Immunity
Page3
[65-2
USTC ¶9671]
United States of America
v. Joseph Page, Defendant
U.
S. District Court, East. Dist. N. Y., 64 CR 352, 9/27/65
[1954 Code Sec. 7201]
Criminal evasion: Defenses to indictment: Immunity.--Following
its earlier decision in this case at 65-2 USTC ¶9582, the court
determined that the federal indictment against the defendant was not
procured on the basis of any evidence derived directly or indirectly
from the testimony of the defendant before a local grand jury under an
immunity waiver.
Joseph
P. Hoey, United States Attorney, Lewis L. Douglass, Assistant United
States Attorney, Brooklyn, N. Y., for U. S. Jules Ritholz, Kostelanetz
& Ritholz, 52 Wall.
St.
,
New York
, N. Y., for defendant.
Memorandum
and Order
DOOLING,
District Judge:
The
hearing contemplated by the Memorandum and Order of July 19, 1965 [65-2
USTC ¶9582], has been held and supplemented by the examination in
camera of the Grand Jury Minutes and the Report of Special Agent
Rosario Giunta dated June 13, 1963. It is concluded that the
United States
did not procure the indictment on the basis of any evidence derived by
it directly or indirectly from the testimony of the defendant,
commencing on November 14, 1963, before the Queens County Grand Jury.
Accordingly defendant's motion to dismiss the indictment must be denied.
Cf.
United States
v. Tane, 2d Cir. 1964, 329 F. 2d 848, 853.
The
investigation into defendant's tax affairs was occasioned by information
received by the
United States
from the State of
New York
some time in or before November 1962. The Internal Revenue Service,
Intelligence Division, New York City Region, first assigned the case to
Special Agent Louis Nahmias and it was reassigned to Special Agent
Rosario Giunta on November 28, 1962; Giunta continued on the case
through the date of indictment and was the only witness before the Grand
Jury.
Audit
of the defendant's tax returns and those of his corporation, Sentinel
Investigation Service, Inc., was first assigned to Agent H. J. Lambert
and was reassigned to Agent Salatore T. Lauricella on or about January
9, 1963. Agent Lauricella completed his work on the case in May 1963 and
did not have any further contact with the case after May 1963 until the
hearing on the present motion.
[Procedures]
Giunta's
"Chronological Work Brief" shows that before the first date at
which the State gave Giunta access to the books of defendant and his
corporation on February 6, 1963, Giunta had canvassed for bank accounts,
had communicated with customers of Sentinel, had located the Meadowbrook
and Franklin National Bank accounts, had checked the land records in
Queens County, and had interviewed Steward L. Yanover, an outside
accountant who did work on the defendant's records and returns. Giunta's
record shows repeated contacts with the State Attorney General's office
(Messrs. Greenspan, Smiley, Weintraub and Mendelsohn) and with the State
Tax authorities (Mitchell) in the period between December 17, 1962, and
February 1, 1963. Commencing February 6, 1963, Giunta and Lauricella
were given access to the books and records that were in the custody of
the State Attorney General's office in February 1963 and the report
dated June 13, 1963, was completed about May 27, 1963.
Giunta
kept in contact with the State through November 6, 1963; he went to
Queens County Court and was present when defendant entered a plea to the
State indictments on July 17, 1963, on September 26, 1963, when the
State case came on for sentence, on October 24, 1963, when sentence was
imposed in Queens County Court on defendant and Sentinel, and on
November 6, 1963, the day preceding that on which defendant was taken
before the Queens County Grand Jury and refused to testify. Giunta
rendered supplemental reports on his investigation dated July 30, 1963,
and November 1, 1963. These reports do not add evidence to the earlier
report but furnish the formal detail of the State proceedings including
copies of the indictments, a report on the sentences imposed, and an
explanation (attributed to Assistant Attorney General Greenspan) of the
effect in State practice of guilty pleas to less than all counts of an
indictment.
The
present indictment was returned September 22, 1964. Giunta has no record
of any contract with State authorities related to defendant and Sentinel
between November 6, 1963, and September 22, 1964. There is no evidence
that and it is not found that Giunta at any time learned, directly or
indirectly, what defendant told the Queens County Grand Jury. His Grand
Jury testimony and exhibits disclose no evidentiary matter not contained
in his June 13, 1963, report.
Accordingly,
on defendant's motion to dismiss the indictment on the ground that
evidence derived from testimony that defendant was compelled to give
before the Queens County Grand Jury under a waiver of immunity was used
before the Grand Jury in the present case, it is
ORDERED
that the motion is, after an evidentiary hearing, in all respects
denied.
[65-2
USTC ¶9582]
United States of America
v. Joseph Page, Defendant
U.
S. District Court, East. Dist. N. Y., 64 CR. 352, 7/19/65
[1954 Code Sec. 7201]
Criminal evasion: Defenses to indictment: Double jeopardy.--The
taxpayer was not placed in double jeopardy where he was indicted both by
the State of New York and the federal government for tax evasion for the
same years since the taxpayer had committed two distinct crimes, no two
of which had anything in common except the use of the same income tax
data in the state and federal tax returns filed. Motion to dismiss
indictment denied.
[1954 Code Sec. 7201]
Criminal evasion: Defenses to indictment: Immunity from
prosecution.--Although the taxpayer had been granted immunity from
state prosecution in exchange for his testimony before a state grand
jury, the District Court held that this, in itself, did not bar the
present federal indictment under Code Sec. 7201. However, the Government
could not resort to the taxpayer's state grand jury testimony (which
could have been coerced) and must show that the evidence supporting its
indictment was not unconstitutionally obtained. Motion to dismiss
indictment denied.
[1954 Code Sec. 316(a)]
Dividends: Diversion of corporate funds: Embezzlement claim as a
defense.--Money which the Government alleged that the taxpayer
diverted from a corporation that he controlled for his own use was not
stolen or embezzled but, instead, resembled constructive dividends.
Motion to dismiss two counts of the indictment on the ground that
embezzled funds were not taxable income to the taxpayer denied.
Joseph
P. Hoey, United States Attorney, Lewis L. Douglass, Assistant United
States Attorney, Brooklyn, N. Y., for plaintiff. Jules Ritholz,
Kostelanetz & Ritholz,
52 Wall Street
,
New York
, N. Y., for defendant.
Memorandum
and Order
DOOLING,
District Judge:
Defendant
has been indicted in six counts under 26 U. S. C. A. §7201 for wilfully
attempting to evade United States taxes due from a corporation and from
himself and his wife for taxable years commencing in or with 1959, 1960
and 1961 by filing for each tax year false and fraudulent corporate and
personal tax returns in which less tax was reported as due than
defendant then knew was due.
1.
The returns defendant filed contained, in effect, exactly the same gross
income and deductions, items and figures that defendant used in filing
the parallel
New York
State
tax returns for the corporation and for himself and his wife. Before the
present federal indictment was found, defendant was indicted by the
State of New York for the misdemeanors of making false and fraudulent
state returns for the corporation and for himself and his wife; each
state indictment alleged an intent to evade payment of the state tax
involved and the filing of returns known to be false and fraudulent; the
state indictments embody the offending returns and thus make it plain
that defendant employed in allegedly seeking to delude the state the
same underlying income data used in the alleged attempt to delude the
Federal Government. To the state indictments defendant entered a plea of
guilty that, it is said, extended to the whole of the State's charges.
Defendant
now moves to dismiss the federal indictment as putting him twice in
jeopardy for the same offenses.
Defendant
contends that the bent of constitutional thinking is toward depreciation
of both state and federal indictments for the same misconduct (Cf.
Bartkus v. Illinois, 1959, 359 U. S. 121; Abbate v. United
States, 1959, 359 U. S. 187, 197-198) and he emphasizes the use of
the same income data in the two sets of returns as indicative of a
single annual offense. If the decisional trend is as indicated, it could
not reach the present case. The state and federal offenses here are
distinct; assuming the truth of the indictments, the charges are that
twelve distinct tax frauds were perpetrated, by the use of twelve
distinct pieces of paper, each directed to securing a distinct economic
advantage. No one of the papers could interchangeably have performed the
work of any other paper. Each paper required its own distinct act of
will, and its own separate construction and separate filing, and each
presented a distinct, self-complete and self-effective locus
poenitentiae. No one act of preparation and filing created a dual
liability or committed defendant to any other filing. The offenses are
as distinct as two hold-ups with the same pistol. If the test of Blockburger
v. United States, 1932, 284 U. S. 299, 304 is to be revised (Cf.
Abbate v. United States, supra, 359 U. S. at 197-198), no expectable
revision of it would reach the present case, which is one of distinct
crimes no two of which have anything in common except the use of the
same instrument to accomplish different ends. Cf. United States v.
Marzani, D. C. 1947, 71 F. Supp. 615, 617, 618, aff'd, D. C. Cir.
1948, 168 F. 2d 133, aff'd, equally divided court, 1949, 335 U. S. 895,
336 U. S. 922; United States v. West Coast News Company, W. D.
Mich. 1964, 228 F. Supp. 171, 179-182. See Morgan v. Devine,
1915, 237
U. S.
632; Albrecht v.
United States
, 1926, 273
U. S.
1, 11; United States v. Sabella, 2d Cir. 1959, 272 F. 2d 206; United
States v. Crosby, 2d Cir. 1963, 314 F. 2d 654.
The
motion based on the double jeopardy ground must be denied.
2.
Defendant moves to dismiss Counts 4 and 5 on the theory that they charge
him with receiving as income some of the same money charged in other
counts to have been received by the corporation and not reported by it
as income--thus ascribing to defendant, it is argued, embezzlement
income which, at the time of the supposed embezzlement, was not regarded
as income (Commissioner v. Wilcox, 1946, [46-1 USTC ¶9188] 327
U. S. 404); the argument rests on the necessary
"non-retroactivity," in practical effect, of the overruling of
the Wilcox case by United States v. James, May 15, 1961,
[61-1 USTC ¶9449] 366 U. S. 213, 221-222. The Government agrees that
the dividends and capital gains that defendant is alleged to have
excluded from his personal tax returns were a portion of the monies
allegedly received and not reported by the corporation. But the
Government denies that its case assumes embezzlement by defendant,
pointing out that since defendant owned all of the corporation's stock,
his use of its funds for his own purposes need not have been
embezzlement. Cf. Davis v.
United States
, 6th Cir. 1955, [55-2 USTC ¶9685] 226 F. 2d 331.
No
embezzlement claim is necessarily implicit in the Government's position;
on the contrary, the constructive dividend analysis seems to be open to
it, subject to limitations vitalized in Di Zenzo v. Commissioner,
2d Cir. 1965, [65-2 USTC ¶9518] -- F. 2d --. Cf.
United States
v. Goldberg, 3rd Cir. 1964, [64-1 USTC ¶9316] 330 F. 2d 30, 38-40; Federbush
v. Commissioner, 2d Cir. 1963, [64-1 USTC ¶9107] 325 F. 2d 1. It
may be that the Government will have to consider the point defendant now
makes in marshalling its proofs, but that is a matter of evidence and
not of the sufficiency of the counts, as particularized, to withstand
the present motion.
The
motion to dismiss Counts 4 and 5 is denied.
3.
Defendant also moves to dismiss the entire indictment on the ground that
the State granted him a valid immunity as a predicate of coercing him to
testify to a state Grand Jury about many of the facts relating to the
same flows of funds that are now made the basis of the present federal
indictment for tax evasion. While the state testimony came after the
state indictments and plea, there is affidavit evidence that, although
directed no doubt to issues other than tax evasion, the Grand Jury's
inquiry did go into matter germane to the present indictment. Thereafter
the present indictment was found. The Treasury Agent in charge of the
investigation that led to the present indictment has testified that he
derived nothing from the Grand Jury testimony directly or indirectly,
but that he obtained the present indictment on the basis of his own
report, completed before the state Grand Jury proceeding started.
