Petition — INGREDIENTENT TECHNOLOGY CORP. v. UNITED STATES (Nos. 82-1526, 82-1458)

8 2 1 5 2 6 Ottice Supreme Court, US.

ELLE D

MAR 4 1983

Supreme Court of the Unite Sister ——

October Term, 1982

IN THE

INGREDIENT TECHNOLOGY CORPORATION,

formerly known as SuCrest Corporation,

Petitioner,

vs.

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

JuLes RitHoiz

Attorney for Petitioner

Ingredient Technology Corporation

80 Pine Street

New York, New York 10005

(212) 422-4030

Of Counsel:

KostELanetz & RiTHOLz

Exuiot SitbveRMAN

Davi F’, AxELRop

Questions Presented

1. Did the Court of Appeals erroneously uphold a crim-

inal conviction based on an unprecedented and unforesee-

able interpretation of the Internal Revenue Code, as to

which petitioner did not have fair notice, in violation of

the due process clause of the fifth amendment to the Con-

stituticn of the United States?

2. Did the Court of Appeals err in judging the issue

of fair notice under a subjective standard, rather than

under the objective standard of whether the law was clear

to a reasonable person, in conflict with decisions of this

Court and of other federal courts of appeals’

Parties

The parties to this proceeding are Ingredient Tech-

nology Corporation, formerly known as SuCrest Cor-

poration, petitioner, and the United States of America,

respondent.* Robert M. Rapapert, who was also a party

to this action in the United States Court of Appeals for the

Second Circuit, has filed a separate petition for a writ of

certiorari.

* Ingretec, S.A. is a subsidiary of Ingredient Technology Cor-

poration.

Iit

TABLE OF CONTENTS

Questions Presented

Parties

Opinion Below

Jurisdiction

Constitutional and Statutory Provisions

Statement of the Case

A. Introduction

B. Background

C. The 1975 Transaction

D. The 1976 Transaction

E. The Rulings of the Courts Below

Reasons for Granting the Writ

I. SuCrest’s Conviction Was Based on an Unfore-

seeable Interpretation of the Internal Revenue

Code, Depriving It of Its Right to Fair Notice

A. The Interpretation of the Internal Revenue

Code by the District Court and the Court of

Appeals Was Not Foreseeable

B. Au Unforeseeable Expansion of Criminal

Tax Liability Violates the Due Process

Clause

II. The Decision of the Second Circuit, Which

Judged the Issue of Fair Notice Under a Sub-

jective Standard, Is in Conflict With the Deci-

sions of Other Federal Courts of Appeals

Conclusion .

PAGE

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15

16

21

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TABLE OF AUTHORITIES

PAGE

Cases:

Atlantic Coastline R.R. v. Phillips, 332 U.S. 168 (1947) 21n,

Barber-Greene Americas, Ine., 35 Tt. C. 356 (1960) 13n., 14

Bouie v. City of Columbia, 378 U.S. 347 (1964) 15

Chamberlin v. Comm/’r, 207 F.2d 462 (6th Cir. 1953),

cert, denied, 347 U.S. 918 (1954) 13

Comm/’r v. Newman, 159 F.2d 84» (2d Cir. 1947) 21

Comm’r v. Wilcox, 327 U.S. 404 (1246) 16

Connally v. General Constr. Co., 269 U.S, 385 (1926) .. 15n.

Douglas v. Buder, 412 U.S. 480 (1973) 15

Helvering v. Gregory, 69 F.2d 809 (2d Cir. 1934), aff'd,

293 U.S. 465 (1935) vores OAT

James v. United States, 366 U.S. 213 (1961) 16,17

Knetsch v. United States, 364 U.S. 361 (1960) 13n.

Lanzetta v. New Jersey, 506 U.S, 451 (1939) 15n.

Marks v. United States, 430 U.S. 188 (1977) 15

Rushing v. Comm’r, 441 F.2d 593 (5th Cir. 1971) 13n.

Rutkin v. United States, 343 U.S. 130 (1952) 16

Spies v. United States, 317 U.S. 492 (1943) 21

United States v. Critzer, 498 F.2d 1160 (4th Cir.

1974) Pepin y hd ane 17, 18-19

United States v. Dixon, 536 F.2d 1: 388 (2d Cir. 1976) . 18n.

United States v. Garber, 607 F.2d 92 (Sth Cir. 1979) 19

United States v. Harris, 347 U.S. 612 (1954)... 15,17

United States v. Pomponio, 429 U.S. 10 (1976) .

William Powell Co. v. United States, 524 F.Supp. 841

a IU MN sascha pss ashi neces canscceccrnceseaccioinnes 12n.

PAGE

Statutes and Constitutional Provisions:

18 U.S.C. § 371 2,7,8

26 U.S.C. § 471 2,11, 13

26 U.S.C. § 472 2,11

26 U.S.C. § 7201 2,7

26 U.S.C. § 7206 2,7

28 U.S.C. § 1254 2

U.S. Constitution, Amendment 5 1

Administrative Rules and Regulatiors:

26 C.F.R. § 1.471-1 2, 11-12

26 C.F.R. § 601.601 15

Rev, Proce. 78-24, 1978-2 C.B. 503 15

Rev. Rul. 79-188, 1979-1 C.B. 191 14

Other Authorities:

Fuller, Business Purpose, Sham Transactions and the

Relation of Private Law to the Law of Taxation,

37 Tul. L. Rev. 353 (1963) 13

Note, Criminal Liability for Willful Evasion of an

Uncertain Tax, 81 Colum. L. Rev. 1348 (1981) 18, 20

Panel, Substance vs. Form in Corporate Activities, 20

N.Y.U. Inst. on Fed. Tax. 975 (1962). 13

Schaffer, Another Guideline to the Role of Form in

Corporate Transactions, 56 Taxes 160 (1978) 13

No.

IN THE

Supreme Court of the United States

October Term, 1982

InGREDIENT TECHNOLOGY CORPORATION,

formerly known as SuCrest Corporation,

Petitioner,

Vs.

Unirep Stares or AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Ingredient Technology Corporation respectfully re-

quests that a writ of certiorari issue to review the opinion

and judgment of the United States Court of Appeals for

the Second Circuit, entered on January 5, 1983.

Opinion Below

The opinion of the United States Court of Appeals for

the Second Circuit has not yet been reported. It is re-

produced herein at Al-A26."

The United States District Court for the Southern

District of New York issued no opinion on the issue raised

by this petition.

Jurisdiction

The decision of the United States Court of Appeals

for the Second Circuit was entered on January 5, 1983.

This Court’s jurisdiction is invoked pursuant to 28 U.S.C.

§ 1254(1).

Constitutional and Statutory Provisions

The Fifth Amendment to the Constitution of the United

States provides, in relevant part, that ‘*{n]o person shall

be .. . deprived of life, liberty, or property, without due

process of law...."’

The following statutes and regulations are reproduced

in the Appendix: 18 U.S.C. § 371, 26 U.S.C. ¢ 7201, 26

US.C. § 7206, 26 U.S.C. § 471, 26 U.S.C. § 472, and 26 C.F.R.

§ 1471-1,

* References preceded by “A” are to the Appendix to this petition ;

“Tr.” refers to the trial transcript; “ITC Br.” refers to Ingredient

Technology Corp.’s brief in the Court of Appeals; and “R.Cert.Pet.”

refers to the Petition for a Writ of Certiorari filed in this Court by

co-petitioner Robert M. Rapaport.

Statement of the Case

A. Introduction

This Court should review the decision of the Court of

Appeals which violates the Constitutional standards previ-

ously established by this Court, conflicts with decisions of

other courts of appeals, and creates an unjust and uncon-

stitutional rule which will adversely affect the administra-

tion of federal tax and criminal laws.

The Court of Appeals adopted a novel and totally un-

precedented interpretation of the provisions of the Internal

Revenue Code relating to inventories and then upheld a

criminal conviction based on petitioner’s having failed to

foresee that this gloss would be added to the statute. In

conflict with settled law in other Circuits, under which

criminal liability may attach only to conduct which a rea-

sonable person could have known was proscribed, the court

below held that this retroactive expansion of criminal

liability did not violate the due process clause because evi-

dence in the record could have supported a finding that

employees of the corporation subjectively believed their

conduct to be unlawful. This decision is not only in con-

flict with rulings of other federal courts of appeals, but

also so far departs from previously settled principles of

Constitutional law and federal tax policy as to call for an

exercise of this Court’s power of supervision. Supreme

Court Rule 17.1 (a).

B. Background

Petitioner Ingredient Technology Corporation, formerly

known as SuCrest Corporation (‘‘SuCrest’’), was, during

the period of time in question, a publicly-held company

4

which was engaged in the business of buying, selling and

refining sugar. The Government charged that SuCrest and

its then President, Robert M. Rapaport,” engaged in a

scheme to evade SuCrest’s corporate taxes by the improper

inclusion of certain sugar purchases in its inventory, as

follows.

Due to dramatic increases in the price of domestic raw

sugar in 1974, SuCrest shifted, on the recommendation of

accountants, from a FIFO (‘‘ First In First Out’’) to LIFO

(‘*Last In First Out’’) inventory accounting method. Un-

der the LIFO method, inventories are valued at the price

of the earliest purchases, and the cost of goods sold is

valued at the price of the latest purchases (Tr. 514). In

this way, the LIFO method matches current costs against

current revenues (Tr. 671, 672-673).

Toward the end of its fiscal year 1975, SuCrest dis-

covered that its inventory of sugar had fallen to historically

low levels. Since this was a period of rapid inflation in

sugar prices, the low inventory level meant that the com-

pany would ‘‘invade’’ its LIFO inventory base, and meas-

ure its revenues against the cost basis of ‘‘old’’ (and

therefore cheap) sugar, instead of against ‘‘current’’ (and

therefore relatively expensive) sugar.** Recognition of

profit on this distorted basis would have artificially exag-

* Mr. Rapaport has filed a separate Petition for a Writ of Cer-

tiorari in this Court. Also indicted with SuCrest and Mr. Rapaport

was Allerton D. Marshall, the Treasurer of SuCrest. He was ac-

quitted at trial.

** The essence of both FIFO and LIFO inventory theories, of

course, is that both are equally fictional; in neither instance does the

priority in which the commodity is used to calculate cost of goods sold

follow the actual movement of real sugar (Tr. 1540, 1609-10, 1988).

5

gerated the profits, and therefore the taxes, of SuCrest,

defeating the purpose of the LIFO election.

C. The 1975 Transaction

In order to postpone the recognition of profits thus

generated, SuCrest adopted the following procedure:

Shortly before the end of its fiseal year, SuCrest entered

into a written agreement with one of its suppliers,

Czarnikow-Rionda Co. (‘‘Rionda’’), to purchase sufficient

quantities of sugar to buffer its LIFO base. Simultaneously

with this agreement, the parties reached an oral under-

standing that early in the 1976 fiscal year Rionda would

repurchase a similar amount of sugar based upon market

prices at that time. At the time of the original purchase,

both Rionda and SuCrest entered ato opposite transactions

on the futures exchange, thus “hedging’’ their purchases."

