Brief for the United States — United States v. Ragen

Nos, 04-06

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BRIEF FOR THE UNITED STATES

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Opinion below .

Jurisdiction. — -

Questions presented . -

Statutes and regulations invelved - -

Statement

Specification of errors to be urged

Summary of argument

Argument

INDEX

————

I. The prosecution Was maintainable even though some

services may have been rendered

Il. There was no variance between the indietment or the

Government's theory of the case, and the proof; the

charge to the jury Was proper

Conclusion

Appendix

CITATIONS

Cases:

Bennett v. United Siates, 227 U. S. 333

Berger v. United States, 295 U. 8. 78

Burton v. United States, 202 U.S. 344

Cavone v. United States, 50 F. (2d) 927

Commonwealih v. Reilly, 248 Mass. !

Cooper V United Ntales, 9 F. (2d) 216

Emmich v. United States, 298 Fed. 5, certiorari denied, 266

U.S. 608

Gleckman v. United Stetcs, 80 F (2d) 894, certiorari denied,

297 VS. 709

Gorin v. United States, 312 U. $8. 19

Gurik v. United States, 54 F. (2d) G18, certiorari denied,

285 U. &. S40

Flygrade Provision Co. V Sherman 266 L

Maddelin v. United States, 467 (2d) 266

Morrissey Vv. United Stales, 67 F. (2d) 2€7

Nash v. United States, 229 U.S. 373

Omaecherarria v. Idaho, 248 U.S. 345

Paschen \. United Staies, 70 F. (2d) 49!

Tinkoff v. United States, 86 F. (2d) 868, certir ran denied,

9 §

301 U.S. 689

{i aited States v. Brown, 116 F. (2d) 455

United States v. Cohen Grocery Co., 255 U.S. 81

422568—41——1 (I)

Cuses—Continued.

~

United States v. Glasser, 116 F. (2d) 690 __-. os 2

United States v. Kelley, 105 F. (2d) 982. —. : : 28

United States v. Mann, 108 F. (2d) 354_2.--..--- Ee a1)

United States v. Miro, 60 F. (2d) 58- We deo eee ‘£3

United Siates v. Murdock, 290 U.S. 389_......-.-.----- Pa

United States v. United States Fidelity Co., 236 U.S. 512 34

United States vy. Wurzbach, 280 U.S. 396_- 25

United States, v. Zimmerman, 1O8 F (2d) 370 28

Usary v. State, 112 8S. W. (2d) 7_--- = ae ; 26

Wagner v. United States, 118 F. (2d) 801, certiorari denied,

No. 180, present Tern. E Wie oars 28

Walker v. United States, 93 F. (2d) 383. .-.- “ 2)

Statutes:

Internal Revenue Code:

See. 23 (U.S.C. Supp. V, Title 26, See. 23; 29

See. 25 6U. 8. C. Supp. V, Title 26, See. 25) 29

Sec. 27 (U.S. C. Supp. V, Title 26, See. 27) 20

Sec. 101 (U.S. C. Supp. V, Title 26, See. 101) 29

See. 102 (U.S. C. Supp. V, Title 26, See. 192) 29

See. 105 (UL 8. C. Supp. V, Title 26, See. 105) 29

Sec. 112 «U.S. ©. Supp. V, Title 26, See. 112) 29

Sec. 113 (U. 38. C. Supp. V, Title 26, See. 113) : 29

See. 119 (U.S. C. Supp. V, Tétle 20, See. 119} 29

Revenue Act of 1932, 47 Stat. 169:

See. 73... me 36

Sec. 145 22, 24, 27, 36

Revenue Act of 1934, 48 Stat. 680:

Sec. 23 (U.S. C., Title 26, See. 23) 36

Sec. 145 (U.S. C., Title 26, Sec. 145) -- 3h

Revenue Act of 1936, 49 Stat. 1648:

pee; 23... : 37

Sec. 145___-. : : : 37

Miscellaneous:

Treasury Regulations 77, Art. 126 .__. ne Sa 37

Treasury Regulations 86, Art. 23 (a)-6____- eee ae 37

Treasury Regulations 94, Art. 23 (a)-6__ 2 -

Inthe Supreme Court of the United States

OcToBrR TERM, 1941

No. 54

THe UNITED STaTEs OF AMERICA, PETITIONER

v.