The
essence of defendant's argument is that it is unconstitutional to coerce
testimony unless a complete immunity from all prosecutions, federal as
well as state, is granted by the interrogating sovereign. Even were that
so, defendant's course would have been to persist in refusal; it is so
unlikely that it could be intergovermentally practicable for states to
grant federal immunities (if not vice versa), that a refusal to
answer would have to be supported, if defendant's premise were valid.
But defendant did testify and if it was an unconstitutionally coerced
disclosure, then the limit of defendant's right is to suppress the
disclosure and its fruits, if any. The fact of testifying does not
produce an immunity, any more than an unreasonable search erases the
crime, which may still be prosecuted through untainted means. But the
rule is the plain one so plainly stated in Murphy v. Waterfront
Commission, 1964, 378
U. S.
52, 79. The Government may not resort to the Grand Jury testimony (which
may be coerced by the State) and must show that the evidence on which it
has obtained the indictment is not tainted. For that purpose, the
hearing started on the motion day will resume on September 13, 1965, at
10:00 A.M. substantially as a motion to suppress. See
United States
v. Tane, 1964, 329 F. 2d 848.
The
motion to dismiss the indictment is otherwise denied.
Accordingly
on defendant's motions to dismiss the indictment as putting him twice in
jeopardy and as barred by a state granted immunity, and on his motion to
dismiss Counts 4 and 5 as precluded by the principle of the dismissal
granted in United States v. James, 1961, [61-1 USTC ¶9449] 366
U. S. 213, 221-222, it is
ORDERED
that the motions are denied; and it is further
ORDERED
that the hearing hereinabove described resume on September 13, 1965, at
10:00 A.M. in Courtroom 8,
Brooklyn
,
New York
.
[41-1
USTC ¶9273]
United States of America
, Plaintiff-Appellee, v. William Molasky, Defendant-Appellant.
United States of America
, Plaintiff-Appellee, v. James M. Ragen, Defendant-Appellant.
United States of America
, Plaintiff-Appellee, v. James M. Ragen, Jr., Defendant-Appellant.
United States of America
, Plaintiff-Appellee, v. Lester A. Kruse, Defendant-Appellant.
United States of America
, Plaintiff-Appellee, v.
Arnold
W. Kruse, Defendant-Appellant.
(CA-7),
United States Circuit Court of Appeals for the Seventh Circuit., Nos.
7462-7466. October Term, 1940--January Session, 1941., 118 F2d 128,
02/26/41
Appeals from the District Court of the
United States
for the Northern District of Illinois, Eastern Division.
Attempt to evade and defeat tax: Sufficiency of
indictment.--Indictment held sufficient to apprise defendants of charges
they were called upon to meet although it required a mathematical
computation to determine what item of deduction is charged to be
improper. Further, there was no request for a bill of particulars.
Grand Jury secrecy.--Petitions for an order releasing the oaths of
Grand Jury secrecy to permit defendants to inspect minutes and records
of Grand Jury, so that they might properly prepare certain pleas in
abatement and bar, are held to have been properly denied where to do so
would open way for exploratory expedition and dilatory tactics.
Immunity plea.--Lower court erred in dismissing immunity plea where
testimony before Anti-Trust Grand Jury, with respect to which immunity
was granted, was directly connected with and formed an essential link,
if not the entire chain of circumstances, relied upon for conviction
herein.
Commissions v. dividends: Unlawful deductions.--It having been
determined that defendants rendered services to the corporation in
question, it is held that "where a statute permits a reasonable
deduction for services, a criminal prosecution can not be maintained by
proof other than that such services were not rendered. It is not
sufficient to allege or prove that a deduction claimed for services is
unlawful because the amount charged is unreasonable." Further, the
lower court erred in its charge to the jury with respect to such
distributions. One dissent.
J.
Albert Woll
,
U.S.
Attorney,
Chicago
,
Ill.
, for plaintiff-appellee. David Baron,
St. Louis
,
Mo.
, John L. McInerney, 1 No.
LaSalle St.
,
Chicago
,
Ill.
, Warren Canaday, 10 So. LaSalle St., Chicago, Ill., and Joseph A.
Struett, Board of Trade Bldg., Chicago, Ill., for defendants-appellants.
Before
MAJOR and KERNER, Circuit Judges, and BRIGGLE, District Judge.
MAJOR,
Circuit Judge:
These
are appeals of William Molasky, James M. Ragen, James M. Ragen, Jr.,
Lester A. Kruse and Arnold W. Kruse, from judgments of conviction
entered September 12, 1940. The indictment, upon which they were jointly
tried, was returned August 22, 1939, by the regular June Term Grand
Jury, which had been authorized to continue for the purpose of
completing investigations commenced during the June Term. The indictment
contained five counts, the first four of which charged these appellants,
together with Moses L. Annenberg, Jules Taylor and Herbert S. Kamin, and
the Consensus Publishing Company, an Illinois Corporation, (hereinafter
referred to as "Consensus") with wilfully attempting to evade
and defeat the Federal tax on the income of Consensus during the years
1933 to 1936, both inclusive, in violation of Section 145(b), Title 26,
U.S.C.A. The fifth count charged the defendants with conspiring to evade
and defeat the Federal tax on the income of Consensus for the years 1929
to 1936, both inclusive, in violation of Section 88, Title 18, U.S.C.A.
Prior
to trial, the defendants Annenberg, Taylor and Kamin were dismissed as
defendants. The case was tried to a jury which returned a verdict
finding all of the instant defendants (appellants) guilty on all counts,
except Lester A. Kruse, and finding him guilty on the fourth and fifth
counts, upon which verdict the Trial Court entered the judgments now
under attack. Previous to the trial, certain preliminary motions and
pleas were filed, some applicable to all, and others to only certain of
the defendants.
[Alleged
Errors]
The
appeals may be said, in a general way, to involve the alleged errors of
the Trial Court in its denial of motions to dismiss the indictment; in
its refusal to permit inspection of the Grand Jury minutes and to
discharge the oath of secrecy surrounding the proceedings of the Grand
Jury, in striking certain of the defendants' pleas in abatement based
upon the presence of unauthorized persons before the Grand Jury, in
dismissing special immunity pleas in bar; in the admission of evidence;
in its denial of motions for directed verdict, for a new trial and in
arrest of judgment, and in the court's charge to the jury.
[Sufficiency
of Indictment]
Insofar
as a discussion of the indictment is concerned, it would be sufficient
to set forth the charge in abbreviated form. In view of the theories
advanced by the respective parties, however, as to the merits of the
controversy, it appears material to make a substantial statement
regarding the charge as alleged. The first count is typical of the first
four and charges that the defendants filed a return in 1934 for the
taxable year of 1933, and did unlawfully, wilfully and knowingly attempt
to evade and defeat a large part, to-wit, $9678.02 of a tax due to the
United States on the income of Consensus, and that the attempt was in
the manner following: That Consensus was engaged in the business of
printing and selling "Run Down Sheets" to a class of persons
known as "Bookmakers"; that it maintained offices in St.
Louis, Missouri and Cincinnati, Ohio; that William Molasky was the
President of the Corporation, and that the Corporation was required to
file an income tax return for the year in question, inasmuch as it had
received a gross income of $119,960.96. It alleges that the Corporation
was entitled to deductions as follows:
and that it derived a net income of $81,171.80, upon which it owed a tax
of $13,340.22. It also alleges that the defendants, knowing the
corporation's income to be as above set forth, wilfully attempted to
evade and defeat a part of the tax, to-wit, $9,678.02, and as a means of
so wilfully attempting to evade and defeat said tax, they filed a sworn
return showing the corporation's gross income to be $119,960.96, and
claiming deductions as follows:
The indictment further alleges that according to the return as filed, a
net income of $26,634.15 was shown, with a total tax due and payable of
$3662.20, which was paid.
[No
Request for Bill of Particulars]
The
second, third and fourth counts are in substantially the same form as
Count One. In fact, they are exactly the same except for such
differences as may be occasioned by dates and amounts. It is said that
these counts do not state a cause of action and do not sufficiently
apprise the defendants of the charge which they are called upon to meet.
We think it is true, as contended, that it requires a mathematical
computation to determine what item of deduction is charged to be
improper. Such calculation readily discloses, however, (Count One) that
the item of deduction, "Commissions, $54,537.65" is the one by
which the defendants are charged with attempting to evade the tax. This
result follows by subtracting the total deduction of $38,789.16,
admitted to be proper, from the total deduction of $93,326.81, the
amount alleged to have been claimed in the return as filed. Thus, it is
apparent that the defendants are charged with claiming an unlawful
deduction, designated as commissions, of $54,537.65. While it is not
apparent why the draftsman of the indictment should leave the most
essential element of the charge to a process of calculation, rather than
make a direct allegation as to the unlawful deduction, yet we are of the
view that the defendants were sufficiently apprised of the offense
charged. After all, the gist of the offense is the attempt to evade and
defeat the tax, and if the defendants were in doubt as to the means
alleged, they could have requested a bill of particulars. This was not
done, and "we can not presume that the request would have been
refused." Capone v. United States, 56 F. (2d) 927, 931 [3
USTC ¶885].
[Conspiracy
to Evade]
We
do not understand that defendants question the validity of the fifth
count of the indictment, but inasmuch as the substance of the charge is
material, as will be subsequently developed, it appears not
inappropriate to refer to it at this point. It charges the defendants
with conspiring to evade and defeat the taxes on the income of Consensus
for the years 1929 to 1936, both inclusive. The gross income,
deductions, net income and tax due for each of the years included in the
conspiracy is set forth. For instance, for the year 1933, (the return
for this year was made in 1934 as shown in Count One of the indictment)
the gross income was alleged as $119,960.68, deductions $38,789.16, net
income $81,171.80, and tax due $13,340.22. There is then set forth for
each year an item of improper deduction claimed in the return by reason
of alleged false employment contracts. For the year 1933, this item is
in the amount of $54,537.65. The difference between the total net income
as reported for the years included in the indictment period, and the
correct total net income for those years, as alleged, is the amount upon
which it is alleged a tax was payable. In other words, this difference
represents the amounts which were claimed as deductions in the tax
returns under the heading of commissions. This discrepancy, so it is
alleged, resulted in a tax evasion in the sum of $77,883.53. The count
further alleges, among other things, that the defendants were not
employed in an executive capacity, nor in any other capacity whatsoever,
by the said corporation during the calendar years 1929 to 1936,
inclusive, nor did they or any one of them, or anyone for them, render
any service to the said corporation, but that the defendants were owners
and holders of beneficial interest for themselves and others in the said
corporation, and that all of the moneys paid to them and each of them,
were, in truth and in fact, distribution of profits and dividends from
earnings of the said corporation. Numerous overt acts are alleged which
do not appear material to relate.
[Release
of Grand Jury Secrecy]
On
October 30, 1939, there was filed by Kruse and Kruse, and on the same
date by Molasky, what are designated as petitions for an order releasing
the oaths of Grand Jury secrecy. Numerous allegations were made in an
attempt to show that this secrecy should be removed and the defendants
permitted to inspect the minutes and records of the Grand Jury so that
they might properly prepare certain pleas in abatement and bar. (These
pleas are later discussed). The relief sought by these petitions was
denied. In our view, it is not necessary to relate in detail the
contents of these petitions, as we believe the court correctly ruled
thereon. No authorities are cited by the defendants in support of their
claimed right in this respect. On the other hand, there are numerous
authorities where such procedure has been condemned.
United States
v. Garson, 291 Fed. 646, 649; Metzler v.
United States
, 64 F. (2d) 203, 206; Cox v. Vaught, 52 F. (2d) 562. We
agree with the authorities generally that the granting of such request
would dangerously impair our system of Grand Jury procedure. It would
open the way for an exploratory expedition for the purpose of obtaining
the Government's evidence, and pave the way for numerous dilatory
tactics. We think that the court properly denied such petitions.
