## Facts

- Howard F. Keogh worked as a casino dealer at the Dunes Hotel & Country Club in Las Vegas during 1969–1971 and received wages plus tips (“tokes”) in coins or casino chips.
- The casino’s 21 dealers pooled tokes and divided the pool equally each day among dealers who worked that day; dealers serving as temporary supervisors did not share in the pool.
- Keogh and other dealers reported relatively low annual toke income amounts to the employer, which were reflected on W-2s and on their tax returns.
- The Commissioner determined that Keogh underreported toke income for 1969–1971 and reconstructed his income using a diary kept by another dealer, John Whitlock, who worked at the Dunes from 1967 to 1970.
- Whitlock’s diary contained systematic daily entries in columns (including “tips”), with contemporaneous entries and periodic wage entries that matched the employer’s payroll records.
- At trial, the Commissioner offered a photocopy of the diary and testimony from Whitlock’s former wife to establish how the diary was kept and its accuracy; Whitlock did not appear despite being subpoenaed.
- Keogh asserted he kept his own daily toke records but discarded them after reporting monthly toke amounts to the employer; he objected to the diary as hearsay and unreliable.
- The Tax Court sustained deficiencies for the three years, with some adjustments to the Commissioner’s estimates; Keogh appealed.

## Issues

1. Whether the Tax Court abused its discretion by admitting Whitlock’s diary under Federal Rule of Evidence 803(6) as a record of regularly conducted activity despite Whitlock’s absence and the diary’s personal nature.
2. Whether reliance on the diary-based statistical reconstruction of Keogh’s toke income was arbitrary, clearly erroneous, or violated due process given the inability to cross-examine Whitlock.
3. Whether the diary should have been excluded under Federal Rule of Evidence 403 as unfairly prejudicial.

## Decision

- The Ninth Circuit affirmed the Tax Court’s decision sustaining the deficiencies.
- The court held the diary was properly admitted under Rule 803(6) because it was kept regularly and systematically, with corroborating wage entries, and was supported by adequate foundational testimony.
- The court held that using the diary to reconstruct Keogh’s income was reasonable and the Tax Court’s findings were not clearly erroneous, particularly because Keogh lacked reliable records and the Tax Court made downward adjustments.
- The court rejected due process objections based on the absence of cross-examination of Whitlock and found no abuse of discretion under Rule 403.

## Legal Principles

- A document may qualify as a Rule 803(6) record of regularly conducted activity when it is created contemporaneously, kept systematically, and bears sufficient indicia of reliability; it need not be maintained by a formal business entity.
- Foundational testimony for Rule 803(6) may be provided by a qualified witness with knowledge of the recordkeeping practice; the declarant’s nonappearance does not by itself bar admission.
- When a taxpayer’s records are inadequate or destroyed, the Commissioner may reconstruct income using a reasonable method; the determination is presumptively correct unless the taxpayer produces credible contrary evidence.
- Tax Court factual determinations regarding income reconstruction are reviewed for clear error; careful adjustments to estimates weigh against claims of arbitrariness.
- In civil tax proceedings, admission of reliable hearsay under established evidentiary rules does not, without more, violate due process; Rule 403 balancing is reviewed for abuse of discretion.

## Conclusion

The Ninth Circuit upheld income tax deficiencies based on a tip-income reconstruction derived from a coworker’s systematically kept diary, holding the diary admissible as a business record, rejecting due process and Rule 403 challenges, and deferring to the Tax Court’s fact-finding where the taxpayer lacked reliable records to rebut the Commissioner’s reasonable estimates.


Keogh v. Commissioner of Internal Revenue, 713 F.2d 496 (9th Cir. 1983)