Before the end of the fiscal year 1975, Rionda declared

to SuCrest the sugar cargoes of two ships, thereby passing

* A virtually identical result could have been achieved, in a man-

ner that the Government apparently concedes to be beyond reproach,

if SuCrest had purchased the Kionda sugar and simultaneously sold

the same amount ot sugar short on the New York Coffee and Sugar

Exchange (“the Exchange’) for delivery after the end of the fiscal

year—a traditional “hedge.” The shortcoming of such a hedge,

however, was that the price of actual sugar is a CIF (“cost, insurance

and freight’’) quotation, while prices on the Exchange are FOB

(“free on board”) prices. The difference between these prices-—the

so-called “CIF difierential’—varies widely and is itself subject to

market fluctuation; SuCrest had recently lost approximately $2.5

million, in a period of a few months, because of fluctuations in the CIF

differential (Tr. 703, 1663). The “double hedge” accomplished

through Rionda, in essence allowed SuCrest to hedge both the pur-

chase of the Kionda sugar and the CIF differential. Such a contract

does exist on the Exchange, but could not be accomplished as a

ical matter on the Exchange because the market was too thin,

4.¢., there were too few buyers and sellers trading in sugar at a CIF

— : a. trading in substantial quantities prot (Tr. 256-57,

) °

6

title and risk of loss of the sugar to SuCrest in accordance

with the terms of the written contract (Tr. 865-866, 1297).

When SuCrest filed its tax return for 1975, it caleulated

its profits on the basis of having included these Rionda

purchases in inventory.

D. The 1976 Transaction

Toward the end of its 1976 fiscal year, SuCrest and

Rionda engaged in a similar series of transactions. Once

again, Rionda sold and declared to SuCrest a large quantity

of sugar at the end of the fiseal year, and in the early weeks

of the new fiscal year SuCrest sold to Rionda a correspond-

ing amount of sugar, by prior arrangement. With respect

to its 1976 corporate tax returns, however, SuCrest did not

include the Rionda purchases in its inventory. This change

in tax treatment was the result of an internal investigation

conducted at SuCrest’s request by the New York law firm

of Milbank, Tweed, Hadley & MeCloy. After a lengthy

investigation that included the taking of sworn testimony,

tne Milbank firm issued a report concluding that the Rionda

sugar should not be included in SuCrest’s inventory for

tax purposes, but observed that its conclusion was ‘‘not

free from dispute, and reasonable persons expert in the

fields of tax law and accountancy may differ in their inter-

pretations and conclusions.’’ Quoted in L'T.C. Br. at 20.

The net result of the 1975 Rionda transactions—and

the contemplated result of the 1976 transactions as well—

was the postponement of corporate taxes. The temporary

addition of the Rionda sugar to inventory did not eliminate

the ultimate need to recognize profits caleulated on the

basis of the ‘‘old’’ (and thus inexpensive) sugar; it merely

7

postponed such recognition into a later year. As a matter

of logic, profit based on the inventory would eventually

have to be recognized. In fact, SuCrest recognized such

profits, and thus paid every penny of taxes that it was

alleged to have ‘‘evaded’’ in 1975, when it closed out its

sugar inventory in a subsequent year.

As set forth at pp. 11-14 below, the tax issue whether Su-

Crest could include the Rionda purchases in inventory had

never, prior to this case, been litigated in any civil or erim-

inal proceeding, nor was it addressed by any tax regulation

or ruling until 1979, several years after the events in ques-

tion, when the Internal Revenue Service adopted Rey. Rul.

79-188, which dealt with the issue for the first time. (See

discussion infra at pp. 14-15). The use of commodity trans-

actions for the sole purpose of postponing the recognition

of profit, of course, is not new, and has been expressly

tolerated by the Internal Revenue Service. See discussion

in R.Cert.Pet. at 6-7,

E. The Rulings of the Courts Below

SuCrest was indicted on August 27, 1981, and charged

with multiple counts redundantly charging income tax vio-

lations for 1975 and 1976 as follows: (1) conspiracy to

evade Federal corporate income taxes for the fiseal year

ended May 31, 1975, in violation of 18 U.S.C. § 371 (Count

1); (2) willful attempt to evade Federal corporate income

taxes for the fiscal year ended May 31, 1975, in violation

of 26 U.S.C. § 7201 (Count 2); (3) willfully making and

subscribing a false Federal corporate income tax return

for the fiscal year ended May 31, 1975, in violation of 26

U.S.C. § 7206(1) (Count 4); and (4) conspiracy to defraud

8

the United States with respect to the fiscal year ended May

29, 1976, in violation of 18 U.S.C. § 371 (Count 3). Messrs.

Rapaport and Marshall also were charged in Counts 1, 2

and 3, and with willfully aiding and assisting the prepara-

tion of a false ederal corporate income tax return for

the fiscal year ended May 31, 1975, in violation of 26 U.S.C.

§ 7206(2) (Count 5).

Beginning on December 28, 1981, SuCrest and the in-

dividual defendants were tried before the Honorable Robert

L. Carter, United States District Judge for the Southern

District of New York, and a jury. At the close of the Gov-

ernment’s case, SuCrest moved for judgment of acquittal

on the ground that as a matter of law, the Rionda sugar

was includible in closing inventory because SuCrest had

valid title and risk of loss before the end of its fiseal year

(Tr. 1805). In the alternative, SuCrest moved for acquittal

on the ground that the applicable tax law governing the

question of inventory accounting in this case was unre-

solved or unclear and therefore criminal liability cannot be

imposed (Tr. 1817). The District Judge conceded that

SuCrest’s position on including the Rionda sugar in inven-

tory ‘‘might be entirely correct ... if this were a civil

proceeding’’ (Tr. 1815). However, the Judge felt that ina

criminal tax case the only issue was intent (Tr. 1813). On

this reasoning, the Court below denied the motion for

judgment of acquittal (Tr. 1854).

SuCrest introduced the expert testimony of William

Badecker, a Certified Public Accountant and a member of

the firm of Main Hurdman, the third largest accounting

firm in the world (Tr. 2027). Mr. Badecker has written

and lectured extensively on numerous accounting subjects,

9

including LIFO accounting (Tr. 2027-2029). Mr. Badecker

testified that in his opinion, the Rionda sugar was properly

includible in SuCrest’s closing inventory because SuCrest

had title and risk of loss with respect to the sugar (Tr.

2033-2035). Under generally accepted accounting prin-

ciples, these elements gave the transaction sufficient ‘sub-

stance’’ to permit SuCrest to include the sugar in inventory

(Tr. 2050-2051). Mr. Badecker testified that the existence

of an oral agreement between SuCrest and Rionda to re-sell

the sugar did not alter his conclusion, because title and

risk of loss passed to SuCrest before the end of its fiscal

year regardless of the oral resale agreement (Tr. 2052).

SuCrest also proffered testimony of two experts in the

field of United States corporate income taxation: Richard

B. Stone, Professor of Law at Columbia University and

formerly the attorney in the office of the Solicitor General

of the United States in charge of all tax cases before this

Court; and David P. Taylor, an attorney and CPA who

has written and lectured on LIFO accounting and is the

Director of Taxation for the Clark Equipment Co. (Tr.

1875-1878, 1885-1894). Professor Stone and Mr. Taylor

would have testified that in their opinion, well-established

principles of tax law and inventory accounting permitted

SuCrest to include the Rionda sugar in its inventory, re-

gardless of the existence of an oral resale agreement (Tr.

1910-1922). This conclusion was based on the fact that

SuCrest had title and a risk of economic and physical loss

(Tr. 1911-1914, 1919-1922). Professor Stone would have

further testified that the Internal Ri .onne Code and regu-

lations in force at the time of these transactions permitted

the inclusion of the sugar in inventory, and that SuCrest

10

could not have predicted at that time the courts would reach

a different conclusion (Tr. 1916-1918).

The testimony of Prof. Stone and Mr. Taylor was ex-

cluded by the District Court, a ruling which is challenged

in co-defendant Robert Rapaport’s petition for a writ of

certiorari in this Court.

On January 20, 1982, the jury found Mr. Marshall not

guilty on all counts, found SuCrest guilty on Counts 1, 3

and 4, and found Mr. Rapaport guilty on Counts 1, 3 and 5.

The jury announced that it was deadlocked as to SuCrest

and Mr. Rapaport on Count 2 (tax evasion). A mistrial

was declared as to Count 2 over SuCrest’s objection (Tr.

2516).

On April 16, 1982, SuCrest was sentenced to the maxi-

mum fine of $10,000 on Count 1, $10,000 on Count 3 and

$5,000 on Count 4, plus the costs of the prosecution. On

January 5, 1983, the United States Court of Appeals for

the Second Circuit affirmed the conviction (A1-A26). That

court rejected SuCrest’s argument that the sugar was in-

cludible in inventory (.(10-A16). It also rejected SuCrest’s

fair notice argument; while the court never held that the

law was clear, it stated that ‘‘[h]ere surely the defendants

knew they were committing a wrongful act’’ (A18), based

on the concealment of the resale agreement and the fact

that officers of SuCrest had lied to the company’s auditors

and attorneys. Id.

11

Reasons for Granting the Writ

os

SuCrest’s Conviction Was Based on an Unforesee-

able Interpretation of the Internal Revenue Code, De-

priving It of Its Right to Fair Notice.

A. The Interpretation of the Internal Revenue

Code by the District Court and the Court

of Appeals Was Not Foreseeable.

Prior to this prosecution, no ease, civil or criminal,

had dealt with the propriety of including in inventory

goods subject to a resale agreement. As noted below, Su-

Crest literally satisfied all of the terms of the governing

regulation. The Government’s argument, that the court

should read into the statute a vague requirement of ‘‘sub-

stance over form’’, was based solely on analogies to other

areas of tax law; SuCrest’s position had support in prior

law that was at least as strong. See LT.C. Br. at 24-34;

see also p. 14, infra. Experts in the field of federal tax

law and accounting testified in the trial court, without

contradiction by the Government, that SuCrest’s position

was correct and that the law was at worst unclear. (See

pp. 8-10, supra). Under these circumstances, the decision

below affirming SuCrest’s conviction violates the funda-

mental requirement of fair notice.

Section 471 of the Internal Revenue Code provides that

inventories shall be kept ‘‘on such basis as the Secretary

may provide.’’ Section 472 specifically authorizes the use

of the LIFO method of inventory. The governing regula-

tion, 26 C.F.R. § 1.471-1, provides in relevant part that

‘‘inventory should include all... raw materials .. . which

12

have been acquired for sale... if title thereto is vested. ...°°

The regulation make clear that ‘‘[a] purchaser should in.

clude in inventory merchandise purchased (including con-

tainers), title to which has passed to him, although such

merchandise is in transit or for other reasons has not been

reduced to physical possession... .’’ /d. (These statutes

and regulations are reproduced in full at A29-A382.)

