Agent Ansbigian indicated in some detail the procedures he adopted to determine all non-income deposits. As these deposits were identified, they were deducted from the total deposit amount. Ansbigian then testified as to undeposited business income, primarily in the form of customer checks which had been cashed or endorsed over to third parties. This testimony was supported by the relevant documentary evidence, and the ascertained amounts were added to the bank deposit total to produce reconstructed gross income.

With respect to these calculations, defendants strenuously object to the nature of the government's evidence concerning the non-income deposits deduction. They urge that, unlike the evidence respecting total bank deposits and undeposited business income, the non-income deposits evidence was unsupported by independent documentation and corroboration, and essentially constituted inadmissible hearsay.⁵ We agree and reverse for a new trial.⁶

Agent Ansbigian testified that upon completion of a thorough investigation, and after giving the defendants the benefit of every doubt, he was able to discern eight categories of non-income deposits, with amounts as follows:⁷

                                                       1965          1966         1967        1968
                  (1) LOAN PROCEEDS ...............  $24,055.66   $17,208.00  $ 32,600.00   $ 8,000.00
                  (2) INTER-BANK TRANSFERS .......       860.00    11,000.00    27,480.00      -0-
                  (3) CURRENCY DEPOSITS ..........     2,580.00     7,045.00     6,437.00      -0-
                  (4) CUSTOMER CHECKS RETURNED            57.50       712.00       357.96      -0-
                  (5) PROCEEDS FROM SALE OF
                        LAND.......................      -0-       50,000.00    94,132.21      -0-
                  (6) PROCEEDS FROM SALE OF
                       TRUCK ......................      -0-         -0-          -0-         6,000.00
                  (7) RETURNED CERTIFIED CHECK .....     -0-         -0-          -0-           500.00
                  (8) UNIDENTIFIED..................      12.00        2.00      2,722.07     1,462.50
                                                      __________  __________   ___________    __________
                  TOTAL NON-INCOME DEPOSITS ...       $27,565.16  $85,967.00   $163,729.24    $15,962.50
                  (Excluded from Total Bank Deposits)
                

However, despite the fact that Ansbigian arrived at these figures, in part, through extra-judicial inquiry and a careful review of related documents, the government made no attempt to support his analysis through the introduction of any corroborating witnesses or available records. Rather, the government apparently took the view that since these items are credits to the taxpayer, even if hearsay and not adequately proved, no prejudice resulted.

Such an approach loses sight of the true nature of the government's total objective, and its burden. The significance of the agent's allowing a non-income deduction is not the concession, but the corresponding implication that it should not be larger. We may agree with the government that such a negative implication may not be provable with the particularity that is required for proof of affirmative receipts, cf. Greenberg v. United States, 295 F.2d 903 (1st Cir. 1961), but the agent does have an overall burden to prove that he has done the best he can to discover, and exclude, all non-income items from the reconstructed income. Where direct evidence is available as to their existence and magnitude, there is no need to rely on the agent's hearsay assertion that they were no larger than he had accounted for.⁸ Accordingly, we cannot accept the government's position.⁹

The damaging nature of the non-income deposits hearsay evidence in issue here might best be illustrated with an example. With respect to deposited loan proceeds, an obvious non-income deduction, the agent testified that

"I had copies . . . of liability ledger cards, listing all the loans, renewals, payments, new loans, I had all of that. Examining the liability ledger cards I determined the loans.

* * * * * *

"I traced loan proceeds to all bank accounts to see if the bank account was credited or the proceeds were deposited. If they appeared as a deposit, they would be in this top line here. I would add a schedule showing loan proceeds and the dispositon of them. Anything that was deposited comes out, anything. There were several instances in which the loan proceeds were not deposited."

Nonetheless, with but one exception (pertaining to the 1965 return), the government made no effort to introduce the ledger cards into evidence. Thus, neither court nor jury were provided with any independent corroboration of the purported total amounts of loan proceeds. Moreover, without the ledger cards, they lacked any knowledge of the particular banks from which the loans were received, the dates thereof, and the amount of each individual loan. All they had was hearsay evidence from Ansbigian regarding the final results of his extra-judicial investigation.

Plainly stated, in computing the deduction for deposited loan proceeds, the agent not only examined the bank deposit records, which were admittedly in evidence before the jury, but examined the liability ledger cards as well. Knowing the amount of...