[Abatement
Pleas]
On
November 15, 1939, there was filed by Molasky, abatement pleas Nos. 1
and 2; on the same date, similar pleas by Kruse and Kruse, and also by
the defendants Ragen and Ragen, as well as other defendants, not now
before the court. In the first of these pleas, it is claimed the
indictment is void for the reason that three special assistants to the
Attorney General were, without authority, present before the Grand Jury
during the course of the proceedings. The District Court found there was
no merit in this plea, and we agree. Hale v.
United States
, 25 F. (2d) 430, 435;
United States
v. Amazon Industrial Chemical Corp., 55 F. (2d) 254, 258. The
second plea attacked the authority of three other special assistants on
the ground that, although they were concededly authorized to appear
before the Grand Jury, their authority was limited to investigating
offenses arising under the Revenue Laws. It is alleged, however, that
these assistants also participated in the investigation which resulted
in the return of the fifth count of the indictment, charging conspiracy
to violate the Revenue Laws. We are of the view that the contention of
the defendants in this respect is also without merit. It requires little
argument, and no citation of authorities to convince us that the
proceedings of a Grand Jury are not invalidated because of the presence
of assistants to the Attorney General authorized to conduct an
investigation of certain substantive offenses, merely because, during
such investigation, evidence may be brought to light concerning the same
subject matter of the investigation and which later results in the
return of a conspiracy indictment.
We
have studied the merits of these abatement pleas and discussed them
briefly, even though we have serious doubts that they are a proper
subject for our review. Title 28, U.S.C.A., sec. 879, in connection with
Sec. 861(b), appears to preclude a reversal by this court "for
error in ruling any plea in abatement, other than a plea to the
jurisdiction of the court, or for any error in fact." Without
discussing our province in this respect, we refer to McHie v. McHie,
78 F. (2d) 351, a decision of this court, wherein these provisions are
discussed and interpreted. It appears that the instant plea did not
attack the jurisdiction of the court, and unless so, according to this
holding, there is no right of review.
[Immunity
Plea]
On
January 10, 1940, there was filed on behalf of Molasky, a special
immunity plea in bar. On the same date, a similar plea was filed by
Ragen, Jr. On April 1, 1940, an amended plea in bar was filed by
Molasky. To these pleas the Government filed a motion to dismiss, which
was allowed. It is to be remembered that while the indictment in the
instant case was returned August 22, 1939, the Grand Jury was a
continuation from the June Term. This Grand Jury is referred to as the
June Income Tax Grand Jury. There was impaneled in July a Grand Jury,
charged with investigation of violations of the Sherman Anti-Trust Act,
referred to as the Anti-Trust Grand Jury.
We
shall first consider Molasky's amended plea. Stating the allegations in
a form as abbreviated as the circumstances will permit, it alleges, in
substance, that he was served both with a personal subpoena and a
subpoena duces tecum, commanding him to appear and testify in
behalf of the United States before the Anti-Trust Grand Jury, and to
produce certain documents and records of Consensus; that after appearing
before said Grand Jury, and after he had been sworn and testified
concerning his name and address, claimed the constitutional privilege
against testifying to anything that might tend to incriminate him
personally, and refused to answer all questions unless granted immunity
from prosecution. Whereupon, it alleges that an assistant to the
Attorney General of the United States, in charge of such Grand Jury
proceedings, stated in the presence of, and to the Grand Jury, that the
defendant was granted immunity on all matters and questions put to him
by or before said Grand Jury, and that such immunity would apply to any
and all matters, transactions and things as to which he might testify.
The plea further alleges that after the granting of such immunity, he
was required to testify and produce evidence in his possession, and that
he gave oral testimony relating to, and proving, the following
transactions, matters and things, among others. 1 The facts
and transactions leading up to the organization and incorporation of
Consensus, transactions with reference to the capital stock and
ownership of the same during the years described in the indictment, the
employment contracts with reference to commissions and salaries to be
paid by Consensus to Molasky and other defendants, the payments of
commissions and salaries by Consensus, and to whom, and the duties
performed by each of said defendants in behalf of Consensus; expenses
and commissions paid by Consensus, dividends paid by Consensus, and tax
returns made by Consensus. It alleges, with reference to each of these
matters and things, that the testimony given had to do with the years
mentioned in the indictment. It further alleges with reference to these
matters and things that Molasky was compelled to give answers and to
produce evidence relating to and tending to connect him with the
allegations of the instant indictment, and thereby disclosed to the
Grand Jury information material and relevant to the transactions,
matters and things alleged against him in the indictment and every count
thereof, and that the matters and things concerning which such testimony
was given, proved, or tended to prove, material allegations of said
indictment, and constituted necessary links in a chain of evidence
necessary to establish guilt.
The
Immunity Statute, contained in the Anti-Trust laws of the United States,
(Title 15, Sec. 32, U.S.C.A.) reads, so far as here material, as
follows:
Immunity
of witnesses. No person shall be prosecuted or be subjected to any
penalty or forfeiture for or on account of any transaction, matter, or
thing concerning which he may testify or produce evidence, documentary
or otherwise, in any proceeding, suit, or prosecution under sections 1
to 27, inclusive, of this chapter: * * *
The
privilege against self-incrimination, found in the Fifth Amendment to
the Constitution of the
United States
, provides:
No
person shall * * * be compelled in any criminal case to be a witness
against himself, * * *
One
of the early cases dealing with the question of immunity is that of Counselman
v. Hitchcock, 142
U.S.
547, wherein the court, in discussing the requirements of such an act,
on page 586, said:
*
* * In view of the Constitutional provision, the statutory enactment, to
be valid, must afford absolute immunity against future prosecution for
the offense to which the question relates. * * *
A
similar immunity statute, contained in the Interstate Commerce Act, was
held valid in Brown v. Walker, 161
U.S.
591, for the reason that the provision afforded a complete and unlimited
immunity, and was, therefore, a valid substitute for the constitutional
privilege.
The
District Court, in dismissing the plea, stated:
A
plea of immunity under the statute in question, which merely states that
a witness testified concerning certain matters is not sufficient. The
plea should state the substance of the testimony given by the witness
and should show by apt averment of fact that, if it were not for the
immunity statute the witness could have invoked the constitutional
privilege of silence.
We
are of the opinion that this view of the court imposes a requirement
upon the pleader of a higher degree than is contemplated by the statute,
notwithstanding the Government's contention to the contrary. The
Government in its brief, states: "The plea simply alleges that the
defendant gave testimony 'concerning' or 'relating to and directly
proving' certain transactions, matters and things. But the pleas nowhere
set out what facts were testified to in connection with these
transactions, matters and things." The plea alleges, however, that
the defendant's oral testimony was concerning, relating to and directly
proving such matters and things. As will be subsequently disclosed in
this opinion, the matters and things concerning which Molasky was
required to testify, as alleged in his plea, were matters and things
which constitute the main issues in this case insofar as its merits are
concerned. Briefly mentioning a few of them, they are--who owned the
stock in Consensus, to whom and for what purpose were the deductions in
controversy paid, and, still more important, the issue as to whether
such deductions were dividends and, therefore, improperly deducted, or
commissions for services rendered. These are some of the matters and
things about which Molasky was required to testify before the Grand
Jury. How can it be said that testimony regarding such matters and
things was not pertinent to and directly connected with, the charge with
which Molasky was subsequently confronted? Surely it should not be held
that one who pleads in bar is required to allege, in question and answer
form, the testimony as given. To do so would come near to annihilating
the immunity statute, as well as the constitutional privilege by which a
person is protected from giving testimony.
But
it is argued by the Government that the matters alleged have nothing to
do with tax evasion and, therefore, are not the subject-matter of
immunity. As pointed out, however, the question as to who owned the
stock in the corporation, and whether the claimed deductions were
commissions or dividends, were essential matters about which the
controversy largely revolved. It is also argued that there is no
allegation in the plea that the evidence heard before the Anti-Trust
Grand Jury was considered by the Income-Tax Grand Jury. We do not think
such an allegation is necessary. The application of the immunity
provision is dependent upon how the information is obtained rather than
the use to be made of it thereafter. Furthermore, the testimony thus
obtained was available to the Government on the trial and, in fact,
appears to have been utilized. It is further argued that there is
nothing in the plea to disclose that the Income-Tax Grand Jury did not
obtain from other sources the information given to the Anti-Trust Grand
Jury by Molasky. Neither do we think this allegation was necessary.
Again, in our opinion, the language of the immunity provision leaves no
room for such construction. As was said in Doyle v. Hofstader,
257 N.Y. 244, 177 N.E. 489, in an opinion by Justice Cardozo, on page
493 (N.E.):
A
witness is not required to show, in order to make his privilege
available, that the testimony which he declines to give is certain to
subject him to prosecution, or that it will prove the whole crime,
unaided by testimony from others. It is enough, to wake the privilege
into life, that there is a reasonable possibility of prosecution, and
that the testimony, though falling short of proving the crime in its
entirety, will prove some part or feature of it, will tend to a
conviction when combined with proof of other circumstances which others
may supply.
The
contention that the plea is not sufficiently specific, in stating
Molasky's grand jury testimony, places the Government in a rather
awkward position. It must be remembered that the detailed testimony of a
witness before a Grand Jury is in the possession of the Government and
not the witness. That situation is well illustrated in the instant case.
Molasky and some of the other defendants attempted by petition to obtain
the minutes of the Grand Jury so that they might determine the propriety
of a plea in bar. We have held that this request was properly denied. It
is our view, however, when the instant plea in bar was presented, that
the Government should have been required to take issue thereon. It had
possession of the Grand Jury minutes, and it alone was in a position to
disclose any misrepresentation in the plea. In no other manner could the
assertions contained in the plea be dispelled.
The
difficulty confronting a witness in framing a plea in bar is discussed
in Hale v. Henkel, 201
U.S.
43, 68. The court said:
The
suggestion that a person who has testified compulsorily before a Grand
Jury may not be able, if subsequently indicted for some matter
concerning which he testified, to procure the evidence necessary to
maintain his plea, is more fanciful than real. * * *
After
discussing how the evidence may be obtained, the court said:
*
* * It is scarcely possible that all of them would have forgotten the
general nature of his incriminating testimony * * *.
It
appears the Court had in mind that the pleader need only allege the
general nature of the testimony given by the witness.
The
Court below, in dismissing this plea, and the Government here in support
of the Court's action, place much stress upon Heike v. United States,
227 U.S. 131. We think this case is clearly distinguishable and has very
little, if any, application to the instant situation. There the witness
was required to produce before the Grand Jury certain records of the
American Sugar Refining Company. The testimony was largely, if not
entirely, concerned with the records and books of the corporation. In
that case, issue was joined upon the immunity plea, a trial had thereon,
and the court directed a verdict for the Government. In sustaining this
action, the court, on page 143, said:
The
evidence did not concern any matter of the present charge. Not only was
the general subject of the former investigation wholly different, but
the specific things testified to had no connection with the facts now in
proof much closer than that they all were dealings of the same sugar
company. * * *
As
pointed out, the matters and things about which Molasky testified were
directly connected with and formed an essential link, if not the entire
chain of circumstances relied upon for conviction.
[Error
in Dismissing Plea]
Nor
do we think that the corporate exception to the immunity provision is
applicable. The plea alleges that he gave oral testimony concerning his
personal knowledge of the matters and things described. Wilson v.
United States, 221 U.S. 361, Hale v. Henkel, 201 U.S. 43, United
States v. Goldman, 28 F. (2d) 424. We are of the opinion, therefore,
that the Court erred in dismissing this plea.
The
special plea in bar filed by the defendant, James M. Ragen, Jr., also
claimed immunity. The disclosures of the plea with reference to the
Grand Jury before whom he testified, and the granting of immunity, are
substantially the same as those made in the plea of Molasky. It alleged
that the defendant gave oral testimony before said Grand Jury
"describing his relations in connection with the Consensus
Publishing Company, Moses L. Annenberg, William Molasky, and James M.