The sugar that SuCrest purchased from Rionda clearly

met all of these requirements, The Court of Appeals, how-

ever, accepted the Government’s argument that SuCrest

could not include this sugar in inventory because the trans-

action did not involve any ‘‘beneficial interest other than

the reduction of taxes’? (A114), and was thus a ‘*sham”

(A8). This interpretation of TRC $471 is supported by

no prior decision of any court construing that statute or

the regulations thereunder, SuCrest had literally complied

with every formal requirement of the applicable statute

and regulations; for the Court of Appeals to read into the

statute a ‘‘business purpose’’ requirement, while perhaps

arguable in a civil tax proceeding,”* is the sort of retroactive

expansion of criminal liability that has long been con-

demned by this Court as violative of the due process clause.

See 15-16, infra. As one commentator has noted:

In spite of all that has been written about the business

purpose doctrine, sham transactions, net effect, and

* SuCrest contended in the District Court and the Court of Ap-

peals that, even as a matter of civil tax law, the sugar was properly

includible in inventory, While this issue is not raised in this Court,

the presence of a good faith dispute as to this issue points out the

lack of clarity of the law at the time of the events in issue.

Additionally, it should be noted that in William Powell Co. vy.

United States, 524 F.Supp. 841 (S.D. Ohio 1981), a civil tax case

involving LIFO inventories, the court declined to read a “business

purpose” test into the LIFO rules, 524 F.Supp. at 846 n.5,

18

the role of the court in looking through form to find

substance, no authoritative, explicit rationale for ju-

dicial intervention to frustrate plans for tax avoidance

has ever been given. The unpleasant conclusion re-

mains that predicting the outcome of a concrete case

in many of these areas, after a flood of decisions, re-

mains often dificult and sometimes impossible.

Fuller, Business Purpose, Sham Transactions and_ the

Relation of Private Law to the Law of Taxation, 37 Tul. L.

Rey. 353, 389 (1968). See also Panel, Substance vs. Form

in Corporate Activities, 20 N.Y.U. Inst. on Fed, Tax, 975,

1080 (1962).

Where no court had ever before read the requirements

of a ‘‘business purpose”’ or ‘substance over form’ into

IRU * 471, SuCrest should not have been required, at the

peril of criminal liability, to predict the result that was

reached by the Second Circuit. The doctrines of ‘‘ business

purpose”’ and ‘‘sham transactions’’ are not universal prin-

ciples of federal tax law. While they have been applied to

certain areas of the Internal Revenue Code, where this is

necessary to avoid frustrating the purpose of the statute,*

there are numerous other areas where, as here, the statutory

policy would be frustrated by failing to give effect to the

form of a transaction. In such cases, the courts have re-

quired only literal compliance with the formal requirements

of the Code. See Schaffer, Another Guideline to the Role of

Form in Corporate Transactions, 56 Taxes 160, 161-62

(1978) (collecting cases),**

*See, eg., Knetsch vy. United States, 304 U.S. 361 (1960)

(interest deduction on sham indebtedness).

** See also, ¢.g., Barber-Greene Americas, lne., 35 T.C. 356, 384-90

py (foreign source income) ; Rushing v. Comm’r, 441 F.2d 598,

98 (5th Cir, 1971) (installment sales) ; Chamberlin v. Comin'r, 207

F.2d 462 Sg Cir, 1953), cert. denied, 347 U.S, 918 (1954) (pre-

ferred stock bailouts; rule later changed by TRC § 306).

14

Thus, while the Government’s argument, accepted by

the courts below, is premised upon vague ‘substance over

form’’ principles, the courts have frequently regarded the

passage of title as the crucial event for tax purposes, rather

than the ‘‘substance’’ of the transaction. For example, in

determining the source of income of a Western Hemisphere

trading corporation, courts look solely to the place where

formal title passed, and not to the place where the ‘‘sub-

stance’’ of the sale oceurved, /.g., Barber-Greene Ameri-

cas, Inc., 35 'T.C. 365, 384-387 (1960). This is true even if the

piace where title passed was specifically arranged so as to

achieve tax benefits. /d. at 386. Since LIFO is a purely

theoretical method of accounting for inventory (see p. 4

n.**, supra), the purpose of the statute would not be served

by reading into it a requirement of *‘substance over form"

or ‘‘business purpose’’.

That the substantive theory of tax law relied upon by

the Court of Appeals was not settled at the time of trans-

actions in issue is made clear by the fact that in 1979 (four

years after the events at issue in this ease) the IRS, for

the first time issued a Revenue Ruling supporting this

theory. Rev. Rul, 79-188, 1979-1 C.B, 191, stated for the

first time that it was the LR.S.’ position that a manu-

facturer which made year-end purchases to avoid invasion

of its LIFO base could include those goods in its LIFO

inventory only if they were intended to be used in the

ordinary course of business. The very fact that a Revenue

Ruling was issued on this point in 1979 establishes that

the law was unclear in 1975 and 1976, the years when Su-

Crest did the acts which are the basis of this conviction.

The governing regulation provides that Revenue Rulings

will be published only when they involve issues not ‘‘an-

15

swered by statute, treaty or regulations’? or ‘‘by ruling,

opinions or court decisions previously published in the

{Internal Revenue] Bulletin,’’ 26 C.F.R. § 601.601 (d)(2)

(iii). See also Rev. Proce. 78-24, 1978-2 C.B. 503,

B. An Unforeseeable Expansion of Criminal Tax

Liability Violates the Due Process Clause.

This Court has long held that the due process clause

of the fifth amendment requires that any criminal statute

‘*give a person of ordinary intelligence fair notice that his

contemplated conduct is forbidden by the statute. The

underlying principle is that no man shall be held criminally

liable for conduct which he could not reasonably under-

stand to be proseribed.”’ United States v. Harris, 847 US.

612, 617 (1954).* This principle is not limited to facially

vague statutes; rather, whenever ‘‘an unforeseeable . . .

construction of a criminal statute is applied retroactively

to subject a person to criminal liability for past conduet,

the effect is to deprive him of due process of law in the

sense of fair warning that his contemplated conduct con

stitutes a crime.’’ Douglas v. Buder, 412 U.S, 430, 482

(1973), quoting Bouie v. City of Columbia, 37° U.S. 347,

354-55 (1964). Accord, Marks vy. United States, 480 US.

188, 191-95 (1977).

This rule applies with particular force to tax crimes,

an essential element of which is willfulness, which this

Court has defined as a ‘‘voluntary, intentional violation

of a known legal duty.’’ United States v. Pomponio, 429

U.S. 10, 12 (1976) (emphasis added), <A _ retroactive re-

* Accord, Lansetta vy. New Jersey, 306 U.S, 451, 453 (1939);

Conally v. General Constr, Co., 269 U.S, 385, 391 (1926).

16

interpretation of the Internal Revenue Code, even if per-

missible in civil tax cases, may not form the basis for

criminal liability.

For example, in James v. United States, 366 U.S. 213

(1961), this Court reversed James’ conviction of income

tax evasion due to uncertainty in the applicable tax law.

James’ conviction had been based upon a willful failure to

report embezzled funds. Fifteen years before James, this

Court had held such funds non-taxable. Commissioner v.

Wilcox, 327 U.S. 404 (1946). After Wilcox and nine years

before James, a realigned Court reached a seemingly op-

posite conclusion, undermining the vitality of Wilcox by

distinguishing it on tenuous grounds in a case involving

extortion income. Rutkin vy. United States, 343 U.S. 130

(1952). The Chief Justice wrote in James that as a matter

of law, the element of willfulness could not be proved in a

criminal prosecution while the law concerning the defend-

ant’s conduct was in such a confused state. 366 U.S. at 221-

22.

The Decision of the Second Circuit, Which Judged

the Issue of Fair Notice Under a Subjective Standard,

Is in Conflict With the Decisions of Other Federal

Courts of Appeals.

The Second Circuit never disputed that the tax law at

issue here was unclear. Rather, it rejected SuCrest’s due

process challenge to its conviction by stating simply that

‘‘(hjere surely the defendants knew they were committing

a wrongful act’? (A18). This conclusion is factually in-

17

correct,* but, more importantly, is legally inapposite under

the decisions of this Court, and is in conflict with decisions

in other Circuits. The question of fair notice is to be de-

termined objectively ; i.e., in regard to ‘‘a person of ordi-

nary intelligence’’, United States v. Harris, supra, and

does not depend upon the subjective expectations of the

defendants.

Thus, in James v. United States, supra, this Court heid

that the confused state of the tax law precluded James’

conviction, notwithstanding the fact that the defendant’s

‘tacts were willful and were done in a knowing and con-

scious attempt to evade and defeat his tax obligations,’’ 366

U.S. at 244 (Harlan, J., concurring in part and dissenting

in part), and that there was no evidence in the record that

the defendant had actually relied on the prior conflict in the

law. See id. at 245. See also United States v. Critzer, 498

F.2d 1160, 1162-64 (4th Cir, 1974) (discussing the facts in

James).

The reasons for this rule are lucidly set forth in a recent

commentary :

The sole test is whether the government gave the de-

fendant constructive notice that his conduct was pro-

hibited, and gave the criminal justice system a definite

standard by which to measure the defendant’s guilt.

If the uncertain law failed to meet that twofold require-

ment, the vagueness doctrine requires acquittal, with-

out regard to the facts of the particular case, including

the defendant’s state of mind. The true purpose of

* Testimony in the record of a key Government witness established

that “Mr. Rapaport continued to believe that the situation was an

appropriate one despite the acknowledgement of the oral agreement.”

(Tr. 326).

18

the vagueness defense is to restrain government, not

to ascertain the factual guilt of individual defendants.

Note, Criminal Liability for Willful Evasion of an Uncer-

tain Tax, 81 Colum. L. Rev. 1348, 1358-59 (1981) (emphasis

added; citation omitted).

In focusing solely on the subjective intent of the in-

dividual defendants, the decision of the Court of Appeals

for the Second Circuit conflicts with the decisions of the

Fourth and Fifth Cireuits.*. In United States v. Critzer,

498 F.2d 1160 (4th Cir. 1974), the Fourth Circuit reversed

a criminal tax fraud conviction against an Eastern Cherokee

Indian who failed to report a portion of her income derived

from land held in trust by the United States. Whether the

income was taxable was a disputed question dependent on

the interpretation of certain land allotment statutes. Said

the court:

As a matter of law, defendant cannot be guilty of

willfully evading and defeating income taxes on income,

the taxability of which is so uncertain that even co-

ordinate branches of the United States Government

plausibly reach directly opposing conclusions. As a

matter of law, the requisite intent to evade and defeat

income taxes is missing. The obligation to pay is so

problematical that defendant’s actual intent is irrele-

vant. Even if she consulted the law and sought to

* The Second Circuit relied upon its own decision in United

States v. Dixon, 536 F.2d 1388, 1397 (2d Cir. 1976), which was not

a tax case, but rather a crimitial prosecution under © 32(a) of the

Securities Exchange Act, a statute which does not require “[p]roof

of a specific intent to violate the law.” United States v. Dixon, supra,

at 1397. In contrast, the instant case involves alleged criminal viola-

tions of the Internal Revenue Code, conviction of which “involves a

specific intent.” James v. United States, 366 U.S. 213, 221 (1961).

See also p. 15, supra.