James M. RaGen

No. 55

THe Unitep States of AMERICA, PETITIONER

v.

ARNOLD W. KRUSE

No, 56

THE UNITED StraTES OF AMERICA, PETITIONER

v.

LESTER A. KRUSE

ON WRITS OF CERTIORARI TO THE UNITED STATES CIRCUIT

COURT OF APPEALS FOR THE SEVENTH CIRCUI1I

BRIEF FOR THE UNITED SiATES

OPINION BELOW

The opinion of the Circuit Court of Appeals

for the Seventh Circuit (R. 487-505) is reported

in 118 F. (2d) 128.

(1)

JURISDICTION

The judgments of the Cireuit Court of Appeals

were entered February 26, 1941 (CR. 505-507).

T! petition for writs of certiorari was filed April

2. 1941, and granted June 2, 1941 (R. 511). The

jucvisdiction of this Court is invoked under See-

tion 240 (a) of the Judicial Code, as amended by

tie Act of February 13, 1925, and the Rules of

Practice and Procedure in Crimimal Cases, pro-

mulgated by this Court.

QUESTION PRESENTED

The respondents were convicted of a wilful eva-

sion of income taxes of a corporation by making

distributions of corporate profits to the stock-

holders under the guise of payments of ‘‘comiuis-

sious’” which were deducted from the corporation's

gross income. The principal question presented ts

whether there is a sufficiently definite standard of

guilt for the jury to convict if any of the distrib-

utees rendered any services at all to the corpora-

tion.

STATUTES AND REGULATIONS INVOLVED

The relevant provisions of the statutes and reg-

ulations involved are set forth in the Appendix,

thi hye, })}). 36-37.

STATEMENT

On August 22, 1939. an indictment in tive eounts

Was returned agaist the respondents and others

in the Distriet Court for the Northern District

of THinois ¢R. 2-27). The first four counts

3

charged the defendants jointly with wilful at-

tempts to defeat and evade imcome taxes of the

Consensus Publishing Company, a corporation,

for the vears 1933 through 1936 by causing the

company to file returns which were false and

fraudulent. In substance, the charge was that

there were deducted from the gross income of the

company as business expenses certain amounts

designated as ‘fcommiissions, ” which were in fact

dividends or distributions of profits (R. 2-18).

~The dednetious thus claimed were as follows: 1933,

£54.537.65 (R. 6); 1934. F50.172.28 CR. 10); 1935,

$76,713.75 CR. 14): 1956, $119,755.78 CR. 18).

The fifth count of the indictment charged a

cousplracy to commit such offenses for the vears

1929 through 1936, consisting of a scheme to dis-

tribute the net profits of Consensus in the guise

of “Scotmmiissions’” or salaries for services. It was

charged that the scheme iivelved, among other

things, the execution of spurious employment con-

tracts and the falsification of books and records

(CR. 18-27). This count also alleged that the de-

rendants did not im facet perform any services for

the company by virtue of the employment con-

tracts,

The #fv returned a verdict finding each of the

iespondents cuilty on all five counts, except Lester

Kruse, who was found guilty on the fourth and

nfth counts (R. 237-238). The court imposed

'The corporation also was convicted and fined (R. 237,

245). but took no appeal.

4

the following sentences: Arnold W. Kruse, eight-

een months’ imprisonment and a $10,000 fine;

William Molasky, a year’s imprisenment and a

$10,000 fine; James M. Ragen, Sr., imprisonment

of a vear and a day and a $10,000 fine; James

Ragen, Jr.. and Lester A. Kruse, fines of $1,000

each (CR. 239-245). On appeal to the Circuit

Court of Appeals for the Seventh Cireuit the eon-

Victions were reversed (R. 505-507). The Gev-

erument’s petition for rehearing was demied on

Mareh 18, 1941 (R. 507).