Ragen," and testified fully and stated all facts within his
knowledge concerning the "said Consensus Publishing Company and
this defendant's connection therewith, and salaries and commissions
received by him from, and services performed by him, for said
Company." Other allegations more geeneral in their nature are to
the effect that the testimony which he was required to give was material
and relevant to the matters alleged in the indictment. While the
allegations of this plea as to the matters and things concerning which
he was required to testify are not as complete as those contained in
Molasky's plea, yet we think they are sufficient, and what we have said
concerning Molasky's plea is applicable to Ragen's. It follows that the
court, in our opinion, also erred in dismissing this plea.
[Consideration
of Merits of Case]
This
brings us to a consideration of the case on its merits. Notwithstanding
that we have held that dismissal of the immunity pleas of Molasky and
James M. Ragen, Jr. was erroneous, we shall treat the case on its merits
as it concerns all of the defendants.
It
becomes material to make a further statement concerning the facts. The
record is voluminous and contains several hundred exhibits, which makes
it difficult, if not impossible, to state the relevant facts within any
reasonable limitation.
At
or about the date of the return of the instant indictment, several other
indictments were returned against the defendants and others, most of
which charged offenses closely related to those of the present case. In
all of these indictments, one of the defendants was Moses L. Annenberg,
who appears to have been a leader in the activities concerned in the
charge on which the defendants were convicted. Annenberg entered a plea
of guilty on another charge, and in conformity with a stipulation made
by the Government, the indictment against him in the instant case, and
in other cases, was dismissed. None of the defendants in the trial below
testified or offered any testimony in his own behalf. The testimony,
therefore, was all given by Government witnesses, with the exception of
one who was called by the Court at the instance of the Government.
The
evidence discloses that in 1929, at the suggestion of Annenberg, it was
agreed among him, Kruse, Ragen, Sr., and Molasky that they would take
over and operate the business of manufacturing and distributing a card
known as a "Run Down Sheet" which, prior thereto, had been
distributed by Molasky and a
St. Louis
party by the name of Sweig. On September 18, 1929, Kruse organized an
Illinois
corporation known as the "Consensus Publishing Company." There
were issued 100 shares of stock of the value of $5,000. The stock was
issued as follows:
There
was in existence at that time the Cecelia Investment Company
(hereinafter referred to as "Cecelia"), a holding company for
Annenberg's stock in a large number of corporations. On October 1, 1929,
Taylor
's 30 shares were re-issued to the Cecelia Company. On June 3, 1933,
Molasky's 30 shares were re-issued, 15 shares to Molasky and 15 shares
to B. Hoffman, his niece, and about April 9, 1935,
Clark
's 20 shares were re-issued to one Herbert S. Kamin, an attorney and
nephew of Annenberg. The shares issued to Ryan appear to have been
subsequently issued to Ragen, Sr., although this is disputed. At any
rate it can be said that Clark, Ryan and Taylor were mere dummy
stockholders. So far as we are able to discern nothing of value was paid
for any of the stock. The defendants contend as a matter of fact that
none of the stock at any time was owned by them, that it was issued to
them by mistake, and that it was always intended to have been issued in
its entirety to Cecelia.
The
business of Consensus was operated by Molasky in
St. Louis
where he lived and had his principal office. The business spread and was
operated in Cincinnati, Kansas City, Louisville, Lexington, East St.
Louis, Dayton, Columbus and other cities. He also was engaged in the
distribution of various newspapers and periodicals published by
Annenberg with whom he was associated. During the indictment period
Arnold W. Kruse was the general manager of the Daily Racing Form
Publishing Company, which Company was located in
Chicago
, the stock of which was held by Cecelia on behalf of Annenberg, and
which published the Racing Form. Consensus, however, had its principal
office and place of business in
Chicago
where Kruse and Ragen were located. James M. Ragen was the general
manager of the General News Bureau which collected information, at
different race tracks throughout the country, used by bookmakers in
connection with the run-down sheets in paying bets on horses.
As
stated, the business of Consensus was conducted by Molasky in
St. Louis
in connection with Arnold W. Kruse, James M. Ragen, and their sons,
Lester A. Kruse and James M. Ragen, Jr. in
Chicago
. The collections comprising the gross income, shown by Consensus in the
income tax returns in question, were received through the
St. Louis
office. Molasky prepared two weekly statements, one showing the amount
of collections which he deposited in the name of Consensus in a St.
Louis bank, the other the expenses incurred in the
St. Louis
office, which statements were forwarded to the
Chicago
office. In the
Chicago
office there were bookkeepers and stenographers who transcribed the
statements furnished by Molasky upon what were called work sheets, and
made entries of such transactions on the books of Consensus, consisting
of a journal, cash book, and general ledger. These books of Consensus
disclosed the gross income as contained in the reports prepared by
Molasky, and also the gross income in the exact amount as reported in
the income tax returns.
The
return filed in 1934 for the taxable year 1933 is typical. The figures
for that year have heretofore been set forth in connection with our
discussion of the indictment. Each week there was sent from the
Chicago
office to Molasky in
St. Louis
a check for expenses incurred. For the year 1933, these amounted to the
sum of $38,789.15, which included large items for salaries, wages, and
expenses. The total of these items, it is conceded by the Government--in
fact it is so charged in the indictment--was properly deductible. None
of these items, however, includes any compensation or salary for any of
the defendants in this suit. We are unable to determine to a certainty,
but we are of the opinion that they do not include any salaries or
expenses for bookkeepers or office help in the
Chicago
office. At any rate there were distributed from the
Chicago
office weekly the net proceeds, the amount reported by Molasky less the
money advanced him for expenses, in the following proportions: 30% to
Cecelia, 30% to Molasky, 20% to A.W. Kruse, and 20% to J.M. Ragen. This
statement must be modified to the extent that in 1931, James M. Ragen
had his stock transferred to his son, James M. Ragen, Jr. to whom
distribution was thereafter made, and in 1932, the distribution on
account of the 20 shares of stock held by Arnold W. Kruse was made to
his wife, Alma Kruse until March 16, 1933, and thereafter to his son,
Lester A. Kruse. Also for the years 1933-36, both inclusive, one-half of
the amounts payable to Molasky were paid to B. Hoffman. All of these
distributions were reported in the income tax returns of the individual
recipients thereof and entered upon the books of Consensus. It was these
distributions made by Consensus and received by the defendants, shown in
the income tax return of Consensus as commissions and deducted as such,
that constitute the basis for the charge of a willful attempt to evade
income tax.
It
is not the province of this Court to weigh the testimony but it is our
duty to review the record with a view of ascertaining if the defendants
had a fair trial upon the charge as alleged in the indictment. This is
especially true in view of our conviction derived from a study of the
record that the Government's case is not strongly supported. In fact we
agree with the District Judge when he said in denying the motions for
directed verdict: "I admit that I think this is a pretty weak
case." The important matter for consideration is whether the case
was tried and submitted to the jury on correct legal principles.
[Contentions
of Parties]
There
are two outstanding propositions around which this controversy largely
revolves--one advanced by the Government that the defendants were the
owners of the stock, and the other by the defendants that they rendered
service to Consensus and were entitled to a lawful deduction in
connection therewith. As to the first proposition it is denied by the
defendants that they were owners of the stock. (Without entering into a
discussion of the evidence in this respect it is sufficient to state
that in our judgment the record justifies the conclusion that they were
such owners.) The fact that the disbursements were made to the
defendants in the same proportion as their stock holdings constitutes
the Government's major argument that such disbursements were dividends.
This does not necessarily follow. Austin v.
United States
, 28 Fed. (2d) 677 [1 USTC ¶329]. In fact any presumption in this
respect would be overcome by proof that services were rendered for which
the disbursements were made or could have been made.
[Question
as to Services Rendered]
On
the other hand, we think the major argument advanced by the defendants
to the effect that services were rendered to the corporation for which
deductions might have been lawfully made is plainly disclosed. While the
Government contends to the contrary, yet counsel for the Government in
his opening statement to the jury said: "The defendants, Arnold W.
Kruse and James M. Ragen had very little if anything to do in the
operation of the company's business * * * William Molasky actually ran
the business and did considerable work * * *" The trial Judge was
of the opinion that "some and perhaps all of the defendants"
rendered services to Consensus and so stated during the argument on the
motion for directed verdict. We think there is considerable testimony in
the record of services rendered by Molasky, who was president of
Consensus, as well as by Kruse, Sr., and some evidence of services
performed by the other defendants. There was no proof and no effort by
the Government to show that the services disclosed constituted the total
of those performed and no effort to show the reasonable value of such
services.
It
does not require a great deal of proof to be convincing that the
executives, managers, and employees of a corporation which earned a
gross income of $119,960.96 for the year 1933 (in some years the income
was much greater) rendered services and were reasonably entitled to
substantial salaries. In 1929, Consensus took over a business--if it can
be thus dignified--that was a losing proposition, and made it a
financial success. So far as is disclosed by this record, these
defendants alone were responsible for that success. According to the
Government's theory, no executive ability was displayed and no service
rendered for which the defendants were entitled to compensation or
salary. Such a theory is incredible.
Furthermore,
defendants contend that there was an agreement in 1929, prior to the
incorporation of Consensus, between them and Annenberg, that Cecelia
should take 30% of the profits as the owner of the business, Molasky
30%, and Ragen, Sr. and Arnold Kruse each 20% as compensation for
services in the operation of the company. There is testimony which
sustains this contention. True, the Government argues that it is
unbelievable, even though it came from Government witnesses. It appears
to us, however, that the validity of such agreement is of little
importance, and certainly not controlling. We should think that the
defendants would impliedly be entitled to compensation for services
rendered irrespective of an express agreement relative thereto.
[Unlawful
Deductions]
Under
the Government's theory, however, it is immaterial and irrelevant as to
whether the defendants performed services for which they might have been
entitled to compensation or salary. The case was tried and is presented
here on that theory. In other words, the Government argues that
conceding the defendants rendered services for which they might have
been entitled to compensation, yet the disbursements were received as
corporation dividends and were, therefore, unlawful deductions. Assuming
there is evidence which sustains the contention that the disbursements
were, on some occasions, recognized as dividends, is that sufficient to
show that the deductions were unlawful? The terms "dividends"
and "commissions" appear to have been used interchangeably by
the bookkeepers for Consensus on the work sheets and on the statements
furnished the defendants each week. There is testimony, much stressed,
that during the years 1932 to 1935, all the stock in Consensus was
issued to Cecelia, the shares held by the various defendants and dummies
destroyed and the so-called employment contracts executed and dated back
to cover prior years since the organization of Consensus. This was done
largely by Kamin (originally a defendant, lawyer, and newphew of
Annenberg, dismissed out of the instant case) who worked under the
supervision of Arnold W. Kruse. That these facts and circumstances
strongly indicate that some sort of chicanery was in progress cannot be
doubted. But its efficacy as proof that the defendants were evading the
income tax of Consensus by charging as commissions that which they knew
to be dividends, is difficult to discern. If the Government's theory is
correct that the disbursements were made solely as dividends,
notwithstanding the fact that services were rendered by the defendants,
then we have the anomolous situation wherein the defendants willfully
attempted to evade the tax by unlawfully claiming as deductions that
which they could have lawfully claimed.
[Audit
of Returns]
Another
fact unfavorable to the Government is that each year during the
indictment period, the return filed by Consensus, as well as the
corporate books, plainly disclosed the gross income, admittedly correct,
as well as the item of deduction now claimed to be unlawful. Not only
that, the return disclosed how this item was divided among the various
defendants. During the years in question, the Auditors of the Revenue
service, on numerous occasions, audited the returns and checked them
with the corporation records. Such disclosure by the taxpayer, if
intended as a plan of tax evasion, is consistent only with gross
ignorance on the part of those who devised the plan. Whatever may be
said of these defendants, we do not think they can be charged with such
ignorance. Also the record discloses that B. Hoffman, to whom Molasky in
1933, assigned 15 shares of stock in Consensus, in her individual tax
return for certain years, showed the money received from Consensus as
dividends. The Revenue officials pointed out to her that she was in
error in this respect and that such receipts must be shown as
commissions. On this basis, an additional tax was assessed against her.