19

guide herself accordingly, she could have had no cer-

tainty as to what the law required.

498 F.2d at 1160 (emphasis added).

Critzer was followed by the Fifth Circuit in United

States v. Garber, 607 F.2d 92 (Sth Cir. 1979) (en bance),

where the court reversed a tax evasion conviction based

on the defendant’s failure to report income from the sale

of her blood plasma. Finding that the taxability of such

income had never previously been adjudicated, 607 F.2d

at 95, 97, the court held that willfulness had not been

proved, and stated that ‘‘the relevance of a dispute in the

law does not depend on whether the defendant actually

knew of the conflict.’’ /d. at 97."

As the court noted, ‘‘To hold otherwise would advocate

convicting an unsophisticated taxpayer who failed to seek

expert advice as to whether certain income was taxable

while setting free a wise taxpayer who could find advice

that taxes were not due on the identical type of debatably

taxable income.’’ Jd. at 98.

Here, had the defendants actually sought legal advice

before undertaking the Rionda transactions, they would

have been informed that the sugar purchases from Rionda

could be included in inventory. Experts in the fields of tax

law and inventory accounting so testified in the District

Court (Tr. 1874-1900, 1909-22, 2026-42). See pp. S-10,

supra. The Government’s position was not supported by a

single case involving LIFO inventories. The report of the

*In both Critzer and Garber, the evidence showed that the de-

fendants had subjectively believed that they were violating the tax

laws. See United States v. Critzer, supra, 498 F.2d at 1160; United

States v. Garber, supra, 607 F.2d at 96 n.3, 101.

20

law firm of Milbank, Tweed, Hadley & McCloy in 1977 con-

cluded that the propriety of the Rionda transactions was

‘*not free from doubt, and reasonable persons expert in the

field of tax law and accountancy may differ in their interpre-

tations and conclusions.’’ (See p.6, supra). Even the trial

judge agreed that SuCrest’s position ‘‘might be entirely

correct ... if this were a civil proceeding’’ (Tr. 1815).

Under these circumstances, the conviction of SuCrest vio-

lates well-settled standards of due process. As one com-

mentator has written:

In some cases .. . there are no statutes, regulations

or judicial rulings that authoritatively determine the

taxability of particular receipts. In those relatively

few cases, the defendant can often reasonably claim

that the tax evasion statute, including all the tax law

it incorporates by reference, is vague as applied. If

the defendant can cite prior cases that favor his posi-

tion and have not been definitively overruled, that alone

should demonstrate that the tax law was too vague to

support a conviction, even if other cases favor the

prosecution. Jf, by ordinary analogy and extension

from prior authoritative pronouncements the defend-

ant can reasonably argue that his receipts were not

taxable, that too would suggest that the law was not

clear enough to support a conviction.

Note, Criminal Liability for Willful Evasion of an Uncer-

tain Tax, 81 Colum. L. Rev. 1348, 1363 (1981) (emphasis

added).

21

Conclusion

‘*‘Over and over again, courts have said that there is

nothing sinister in arranging one’s affairs as to keep taxes

as low as possible.’’ Comm’r v. Newman, 159 F.2d 848, 850

(2d Cir. 1947) (L. Hand, J., dissenting).” This Court

long ago pointed out that tax avoidance, and even the er-

roneous underpayment of taxes, are not criminal;

It is the right as well as the interest of the taxpayer

to limit his admission of liability to the amount he

actually owes. But the law is complicated, accounting

treatment of various items raises problems of great

complexity, and innocent errors are numerous .. . it is

not the purpose of the law to penalize frank difference

of opinion or innocent errors made despite the exer-

cise of reasonable care. Such errors are corrected by

the assessment of the deficiency of tax and its collection

with interest for the delay.

Spies v. United States, 317 U.S. 492, 496 (1943) (Jackson,

J.) (footnote omitted).

The decision of the Court ef Appeals blurs this crucial

distinction between legitimate tax disputes and criminal

tax evasion, and thus jeopardizes not only the rights of all

taxpayers but also the fair and efficient administration of

the federal tax system.

* See also Atlantic Coastline R.R. v. Phillips, 332 U.S. 168, 172-

73 (1947) (Frankfurter, J.) ; Helvering v. Gregory, 69 F.2d 809,

810 (2d Cir. 1934), aff'd, 293 U.S. 465, 469 (1928).

22

For the reasons stated, the petition for a writ of cer-

tiorari should be granted.

Respectfully submitted,

Jutes Rrruoiz

.lttorney for Petitioner

Ingredient Technology Corporation

80 Pine Street

New York, New York 10005

(212) 422-4030

Of Counsel:

Kosrevanetz & RirHo.z

Exuior SiLvERMAN

Davin F. AxELRop

13

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

—>—

Nos. 124, 144—August Term, 1982

(Argued October 20, 1982 Decided January 5, 1983)

Docket Nos. 82-1128, 82-1144

>

UNITED STATES OF AMERICA,

Appellee,

_—Vo—

INGREDIENT TECHNOLOGY CORPORATION, formerly known

as SUCREST CORPORATION, and ROBERT M. RAPAPORT,

Appellants.

Before:

OAKES and WINTER, Circuit Judges,

and METZNER, District Judge.*

i

Appeal by corporation and its former president for tax

fraud conviction after jury trial in the United States

° Of the Southern District of New York, sitting by designation.

1027

23

District Court for the Southern District of New York,

Robert L. Carter, Judge, finding that defendants willfully

engaged in scheme to overstate “LIFO” inventory

through pretended purchase of raw sugar in 1975 and

conspired to do so in 1976.

Affirmed.

—

JULES RITHOLZ, Kostelanetz & Ritholz, New

York, N.Y. (Eliot Silverman, David Ax-

elrod, Kostelanetz & Ritholz, New York,

N.Y., of counsel), for Appellant Ingre-

dient Technology Corp.

FREDERICK T. Davis, Patterson, Belknap,

Webb & Tyler, New York, N.Y. (Leslie C.

Levin, Patterson, Belknap, Webb &

Tyler, New York, N.Y., of counsel), for

Appellant Rapaport.

MINNA SCHRAG, Assistant United States

Attorney for the Southern District of

New York, (John S. Martin, Jr., United

States Attorney for the Southern District

of New York, Charles M. Carberry, War-

ren Neil Eggleston, Walter P. Loughlin,

Assistant United States Attorneys for the

Southern District of New York, of coun-

sel), for Appellee.

a ae

1¢28

3a

OAKES, Circuit Judge:

This appeal is by a corporation and its former president

from judgments of conviction fOr tax fraud by means of

year-end LIFO (“last-in-first-out”) inventory overstate-

ment. The principal arguments of both defendants before

the jury in a trial in the United States District Court for

the Southern -District of New York, Robert L. Carter,

Judge, were that the inventory was not overstated because

the corporation in fact had legal title on the year-end date

to the property in question—raw sugar—even though it

had previously agreed to resell it to its seller, and that in

any event the element of willfulness was negated because

the tax laws were too unclear for the defendants to have

known that they had committed a crime. Other argu-

ments based on evidentiary rulings, the court’s charge,

the statute of limitations, the proof, and a claim that a

corporation as a matter of law cannot be convicted of

perjury under 26 U.S.C. § 7206(1) are made on appeal.

We affirm the convictions.

FACTS

The appellants include Ingredient Technology Corp.,

which used to be known as SuCrest Corp., and its former

president, Robert M. Rapaport. These two were charged

in a five-count indictment along with SuCrest’s treasurer,

Allerton D. Marshall, who was acquitted on all charges.

SuCrest and Rapaport were convicted on Count One for

conspiracy to evade SuCrest’s corporate income tax for

fiscal 1975 (18 U.S.C. § 371). Count Two, on which the

jury was unable to agree, is irrelevant here. SuCrest and

Rapaport were convicted on Count Three for conspiracy

to defraud the United States by impeding the Department

1029

|

of the Treasury in the collection of revenue in connection

with SuCrest’s federal income tax for fiscal 1976 (18

U.S.C. § 371). SuCrest was convicted on Count Four for

its subscribing to a false federal income tax return in

fiscal 1975 (26 U.S.C. § 7206(1)); this is the count for

which SuCrest claims it cannot be liable as a matter of

law. Rapaport was convicted on Count Five for assisting

SuCrest in the presentation of a false corporate federal

income tax return for fiscal 1975 (26 U.S.C. § 7206(2)).

During 1974 through 1976 SuCrest, a publicly traded

company with annual sales in the hundreds of millions of

dollars, was principally in the sugar refining and sales

business, buying raw sugar for refining from brokers

(Operators) who either imported raw sugar or bought it

from domestic producers. SuCrest had never been in the

business of selling raw sugar or buying raw sugar for

resale. Rapaport, who was president and chief executive

officer of SuCrest, actively participated in the operation

of the Sweetener Division which refined and resold re-

fined sugar, and in the tax years in question his approval

was required for every purchase of raw sugar. These

purchases at any one time involved ten to twenty tons.

In 1974 the price of raw sugar began to fluctuate widely

and although SuCrest was making large gross profits as a

result of price fluctuations upward, taxes on those profits

and the escalating cost of raw sugar depleted its income.

Like many other United States sugar refiners, SuCrest

switched in 1974 to the LIFO inventory accounting

method for its “raw sugar and raw sugar content in goods

in process and in finished goods.” Under LIFO, of

course, the most recently purchased raw materials repre-

sent the cost of inventory attributable to costs of goods

sold. In this inflationary period, therefore, LIFO pro-

1030

5 a

duced a higher cost of goods sold which in turn resulted

in lower taxable income than the FIFO (first-in-first-out)

method formerly used. Moreover, LIFO more accurately

reflected real costs because profits had to be reinvested in

increasingly expensive raw materials. Thus in the fiscal

year in which SuCrest adopted the LIFO accounting

method—1974—it was able to report and to carry

forward a loss of about $14.7 million as opposed to a

taxable income of $12.2 million which it otherwise would

have had to report. This substantial tax saving occurred

as a result of large purchases of raw sugar; SuCrest

accumulated an unusually large inventory of about 194

million pounds which thereupon constituted what is

called the “LIFO base.” In SuCrest’s case this was valued

at about ten cents per pound and, as the accountants

insist to those wh» adopt the LIFO method, it was

important to maintain this LIFO base, because if the

amount of sugar fell below its level, then an equivalent

amount of sugar valued at only ten cents per pound (as

opposed to higher subsequent prices) would have to be

attributed to that given year’s cost of goods sold, with the

result that profits and taxes would be increased.

In 1975 and 1976, with both raw sugar prices and

interest rates increasing, SuCrest operated its refineries

with as little raw sugar on hand to be processed as

possible, slightly less than 100 million pounds or about

half of the 1974 year-end inventory or LIFO base. Be-

cause this would have caused large 1975 profits and taxes,

it was determined to add enough raw sugar to the inven-

tory level so as not, in accounting terms, to “invade” the

LIFO base before the end of the fiscal year, in this case

May 31, 1975. SuCrest could have done so simply by

purchasing raw sugar on the open market, but such a

1031

6 a

purchase would involve market risks, capital outlay, pos-

sibly high interest expenses, and the like. Management set

upon another course, resulting in the instant convictions.