The evidence supporting the verdict of the Jury

may be summarized as follows:

Organization and Business of the Company.--

The Consensus Publishing Company, the taxpayer

corporation, was organized under the laws of the

State of THlimois in 1929 (R. 334, 373) pursuant to

an agreement between Moses L. Annenberg, Ar-

hold W. Kruse, James M. Ragen, Sr.. and William

Molasky, fer the purpose of carrying on the busi-

ness of printing and selling “run-down” sheets to

bookmakers (R.323,392). The ‘trun-down”’’ sheet

husiness was originally started in St. Louis in 1927

> Various preliminary motions and pleas were filed by the

respondents, which were overruled or denied by the District

Court. The Circuit Court of Appeals, however. held that

the District Court erred in dismissing special immunity pleas

in bar filed by William Molasky and James Ragen, Jr. OR,

491-496). The Government bas not requested that this rul-

Ing, Which affects only William Molasky and James Ragen,

Jr. be reviewed by this Court.

o

or 1928 by Julius Zweig. However, shortly after’

Molasky brought out a competing sheet, Zweig

sold a sixty percent interest in his business to

Molasky and associates for $1,000, and later dis-

posed of his remaining forty percent interest in

the same manner for $9,500 (R. 319, 320). There-

after the business spread to Cincinnati and other —

places (Tt. 498).

The “run-dewn” sheets, printed and distributed

daily, showed the herses running at the various °

race tracks throughout the country with their post

positions and code numbers for deciphering racing

information sent out over the wire service fur-

nished by Nationwide News Service, an Amnen-

berg corporation, of which James Ragen was gen-

eral manager (R. 322, 392). Since the racing

information contained in the wire service re-

b

fecred to each horse by “eryptie’’ code number

rather than by name, it was necessary to purchase

the *‘run-down" sheets in order te be able to use

the wire service (R. 393).

This business, while lucrative, was mechanically

simple. It merely involved not.ng and printing on

a sheet the racing information which came over

the News Service wires and the distribution

thereof to bookmakers at twenty-five or thirty-five

cents a sheet (R. 320-321). Printing and selling

costs were low, type setting could be done by one

man in four or five hours, and the printing itself

by another in one or two hours (R. 321). The

collection of receipts, preparation of records and

6

reports and such supervision of the printing of

the sheets as was required, which ‘*wasn’t much’’,

was done by Gordon Brooks, an employee «— an-

other company owned by Molasky (R. 350-351).

In Cincinnati the *trun-down"™ sheets were printed

by the American Racing Record, another Annen-

berg company (R. 356), and distributed by one

Surlin, a news distributor for Annenberg (R.

396). All receipts were sent to the St. Louis

office where they were received and deposited in a

bank account by Brooks (R. 353). The foregoing

activities required, at most, about an hour or an

hour and a half of his time every day, except that

once a Week “the night spend three hours” making

out the operating reports forthe Chicago office (R.

251). In answer to repeated questions by tlic

court at the trial, Brooks testified that there

wasn't much supervising that had to be done but

that he did all of it and no one else did any (R.

352). | |

Stock ownership and records.—The 100 shares

of stock of the company were divided as follows:

Cecelia Investment) Cempany (an Annenberg

holding company, thirty shares, Molasky, thirty

shares, Arnold Kruse, twenty shares, James Ragen,

Sr., twenty shares (R. 333-334, 385)... The evi-

* Thirty shares originally were issued to Molasky, of which

fifteen shares were subsequently transferred to his niece, B.

Hoffman OR, 334, 3895, 429, 497, 499). The distributions on

the shares in the name of B. Hoffman were deposited in Mo-

lasky’s own account upon which his niece had no right to

~

é

dence shows, as the court below conceded, that the

one hundred shares of stock of the company were

first issued to *‘dummies’? with the exception of

thirty shares which were issued to Molasky (R.

497). The respondents strongly contended that

they were not stockholders, and that all the stock

was owned by the Cecelia Investment Company.

The court below, however, recognized that the

record (R. 333, 348, 350, 364) justified the conclu-

sim that the defendants were in fact stockholders

(R. 499).

The company maintained its principal business

office at St. Louis, Missouri. The books, however,

were kept in the Chicage office of the Daily Racing

Form, an Annenberg company, and tax returns

were filed in the Chicago District. Each week

reports of all the receipts and expenses of the

draw (R. 427-429). ‘Twenty shares originally were issued to

A.W. Krause in the name of “Clark,” and held by Kruse, the

distributions thereon being assigned to his wife and son,

Lester Kruse (R. 334, 377, 497, 499) 5 in 1935 a new certifi-

eate for these shares was issued in the name of Herbert S.