[Dividends
v. Commissions]
The
Government in its brief and in oral argument before this Court asserts
that the deductions in question must be treated either as dividends in
their entirety, and if so as unlawful deductions, or as commissions in
their entirety, and therefore properly deducted. In other words, in
accordance with this argument there can be no middle ground. We agree
with this argument for two reasons: First, it was directly alleged in
the conspiracy count of the indictment and impliedly in the other counts
that none of the defendants "rendered any services to the said
corporation." Thus the question was directly in issue and the
Government had the burden of establishing the affirmative. Second, it is
a serious question whether a prosecution for income tax evasion, founded
upon improper deductions, can succeed where the proof is other than that
the deductions are improper in their entirety.
Section
23(a) of the Internal Revenue Code (26 U.S.C.A. Sec. 23(a)) allows
deductions in computing a net income for "all the ordinary and
necessary expenses paid or incurred during the taxable year in carrying
on any trade or business, including a reasonable allowance for salaries
or other compensation for personal services actually rendered; * *
*" The reported cases, dealing with criminal responsibility for tax
evasion, are, so far as we are aware, predicated upon a failure to file
a return, or if filing a return, failure to report the correct gross
income. We find no case where the evasion charged was based upon an
improper deduction. We have reached the conclusion that where a statute
permits a reasonable deduction for services, a criminal prosecution can
not be maintained by proof other than that such services were not
rendered. It is not sufficient to allege or prove that a deduction
claimed for services is unlawful because the amount charged is
unreasonable. Such a charge would leave to the trier of the facts the
responsibility for fixing the standard by which a defendant's guilt
would be determined. The standard would vary according to the views of
different courts and juries. Such a theory would be violative of the
defendant's constitutional rights, and void. United States v. Cohen
Grocery Co., 255 U.S. 81; International Harvester Co. v.
Kentucky, 234 U.S. 216, 221; Collins v. Kentucky, 234 U.S.
634, 638.
The
principle may be illustrated by reference to the deduction of $2,000
allowed to a person as head of a family. Assume A is charged with
attempting to evade his tax by claiming a deduction of $2,000 as head of
a family, knowing that such is not the case. On a trial it develops that
A is the head of a family. That of course would be fatal to the
Government's case. Assume further that the statute provided a reasonable
deduction for a person at the head of a family, taking into
consideration the size of his family and station in life. That would be
a deduction privilege somewhat similar to "a reasonable allowance
for salaries or other compensation for personal services actually
rendered." Assume, under a provision of this character, A was
charged with tax evasion by claiming a deduction of a certain amount as
the head of a family, knowing that such was not the case. The proof
discloses that he is not the head of a family. He is, therefore,
entitled to no deduction and could properly be convicted. Assume again,
however, that the proof shows him to be the head of a family. We should
think that would end the prosecution. The only question remaining would
be the reasonableness of the deduction. That would be a matter
concerning which honest individuals, as well as courts and juries, might
differ. An unreasonable deduction by such an individual might form a
valid basis for civil suit but not for a criminal prosecution.
So
it is in the instant case. The defendants are charged, necessarily we
think, with causing an improper deduction in its entirety in the returns
of Consensus. The proof shows without doubt what they rendered service
to Consensus and were entitled to compensation therefor in the form of
salary or otherwise. When that situation developed in the trial we are
of the opinion that it should have proceeded no further. Of course it
may be argued that it was still a jury question as to whether the
deductions were dividends in their entirety or commissions for services
rendered. Assuming without agreeing, that such is the case, we come to
the alleged error of the Court in its charge to the jury which in part
is as follows:
*
* * it is for you to decide whether these were, or whether a substantial
portion thereof, was a distribution of profits rather than the
compensation of employees.
I
use the words "These sums or a substantial portion thereof."
It is not necessary for the government under this indictment to prove
that all of the sums so distributed to these defendants were profits. *
* * It is sufficient if you find beyond a reasonable doubt that the
defendants intentionally diverted profits of this concern, in the
amounts charged in the indictment or substantial parts thereof, diverted
them from the form of profits and received them in the form of
commissions. * * *
[Instruction
to Jury]
The
jury was thus advised in effect that in order to convict it was only
necessary that a substantial portion of the profits of Consensus were
distributed to the defendants as dividends. This statement was neither
consistent with the indictment nor the theory upon which the case was
tried. Furthermore, it clothed the jury with the right to determine what
portions of the sums received by defendants were a distribution of
profits and what portions were to be deemed reasonable compensation for
services. If any portion of such sums was properly received as
compensation for services then it is subject to the fatal objection that
the jury was permitted to fix the standard. It is true that this
particular portion of the charge appears less harmful when read in
connection with the charge as a whole than when standing alone. Yet we
do not agree that its harmful effect was eliminated by other portions of
the charge. Who can say but that the jury might well have reasoned that
the distributions made to the defendants were partly for services
rendered and partly for profits in the form of dividends, but that the
latter constituted a substantial portion and was, therefore, the guide
by which they arrived at a verdict of guilty.
[Conclusion]
We
have not overlooked the Government's argument that every means alleged
in a conspiracy charge need not be proved. Here, however, there was only
one means alleged and that was that the defendants caused Consensus to
take a deduction as commissions when no services were rendered and with
knowledge that the deductions were dividends or a division of profits.
In
view of what we have said it follows that the judgments must be and are
hereby Reversed and the Cause Remanded.
[Dissenting
Opinion]
KERNER,
C.J.:
I
am unable to concur in that part of the opinion holding that the
District Court erred in instructing the jury.
The
gist of the offense was the willful attempt to evade and defeat income
taxes. Whether there was such a willful attempt in this case was the
province of the jury to determine from the evidence. In passing upon the
sufficiency of the proof, it is not our province to weigh or determine
the credibility of the witnesses. We must take that view of the evidence
most favorable to the appellee and sustain the verdict of the jury if
there is substantial evidence to support it.
The
record clearly discloses that Howard Clark was bookkeeper for the
Consensus Company and that in keeping the books he took his instructions
from Kruse, Sr. who told him to charge 30% of the net profits to Cecelia
as dividends and the remaining 70% would be distributed to Molasky,
Kruse, Sr. and Ragen, Sr. as commissions.
The
record also discloses that at the close of each week all of the profits
remaining after the payment of the operating expenses were distributed
weekly in proportion to the number of shares owned by the stockholders.
The profits were called dividends on all of the work papers of the
bookkeepers. While it is true that what they were styled by the
defendants did not necessarily determine their character, nevertheless
it was for the jury to say from all the evidence whether there was here
a willful attempt to evade and defeat the just payment of income taxes.
This the jury did. I believe there was ample proof of acts and that the
reasonable inferences flowing therefrom warranted the verdict that there
was a willful attempt to evade the payment of income taxes.
The
amount of the tax which it was charged was attempted to be evaded was
not of the gist of the offense, Gleckman v. United States, 80 F.
(2) 394 [35-2 USTC ¶9645], nor was it necessary that the Government
prove an evasion of all the tax charge, Tinkoff v. United States,
86 F. (2) 868 [37-1 USTC ¶9057].
It
is elementary that any specific given instruction must be considered in
relation to the entire charge. The instructions were exceedingly fair
and thorough, and when the entire charge is considered, it is clear the
jury was distinctly called upon to decide whether the defendants entered
into a scheme to willfully evade the payment of income taxes.
The
judgment as to the appellants, James M. Ragen, Sr., Arnold W. Kruse and
Lester A. Kruse, should be affirmed.
1
To conserve space, we do not set forth such matters and things in their
entirety, but only in abbreviated form.
[42-1
USTC ¶9186]The United States of
America
, Petitioner, v. James M. Ragen The
United States of America
, Petitioner, v.
Arnold
W. Kruse The
United States of America
, Petitioner, v. Lester A. Kruse
Supreme
Court of the United States., Nos. 54, 55, 56. October Term, 1941, 314 US
513, 62 SCt 374, Decided January 5, 1942
On writs of certiorari to the United States Circuit Court of Appeals for
the Seventh Circuit.
Penalty for attempt to defeat or evade tax.--(1) The trial court
did not err in submitting to the jury the question of whether appellees
in returns of a corporation for the taxable years, attempted to make
unreasonable allowance for personal services rendered by them. The mere
fact that a penal statute is so framed as to require a jury to determine
a question of reasonableness is not sufficient to make it too vague to
afford a practical guide to permissible conduct. (2) Evidence was
sufficient to support jury's finding that appellees willfully attempted
to make unreasonable allowances for personal services. (3) The variance
which existed between the indictment and the proof, in that indictment
alleges that commission payments were actually dividends in their
entirety whereas evidence indicates that some services were performed,
is at most a matter of the extent of the alleged evasion, and involves
no elements of surprise prejudicial to appellees' efforts to prepare
their defense. Reversing decision of Circuit Court of Appeals, Seventh
Circuit, 41-1 USTC ¶9273, 118 Fed. (2d) 128, which reversed District
Court decision.
Charles
Fahy, Solicitor General, Samuel O. Clark, Jr., Assistant Attorney
General, and Arnold Raum, Gordon B. Tweedy, and Meyer Rothwacks, Special
Assistants to Attorney General, for petitioner. John L. McInerney,
Chicago
,
Ill.
(Matthias Concannon and Sidney R. Zatz, both of
Chicago
,
Ill.
, of counsel), for respondent James M. Ragen. George K. Bowden, Joseph
A. Struett, and Warren Canaday, all of
Chicago
,
Ill.
, for respondents Arnold W. Kruse and Lester A. Kruse.
Mr.
Justice BLACK delivered the opinion of the Court:
Section
145 of the Revenue Act of 1932 provides that "any person who
willfully attempts in any manner to evade or defeat any tax imposed by
this title or the payment thereof, shall, in addition to other penalties
provided by law, be guilty of a felony * * *" 47 Stat. 217. (There
are identical provisions in the Revenue Acts of 1934 and 1936. 48 Stat.
725; 49 Stat. 1703.) Petitioners were indicated, tried, and convicted in
the District Court for conspiracy to violate, and for violation of, this
provision. The Circuit Court of Appeals, one judge dissenting, reversed.
United States v. Molasky, 118 F. (2d) 128 [41-1 USTC ¶9273].
Because questions of importance in the enforcement of this criminal
statute and the
admin
istration of the revenue laws were raised, we granted certiorari. 313
U. S.
557.
In
computing net corporate income subject to tax, a deduction is permitted
for "all the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business, including
a reasonable allowance for salaries or other compensation for personal
services actually rendered * * *" Sec. 23(a), Revenue Acts of 1932,
1934, and 1936. 47 Stat. 179; 48 Stat. 688; 49 Stat. 1658.
"Dividends" distributed from net corporate profits are not
allowable deductions. But "commissions," if incurred as
necessary business expenses and as a reasonable allowance for personal
services actually rendered, are deductible from gross income. The larger
the allowable deduction the smaller are the net taxable income and the
tax imposed. The first four counts of the indictment set out attempts by
the defendants to evade income taxes of the Consensus Publishing Company
for the years 1933 to 1936, through a fraudulent scheme whereby, under
the guise of paying commissions which were deducted from gross income,
the corporation distributed dividends deduction of which the statute
does not permit. The fifth count sets out a conspiracy to accomplish
similar results for the years 1929 to 1936.
After
an examination of the evidence in the record including numerous
exhibits, we are satisfied that the jury could justifiably have found
the following facts to be true:
[The
Facts]
The
Consensus Publishing Company, an
Illinois
corporation, was organized in 1929 to carry on the business of preparing
"rundown" sheets, daily builetins containing information on
horse racing, and selling them to bookmakers. The original stock
ownership was distributed among Arnold Kruse (20 shares), James Ragen,
Sr. (20 shares), William Molasky (30 shares), and Cecelia Investment
Company (30 shares), a holding company controlled by Moses Annenberg,
the dominant figure in several other corporations which were engaged in
enterprises connected with betting on horse races. Kruse and Ragen were
executives in other Annenberg companies. Molasky alone lived in St.