The method adopted had the overall effect of involving

no financial risk, with title to sugar being taken before

the end of the fiscal year but immediately thereafter

resold to the seller, with the sugar never entering any flow

of raw materials for the refining process, and the only

expense being the payment of a small fee to the cooperat-

ing operator. More specifically, what was done was the

following.

Arrangements were made with one of SuCrest’s opera-

tors, Czarnikow-Rionda Co. (Rionda), whereby it would

sell to SuCrest the quantity of raw sugar SuCrest needed

to protect its LIFO base and SuCrest would then sell the

raw sugar back to Rionda so that SuCrest would be able

to claim formal title without having to take physical

delivery and with neither side making a profit on the

transaction. In addition, SuCrest and Rionda engaged in

an elaborate pricing formula hinged to the market value

of raw sugar on the futures exchange because the volatile

price fluctuations in the sugar market could result in a

resale at a price different from the original purchase price

so that either SuCrest or Rionda would stand to lose on

what was intended to be simply a bookkeeping trans-

action. It was agreed that Rionda would sell sugar to

SuCrest at 1.075 cents per pound alove the July 1975

futures price on the New York Coffee and Sugar Ex-

change on the day of the sale and buy the sugar back at

1.0 cent above that same futures price on the day of the

resale, with the difference of .075 cent going to Rionda as

the only SuCrest expense in the transaction. Then SuCrest

and Rionda each agreed to take opposite and identical

futures positions on the Exchange, which in turn assured

1032

7a

no gain or loss for either party since any gain from the

resale of the physical sugar as the result of an increase in

sugar price would be matched and offset by an equivalent

loss on the futures contracts or vice versa.

SuCrest’s contract to purchase 50,000 long tons of raw

sugar from Rionda, executed on April 18, 1975, the day

SuCrest and Rionda opened their futures positions, was

in writing. Rionda’s agreement to repurchase was not.

Supposedly because of “gossip among sugar buyers,”

SuCrest brief at 12, Rapaport cautioned one of his

juniors not to discuss the details of the Rionda trans-

action “on the street.”

Prior to the close of the SuCrest fiscal year, Rionda in

accordance with the purchase contract “declared” to

SuCrest title to the cargoes of the two ships Ally and St.

Etienne involving 41,755 long tons of raw sugar. It turned

out that the remaining 8,245 long tons due under the

contract were not required by SuCrest to maintain its

LIFO base and they were declared after the end of

SuCrest’s fiscal year in June 1975. Almost immediately

thereafter and while the vessels were still at sea, the same

sugar was resold to Rionda. Checks were exchanged for

the purchase and resale and for the net changes in the

futures positions. SuCrest never actually drew on its

funds to pay the nearly $29 million due for the sugar.

Rionda made its “commission” of $84,000. Except for

satisfying the accountants and the lawyers and ultimately

the Government, the transaction was at an end.

Significantly, two facts were not disclosed until a later

time. One was that Rionda’s vice president, who had

entered into the understanding with SuCrest as to the

overall transaction, had about a week after April 18 asked

for a letter that would set out the terms of the resale, a

letter which a SuCrest executive and the Rionda vice

1033

8 a

president sealed with wax and placed in the latter’s safe.

After the transaction was completed, the two men met

and destroyed the letter. Significantly also, after Rionda

had declared title to the sugar to SuCrest but before the

resale, Rionda declared title to the sugar on board the St.

Etienne to another customer pursuant to a contract that

had been made several weeks earlier. In other words, the

transaction was, so far as Rionda was concerned, a total

sham. The principal question before the jury was whether,

so far as SuCrest and Rapaport were concerned, the

transaction was the same.

The company’s auditors questioned the subsequent

resale despite the fact that there were separate documents

for all of the transactions other than the agreement to

resell or, on the part of Rionda, repurchase. The auditors

in fact obtained an opinion letter from the company’s

attorneys which stated that, based upon representations

received from SuCrest employees that as of the end of the

fiscal year SuCrest had no commitment to resell and

Rionda no commitment to repurchase the sugar, SuCrest

did own the sugar at the end of the fiscal year. The

auditors, who were told by Rapaport and Marshall that

all data concerning commitments had been made avail-

able, that the scope of the auditors’ examination had not

been restricted, and that “goods for which the company

was accountable to others . . . had been excluded from

inventories,” were left in the dark as to the prearranged

agreement of resale. SuCrest accordingly reported cost of

goods sold on the basis of the year-end purchase of

inventory, thereby uiderstating the SuCrest 1975 operat-

ing profit by about $13.7 million.

SuCrest’s fiscal year 1976 was also involved. The price

of sugar declined after April, 1975, and another similar

sale with Rionda was arranged, this time for 60,000 long

1034

9 4

tons of raw sugar. The only variations from the preceding

year’s elaborate arrangements were that SuCrest obli-

gated itself to pay Rionda’s commissions for the future

trades, covered its own and Rionda’s margin require-

ments, and instead of having a slight variation in the

pricing formula was to give Rionda simply a straight

$25,000 fee. The fixed differential in the pricing formula,

that is to say the figure that was to be added to the price

at which July, 1976, futures were trading on the day the

raw sugar was purchased and on the day when it was

eventually resold, was set at 3.25 cents per pound. The

written contract of purchase by SuCrest was dated

August 5, 1975, with title not to be declared until May,

1976, and delivery in June or July of 1976. Opposite and

identical 1,200-lot futures positions were opened, al-

though they were not shown on reports of open futures

positions. In late May, 1976, Rionda declared title to

SuCrest to the sugar in three vessels at sea in satisfaction

of the August 5, 1975, contract, and during June, 1976,

while the vessels were still at sea SuCrest resold the same

sugar back to Rionda with the resale prices set according

to the formula previously used containing a 3.25-cent

fixed differential. The futures positions were mutually

reversed, and again each party ended up in exactly the

same position as it had been before except for Rionda’s

obtaining a $25,000 fee and about $74,000 in commis-

sions. The 60,000 long tons of raw sugar were entered on

the books and presented to the auditors as such. Mean-

while, however, the raw sugar buyer of SuCrest in the

Sweetener Division had told one of the members of the

auditing team “off the record” about the resale aspect of

the 1976 transaction. False explanations for the resale

were given to the auditors in Rapaport’s presence by some

ef his managers, and questioning of a Rionda vice presi-

1035

1U 4

dent elicited a response that the resale was unrelated to

the original purchase by SuCrest. Again, the SuCrest

auditors asked counsel for an opinion. Eventually the

board of directors was advised by the company vice

president who was president of the Sweetener Division

that the resale had been prearranged. Audit procedures

were expanded. Outside counsel was hired to ascertain the

facts and concluded that the Rionda transactions had no

substance and that the Rionda sugar purchase should not

be included in the 1975 and 1976 computations of costs of

goods sold. SuCrest filed its 1976 tax return based upon

outside counsel’s report and gave no recognition to the

Rionda transactions.'

DISCUSSION

The primary argument made by both SuCrest and

Rapaport is that as a matter of law the Rionda sugar was

properly includable in SuCrest’s LIFO inventory because

SuCrest both had title and bore the risk of loss, satisfying

the requirements for inclusion in inventory under the

Internal Revenue Code Section 471? and Treasury Regula-

tion Section. 1.471-1.’ SuCrest points to the portion of

! The SEC filed a complaint against the appellants here, Rionda and

two other SuCrest executives, each of whom agreed to consent judg-

ments. Rionda also pleaded guilty to two counts of assisting SuCrest in

the presentation of false tax return information (26 U.S.C. § 7206(2)).

: 26 U.S.C. § 471 provides:

Whenever in the opinion of the Secretary the use of inventories is

necessary in order clearly to determine the income of any taxpayer,

inventories shall be taken by such taxpayer on such basis as the

Secretary may prescribe as conforming as neariy as may be to the

best accounting practice in the trade or business and as most clearly

reflecting the income.

3 Treas. Reg. § 1.471-1 provided:

Need for Inventories. In order to reflect taxable income correctly,

inventories at the beginning and end of each tayable year are

1036

lia

Regulation Section 1.471-1 which requires that

“{mJerchandise should be included in the inventory only

if title thereto is vested in the taxpayer. . . . although

such merchandise is in transit” but should “exclude from

inventory goods sold. . . titie to which has passed to the

purchaser,” an event which had not taken place here. See

also Rev. Rul. 71-451, 1971-2 C.B. 217,‘ Rev. Rul.

81-272, 1981-2 C.B. 116. SuCrest argues that the Treasury

Regulation makes “goods under a contract of sale”

includable in inventory so long as SuCrest retains title;

that SuCrest acquired the sugar “for sale” and not for use

in SuCrest’s business; and that title to the goods passed

necessary in every case in which the production, purchase, or sale of

merchandise is an income-producing factor. The inventory should

include all finished or partly finished goods and, in the case of raw

materials and supplies, only those which have been acquired for sale

or which will physically become a part of merchandise intended for

sale, in which class fall containers, such as kegs, bottles, and cases,

whether returnable or not, if title thereto will pass to the purchaser

of the product to be sold therein. Merchandise should be included

in the inventory only if title thereto is vested in the taxpayer.

Accordingly, the seller should include in his inventory goods under

par pred epllsgthennare soba aage tegen ee

and goods out upon consignment, but should exclude from inven-

tory goods sold (including containers), title to which has passed to

the purchaser. A purchaser should include in inventory merchandise

purchased (including containers), title to which has passed to him,

although such merchandise is in transit or for other reasons has not

been reduced to physical possession, but should not include goods

ordered for future delivery, transfer of title to which has not yet

been effected. (But see § 1.472-1.)

4 Rev. Rul. 71-451 involved a contract of sale or return used by a

garden seed producer, which did not treat seeds delivered to dealers

under such a contract as sales. Following J.J. Little and Avis Co. v.

Commissioner, T.C. Memo 1966-68, the Service ruled that income

accrued to the producer when title passed, i.e., on delivery to a

common carrier, and that seeds so delivered could not be included in

inventory. In that situation neither party knew what portion, if any, of

the seeds would be returned, whereas here both parties knew that all

the raw sugar would be returned. There the business purpose of the

contract of sale or return was to give the dealers an inventory for resale

. to customers. Here there was no way in which SuCrest was to use the

Rionda sugar.

1037

124

under New York Uniform Commercial Code Sections

2-401, 2-501, which in turn is said to have passed the risk

of loss to SuCrest. Jd. § 2-509. Thus, even if the oral

understanding between SuCrest and Rionda amounted to

a contract of resale, the argument runs, SuCrest could

still include the sugar in its inventory. Moreover, it is said,

the oral resale agreement involved the sale of goods in

excess Of $500 which was not an enforceable contract

because it was not in writing as it must be under the New

York Statute of Frauds. Jd. § 2-201(1). It is also con-

tended that the unsigned letter in the Rionda safe was not

enforceable by SuCrest or Rionda because the executive

who signed the letter on behalf of SuCrest never was

authorized to do so. Support for this last point is said to

lie in Rev. Rul. 71-451, 1971-2 C.B. 217, see supra note 4,

and cases to the effect that it is immaterial that SuCrest

may have intended to resell the sugar before it actually

did sell. The hedging transaction was said to be a normal

hedge which does not make for inventory ineligibility.