Kamin as “dammy” for Kruse (R. 379, 880). The distribu-

tions made in the name of his wife were, however, deposited

in his own account (R. 427). as were those made in the name

of his son in 1923 and part of 1984 (R. 427, 428); other dis-

tributions were placed in an account which was in the name

of his son, but all of the checks on which, with few excep-

tons, were drawn by him (R. 363, 427-429). Twenty shares

were issued to J. M. Ragen, the distributions thereon Leing

assigned to J. M. Ragen, Jr.. in 19.31 (R. 334, 376, 426-428,

499). Changes in the distribution o1 profits were not aecom-

panied by changes in steck records. In 1937 distributions

Were again made directly to Molasky and Kruse (R. 429),

422568—41 2 y

a a mm me

s§

business, showing the balance of profits remainmg

after the deduction of expenses, were sent from

the St. Louis office to the Chicago offices of the

Annenberg companies, which operated under the

supervision of Arnold Kruse (R. 322, 351). The

bookkeeper who received these reports ¢onstructed

his own work sheets on whieh he computed thie

receipts, expenses, net profits, and distribution of

the profits (R. 414). Reports showing this in-

formation were sent to the stockholders each week

(R. 334). The bookkeeping svstern was set up as

directed by Arnold Kruse (R. 410, 411, 416).

Distribution of profits.—The net profits of th

business were distributed weekly in direct propoy-

tion to the stockholdings (R. 324, 340-341, 35s-

399, 426-428). The responaents contended, Low-

ever, that Cecelia alone receeised dividends, the

balance of the net profits, or seventy percent, being

distributed not as dividends but as commissions

for services.’ The books of the company showed

* The respondents contended, and, although attaching |i

tle significance to it, the court below found some testimony

to sustain the contention (R. 500), that an arrangement wa-

made at the Inception of the business to pay commissions for

services. “Ti.s contention is ‘sed on the testimony of

Howard Clark, the first bookkeeper, who was called a- a

witness of the court. as to a conversation alleged to have

taken place at that time between Annenberg, Kruse, Ragen.

Sr. and Molasky. The alleged conversation was repeate:

verbatim three times (R. 416, 419. 421) by the witness at

widely spaced intervals in his cross-examination, althoug!:

he denied having memorized it. In any event, the jury

by its verdict rejected this testimony. as it was fully justs-

fied in doing.

q

these distributions as Commissions, as was neces-

sary if they were to be claimed as a deduction

for business expense (R. 327-3380). This was in

accordance With instructions from Kruse who told

the bookkeeper to charge seventy percent of the

net profits of the company as commissions (I.

411). There is, however. substantial and cogent

evidence that the payments were in fact dividends

or distributions of profits and not commissions,

The confidential weekly reports to the stockhold-

ers from October 12, 1929, through August 19,

133. and from June 5, 1937, through November 5,

1937. labeled these distributions as dividends (Rh.

30-335, 337, 414). Similarly, from September

124, through August 19, 1933, and in some im-

stances thereafter, the private work sheets of the

hoakkeepers showed distributions of ‘‘dividends”’

“The court below apparently attached some significance

to the fact that the tax returns disclosed the deductions tm

question (R. 501). Obviously, however, the listing of these

deductions in the returns was essential if a reduction of the

taxable het recone of the corporation were to be secured,

Again, the opinion states asa fact that the returns had been

audited, ipiplying that the Government had knowledge of

the facets. This receives no support in the record, as the trial

court repeatedly advised that questions concerning such ex-

aininations were immatertal (R. 437. 458, 440). Further,

sich an examination, even if made. would not be binding on

the Government. Cooper v. United States. 9 BP. (2d) 216, 223

(LCL AL Sthy: Guazik ve United States, 54 F. (2d) 618

(©. CL A. 7th), certiorari denied, 28s U.S. 545.

