Brief for the Respondent in Opposition — Soeder v. United States

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CITATIONS

Cases:

Burroughs Bldg. Material Co. v. Commissioner, 47 F.2d 178. 7,8

Chicago, R. I. & P. Ry Co. v. Commissioner, 47 F. 2d 990,

certiorari denied, 284 U. 8. 618- vat Pore ate 7

Commissioner v. Heininger, 320 U. 8. 467 se ewan hac os 7,8

Eversman v. Shipman Co., 115 Ohio St. 269... - 9

Great Northern Ry. Co. v. Commissioner, 40 F. 2d 372, cer-

tiorari denied, 282 U.S. 855__- Satins wines tee 7,8

Harden M. Loan Co. v: Commissioner, 137 F. 2d 282, i

certiorari denied, $20°U. S, 701.252 050. 2. eee 7

SRRONE: VDE GUO GOO th. Ae Bodo eho d ene ean oucces 10

Helvering v. Superior Wines & Liquors, 134 F. 2d 373____- 7 i

Morrissey v. Commissioner, 296 U. 8. 344- pi gmcwhawa s 10 ‘

Rugel v. Commissioner, 127 F. 2d 393_- saci wer nace Fae | ee

Sweeny v. Driller Co., 122 Ohio St. 16.............._--- 9

Tunnel R. R. v. Consmiesianer, 61 F. 2d 166, certiorari

bi ae oy tr ES aoe oo oa eu naenuniwes nceccoees 7

Statutes: Pal

Revenue Act of 1926, c. 27, 44 Stat. 9, Sec. 1114... ____- ll §

Revenue Act of 1936, c. 690, 49 Stat. 1648: :

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BR oe co eeu anes ke, eee Bape fer Bae HOGS 12 é

eit oA beers aes ne een ee eae 13 2

SE RSC OES ERO pares one pee ea 10, 13

Ohio General Code, Secs. 5509-5513__..____.________-._- 9

Throckmorton’s Ohio Code, Annotated (1940 Ed.):

Sections 1080-1 to 1080-23______._______ Sea eee 3,7

Miscellaneous:

8 Fletcher, Cyclopedia of Corporations:

SS INR nad pried eaters cme meme Stree Nicene die oe 9

a Ran ene oe ee ae 8

| 5G AACE Pe ON ip ee ny On Fem 2 8

Rules of the Supreme Court of the ‘United States:

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600509—44——-1

Guthe Supreme Court of the nited States

OcrosBerR TERM, 1944

No. 195

WILLIAM J. SorpeER AND EpWARD A. SOEDER,

PETITIONERS

v,

Unitrep States OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES CIRCUIT COURT OF APPEALS FOR THE SIXTH

CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The District Court delivered no opinion. The

opinion of the Circuit Court of Appeals (R. 643-

644) is reported at 142 F. (2d) 236.

JURISDICTION

The judgment of the Circuit Court of Appeals

was entered on April 20, 1944 (R. 643-644).

A petition for rehearing was denied on May 22,

1944 (R. 659). The petition for a writ of cer-

tiorari was filed on June 26, 1944. The jurisdic-

tion of this Court is invoked under Section 240

(1)

2

(a) of the Judicial Code, as amended by the Act

of February 13, 1925.

QUESTIONS PRESENTED

Petitioners, who are the sole stockholders and

officers of a milk company, were convicted of pro-

curing and counselling the preparation and filing

of false and fraudulent tax returns of the com-

pany for the years 1936 and 1937, and of attempt-

ing to evade the company’s taxes for such years.

The questions apparently presented by the peti-

tion’ are as follows:

1. Did the trial court err in refusing to charge

the jury, as requested by petitioners, that the com-

pany, which kept its books on the accrual basis,

was entitled to deduct for 1936 and 1937, if found

to be ordinary and necessary business expenses,

certain payments made to petitioners during those

years to reimburse them for unlawful rebates

given to customers of the company in 1933, 1934,

and 1935?

9. Did the trial court err in charging the jury

as a matter of law that the company was to be

regarded as a corporation under Section 1001 (a)

(2) of the Revenue Act of 1936, and hence was

required to file income and excess-profits tax re-

turns for the years 1936 and 1937?

1 The petition contains no specific statement of the ques-

tions presented, as required by Rule 38 (2). While a failure

to comply with this requirement may be sufficient reason for

denying the petition (Rule 38 (2), and cases cited), we shall

undertake to show that the petition also fails on the merits.

BED Bie TE Hg

3

STATUTES INVOLVED

The pertinent statutory provisions are set forth

in the Appendix, infra, pp. 11-13.

To ES OATS

eRe

STATEMENT

Petitioners, William J. Soeder and Edward A.