Monfort of Colorado, Inc. v. United States, 561 F.2d 190

(10th Cir. 1977); Rev. Rul. 74-226, 1974-1 C.B. 119;° Rev.

Rul. 74-223, 1974-1 C.B. 23.° SuCrest made an elaborate

argument to the jury and argues to us that because the

futures prices involved cover only the cost of the raw

sugar and not the cost of insurance and freight, that is to

s Rev. Rul. 74-226 dealt with commodities dealers on organized

exchanges who are required to maintain inventories, and ruled that

they are entitled to value goods on hand at market value when engaged

in “carrying operations” or “straddles.” There the purchase or sale of

commodities was an income-producing factor.

6 Rev. Rul. 74-223 also dealt with commodities dealers and ruled that

they may take into account gains or losses based upon the market value

of such open futures contracts to which they are parties as are hedges

against actual spot or cash transactions or against “forward” sales or

purchases, but not of purely speculative transactions not offset by such

transactions or such sales and purchases.

1038

13 2

say, are on an FOB basis, whereas the price for a purchase

of actual sugar is CIF, i.e., includes the cost of insurance

and freight, the difference, that cost, amounts to the

“CIF differential” which, of course, is also subject to a

certain amount of market fluctuation. The theory pre-

sented is that the elaborate purchase of opposite and

identical futures was so as to hedge the CIF differential

which was not hedgable merely by going short on the

futures contract.

Having satisfied the formal requirements of what it

sees as the applicable rules, SuCrest urges us to under-

stand its elaborate machinations as a legitimate ploy to

hold down taxes and directs us to the maxim that a

person is entitled to arrange his taxes so as to pay only

that which is due. But, of course, the taxpayer is not

permitted to avoid taxes which are due and the invocation

of the phrase tells us nothing about what must ultimately

be rendered unto the I.R.S. any more than Socrates

solved the thorny problems of justice by defining it to

require that we give every person his due. See P. Westen,

“The Empty Idea of Equality,” 95 Harv. L. Rev. 537,

556-58 (1982). At best such maxims, which Roscoe Pound

labeled “minims” because they revealed so little, Shep-

pard v. United States, 361 F.2d 972, 977 n.9 (6th Cir.

1966), are “singularly unhelpful when it comes to decid-

ing cases,” Goldstein v. Commissioner, 364 F.2d 734, 741

n.7 (2d Cir. 1966). As a starting point, they are at best

confusing. See, e.g., Grove v. Commissioner, 490 F.2d

241 (2d Cir. 1973). See generally Commissioner v. Court

Holding Co., 324 U.S. 331 (1945); Gregory v. Helvering,

293 U.S. 465, 470 (1935).

These conclusory maxims are less confusing if we

regard them as conclusions for substantive analysis and

the substance underlying the transaction is taken to be the

1039

14a

start. Two factors guide us here. First, we agree with

Judge Learned Hand in dissent in Gilbert v. Commis-

sioner, 248 F.2d 399, 412 (2d Cir. 1957), that it is immate-

rial whether we are talking about “substantial economic

reality,” “substance over form,” “sham” transactions, or

the like; rather the question is whether under the statute

and regulations here involved the transaction affects a

beneficial interest other than the reduction of taxes. And

here we note that the very first sentence of Section

1.471-1 makes inventories necessary in the first instance

“in every case in which the production, purchase, or sale

of merchandise is an income-producing factor.” (Empha-

sis added.) Thus, while title may be necessary for inclu-

sion in inventory, it in itself is not alone sufficient, at least

where the parties’ purpose is solely tax avoidance. See

United States v. Balanovski, 236 F.2d 298, 306 (2d Cir.

1956), cert. denied, 352 U.S. 968 (1957). Here, from the

beginning, it was never intended that the sugar which was

on board ship would be for SuCrest “an income-produc-

ing factor.” On the contrary, it was never intended to be

refined, and SuCrest was not in the business of selling or

brokering raw sugar. SuCrest would have us give meaning

to inventory which was never intended to be used or sold

in the regular course of business. In fact, the transaction

was designed not to earn money for SuCrest. Irrespective

of lega! enforceability of the contract of resale, whether

under Restatement Section 90 or otherwise, the fact that

Rionda was one of SuCrest’s regular operators and was

paid in effect a commission indicates that Rionda had a

business interest in going through with the 1975 trans-

action, a business interest which was further demon-

strated by its willingness to go through the same charade

in 1976. There was absolutely no beneficial interest on the

part of SuCrest except to inflate inventory for a few days

1040

15 4

solely for tax purposes, and there was no prospect of gain

from the transaction; indeed it was sure to lose in terms

of brokerage commissions and Rionda’s fee for engaging

in it, however depicted to SuCrest. The fact that Rionda’s

obligation to repurchase may have been unenforceable,

however it may be examined, does not affect SuCrest’s

purpose to avoid taxes which would have occurred irre-

spective of such enforceability; the only thing that lack of

enforceability shows, if indeed there were such, is that the

scheme might not have succeeded in its true goal of losing

money only to the extent of the brokerage commissions

and fee to Rionda. This “beneficial interest factor” alone

should be sufficient in this case to disqualify SuCrest’s

purchase from its LIFO base.

Second, as Corliss v. Bowers, 281 U.S. 376, 378 (1930),

stated broadly, “taxation is not so much concerned with

the refinements of title as it is with actual command over

the property taxed.” (Emphasis added.) SuCrest argues

that as of the end of the fiscal year it had title to the sugar

and therefore enjoyed the right “to take possession of the

sugar, to refine it, or to sell it,” and suffered the hazard

that “if the ships had sunk, or if the sugar had become so

damaged as to become unmarketable, SuCrest would

have had to bear the risk of economic and physical loss.”

Brief at 31. This, of course, assumes that Rionda was not

in fact in control of the suger. On this score, Rionda had

none of the illusions that SuCrest urges us to abide here:

Rionda declared title to the sugar to third parties even

before the sugar was sold back by SuCrest. It is only on

the issue of actual control of the property that SuCrest’s

argument that its contract with Rionda was unenforceable

has any significance. At the outset, we note thut “[t]ax

consequences follow what has taken place, not what

might have taken place,” Central Tablet Manufacturing

1041

los

Co. v. United States, 417 U.S. 673, 690 (1974), and the

resale agreement was completely obeyed here. Second, it

would be high irony to find that the defendants here are

immune to prosecution for their scheme because they

never wrote it down. The reason it was never written

down, and the reason that the copy sealed in wax was

destroyed, is that such a document would prove that they

had agreed to resell at the time of sale and would close the

case against them in a prosecution like this one. In short,

the contract was never written because it was illegal, and

we decline the defendants’ invitations to apply the Statute

of Frauds not as a measure to protect the parties to

contracts but as a means to promote frauds on the

government.’

We conclude that the concept of inventory from an

accounting point of view and the term inventory in the

applicable Treasury Regulations would be meaningless

were there to be included in the term or concept property

bought, agreed to be resold, never intended to be utilized

in the trade or business of the taxpayer (except for tax

purposes), and in fact under the corporate iaxpayer’s

dominion, control, and at itw risk about as long as the

pea in the proverbial shell game is under the shell.

7 We also duly note the nice distinction made in the SuCrest brief at 34

and n.* between unenforceable oral resale agreements such as were

disregarded by the Court of Claims in a case involving the issue

whether a bank holding municipal bonds as coilateral for a bond

dealer’s loan was subject to the tax exemption for interest on munici-

pal securities, Citizens National Bank v. United States, $51 F.2d 832,

841 (Ct. Cl. 1977), and cases involving a similar issue involving written

and enforceable resale agreements, ¢.g., Union Planters National Bank

v. United States, 426 F.2d 115 (6th Cir. 1970) (burden did not assume

risk of fluctuations in market value of bonds). The appellants would

like to have us apply a similar distinction here, even though the issue

before us relates to the entirely distinguishable category of inventories

and not to the deductibility of interest on bonds heid as collateral.

1042

17 3

The next argument, which is on due process grounds

but also goes to the court’s exclusion of proffered expert

testimony and refusal to instruct the jury, is that the

convictions must be reversed because the applicable tax

law was at least in such dispute that it was not sufficiently

clear at the time of the Rionda transactions to provide a

“clear and definite statement of the conduct proscribed”

under United States v. Chiarella, 588 F.2d 1358, 1377 (2d

Cir. 1978) (dissenting opinion), rev’d, 445 U.S. 222

(1980), thereby negating the element of willfulness or

scienter.*

We agree that a criminal statute must meet the require-

ments of the Due Process Clause and be sufficiently

definite as to “give a person of ordinary intelligence fair

notice that his contemplated conduct is forbidden.”

United States v. Harris, 347 U.S. 612, 617 (1954). See

also Bouie v. City of Columbia, 378 U.S. 347, 352 (1964).

But as this court has noted,

All the Due Process clause requires is that the law

give sufficient warnings that men may conduct them-

8 SuCrest and Rapaport concede that in 1979 the Internal Revenue

Service issued Rev. Rul. 79-188, 1979-1 C.B. 191, which took the

position that property not intended by the taxpayer to be used in

business could not be included in inventory to avoid invasion of a

LIFO base. But it is argued that the very fact that the Service issued

this ruling proves that the question was not settled in 1975. The

issuance of the LIFO Revenue Ruling in 1979 on which the appellants

rely by no means signifies a lack of clarity in the law at the time the

SuCrest-Rionda transaction was entered into in 1975. In the first place,

the ruling goes to different facts, since under it the purchase and resale

were not prearranged, the prices were not structured to eliminate the

possibility of profit or loss on the resale, and there were no indicia of

concealment. Moreover, as Revenue Ruling 79-188 itself points out,

“the purpose for which raw material is purchased is a major factor

whether such material is inventoriable by the taxpayer,” and has been

since Latimer-Looney Chevrolet, Inc. v. Commissioner, 19 T.C. 120

(1952) acq’d in 1953-1 C.B. 5, which the Ruling cites for that

proposition

1043

18 3

selves so as to avoid that which is forbidden, and

thus not lull the potential defendant into a false sense

of security, giving him no reason even to suspect that

his conduct might be within its scope.

United States v. Herrara, 584 F.2d 1137, 1149 (2d Cir.

1978). And of course it is immaterial that “there is no

litigated fact pattern precisely in point.” United States v.

Brown, 555 F.2d 336, 339-40 (2d Cir. 1977). Here surely

the defendants knew they were committing a wrongful

act. United States v. Dixon, 536 F.2d 1388, 1397 (2d Cir.

1976). The resale component of the agreement was con-

cealed. The auditors were lied to, as were the attorneys.

The secret letter sealed with wax was hidden in a safe and

then destroyed. Cf. United States v. Feola, 420 U.S. 671,

685 (1975) (conviction for assaulting federal officer up-

held despite defendant’s ignorance of victim’s official

identity). Willful intent was a question of fact decided by

the jury at trial contrary to the defendants. United States

v. Pomponio, 563 F.2d 659, 662 (4th Cir. 1977), cert.

denied, 435 U.S. 942 (1978).