Louis, where Consensus conducted its principal business operations, but
he delegated to one Gordon Brooks, an employee of another corporation
owned by Molasky, the job of collecting receipts, preparing records and
reports, and supervising printing for Consensus, work which took Brooks
an hour and a half a day on the average except for the one day each week
when the preparation of operating reports for the Chicago office
required about three hours.
For
several years Consensus made a weekly distribution of money to its
shareholders in direct proportion to their holdings. In the period
covered by the indictment, only the 30% of the distribution going to
Cecelia Investment Company was treated as dividends in Consensus' tax
returns. The remaining 70%, although referred to in some of the
corporation's confidential weekly reports to stockholders during the
period as "dividends," was nevertheless in its income tax
return deducted from gross income as "commissions." The
deductions thus claimed were $10,761 in 1929, $62,961 in 1930, $64,791
in 1931, $57,255 in 1932, $54,538 in 1933, $60,172 in 1934, $76,714 in
1935, and $119,756 in 1936. The bookkeeping system under which 70% of
the funds remaining after payment of expenses was charged as commissions
was set up in 1929 in accordance with instructions from Arnold Kruse.
In
1934, Kruse, having learned of a decision of the Board of Tax Appeals
that distributions of profits as commissions would not be allowed as a
deductible expense if made in accordance with stockholdings, set in
motion a series of transactions retroactively modifying and relationship
between Consensus and its stockholders. He directed an employee to
destroy the original stock book of the company, issue new stock
certificates bearing the date of incorporation (September 18, 1929), and
then immediately to cancel the new certificates and issue a single
certificate for one hundred shares to the Cecelia Investment Company. In
1935 or 1936, Kruse ordered the drawing up of written yearly contracts
of employment for the several years from 1930 on between Consensus and
the individuals to whom "commission" payments had since the
inception of the company been made. In each contract, the compensation
was to correspond identically with the amount that had already actually
been paid.
Except
for delays in destroying the original stock book and the original stock
certificates, this plan was promptly carried out. Moreover, corporate
minutes were drawn up, appropriately back dated, which set out the stock
"issue" and the employment contracts as if they were actual
events contemporaneous with the false dates of recording.
Among
the back dated contracts were several between Consensus and the
respondent Lester Kruse, son of
Arnold
. These together with a back dated assignment by
Arnold
to Lester of his "contract of employment" with Consensus were
to afford ostensible documentation of a shift to Lester, after March,
1933, of the share that had formerly gone to
Arnold
. 1 Similarly,
after 1931, Consensus paid the share that had formerly gone to Ragen to
Ragen's son. Here, too, a set of back dated papers documenting the shift
was fabricated. After their sons became the nominal recipients of
commissions, Kruse and Ragen continued to be connected with the affairs
of Consensus. Kruse, for example, directed the creation of the spurious
papers and records already described, and Ragen from time to time at
least until 1935 signed "commission" checks of Consensus which
were paid in regular course. 2
[Charge
to Jury by Trial Court Was Proper]
If,
from the foregoing and other supporting evidence in the record, the jury
could have found that any one of the defendants had, with the
intentional cooperation of the others, received "commissions"
without rendering any services whatsoever, it would have been possible
for the trial judge to have submitted the case to the jury without
calling upon it to decide any questions of reasonableness of
compensation for services actually rendered. If, however, each defendant
had performed some service for the corporation, the jury would have had
to consider whether or not the "commissions" had intentionally
been made excessive so that a portion of payments made in the guise of
meeting expenses actually constituted a distribution of dividends. There
was evidence which, if believed, tended to establish that each defendant
had performed some service, although of an irregular and undefined
nature. Hence, it seems to us entirely proper for the trial judge to
have submitted the case to the jury with a charge not necessarily
calling for a determination of whether all or none of the
"commissions" paid to each defendant were dividends, but
permitting a determination of whether the "commissions" were
intentionally made to include substantial amounts which should
have been treated as dividends. Upon such a charge, 3 the jury
found Arnold Kruse and Ragen guilty on all five counts, and Lester Kruse
guilty on counts four and five. 4
In
the charge as given, the Circuit Court of Appeals found reversible
error. The gist of the court's argument is contained in the following
excerpt from the opinion:
We
have reached the conclusion that where a statute permits a reasonable
deduction for services, a criminal prosecution can not be maintained by
proof other than that such services were not rendered. It is not
sufficient to allege or prove that a deduction claimed for services is
unlawful because the amount charged is unreasonable. Such a charge would
leave to the trier of the facts the responsibility for fixing the
standard by which a defendant's guilt would be determined. The standard
would vary according to the views of different courts and juries. Such a
theory would be violative of the defendant's constitutional rights, and
void. United States v. L. Cohen Grocery Co., 255 U. S. 81 * * *; International
Harvester Co. v. Kentucky, 234 U. S. 216, 221 * * *; Collins v.
Kentucky, 234 U. S. 634, 638 * * * 5
[Standard
of "Reasonableness" Properly Applied]
Determination
of allowable deductions by reference to a standard of
"reasonableness" is not unusual under federal income tax laws.
For example, the deductions allowed for depreciation and obsolescence,
for bad debts, and for ordinary and necessary business expenses (other
than compensation for services) are designated in the Internal Revenue
Code as "reasonable." 53 Stat. 1, Secs. 23(1), 23(k)(1),
23(a)(1). If, as the opinion below suggests, the only question that can
properly be submitted to the jury is whether the entire deduction
is fabricated, an unconscionable taxpayer can immunize himself from the
criminal sanctions for tax evasion by the simplest of expedients. He
need only find a legitimate item of deduction and then pad it as much as
his purpose requires. By transforming the question "Should any
deduction have been made?" into "Was the deduction made in
excess of a reasonable allowance?" he can, if the theory accepted
below be correct, largely destroy the deterrent effect of a penal
statute passed by Congress.
We
have concluded, however, that the ground of decision below is untenable.
The mere fact that a penal statute is so framed as to require a jury
upon occasion to determine a question of reasonableness is not
sufficient to make it too vague to afford a practical guide to
permissible conduct. Cf. Nash v.
United States
, 229
U. S.
373. The cases cited by the Court of Appeals affirm no such proposition.
In the Cohen Grocery case, this Court held a conviction under
Section 4 of the Lever Act, 41 Stat. 297, 298, unconstitutional because
the statute left open "the widest conceivable inquiry, the scope of
which no one can foresee and the result of which no one can foreshadow
or adequately guard against," and because an "attempt to
enforce the section would be the exact equivalent of an effort to carry
out a statute which in terms merely penalized and punished all acts
detrimental to the public interest when unjust and unreasonable in the
estimate of the court and jury." United States v. Cohen Grocery
Co., supra, 89. In the International Harvester case, this
Court expressed the view that assurance that the state statute there in
issue was complied with called for "gifts that mankind does not
possess." International Harvester Co. v. Kentucky, supra,
224. And in the Collins case, the same statute was said to call
for a determination of conduct "not according to the actualities of
life, or by reference to knowable criteria, but by speculating upon
imaginary conditions." Collins v. Kentucky, supra, 638.
[No
Unworkable Standards Were Involved Here]
No
such unworkable standards are involved here. Section 145 of the Revenue
Act of 1932 standing alone is not vague nor does it delegate policy
making powers to either court or jury. It declares that "any person
who willfully attempts in any manner to evade or defeat any tax
imposed" by the act "shall * * * be guilty of a felony"
and specifies penalties in addition to those otherwise provided by law.
That such acts of bad faith are not beyond the ready comprehension
either of persons affected by the act or of juries called upon to
determine violations need not be elaborated. Nor does the particular
mode of evasion here alleged, intentional deduction of dividends in the
guise of compensation for personal services, so transform the nature of
the offense as to make the actors less aware that they are committing it
or juries less competent to detect it. The statutory specification of
permissible deduction here in question is of long standing. For years
thousands of corporations have filed income tax returns in accordance
with the direction to deduct "a reasonable allowance for salaries
or other compensation for personal service actually rendered," and
there has not been any apparent general confusion bespeaking inadequate
statutory guidance. A finding of unconstitutional uncertainty in this
section of the act as applied here would be a negation of experience and
common sense.
On
no construction can the statutory provisions here involved become a trap
for those who act in good faith. A mind intent upon willful evasion is
inconsistent with surprised innocence. Cf. Gorin v.
United States
, 312
U. S.
19; Hygrade Provision Co. v. Sherman, 266
U. S.
497; Omaechevarria v.
Idaho
, 246
U. S.
343. And the charge given by the trial court amply instructed the jury
that scienter is an essential element of the offense.
[Sufficiency
of Evidence to Support Jury's Finding]
We
conclude that it was not error to submit to the jury the question of
whether or not the respondents attempted to make unreasonable allowances
for personal services. The respondents, however, raise a further
objection going not to the propriety of such a submission as a matter of
law, but to the insufficiency of the evidence upon which the jury could
have found an answer to the question submitted. They contend that the
record discloses that the recipients of commissions performed some
services; that the record fails to show that the services disclosed were
the only services rendered; that there was no direct testimony as to the
total amount of services rendered or the reasonable value thereof; and
that, therefore, the jury had no rational basis upon which to conclude
that the sums deducted as "commissions" were more than a
reasonable allowance for compensation for the services rendered. We must
reject this contention.
The
business conducted by Consensus, a business which, according to the
testimony of a person who was in immediate charge of its major
operations, normally required only an hour and a half daily of
managerial supervision, would hardly seem to call for additional
executive services worth what Consensus paid in "commissions."
The same witness testified that he had never seen some of the recipients
of "commissions," and that his only contact with one of them
was two telephone conversations. This testimony, too, belies
participation by the respondents in the business activities of Consensus
to a degree justifying payment of the high
"commissions"--equal on the average to about half of gross
revenues and amounting each year to several times all other wages and
salaries--as a quid pro quid for their services. Moreover, there
is the additional circumstance, damaging to the respondents' contention,
that year in and year out, 30% of earnings after deduction of expenses
was paid to the Cecelia Investment Company as dividends, and 70% to the
respondents or other individuals as "commissions." This
uniformity in the computation of "compensation" is difficult
to reconcile with the variations in extent and kind of personal services
which one would expect to find in accounts reflecting bona fide
allowances for personal services. Further, there is the circumstance
that the "commission" payments were always in proportion to
original stock holdings. And darkening the whole picture is the
atmosphere of purposeful concealment evinced by the destruction of some
important corporate papers and the fabrication of others. We are
convinced that all of this is sufficient to support a finding by the
jury that the respondents willfully attempted to make unreasonable
allowances for personal services.
[Variance
Between Indictment and Proof Was Not Prejudicial to Defense]
The
respondents also urge that there was a fatal variance between the
indictment and the proof in that the indictment alleges that the
commission payments were actually dividends in their entirety whereas
the evidence indicates that some services were performed. The fifth
court of the indictment does refer to "all of the moneys * * * paid
* * * by virtue of the * * * so-called Employment Contracts'" as
"in truth and in fact, distributions of profits and
dividends." But the gravamen of the charge is distribution of
dividends in the guise of commissions, and the respondents cannot fairly
claim that they were not adequately apprised of the nature of the
offense. Any variance which existed, at most a matter of the extent of
the alleged tax evasion, involves no elements of surprise prejudicial to
the respondents' efforts to prepare their defense. Cf. Berger v.
United States
, 295
U. S.
78; Bennett v.
United States
, 227
U. S.
333.
The
respondents have made further contentions which we conclude after
consideration are without merit.
The
judgment of the Circuit Court of Appeals is reversed and that of the
District Court affirmed.
It
is so ordered.
Mr.