Soeder, are secretary-treasurer and president, re-

spectively, of Soeder Sons Milk Company (R. 60,

63, 622), and each owns fifty per cent of the com-

pany’s stock (R. 590). On May 12, 1943, they

were convicted in the District Court for the North-

ern District of Ohio, Eastern Division, of procur-

ing, counseling and advising the preparation and

presentation of false and fraudulent tax returns

of Soeder Sons Milk Company for the years 1936

and 1937, and of attempting to defeat and evade

income and excess profits taxes of the company

during such years (R. 24-25). Each was sen-

tenced to imprisonment for one year and a day,

and fined $5,000 and costs (R. 26-28). On appeal

to the Circuit Court of Appeals for the Sixth Cir-

cuit, the convictions were affirmed (R. 643-644).

The evidence relating to each of the questions

presented may be summarized as follows:

1. Soeder Sons Milk Company engaged in a

general dairy business in Cleveland, Ohio (R. 589).

From June 22, 1933, to July 1, 1935, there was in

effect in Ohio a statute commonly called the Burk-

Herner Act (Throekmorton’s Ohio Code, Anno-

tated (1940 Ed.), Sections 1080-1 to 1080-23,

inclusive), which established a general scheme of

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regulation of the milk industry in the state. The

statute made unlawful the sale of milk at a price

lower than the minimum prescribed by the Ohio

Milk Marketing Commission. Petitioners violated

the Act by secretly paying cash rebates to numer-

ous customers of Soeder Sons Milk Company (R.

90, 94, 97, 362, 373, 383, 385, 387). During all of

the years in which the Act was in effect, as well

as in 1936 and 1937, the years involved in the

indictment, some of the company’s income was

diverted directly to petitioners and was neither

recorded as income on the company’s books nor re-

ported in its tax returns (R. 96-100, 604-605).

The company’s bookkeeper testified that from 1934

to 1938 varying amounts of cash receipts were

segregated and paid directly to the petitioners as

reimbursement to them for the rebates which they

had paid to the customers (R. 96-100). Petition-

ers made no attempt to show the extent, if any, to

which the income so diverted in 1936 and 1937

represented rebate payments for which petitioners

had not been reimbursed in prior years.

The books of the company were kept on the

accrual basis (R. 399).

Petitioners requested the trial court to charge

the jury that in computing the income-tax liability

for the taxable years involved, the jury should de-

duct all rebates and discounts which were found

to be ordinary and necessary business expenses

during such years, even though such payments

—

o

were made in violation of the Burk-Herner

Act (Requests Nos. 8 and 9, R. 583-584). The

court refused to give such an instruction, but

charged the jury that petitioners were not guilty

of fraud if they merely attempted to reduce taxes

by honestly claiming deductions to which they

believed the company was legally entitled (R.

556).

2. On January 2, 1922, petitioners and three oth-

ers (Henry Soeder, Daisy Soeder, and Elmer G.

Derr) executed articles of incorporation of ‘‘Soe-

der’s Sons Company” for the purpose of carrying

on a general dairy business in Cleveland (R. 638).

These articles were cancelled by the Secretary

of State of Ohio on February 15, 1924, for

failure to pay franchise taxes, were reinstated

on January 22, 1935, and were again cancelled for

the same reason on February 15, 1926, without

subsequent reinstatement (R. 359). Some time

thereafter the company began to use the name

“Soeder Sons Milk Company”’ instead of ‘‘Soe-

der’s Sons Company’”’ (R. 590). Petitioners in-

tended to amend the articles of incorporation to

show this change of name, but no such action was

actually taken (R. 590). A state corporation

franchise tax return for the year 1934 was filed

by the company with the Secretary of State of

Ohio in 1935, but was returned by him with the

statement that he had no record of a corporation

6

by the name of ‘“‘Soeder Sons Milk Company”

(R. 418). A personal-property tax return for the

year 1934 was filed with the Ohio Department of

Taxation by the company as a corporation (R.

340). During 1935 the corporation’s tax account-

ant discussed with a representative of the Bureau

of Internal Revenue the question whether the com-

pany should continue to file corporate income-tax

returns, and was advised that it should (R. 418).

Petitioners frequently referred to themselves as

officers and stockholders of the corporation (R.

63, 104, 108, 176, 377, 438-".9, 589-590, 622), and

they described the company as a corporation (R.

590, 622).

The trial court charged the jury as a matter of

law that the Soeder Sons Milk Company was a

corporation for tax purposes (R. 553), and re-

fused to grant petitioners’ requested charge that

the corporate status of the company was a question

of fact to be determined by the jury (R. 585).

ARGUMENT

1. The refusal of the trial court to give the re-

quested instructions charging the jury to deduct

the rebate payments if found to be ordinary and

necessary business expenses was clearly correct on

two separate grounds.

First, since the company kept its books on the

accrual basis, any deductions for rebates, if allow-

able at all, were allowable only for 1933, 1934, and

1935, the years in which they were actually paid

7

to the customers and in which the sales to which

they relate were made. The years involved in the

indictment are 1936 and 1937. The Burk-Herner

Act expired on July 1, 1935. No comparable

statute was in effect during 1936 and 1937, and

there is no evidence in the record of any rebate

payments made in 1936 or 1937 or with respect to

1936 and 1937 sales.