The more sophisticated argument is made that the

district court’s exclusion of the testimony offered by two

of defendant’s experts, coupled with the decision of the

trial court not to instruct the jury in terms of Treasury

Regulation § 1.471-1, thwarted the defense that the de-

fendants could not have formed a willful intent. Rapa-

port argues that the clarity of whatever legal duty was

owed has become, in this case, an issue of fact and not of

law. The defendants point to United States v. Garber, 607

F.2d 92 (Sth Cir. 1979) (en banc), a case involving a

prosecution for tax evasion for having failed to report

income from the sale of the taxpayer’s blood containing a

rare and valuable antibody, where the Fifth Circuit held

1 Obed

19 24

exclusion of the testimony of a tax expert that in his

opinion the income was not taxable was erroneous and

reversed the conviction. Indeed, it is pointed out, the

Fifth Circuit went further to say that the relevance of a

dispute in the law “does not depend on whether the

defendant actually knew of the conflict.” Jd. at 98, citing

United States v. Critzer, 498 F.2d 1160 (4th Cir. 1974). See

also United States v. Clardy, 612 F.2d 1139, 1153 (9th Cir.

1980) (government expert’s testimony relative to issue of

willfulness admissible where defense theory is that there is

good faith dispute as to tax law interpretation). We

deciine to apply the Garber reasoning for two reasons.

First, the holding of that case was that in view of the

defense that Ms. Garber “subjectively thought that pro-

ceeds from the sale of part of her body were not taxable”

exclusion of an accountant’s expert testimony that money

obtained from the sale of blood plasma was not taxable

income was reversible error. Here, however, there was no

evidence that Rapaport or anyone else at SuCrest genu-

inely thought that what they were doing was lawful and

proper; on the contrary, their conduct indicated a subjec-

tive belief in the unlawfulness of the conduct. Second, as

pointed out in Note, Criminal Liability for Willful Eva-

sion of an Uncertain Tax, 81 Colum. L. Rev. 1348, 1360

(1981), the Garber majority’s approach permits juries to

find that uncertainty in the law negates willfulness

whether or not the defendants are actually confused

about the extent of their tax liability. In contrast, prior

cases on willfulness consistently require factual evidence

of the defendants’ state of mind to negate willfulness

under any theory. See id. at 1357. We agree with the

Garber dissent, 607 F.2d at 105, that it would be very

confusing to a jury to have opposing opinions of law

admitted into evidence as involving a factual question for

1045

20a

them to decide. Indeed, as that dissent points out, the

inevitable logic of the majority’s decision in Garber is

that if the tax law is uncertain, the indictment should be

dismissed. Questions of law are for the court. United

States v. Bronston, 658 F.2d 920, 930 (2d Cir. 1981), cert.

denied, 102 S.Ct. 1769 (1982); Marx & Co. v. Diners

Club, Inc., 550 F.2d 505, 509-10 (2d Cir.), cert. denied,

434 U.S. 861 (1977). See also 7 Wigmore, Evidence

§ 1952 at 81. To the extent that Garber is inconsistent

with our Bronston and Marx cases, we decline to follow

it. We note that the Fifth Circuit has itself limited Garber

in United States v. Herzog, 632 F.2d 469, 473 (Sth Cir.

1980) (expert’s view of tax laws irrelevant to willfulness

issues since complexity of laws sheds no light on defen-

dant’s intent).

The court’s instructions were proper concerning willful-

ness, an issue which is a question of fact to be determined

by the jury. Spies v. United States, 317 U.S. 492, 500

(1943). The instructions as set forth in the margin’ gave,

9 I instruct you that a transaction without economic substance

which is entered into solely for the purpose of tax avoidance can't

properly be used to compute taxes. The government contends that

an agreement simultaneously to purchase and resell the same

amount of raw sugar on terms that guarantee no risk of loss or

chance for gain has no economic significance.

A taxpayer nay of course try to pay as little tax as possible so

long as he uses legal means. Transactions may be arranged in an

attempt to minimize taxes if the transactions have economic sub-

stance. The defendants contend that the Rionda transaction had

economic substance. They claim that SuCrest had title to the sugar

purchased from Rionda, had risk of loss with respect to such sugar,

had a binding obligation to resell the sugar at a fixed price and had

a business purpose in entering into the Rionda transaction.

As a final instruction on this count, | will discuss certain terms

you have heard used throughout the trial:

Inventories are defined by the Internal Revenue Code as raw

material acquired for sale or manufacture in the ordinary course of

business.

1046

213

in our opinion, all that is necessary: a fair presentation of

the defense’s contentions. United States v. Park, 421 U.S.

658, 674-75 (1975). Instructions given in the precise terms

of the Treasury Regulation would invite the jury to

interpret the law which is, as we have said, a matter for

the judge. See United States v. Lanni, 466 F.2d 1102, 1110

(3d Cir. 1972).

The remaining arguments of appellants are no more

persuasive. They contend that in connection with the 1976

tax return no conspiracy to defraud was alleged because

the transactions were not reflected in SuCrest’s 1976 tax

return and no such conspiracy was accordingly es-

tablished. They rely on the decision in United States v.

Tarnopol, 561 F.2d 466, 474 (3d Cir. 1977), that the mere

keeping of false books and records does not amount to a

conspiracy to defraud the United States in connection

with the collection of revenue under 18 U.S.C. § 371. A

specific statute dealing with revenue matters was con-

strued as early as Haas v. Henkel, 216 U.S. 462, 479

Inventories, as so defined, must be recorded on tax returns so as

to clearly reflect income.

The government contends that the raw sugar involved in the

Rionda transaction was not acquired for use in the ordinary course

of SuCrest’s business and that the sugar was thus not truly part of

SuCrest’s inventory.

I told you that the defendants contended that SuCrest had title to

the sugar purchased, that the Rionda transaction had economic

{substance}, that the title to the sugar purchased from Rionda had

risk of loss with respect to the sugar and that the transaction had a

business purpose.

I misstated. What I should have also told you is that they contend

that the oral agreement to resell the sugar to Rionda was not

binding on either Rionda or on SuCrest. That is the defendant's

contention.

1047

224

(1910), to apply in the case of a corrupt agreement

“calculated to obstruct or impair” the given governmental

department’s function. A conspiracy is, after all, an

agreement to engage in prohibited conduct. United States

v. Herrara, supra, 584 F.2d at 1150. It is immaterial that

conspirators disband or are interrupted before the goal is

achieved. See United States v. Rosner, 485 F.2d 1213,

1228-29 (2d Cir. 1973), cert. denied, 417 U.S. 950 (1974);

W. Lafave & A. Scott, Criminal Law 459 (1972). Recog-

nizing that conspiracy-to-defraud prosecutions must be

carefully scrutinized, United States v. Rosenbiatt, 554

F.2d 36, 40 (2d Cir. 1977), here the indictment and proof

withstand such scrutiny since the criminal agreement was

sufficiently established. United States v. Tarnopol, supra,

is distinguishable, because there the Government failed to

prove that the conspirators intended to defraud the In-

ternal Revenue Service, even though they had not kept

accurate business records. Here the whole purpose of the

sale and resale transaction in 1976 as well as in 1975 was

to evade federal taxes. As for the argument that a

taxpayer has a right of “self-correction,” it is clearly

inapplicable to these defendants since it was only when

the fraud was detected by the auditors that the scheme

was dropped. See United States v. James, 609 F.2d 36,

41-42 (2d Cir. 1979), cert. denied, 445 U.S. 905 (1980).

Requested instructions to this effect were therefore prop-

erly disallowed. In other words, Rapaport and his com-

pany did not go through with the ultimate fraud not

because they “saw the light,” but because the light saw

them.

Appellants do have support, in connection with the

Count Three charge of conspiracy to defraud in 1976, for

their claim that the applicable statute of limitations is five

1048

23 34

rather than six years, and that 18 U.S.C. § 3282, the

general five-year statute, is applicable rather than that

portion of 26 U.S.C. § 6531(1), (8).'° While 26 U.S.C.

§ 6531(8) expressly refers to 18 U.S.C. § 371, “where the

object of the conspiracy is to attempt in any manner to

evade or defeat any tax or the payment thereof,” the

argument is that this is not an offense “arising under” the

Internal Revenue laws. Moreover, support is said to lie

for the applicability of section 3282 in Grunewald v.

United States, 353 U.S. 391, 396 & n.8 (1957); United

States v. Klein, 247 F.2d 908 (2d Cir. 1957), cert. denied,

355 U.S. 924 (1958); and United States v. Witt, 215 F.2d

580 (2d Cir.), cert. denied, 348 U.S. 887 (1954). Each of

these cases states that an indictment alleging conspiracy

under section 371 is governed by the statute of limitations

set forth in 18 U.S.C. § 3282. We agree, however, with

United States v. Lowder, 492 F.2d 953, 955-56 (4th Cir.),

cert. denied, 419 U.S. 1092 (1974), that it was simply pure

oversight in Grunewald, Klein, and Witt that reference

was not made to the six-year statute, § 6531(1)(8). See

also United States v. Fruehauf Corp., 577 F.2d 1038, 1070

10 26 U.S.C. § 6531 provides in part:

No person shall be prosecuted ... for any of the various

offenses arising under the internal revenue laws unless the indict-

ment is found or the information instituted within 3 years next after

the commission of the offense, except that the period of limitations

shall be 6 years—

(1) For offenses involving defrauding or attempting to defraud

the United States or any agency thereof, whether by conspiracy or

not and in any manner;

(8) for offenses arising under Section 371 of Title 18 of the

United States Code, where the object of the conspiracy is to attempt

in any manner to evade or defeat any tax or the payment thereof.

1049

244

1070 (6th Cir.), cert. denied, 439 U.S. 953 (1978). The

error is understandable because section 3282 applies

“[e]xcept as otherwise expressly provided by law,” but the

Statute does not name the exceptive statutes and leaves the

courts to search the United States Code for them, a

search which did not lead to section 6531 in Grunewald,

Klein, or Witt. In this respect this opinion has been

circulated before filing to the active judges in this circuit,

who have expressed no desire to hear the matter en banc.

SuCrest argues that its conviction on Count Four must

be reversed because as a matter of law a corporation

cannot be guilty of false declaration under 26 U.S.C.

§ 7206(1).'' That section is described as a perjury statute

and we are referred to the line of authority holding that

corporations cannot commit perjury since a corporation

cannot take an oath to tell the truth. See Note, 60 Harv.

L. Rev. 283, 284 (1946); United States v. John Kelso Co.,

86 F. 304, 306 (N.D. Cal. 1898). And it is said that the

Service has itself interpreted § 7206(1) and its predecessor,

§ 3809%(A) of the Internal Revenue Code of 1939, so as

not to apply to corporations, an interpretation which,

while not controlling, is entitled to considerable weight.

