Brief for the United States — Berger v. United States

Jn the Supreme Gourt of the United States

Ocroper TERM, 1972 |

No. 71-1514

Son. BERGER, PETITIONER

v.

UntTep States, oF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App.

A-1 to A-6) is not yet officially reported. The opinion

of the district court (Pet. App. A-10 to A-26) is re-

ported at 325 F. Supp. 1297.

JURISDICTION

The judgment of the court of appeals (Pet. App.

A-7) was entered on March 29, 1972. The petition for

a writ of certiorari was filed on May 19, 1972. The

jurisdiction of this Court is invoked under 28 U.S.C.

1254(1).

471-070—72——-1

“ie

QUESTION PRESENTED

“Whether there is sufficient evidence to support the

finding of the district court that petitioner acted will-

‘fully ‘with intent to defeat and evade the income tax

liability of his controlled corporation in causing it to

take improper tax deductions for manufacturing costs

which were expenses of a wholly owned subsidiary.

. STATUTES INVOLVED

~-96 U.S.C. 482 is set forth at Pet. App. A-29.

26 U.S.C. 7201 provides as follows:

Any person who willfully attempts in any

mannez to evade or defeat any tax imposed by

this title or the payment thereof shall, in addi-

tion 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.

STATEMENT

After a bench trial in the United States District

Court for the Southern District of New York, peti-

tioner was convicted of having willfully attempted to

evadé income taxes owed for the years 1962, 1963

and 1964 by the Colonial Corporation of America,

in ¥idlation of Section 7201 of thé Internal Revenue

Goede of 1954 (R. 21a, 24a-25a).’ Petitioner was sen-

tericed to concurrent prison terms of eighteen months

on each count, with the conditions that ‘he be confined

pita) Se See

1“R” references are to the appendix in the court of appeals.

3

in a jail-type institution. for. three months, that execu-

tion of the remaining prison sentence be suspended,.

and that he be placed on probation for a period of

one year commencing upon expiration of confinement.

The court of appeals affirmed (Pet. App. A-1 to A-6).

Petitioner was chief executive officer of, and a con-

trolling shareholder in, Colonial Corporation of Amer-

ica (“Colonial”), a manufacturer of wearing apparel

(Pet. App. A-1, A-12). In 1959, Colonial organized a

foreign subsidiary, Colonial Shirts of Jamaice, Ltd.

(“Jamaica’’) in order to take advantage of the perma-

nent exemption which such a corporation would enjoy

from United States income taxes. Jamaica manufac-

tured shirts and sold its entire production to Colonial

(Pet. App. A-2, A-12).

For purpose of the United States customs duties im-

posed on Jamaica’s sales to Colonial, the corporations

established a price equal to the Shirts’ “constructed

value’ (R. 486a-487a, 488a). See 19 U.S.C. 1401a. The

price so determined was based on manufacturing costs

and included an allowance of a reasonable profit to

Jamaica. This price was substantiated by Colonial and

approved by a United States Customs Examiner.

Jamaica thereafter billed Colonial at this price (R,

069a). +3

The district court found that, beginning in 1959 or

1960, and at petitioner’s express direction, the head

bookkeeper of Colonial caused some of the invoices for

piece goods shipped and invoiced to Jamaica to be

entered in Colonial’s purchase journals and paid by

a

+

Colonial; quarterly reports of such entries and pay-

merits were made only to petitioner. The substance of

this praetice was that Colonial was thereby paying a

portion of Jamaica’s expenses, amounting to between

$50,000 and $75,000 per quarter; the effect of these

payments was that Colonial claimed a business ex-

pense which in fact was attributable to Jamaica, a cor-

poration not subject to federal income tax.

The district court accepted as true the testimony

of Colonial’s production chief and accountants that

this practice of having Coloniai make payments di-

reetly to Jamaica’s suppliers was not known by or dis-

closed to them. The district court disbelieved the testi-

mony of petitioner, who denied instructing the book-

keeper in this practice and testified that his fellow

officers agreed to these manipuiations in order to

insure a “fair profit’? to Jamaica (R. 1264a, 1353a;

1239). (Pet. App. A-5 to A-6, A-13, A-22 to A-26.)

These payments reduced Colonial’s reported income

tax liabilities in the amounts of $152,954.71, $123,-

065.09, and $191,417.77 for 1962, 1963 and 1964, re-

spectively (Pet. App. A-13; R. 1815a). The district

court held that these payments were not properly

deductible as expenses of Colonial (Pet. App. A-18),

and the court of appeals affirmed.