‘Most of the other weekly reports used the descriptive

plrase “dividends and commissions” (R. 334). One con-

tained the statement “No dividends this week.” (R. 337.)

eel

10

rather than ‘‘eommissions’* CR, 529-3380, 337, 335,

SOR, BOL, 411, 412, 418). Molasky and his miece

reported these distributions as dividends i their

tax returns for the vears 1933 through 1935 CR.

308 and Ex. 47-53). A letter from a bookkeeper

to Molasky, dated December 21, 1935, stated that

“no dividend cheeks’ would be issued until he

could tatk with Krause with respect to the five per-

cent tax on dividends CR. 381). Kruse advised

the bookkeeper that the division among the stock-

holders was an arbitrary arrangement CR. 342-

344).

Destruction of stock records and crccution of

pre-dated contracts of employment ——-In 1954,

Kruse, becoming concerned about a Board of Tax

Appeals decision holding that distributions of

profits as commissions but in accordance with

stockholdings would not be allowed as a deductible

expense GR. 398-397), instructed an employee te

destroy the original stock book of the eompany.

He alse instructed the employee to issue new stock

certificates to the original incerporators from a

new steck book as of the date of the meorpora-

tion of the company, September 18, 1929; and, also

as of the same date, to cancel such new certificates

and isstie one certifieate for one hundred shares

of stock to Cecelia. The instructions as te the new

certificates were followed. The original stock

hook, however, was not destroyed until sometime

later and the original steck certificates were re-

tained by the stockholders until 1938 when they

were carefally torn up or otherwise dest raved.

The destruction of the original stoek book. an

admittedly “irregular procedure’ (CR. 379), wos

desired by Kruse in order to aveid “ annecessary

questions’? (RL 375) belag raised with respect to

the stock ownership CR. 376). Ino April 1935,

Kruse himself caused his original stock certificave

to be cancelled and a new one from the origimal

stock book, which had not then been destroyed,

to be issued in the name of a “tdummy™” CR. 3580).

In 1955, or 1936, Kruse iastructed an emplovee

to draw up written contracts of employment be-

tween the company and the individuals in whose

name the profits of the company had been dis-

tributed CR. 381-384). Purported employment

contracts were drawn and dated back over all the

years to and including 1980, and were signed in

Intk by the individuals (R. 399, 400, 403, 404,

4067). In addition, corporate minutes reflecting

the “stock issue’? in 1934 and these contracts were

also drawn up and dated back for the entire pe-

rid from 1930 for which tio minutes had previ-

ously existed (R. 378, 383, 384).

The court below, while failing to see their rele-

Vance te Imcome tax evasion, recognized that these -

transactions ‘strongly indicate that some sort of

chieanery Was in progress’ (R. 501).

"Molasky's certifieate was torn up and thrown down a

toilet, Kruse's was torn up and thrown in a wasvebasket, and

Rayen’s was burned (R. 354,385).

12

Whether defendants performed any services,—

The court below stated (R. 500) that there was

‘considerable testimony in the recerd of services

rendered by Molasky, who was president of Con-

sensus, as well as by Kruse, Sr., and sonie eviderce

of services performed by the other defendants.”

Molasky and Arnold pe hpsigiontys did per-

form some services (R. 322-323, 326, 341, 354-

355). But there is also evidence that little or no

services were perfornied by the other respondents

CR. 341, 353, 355). The witness Burris, an em-

plovee of another Annenburg company, who did

bookkeeping work for Consensus for two years (R,

339), testified that he had no knowledge of any

work that Lester Kruse, or Ragen, Sr.. or Ragen,

Jr., ever did for Consensus (R. 341, 344). The

bookkeeper Brooks similarly stated that, although

he had talked to them over the telephone, he did

not know any of these men and had never seen

them in the office of Consensus (R. 353, 555),

When apes on his statement that he had often

talked to Lester Kruse, lie was unable to remet-

her when he ever talked to him and finally ae

mitted he had done so only twice CR. 355).

None of the respondents testified or offered ans

testimony im his own behalf.

The court charged the jury in part as follows

CR. 470-471)

‘The only exception taken to this charge was as follos

(R. 473):

“T take exception to the doctrine announced — at if thes

find that this tax, or any substantial part thereof, was evade.