Justice ROBERTS, Mr. Justice MURPHY, and Mr. Justice JACKSON took no
part in the consideration or decision of this case.
1
Or to his wife. From August, 1932, to March, 1933, Consensus distributed
20% of its earnings to Mrs. Arnold Kruse. No explanation is apparent in
the record.
2
Because of this and other circumstances showing Ragen's continued
participation in the affairs of Consensus, we conclude that the
argument, separately made on his behalf, that there was insufficient
evidence to establish his connection with any scheme to evade taxes, is
without merit.
3
The crucial portions of the District Judge's charge to the jury are as
follows:
"If
these sums distributed were distributed as a part of the profits of the
corporation, then they should have been accounted for in the income tax
report of the Consensus Company as profits and upon that the corporation
should have paid a tax, which it did not.
"If
on the other hand, they were intended to and represented actual bona
fide compensation to employes of this corporation in the ordinary
operation of its business; in other words, if they were ordinary and
necessary expenses of the operation of the business, then they were
properly deductible as they were deducted and no tax was due upon them.
*
* * * * * *
We are concerned only with the question of whether these men have
entered into a conspiracy, into a scheme whereby as a result this
corporation, the Consensus Company, under the guise of commissions
distributed to its shareholders sums that actually represented a
division of profits.
"If
these defendants had that kind of plan and carried it out, if they
wilfully and intentionally entered into such an arrangement, there
wouldn't be any question of their guilt.
*
* * * * * *
It is not necessary for the government under this indictment to prove
that all of the sums so distributed to these defendants were profits. It
is not necessary that the government prove all of the figures precisely
as they are charged in the indictment. It is sufficient if you find
beyond a reasonable doubt that the defendants intentionally diverted
profits of this concern, in the amount charged in the indictment or
substantial parts thereof, diverted them from the form of profits and
received them in the form of commission."
4
Molasky, James Ragen, Jr., and the Consensus Publishing Company were
also found guilty. The government has not sought review of the Circuit
Court of Appeals' reversal of the conviction of Molasky and James Ragen,
Jr., which involved additional issues of no relevance to the respondents
here. The corporation did not take an appeal from the judgment of the
District Court.
5
United States v. Molasky, supra, 139.
6
In 1936, for example, "commissions" amounted to $119,756 as
compared with $8,816 paid out for other wages and salaries.
[53-2
USTC ¶9538]
United States of America
v. George L. Smith, Appellant
(CA-3),
In the United States Court of Appeals for the Third Circuit, No. 10,872,
206 F2d 905, August 17, 1953
On Appeal from the United States District Court for the District of New
Jersey.
Tax evasion: Immunity from prosecution: Failure to file return v.
evasion: Proof.--Taxpayer could not claim immunity from prosecution
for income tax evasion for 1946 and 1947, even assuming that the
indictment was based on information gained from his testimony, pursuant
to a subpoena, at a hearing conducted by the O. P. A. in April, 1946,
since the offenses for which he was prosecuted were not committed until
March 15, 1947, and March 15, 1948. With regard to the charged evasion
of tax for 1945, an offense alleged to have been committed prior to the
O. P. A. hearing, no opinion was rendered as to the effect of taxpayer's
immunity argument, inasmuch as the total sentence imposed upon all
counts of the indictment was sustainable as to any one count standing
alone. Proof of willful failure to file returns, plus evidence of
receipt of substantial amounts of income and other affirmative acts of
evasion, was sufficient to charge a felony under Code Sec. 145(b), as
distinguished from a misdemeanor under Sec. 145(a), so that the
six-year, rather than the three-year, statute of limitations was
applicable to the prosecution. It was not necessary to prove taxpayer's
net worth at the beginning of each taxable year involved or the exact
amount of tax evaded. There was no error in refusing to instruct the
jury as requested by taxpayer.
Charles
A. Stanziale,
1180 Raymond Boulevard
,
Newark
2, N. J., for appellant. Assistant United States Attorney,
Post
Office
Building
,
Newark
1, N. J., for appellee.
Before
BIGGS, Chief Judge, and STALEY and HASTIE, Circuit Judges.
Opinion
of the Court
STALEY,
Circuit Judge:
Defendant
seeks reversal of a judgment entered upon a jury's verdict convicting
him of violating Section 145(b) of the Internal Revenue Code.
The
indictment was returned on March 11, 1952, and contained seven counts.
The first three counts charged that defendant willfully attempted to
defeat and evade payment of his individual income taxes for the calendar
years 1945, 1946, and 1947, respectively. The four remaining counts
charged that defendant, as the officer in control of four different
corporations, willfully attempted to defeat and evade payment of income
taxes due from those corporations, for the calendar year 1946 for one of
them and for the calendar year 1947 for the other three. The jury
returned a verdict of guilty on all seven counts.
[Failure
to File Returns]
We
deem it unnecessary to set out the testimony in great detail. It is
enough to state that the Government introduced evidence, apparently
credited by the jury, sufficient to establish the following:
Defendant
was the officer in control of a number of corporations. The four named
in the indictment, Clinton-Osborne Company, Seven, Twenty-Nine, and
Thirty-Three Holding Corporations, were incorporated to hold title to
certain real estate developments. Neither defendant nor any of his four
corporations filed income tax returns for the taxable years covered by
the indictment. The revenue agent who investigated defendant's and the
corporations' financial status made a detailed analysis of bank records,
bank statements, brokerage accounts, and those books and records of the
corporations that he could lay his hands on. From this analysis, he
computed the income and tax due thereon of defendant and his
corporations. His testimony showed that defendant received substantial
amounts of income in the following forms: dividends credited to a
brokerage account conducted in his own name, dividends from shares of
stock, dividends credited to a brokerage account conducted in the name
of his brother-in-law (who, the Government contends, was merely a front
for defendant), interest on United States Treasury Bonds, short-term
capital gains on the sale of securities in his own name and in the name
of his brother-in-law, and dividends and management fees from his
corporations. The revenue agent testified that the four corporations
received substantial amounts of income from the rental and eventual sale
of their properties.
Aside
from certain contentions which will be discussed later, defendant admits
that he and his corporations had sizable incomes for the years involved,
and he admits that no returns were filed. Most of his defenses raise
questions of law rather than disputes as to the facts.
[Immunity
from Prosecution]
Defendant's
first point is relied upon as a defense to all the counts in the
indictment. He says that he is immune from prosecution for the offenses
charged. Some factual background, otherwise unrelated to the present
case, is necessary for the proper understanding and disposition of this
contention.
In
April of 1946, defendant testified, pursuant to a subpoena, at a hearing
conducted by the Office of Price Administration relating to an
investigation of possible misuse of priority ratings and sales at
over-the-ceiling prices by Daisart Sportswear, Inc., another of
defendant's corporations. His assertion of his privilege against
self-incrimination was unavailing since the Emergency Price Control Act
of 1942 1 incorporated
within it the Compulsory Testimony Act of 1893. 2 Thus,
defendant was forced to trade his constitutional right to remain silent
for the Government's statutory promise not to prosecute him for the
matters about which he testified. In spite of the immunity provisions of
the Compulsory Testimony Act, defendant was convicted of violations of
the Second War Powers Act and the Emergency Price Control Act. The court
of appeals affirmed, but the Supreme Court reversed, holding that
defendant was immune from prosecution since he had asserted his
privilege and his testimony, in part at least, had borne directly upon
the subsequent charges. See Smith v.
United States
, 337
U. S.
137 (1949). About one month after his testimony at the Office of Price
Administration hearing, defendant was subpoenaed to appear before an
agent of the Internal Revenue Bureau and to produce the books and
records of Daisart Sportswear, Inc. In October of 1946, defendant
appeared and testified.
Upon
these facts, defendant claims immunity from prosecution for the present
offenses, arguing that the information disclosed by him at the prior
hearing was available to the revenue agents and was used by them to
develop further leads which ultimately brought out the facts which were
the basis of this indictment, thus violating his immunity. Of course,
the Government denies that there was any such connection, and, at the
hearing on the matter, conducted by the district court, the revenue
agents who had investigated the fiscal affairs of defendant and his
corporations unequivocally denied that the present indictment was in any
way based upon any information gained from the Office of Price
Administration hearing. However that may be, we need not decide the
question. Even assuming that defendant is right on the facts, his legal
contention is of no help to him. The obvious defect in his argument, at
least as to the counts covering the taxable years 1946 and 1947, is that
it amounts to a claim of immunity from prosecution for crimes not yet
committed when defendant testified. Each count of the indictment charges
that the offense set out was committed on or about March 15 of the year
following that for which the tax was due. Thus, the offense of willfully
attempting to defeat and evade income taxes for the calendar year 1946
is alleged to have occurred on or about March 15, 1947, and the offense
as to the year 1947 is alleged to have been committed on or about March
15, 1948. Thus, defendant's testimony in April of 1946 cannot make him
immune from prosecution for crimes which were not committed until 1947
and 1948. The immunity granted by the Compulsory Testimony Act is
coextensive with the protection granted by the privilege against
self-incrimination. Shapiro v.
United States
, 335
U. S.
1 (1948); Heike v.
United States
, 227
U. S.
131 (1913). Hence, the witness becomes immune only if he could have
properly refused to testify because his answers would tend to
incriminate him. We fail to see how any answer could tend to incriminate
when the crime presently involved was not committed or perhaps even
contemplated when the answer was given.
United States
v. Swift, 186 Fed. 1002 (N. D. Ill., 1911); People v.
Woodson, 309
Mich.
391, 15 N. W. (2d) 679 (1944), cert. denied, 324
U. S.
853 (1945). Thus, defendant was not immune from prosecution for the
offenses charged in counts two to seven even if the revenue agents did
have access to and use the information given by defendant at the hearing
in April of 1946.
The
offense charged in count one, on the other hand, is alleged to have
occurred on or about March 15, 1946, which was before defendant
testified at the Office of Price Administration hearing. We intimate no
opinion, however, as to the effect of defendant's immunity argument upon
count one. It is familiar law that where the total sentence imposed upon
conviction on a multi-count indictment is less than that which could
legally have been imposed upon one count standing alone, the reviewing
court will not search through each count but will affirm if the
conviction is sustainable as to any one count. Pinkerton v. United
States, 328
U. S.
640, 641 n.1 (1946); Abrams v.
United States
, 250
U. S.
616 (1919). See also Hirabayashi v. United States, 320
U. S.
81, 85 (1943), applying the rule to a case of concurrent sentences. Upon
a conviction as to any one count for a violation of Section 145(b) of
the Internal Revenue Code, defendant could legally have been sentenced
to a $10,000 fine and imprisonment for five years. The total sentence
actually imposed upon his conviction on all seven counts was a $10,000
fine and imprisonment for two years. Hence, his total sentence upon all
seven counts was less than could legally have been imposed upon one
count standing alone. Therefore, the rule stated above governs here, and
we need not review each separate count.
[Failure
to File Return v. Evasion]
We
come now to the merits of the case. The indictment charges Section
145(b) violations. Defendant says that if there is any crime at all, it
is a Section 145(a) violation. The difference is not academic. Aside
from the fact that subsection (a) is a misdemeanor, carrying lighter
penalties than the felony described in subsection (b), the statute of
limitations for (b) is six years; 3 for (a) it
is three years./4/ The indictment charges offenses occurring in 1946,
1947, and 1948, but it was not returned until March 11, 1952.
Consequently, if the Government has not proved a Section 145(b) case,
the prosecution is barred and the judgment must be reversed.
Subsections
(a) and (b) of Section 145 are as follows:
"(a)
Failure to file returns, submit information, or pay tax. Any person
required under this chapter to pay any estimated tax or tax, or required
by law or regulations made under authority thereof to make a return or
declaration, keep any records, or supply any information, for the
purposes of the computation, assessment, or collection of any estimated
tax or tax imposed by this chapter, who willfully fails to pay such
estimated tax or tax, make such return or declaration, keep such
records, or supply such information, at the time or times required by
law or regulations, shall, in addition to other penalties provided by
law, be guilty of a misdemeanor and, upon conviction thereof, be fined
not more than $10,000, or imprisoned for not more than one year, or
both, together with the costs of prosecution.