Secondiy, since the rebates were paid in vio-

lation of law, they were not deductible as ordi-

nary and necessary business expenses under

Section 23 (a) of the Revenue Act of 1936,

Appendix, infra, p. 11. Great Northern Ry.

Co. v. Commissioner, 40 F. (2d) 372 (C. C. j

A. 8), certiorari denied, 282 U. 8. 855; Burroughs i

Bldg. Material Co. v. Commissioner, 47 F. (2d) 178

(C. C. A. 2); Chicago, R. I. & P. Ry. Co. v. Com-

missioner, 47 F. (2d) 990 (C. C. A. 7), certiorari

denied, 284 U. S. 618; Tunnel R. R. v. Commis-

stoner, 61 F. (2d) 166 (C. C. A. 8), certiorari

denied, 288 U. 8. 604; Rugel v. Commissioner, 127

F, (2d) 393 (C. C. A. 8); Helvering v. Superior

Wines &: Liquors, 134 F. (2d) 373 (C. ©. A. 8);

Harden M. Loan Co. v. Commissioner, 137 F. (2d)

282 (C. C. A. 10), certiorari denied, 320 U. S. 791.

Commissioner v. Heininger, 320 U. 8. 467, upon

which petitioners principally rely, does not sup-

port their contention. The deduction permitted

there was a lawful payment of attorneys’ fees in-

curred in defending a business against a fraud or-

der of the Post Office Department. In this case

ii _

8

the rebate payments constituting the alleged deduc-

tions were themselves unlawful.’

The only significance of the rebate payments was

their bearing on the question whether petitioners

honestly thought such payments were deductible,

and were therefore not guilty of wilfully attempt-

ing to evade taxes. As has already been noted,

however, the jury were properly instructed by the

court on this question, and no complaint is made

here in that regard.

2. The evidence in the record clearly shows that

the business of Soeder Sons Milk Company was

conducted as a corporation, and that petitioners

referred to it as a corporation and described them-

selves as officers and stockholders thereof. No evi-

dence was presented to the contrary. Since the

facts were undisputed, the question of corporate

existence—t. e., the legal significance of such

facts—was one of law to be determined by the

court. See 8 Fletcher, Cyclopedia of Corpora-

tions, See. 3784, p. 79, Sec. 4061, p. 541.

Petitioners’ contention that the ruling of the

lower court on this point was erroneous is not

founded on any evidence showing that the busi-

ness was not conducted as a corporation. Rather,

2 In the Heininger decision this Court cited Great North-

ern Ry Co. v. Commissioner, Burroughs Bldg. Material Co.

v. Commissioner and Rugel v. Commissioner, supra, with

apparent approval as examples of the basic principle gov-

erning the nondeductibility of expenditures proscribed by

federal or state policies.

9

it is based wholly on the supposition that the cor-

poration’s existence had been terminated as a legal

consequence of the cancellation of its articles of

incorporation by the Secretary of State of Ohio

in 1926. The fallacy of petitioners’ argument

lies in the erroneous premise that the cancellation

of the articles of incorporation for nonpayment

of franchise taxes terminated the existence of the

corporate entity. The Supreme Court of Ohio

has held to the contrary. Eversman v. Shipman

Co., 115 Ohio St. 269; Sweeny v. Driller Co., 122

Ohio St. 16. In construing Sections 5509 to 5513,

inclusive, of the Ohio General Code, the court held

in these cases that cancellation of the articles

of incorporation by the Secretary of State for

nonpayment of franchise taxes, pursuant to Sec-

tion 5509, does not automatically terminate the

existence of the corporation, and that even after

such cancellation the final power to forfeit and

annul corporate privileges and franchises rests

in a court of competent jurisdiction to be exercised

in a quo warranto proceeding.

Nor was the corporate existence terminated by

the insertion of the word “‘ Milk”’ in the name of the

company, in view of the well-established principle

that a change in name, even though unauthorized

or legally insufficient, neither affects the continued

existence of a de jure or a de facto corporation

nor converts a de jure corporation into a de facto

one. 8 Fletcher, Cyclopedia of Corporations, See.

3782, p. 78.

10

The Distriet Court was wholly justified, there-

fore, in concluding that the company had the status

of a corporation under state law. But, in any

event, under Section 1001 (a) (2) of the Revenue

Act of 1936, Appendix, infra, p. 13, the company

would be taxable as a corporation even if it were

only a de facto corporation or an unincorporated

association. Hecht v. Malley, 265 U.S. 144; Mor-

rissey Vv. Commissioner, 296 U. S. 344.

CONCLUSION

The decision below is correct. There is no

conflict of decisions, and there is no occasion

for further review. Accordingly, the petition for

a writ of certiorari should be denied.

Respectfully submitted.

CHARLES Fany,

Solicitor General.

SAMUEL QO. CuLarK, Jr.,

Assistant Attorney General.

SEWALL Key,

Rosert N. ANDERSON,

SPURGEON AVAKIAN,

Special Assistants to the Attorney General.

JULY 1944.