13

So it is a vital question in this case of

whether the Consensus Company was en-

titled to deduct from its income the sums

distributed to the defendants as ordinary

and necessary expenses of its business. The

question is whether it should not rather have

reported that those distributions were dis-

tributions of the profits of the company to

its shareholders rather than the payment of

compensation to employees and about that

this whole case centers,

* ” * aa *

If, on the other hand, if they were in-

tended to and represented actual bona fide

compensation to employes of this corpora-

tion in the ordinary operation of its busi-

ness; in other words, if they were ordinary

and necessary expenses of the operation of

the business, then the were properly de-

ductible as they were G ducted aud no tax

was due upon them.

* * * * *

Men that work for corporations are eu-

titled to proper Gompensation, whether they

be stockholders, directors, or officers. They

are entitled to reasonable compensation for

such services as they may render, irre-

spective of their official connection with the

corporation, On the other hand, share-

holders are entitled to a division of the

profits of the corporation in the way of divi-

dends and it is for vou to decide whether

these were, or whether 2 substantial portion

or attempted to be evaded, that they may find the defendants

guilty.”

14

thereof was, a distribution of profits rather

than the compensation of employes.

I use the words, ‘‘Tiese sums or a sub-

stantial portion thereof.’” Jt is not neces-

sary for the government under this indict-

ment to prove that all of the sums so dis-

tributed to these defendants were profits.

It is not necessary that the government

prove all of the figures precisely as they are

charged in the indictment. Jt is sufficient

if you find beyond a reasonable doubt that

the defendants intentionaliy diverted profits

of this concern, tn the amounts charged in

the indictment or substantial parts thereof,

diverted them from the form of profits and

received them in the form of commissions.

That, as I said, eomes back always to the

ultimate question that you have got to decide.

[ Itahes supplied. ]

SPECIFICATION OF ERRORS TO BE UEGED

1. The Cireait Court of Appeals erred in hold-

ing that the standard of guilt was unconstitution-

aliy indefinite.

2. The Cireuit Court of Appeals erred in hold-

ing that where a statute permits a reasonable de-

duction for services a ertininal prosecution can-

not be maintained by proof other than that such

services Were not rendered,

3. The Cireuit Court of Appeals erred in hold-

ing that when the proof shewed that services had

heen rendered, the trial should have proceeded no

further.

15

4. The Circuit Court of Appeals erred in hold-

ing that the Government had the burden of es-

tablishing that none of the defendants rendered

any services to the Consensus Publishing Com-

pany. |

5. The Cirenit Court of Appeals erred in hold-

ing that the charge of the District Court was im-

proper.

6. The Circuit Court of Appeals erred in revers-

ing the judgments of the District Court.

SUMMARY OF ARGUMENT

I

The single issue raised by the indictment was

whether the defendants wilfully attempted and

conspired to evade and defeat in any manner the

income taxes of the Consensus Publishing Com-

pany in Violation of Section 145 (b). The indict-.

ment did not charge, ner did the Government

undertake to prove, that none of the respondents

rendered any services to the corporation. The

basic question Was whether the defendants wil-

fully and = fraudulently emploved the ‘eommis-

sions’’ device as a means for distributing cor-

porate profits to the stockholders, and the evidence

presented to the jury was amply sufficient to sus-

tain a finding that they did.

The prosecution was maintainable even though

some services may have been rendered. The gist

of the offense charged by the indictment is not the

16

amount of tax evaded, but rather whether there

was a wilful attempt ‘fin any manner to evade

or defeat any tax.’’ Seetion 145 (b). The deci-

sion below that the prosecution is not maintain-

able where some services have been rendered erro-

neously rests upon the doctrine of United States

v. Cohen Grocery Co., 255 U.S. 81, where it was

heid that a ertnunal statute which is so vague as

to compel a man to speculate at his peril as to

whether his actions fall within the statute is in-

valid under the due process clause.

The doctrine of that case has no application here

where there is involved the question of the standard

of proof before a jury rather than the validity of

the statute itself. Moreover, even if the doetrine

were otherwise applicable, the court has mis-

applied it here. The essence of Section 145 (b) is

that the evasion must be wilful. Aceordingly, the

defendant is never left to speculate whether his

acts fall within the statutory prohibition.