"(b)
Failure to collect and pay over tax, or attempt to defeat or evade tax.
Any person required under this chapter to collect, account for, and pay
over any tax imposed by this chapter, who willfully fails to collect or
truthfully account for and pay over such tax, and any person who
willfully attempts in any manner to evade or defeat any tax imposed by
this chapter or the payment thereof, shall, in addition to other
penalties provided by law, be guilty of a felony and, upon conviction
thereof, be fined not more than $10,000, or imprisoned for not more than
five years, or both, together with the costs of prosecution." 26 U.
S. C. §§ 145(a) and (b).
Citing
Spies v. United States, 317 U. S. 492 (1943) [43-1 USTC ¶9243],
the authoritative interpretation of these two subsections, defendant
asserts that the gist of subsection (b) is the filing of a false return
and that, since the proof here is that no return at all was filed, the
Government has proved only a subsection (a) violation. Defendant is
wrong. The Spies case furnishes absolutely no support for such a
statement. The theory of the prosecution here is that this is a case of
a willful failure to file returns and pay the taxes (which would be
enough to sustain a 145(a) misdemeanor conviction), plus evidence of
such other affirmative acts as the Spies case said were
sufficient to raise the offense to the degree of a felony under 145(b).
There the Court explained the difference in this manner:
"The
difference between the two offenses, it seems to us, is found in the
affirmative action implied from the term 'attempt,' as used in the
felony subsection. . . . We think that in employing the terminology of
attempt to embrace the gravest of offenses against the revenues,
Congress intended some willful commission in addition to the willful
omissions that make up the list of misdemeanors. Willful but passive
neglect of the statutory duty may constitute the lesser offense, but to
combine with it a willful and positive attempt to evade tax in any
manner or to defeat it by any means lifts the offense to the degree of
felony." 317
U. S.
at 498-499.
Obviously,
filing a false return is one instance of such affirmative conduct, United
States v. Croessant, 178 Fed. (2d) 96 [49-2 USTC ¶9483] (C. A. 3,
1949), cert. denied, 339
U. S.
927 (1950), but it is not the only instance. In fact, the Spies
case states at page 499:
"By
way of illustration, and not by way of limitation, we would think
affirmative willful attempt may be inferred from conduct such as keeping
a double set of books, making false entries or alterations, or false
invoices or documents, destruction of books or records, concealment of
assets or covering up sources of income, handling of one's affairs to
avoid making the records usual in transactions of the kind, and any
conduct, the likely effect of which would be to mislead or to conceal.
If the tax-evasion motive plays any part in such conduct the offense may
be made out even though the conduct may also serve other purposes such
as concealment of other crime."
[Willful
Attempts to Evade Tax]
Subjected
to the test set out in Spies, we think the Government's evidence
here was literally full of "affirmative acts" and "acts
of commission" and was thus clearly sufficient to sustain the
145(b) conviction. There was evidence that defendant and his
corporations received substantial amounts of income and that no returns
were filed. The "willfulness" element is a question of fact, Battjes
v. United States, 172 Fed. (2d) 1 (C. A. 6, 1949) [49-1 USTC ¶9149];
Maxfield v. United States, 152 Fed. (2d) 593 (C. A. 9, 1945)
[46-1 USTC ¶9115], cert. denied, 327
U. S.
794 (1946), and there was ample evidence from which the jury could have
inferred it here. Furthermore, there was credible evidence that
defendant conducted brokerage accounts in the name of Jeffrey Baker, his
brother-in-law; falsely represented to the investigating agents of the
Bureau of Internal Revenue that certain books and records of the
corporations had been turned over to the purchasers of their properties,
United States v. Beacon Brass Co., 344 U. S. 43 (1952) [52-2 USTC
¶9528]; concealed his assets by having his accountant 5 change the
records so that they would show his check to the Jeffrey Realty Company
as a loan to that company by Jeffrey Baker and made further requests
that the accountant make additional alterations in the records so that
loans that appeared in his name would show as having been made by
members of his family; 6 and used
corporate funds for personal items, such as to pay his jockey, to pay
for insurance on his horses, to pay for repairs to his home, and to buy
a television set. It requires no elaboration to show that these are just
the kind of affirmative acts the Supreme Court was talking about in the Spies
case.
Defendant
would palliate the effects of these acts by assigning other reasons as
their causes. But, "Such inferences are for the jury. If on proper
submission the jury found these acts [those quoted above] taken together
with willful failure to file a return and willful failure to pay the
tax, to constitute a willful attempt to evade or defeat the tax, we
would consider conviction of a felony sustainable." 317
U. S.
at 500.
[Proof
of Net Worth]
Next,
we are told that there is a fatal defect in the Government's proof in
that there is no showing of defendant's net worth as a starting point
for each taxable year. But no such showing is necessary because this is
not a net-worth case. The prosecution relied upon evidence of specific
items of income which, after allowance for known deductions and
exemptions, became net taxable income. Here, the Government did not rely
upon bald cash items and let it go at that. Whether the item was cash or
a check, it was traced to its source and shown to be income within the
legal sense of that term. Thus, elements necessary to a net-worth case
are inapplicable here.
[Proof
of Amount of Income]
Defendant
says that there is another gap in the proof because the Government did
not allow him all the deductions and exemptions to which he says he is
entitled. He argues that to compel him to rebut the Government's prima
facie case is to reverse the traditional rule that the prosecution has
to prove its case beyond a reasonable doubt. We are satisfied that there
has been no such reversal here. Defendant filed no returns and refused
to make his records available to the investigating revenue agents. 7 Having
reconstructed defendant's income from what material it could unearth,
the Government showed substantial net income. Defendant complains,
however, that he was not allowed exemptions for his wife and his two
children, that he had certain bad debts, charitable contributions, and
expenses which are deductible. The trouble is that there is no proof as
to these matters or, where there are intimations in the record, the jury
did not draw the inference which defendant seeks. The Government made
out a case for the jury by showing substantial net income. Of course,
defendant could controvert this evidence by testimony that he was
entitled, under the law, to certain deductions which the Government did
not allow him.
United States
v. Link, 202 Fed. (2d) 592 (C. A. 3, 1953) [53-1 USTC ¶9230].
The only testimony he introduced on this point was in attempting to
establish certain business expenses. No one would doubt that the jury
was not bound to believe the underlying facts upon which he says those
deductions are based. Furthermore, even were he credited with those
deductions, there would still be substantial amounts of income for each
year. That is sufficient, for it is not necessary that the exact amount
of tax evaded be proved, United States v. Johnson, 319 U. S. 503
(1943) [43-1 USTC ¶9470]; nor is the prosecution required to establish
the precise amount which is stated in the indictment. Gendelman v.
United States
, 191 Fed. (2d) 993 (C. A. 9, 1951) [51-2 USTC ¶9474], cert.
denied, 342
U. S.
909 (1952).
Defendant
relies upon United States v. Fenwick, 177 Fed. (2d) 488 (C. A. 7,
1949) [49-2 USTC ¶9448] and Bryan v. United States, 175 Fed.
(2d) 223 (C. A. 5, 1949) [49-1 USTC ¶9322], aff'd 338
U. S.
552 (1950) [50-1 USTC ¶9140]. Both are net-worth cases, and both
reversed convictions because, in showing the net worth at the beginning
of the year involved, the prosecution did not establish that the
defendant did not have other assets which could have been used to make
up the increase in net worth which showed up at the end of the year. We
do not quarrel with those cases, but they have no relation to our
problem. There, the Government established a faulty starting point and
asked the jury to infer that the increase in net worth was income. We
think it part of the Government's prima facie case to establish, at
least, that what it charges against defendant is income for the year
involved. It has not established its prima facie case by showing that
defendant has some money and then asking the jury to infer that that
money is "income" for the year involved. Here, the matter was
not left to inference. The prosecution proved income in the legal sense.
[Jury
Instructions]
Finally,
it is said that the trial judge's refusal to charge one of defendant's
requests was reversible error. The point is without merit because, in
different words, defendant got substantially the charge he requested. 8 Certainly,
one of the prerogatives of a federal trial judge is to phrase his own
charge. If it states the applicable law correctly, as this charge did,
defendant may not be heard to complain that it offends his literary
taste. Barshop v.
United States
, 191 Fed. (2d) 286 (C. A. 5, 1951) [51-2 USTC ¶9425], cert.
denied, 342
U. S.
920 (1952); Wright v. United States, 175 Fed. (2d) 384 (C. A. 8),
cert. denied, 338
U. S.
873 (1949). The charge requested by defendant, the substance of which
was included in the court's instructions, told the jury that a mere
failure to file a return would not sustain a conviction here. In view of
the offenses charged and the issues as made during the trial, defendant
was entitled to no more on that point.
The
judgment of the district court will be affirmed.
1
"No person shall be excused from complying with any requirements
under this section because of his privilege against self-incrimination,
but the immunity provisions of the Compulsory Testimony Act of February
11, 1893 (U. S. C., 1934 edition, title 49, sec. 46), shall apply with
respect to any individual who specifically claims such privilege."
§202(g), 56 Stat. 30 (1942).
2
"No person shall be excused from attending and testifying or from
producing books, papers, tariffs, contracts, agreements, and documents
before the Interstate Commerce Commission, or in obedience to the
subpoena of the Commission, . . . on the ground or for the reason that
the testimony or evidence, documentary or otherwise, required of him,
may tend to criminate him or subject him to a penalty or forfeiture. But
no person shall be prosecuted or subjected to any penalty or forfeiture
for or on account of any transaction, matter or thing, concerning which
he may testify, or produce evidence, documentary or otherwise, before
said Commission, or in obedience to its subpoena, . . . Provided,
That no person so testifying shall be exempt from prosecution and
punishment for perjury committed in so testifying." 27 Stat. 443
(1893), 49
U. S.
C. A. §46 (1951).
3
26 U. S. C. §3748(a)(2).
4
Id.
(a).
5
In fairness to the accountant, it should be noted that he made the
change only after demanding and receiving a letter from defendant
authorizing the alteration.
6
This the accountant refused to do, and his services were terminated.
7
The record is rather ambiguous as to whether the books and records were
produced a few weeks before the trial pursuant to a subpoena, but, in
any event, it is clear that they were not produced before the indictment
was returned.
8
This is what he asked for:
"A
person who files no return has made no misrepresentation. He has simply
failed to do what the statute requires him to do; but the person who
files a willful false return has endeavored to mislead the Government.
He creates the appearance of having complied with the law; whereas, his
neighbor who has filed no return does no such thing. Not only has he
created the appearance of complying but that apparent compliance stands
a good chance of remaining unaltered for the tax authroities cannot
possibly audit every taxpayer's return every year. This is the reason
Section 145(a) is a separate offense from Section 145(b), because under
Section 145(b) there must be an affirmative act to create a willful
attempt to defeat and defraud."
This
is what he got:
"In
order to constitute a violation of the statute which denounces this
offense there must be a wilful and positive attempt to evade or defeat
the tax in some manner or by some means. . . . Any conduct the likely
effect of which would be to mislead or conceal may be indicative of an
affirmative wilful attempt to evade or defeat a tax due. . . .
"There
has been reference made in the course of the trial to another section of
this statute which charges as a violation of the law failure to file an
income tax. I believe that counsel in his summation admitted that for
the years in question, the defendant failed to file an income tax. But
that is not the charge here. That which distinguishes the present
offense from the offense of failing to file an income tax is the
wilfulness and the intent to defraud and defeat the tax. He is not
charged for failing to file the report, but he is charged with wilfully
attempting to evade or defeat a tax due. Now, the mere fact, as I say,
that he failed to file does not constitute a violation of the particular
section a violation of which is charged in this indictment."