ARGUMENT

1. There is no merit in petitioner’s contention (Pet.

5-15) that Colonial was entitled to pay, and to claim

tax deductions for, Jamaica’s costs by virtue of Sec-

tion 482 of the Internal Revenue Code of 1954. Peti-

tioner did not testify that he acted in good faith

5

reliance on Section 482, or that he was even aware of

it, but claims (Pet. 8) that his shifting of purchase

costs from Jamaica to Colonial was a type of realloca-

tion of expenses which is impliedly approved as a

“safe haven” by Section 1.482-1(b) of the Treasury

Regulations on Income Tax, 26 C.F.R. 1.482-1(b).

Thus, despite his protestations (Pet. 12-13), it is he,

not the government, who relies on Section 482. How-

ever, Section 482 can be invoked only at the instance

of the government; use of Section 482 is not a matter

of right to taxpayer. See, e.g., Interstate Fire Insur-

ance Co. v. United States, 215 F. Supp. 586, 598 (E.D.

Tenn), affirmed, 339 F. 2d 603 (C.A. 6).

The courts below (Pet. App. A-5, A-18 to A-19)

found that the expenses in question were necessary

expenses of Jamaica and that their ‘‘clandestine pay-

ment’’ (Pet. App. A-4) by Colonial could only prop-

erly constitute a loan or capital contribution to Jamai-

ea, rather than a deductible expense of Oolonial.

This conclusion is consistent with the other facts

in the case. The Colonial official responsible for nego-

tiating the “constructed value,”’ or price, testified (R.

522a-524a) that it was based on the “exact’’ cost of trim

and a “very accurate’’ cost figure for piece goods and,

while taxpayer testified that he used the “smallest pos-

sible profit’’ figure, it was noted by the courts below that

Jamaica’s resultant profits, which varied from 6 to

13 percent of sales during the years in question, were

not “trifling’’ (Pet. App. A-8, A-14). The court be-

low properly reasoned (Pet. App. A-3 to A-,

A-17 to A-18) that these findings made distinguish-

sn eter svtr cis aii —

6

able the unusual situation where an expenditure by

a parent corporation to preserve the viability of a

subsidiary has been held an ordinary and. necessary

expense of the parent corporation.’ Petitioner’s case

is therefore governed by the rule that a parent cor-

poration cannot ordinarily deduct expenses incurred

by its subsidiary. Interstate Transit Lines v. Commis-

sioner, 319 U.S. 590.

As held by the district court (Pet. App. A-15 to

A-16) and the court of appeals (Pet. App. A-3 to

A-4), the correct tax liability of Colonial was fixed

by the form in which it chose to cast its transactions __

in the relevant tax years and it is no defense to these

criminal charges that petitioner might have arranged

Colonial’s transactions in those years so as to achieve

a: lower ‘tax for Colonial. United States v. Campbell,

351 F. 2d 336, 340 (C.A. 2), certiorari denied, 383

U.S. 907; United States v. Vardine, 305 F. 2d 60, 64

(C.A. 2); Clark v. United States, 211 F. 2d 100, 105

(C.A. 8), certiorari denied, 348 U.S. 911.

2. Petitioner’s contention (Pet. 16-20) that his con-

duct was not motivated by a desire to avoid taxes and

was not willful was properly rejected by the district

court (Pet. App. A-21 to A-26) and the court of appeals

(Pet. App. A-5 to A-6). Such a determination by the

district court is normally sustained if it is supported

by evidence which is substantial when viewed most

favorably to the government. United States v. Sheiner,

2Of course, if Jamaica had required additional funds this

could have been ‘achieved through an increase in the constructed

value.-Presumably petitioner desired to keep this price low in

order to minimize the 25 percent customs duty. See Pet. App.

A-16 to A-17.

7

410 F. 2d 337, 340 (C.A. 2), certiorari denied, 396

U.S. 825; United States v. Durant, 324 F. 2d 859, 864

(C.A. 7), certiorari denied, 377 U.S. 906. As the court

of appeals correctly summarized (at Pet. App. A-6):

The government’s independent evidence of will-

ful affirmative ‘acts beyond its proof of under-

stated taxes, Spies v. United States, 317 U.S.

492, 499 (1943) included the following: (1)

appellant directed Colonial’s bookkeeper to re-

move Jamaica invoices in the amount of $50,-

000 to $75,000 each quarter for treatment as

expenses on the books of Colonial; (2) he and

only he received from the bookkeeper separate

records which were kept of each false entry;

(3) he concealed this procedure from all other

_ top officers of Colonial, from Colonial’s account-

ants and from its outside auditors. Appellant’s

denials not having been credited by the trial

court, its finding of criminal intent beyond a

reasonable doubt is amply supported by the

evidence.

CONCLUSION

For the reasons stated, the petition for a writ of

certiorari should be denied.

Respectfully submitted.

ERwIn N. Grisworp,

Solicitor General.

Scorr P. CRAMPTON, 3

Assistant Attorney General.

JOHN P. BuRKE,

DanreEL B. RosEenBauM,

te Attorneys.

Jury 1972.

U.S. GOVERNMENT PRINTING OFFICE: 1972