E.g., United States v. National Association of Security

ul 26 U.S.C. § 7206(1) provides:

Any person who—

. . « (willfully makes and subscribes any return, statement, or

other document, which contains or is verified by a written deciara-

tion that it is made under the penalties of perjury, and which he

does not believe to be true and correct as to every material matter(,)

shall be guilty of a felony and, upon conviction thereof, shall be

fined not more than $5,000, or imprisoned not more than 3 years,

or both, together with the costs of prosecution.

1050

254

Dealers, Inc., 422 U.S. 694, 719 (1975). But “person” is

defined in the Internal Revenue Code to refer to corpora-

tions, 26 U.S.C. § 7701(A)(1), and § 7206(1) refers to

“fajny person” willfully making and subscribing any

return or other document verified by a written declaration

that it is made under the penalties of perjury. Moreover,

in terms of the statutory history the 1939 Code § 52

provided that “[e]very corporation subject to taxation

under this Chapter shall make a return” to be sworn to by

a principal executive and a principal financial officer.

(Emphasis added.) Individuals were by the Revenue Act

of 1942 § 145(C) made subject to perjury penalties for

willfully making and subscribing false returns and the

1949 amendments to the Code adding § 3809(A) covered

any person, a term including trusts, estates, partnerships,

associations, companies, and corporations. See Sections

1426(f), 1532(i), 1607(k), 1805, 1931(b), 2733(i), 3228(2),

3238(a), 3797(a)(i) (1939), now collected in 26 U.S.C.

§ 7701(A). While a corporation has no independent state

of mind, the acts of individuals on its behalf may be

properly chargeable to it. See United States v. Demauro,

581 F.2d 50, 53 (2d Cir. 1978); J.C.B. Super Markets, Inc.

United States, 530 F.2d 1119 (2d Cir. 1976). Other

circuits have agreed under other analogous statutes.

United States v. Lange, 528 F.2d 1280 (Sth Cir. 1976) (18

U.S.C. § 1001); United States v. Milton Marks Corp.,

240 F.2d 838 (3d Cir. 1957) (18 U.S.C. § 287). Moreover,

the Internal Revenue Service has in fact prosecuted other

corporations for violations of § 7206(1). See, e.g., United

States v. Minnesota Mining & Manufacturing Co., 428 F.

Supp. 707 (D. Minn. 1976) (indictment dismissed on

other grounds), aff’d, 551 F.2d 1106 (8th Cir. 1977).

1051

264

We have examined the other contentions of the appel-

lants and find them without merit."

Judgment affirmed.

12

First, Rapaport’s argument that his cross examination of witnesses

was unfairly limited at best applies to the attempted re-cross of the

witness Azarow who had been cross-examined for what amounts to

170 pages of final transript. Moreover, Judge Carter aptiy noted that

the pedantic concerns of counsel on re-cross were designed “to confuse

and not clarify.” Second, Rapaport’s only tenable argument against the

admission of SuCrest’s 10-K Reports to the Securities and Exchange

Commission is that it might have been misunderstood to apply to

Rapaport as well as to SuCrest, an allegation mitigated by the court's

repeated instruction to the jurors that these statements did not apply to

Rapaport. Third, the government introduced evidence that SuCrest

had not even recorded the receipt of the Rionda sugar in its files, but

the records introduced covered two weeks and not the week that

intervened between them. The prosecution explained the missing week

by noting to the jury, after the defense was given an opportunity to

introduce a witness or submit a reason for the failure of the records to

cover the relevant week, that the files contained no report for the

intervening week. The statement would by no means necessarily lead

the jury to believe that the “defendants had suppressed or otherwise

critical evidence,” and any risk that this would

happen could have been cured by SuCrest through testimony or

suggested explanations to be included in the prosecutor’s statement.

Finally, Judge Carter’s instruction cautioning the jury that Rapaport’s

failure to testify could not be used to infer his guilt substantially

mirrored the one approved by this court in United States v. Lopez, 584

F.2d 1175, 1179 (2d Cir. 1978), and we decline to disapprove it here.

1052

27a

18 U.S.C, § 371

§ 371. Conspiracy to commit offense or to defraud

United States

If two or more persons conspire either to commit any

offense against the United States, or to defraud the United

States, or any ayency thereof in any manner or for any

purpose, and one or more of such persons do any act to

effect the object of the conspiracy, each shall be fined not

more thar $10,000 or imprisoned not more than five years,

or both.

If, however, the offense, the commission of which is the

object of the conspiracy, is a misdemeanor only, the punish-

ment for such conspiracy shall not exceed the maximum

punishment provided for such misdemeanor.

26 U.S.C. § 7201

§ 7201. Attempt to evade or defeat tax

Any person who willfully attempts in any manner to

evade or defeat any tax imposed by this title or the pay-

ment thereof shall, in addition to other penalties provided

by law, be guilty of a felony and, upon conviction thereof,

shall be fined not more than $10,000, or imprisoned not

more than 5 years, or both, together with the costs of

prosecution.

2ha

26 U.S.C. § 7206

§ 7206. Fraud and false statements

Any person wno—

(1) Declaration under penalties of perjury.— Will.

fuliy makes and subscribes any return, statement, or

other document, which contains or is verified by a writ-

ten declaration that it is made under the penalties of

perjury, and which he does not believe to be true and

correct as to every material matter; or

(2) Aid or assistance.—Wil!fully aids or assists in,

or procures, counsels, or advises the preparation or

presentation under, or in connection with any matter

arising under, the internal revenue laws, of a return,

affidavit, claim, or other document, which is fraudu-

lent or is false as to any material matter, whether or

not such falsity or fraud is with the knowledge or con-

sent of the person authorized or required to present

such return, affidavit, claim or document; or

(3) Fraudulent bonds, permits, and entries.—Sim-

ulates or falsely or fraudulently executes or signs any

bond, permit, entry, or other document required by the

provisions of the internal revenue laws or by any regu-

lation made in pursuance thereof, or procures the same

to be falsely or fraudulently executed, or advises, aids

in, or connives at such execution thereof; or

(4) Removal or concealment with intent to defraud.

—Removes, deposits, or conceals, or is concerned in

removing, depositing, or concealing, any goods or com-

modities for or in respect whereof any tax is or shall

be imposed, or any property upon which levy is author-

ized by section 6331, with intent to evade or defeat the

assessment or collection of any tax imposed by this

title; or

29a

(5) Compromises and closing agreements.—In con-

nection with any compromise under section 7122, or

offer of such compromise, or in connection with any

closing agreenient under section 7121, or offer to enter

into any such agreement, willfully-

(A) Concealment of property.—Conceals fron

any officer or employee of the United States any

property belonging to the estate of a taxpayer or

other persion liable in respect of the tax, or

(B) Withholding, falisifying and destroying rec-

ords.—Receives, withholds, destroys, mutilates, or

falsifies any book, documeut, or record, or makes any

false statement, relating to the estate or financial

condition of the taxpayer or other person liable in

respect of the tax;

shall be guilty of a felony and, upon conviction thereof, shall

be fined not more than $5,000, or imprisoned not more than

3 years, or both, together with the costs of prosecution.

26 U.S.C. § 471

§ 471. General rule for inventories

Whenever in the opinion of the Secretary the use of

inventories is necessary in order clearly to determine the

income of any taxpayer, inventories shall be taken by such

taxpayer on such basis as the Secretary may prescribe as

conforming as nearly as may be to the best accounting

practice in the trade or business and as most clearly reflect-

ing the income.

30a

26 U.S.C. § 472

§ 472. Last-in, first-out inventories

(a) Authorization —A taxpayer may use the method

provided in subsection (b) (whether or not such method

has been prescribed under section 471) in inventorying

goods specified in an application to use such method filed

at such time and in such manner as the Secretary may

prescribe. The change to, and the use of, such method shall

be in accordance with such regulations as the Secretary may

prescribe as necessary in order that the use of such method

may clearly reflect income.

(b) Method applicable—In inventorying goods speci-

fied in the application described in subsection (a), the tax-

payer shall:

(1) Treat those remaining on hand at the close of

the taxable year as being: First, those included in the

opening inventory of the taxable year (in the order of

acquisition) to the extent thereof; and second, those

acquired in the taxable year;

(2) Inventory them at cost; and

(3) Treat those included in the opening inventory

of the taxable year in which such method is first used

as having been acquired at the same time and determine

their cost by the average cost method.

(c) Condition—Subsection (a) shall apply only if the

taxpayer establishes to the satisfaction of the Secretary

that the taxpayer has used no procedure other than that

specified in paragraphs (1) and (3) of subsection (b) in

inventorying sucb goods to ascertain the income, profit, or

loss of the first taxable year for which the method described

in subsection (b) is to be used, for the purpose of a report

or statement covering such taxable year—

3la

(1) to shareholders, partners, or other proprietors,

or to beneficiaries, or

(2) for credit purposes.

(d) Preceding closing inventory.—In determining in-

come for the taxable year preceding the taxable year for

which the method described in subsection (b) is first used,

the closing inventory of such preceding year of the goods

specified in the application referred to in subsection (a)

shall be at cost.

(ec) Subsequent inventories—If a taxpayer, having

complied with subsection (a), uses the method described in

subsection (b) for any taxable year, then such method shall

be used in all subsequent taxable years unless—

(1) with the approval of the Seeretary a change

to a different method is authorized; or,

(2) the Secretary determines that the taxpayer has

used for any such subsequent taxable year some proce-

dure other than that specified in paragraph (1) of sub-

section (b) in inventorying the goods specified in the

application to ascertain the income, profit, or loss of

such subsequent taxable year for the purpose of a

report or statement covering such taxable year (A)

to shareholders, partners, or other proprietors, or ben-

eficiaries, or (B) for credit purposes; and requires a

change to a method different from that prescribed in

subsection (b) beginning with such subsequent taxable

year or any taxable year thereafter.

If paragraph (1) or (2) of this subsection applies, the

change to, and the use of, the different method shall be in

accordance with such regulations as the Secretary may pre-

scribe as necessary in order that the use of such method

may clearly reflect income.

32a

26 C.F.R. § 1.471-1

§ 1.471-1 Need for 'aventories

In order to reflect taxable income correctly, inventories

at the beginning and end of each taxable year are necessary

in every case in which the production, purchase, or sale of

merchandise is an income-producing factor. The inventory

should include all finished or partly finished goods and, in

the ease of raw materials and supplies, only those which

have been acquired for sale or which will physically become

a part of merchandise intended for sale, in which class fall

containers, such as kegs, bottles, and cases, whether return-

able or not, if title thereto will pass to the purchaser of the

product to be sold therein. Merchandise should be included

in the inventory only if title thereto is vested in the tax-

payer. Accordingly, the seller should include in his inven-

tory goods under contract for sale but not yet segregated

and applied to the contract and goods out upon consign-

ment, but should exclude from inventory goods sold (in-

cluding containers), title to which has passed to the pur-

chaser. A purchaser should include in inventory merchan-

dise purchased (including containers), title to which has

passed to him, although such merchandise is in transit or

for other reasons has not been reduced to physical posses-

sion, but should not include goods ordered for future de-

livery, transfer of title to which has not yet been effected.

(But see § 1.472-1.)