II

The brief also undertakes not only to show that

there was no variance between the indictment, or

the Government’s theory of the case, and the

proof, but also to discuss the propriety of the

charge to the jury, although it is not clear to what

extent these questions are involved in this case.

17

ARGUMENT

Introductory—In_ substance, the Government

contended in the court below that the evidence

showed that the defendants were stockholders of

the Consensus Publishing Company and attempted

to conceatthat ownership; that, in an effort to

cheat the Government of taxes, they knowingly

received dividends on the stock owned and held

by them and attempted to conceal and misrepre-

sent the character of these distributions so that

they might be fraudulently deducted from the cor-

poration’s gross income as business expenses.

These contentions are fully consonant with the

charges contained in the indictment and are amply

sustained by the record.

The first four substantive counts of the indict-

ment, charging wilful attempts to evade and de-

feat the income taxes of Consensus Publishing

Company for the vears 1933 through 1936, alleged

in substance that the returns of the Company were

false and fraudulent in that they included among

the deductions taken from gross income certain

amounts designated ‘commissions,’ which were

in fact distributions of profits or dividends. The

fifth count, charging a conspiracy to commit simi-

lar offenses for the years 1929 to 1936, inclusive,

alleged, among other things, that the respondents

were not employed in any capacity by the corpora-

tion by virtue of the so-valled ‘temploviment con-

18

tracts ‘and rendered noe serviees by virtue of such

contracts,

On these charges the single issue before the trial

eourt and the jury was whether the defendants

wilfully attempted and conspired to evade and

defeat in any manner the income taxes of the Con-

sensus Publishing Company in violation of See-

tion 145 (b). This was a simple issue of fact,

resolved by the jury's verdict. The majority

opinion of Cireuit Judge Major, however, con-

tains an elaborate narration of the evidence (R.

497-502). It undertakes to cast a balance between

the conflicting inferences, approving some of the

Governivent’s contentions (R. 49@), and more of

the respondents CR. 500-502). The plain infer-

ence of this othemvise irrelevant and rather one-

sided discussion is that the court reversed because

it did not think the evidence sufficient to support

the verdict.” The opinion itself nowhere makes

any such express ruling; it does, however, con-

tain the assertion that the Government had the

burden of establishing that mene of the defend-

ants had rendered any services to the corporation

CR. 502), and that the trial should have termi-

nated upon a showing that services had been

rendered by at least) some of the defendants

CR. 503).

* The respondents in their answers to the Government's pe-

tition for certiorart assert that the principal question in

volved is the sufficiency of the evidence (Bro in Op. No, 974

PEO Permi.p. us Broun Op. Nas. 995 976 [IO Terms.

. ob)

i

19

It is our position that the verdict was fully war-

ranted even though some of the defendants may

have rendered some services, and that the District

Court correctly charged the jury (R. 471) that “Tt

ix not necessary for the government * * *— to

prove that all the sums so distributed to these

defendants were profits. * * * It is sufficient

if vou find bevond a reasonable doubt that the

defendants intentionally diverted profits of this

* * *

concern, in the amounts charged or sub-

* * # 99

stantial parts thereof In short, we

contend that, whether or not any services may have

been rendered, there has been a eriminal violation

of the imcome tax laws if the defendants, with im-

tent to evade taxes, fraudulentiv utilized the ‘com-

missious’” device as the means for distributing

substantial amounts of corporate earnings to the

stockholders. Sueh. in essence, was the charge to

the jury, and #¥s verdict im response thereto is

amply supported hy the record. The fact that the

essential operations of the company were simple

and were carmed on largely by part-time em-

plovees; the facet that at least some of the defend-

ants rendered no services at all, or at best, only

fragmentary services; the fact that the profits of

the enterprise were distributed weekly in’ exact

proportion to stock ownership: > the fact that the

hbookkeepers” work sheets and weekly reports. re-

“Since the defendants were im fact stockholders, as the

opinion of the court below concedes CR. 499). the contention

that seventy percent of the net profits was distributed to the

20

ferred to these distributions as ‘‘dividends’’; the

fact that Molasky and his miece actually reported

the distributions as dividends; the fact that the

defendants participated in the destruction of erit-

ical documents and in the execution of spurious

predated contracts of emplovment—all these fur-

nish overwhelming support for the jury’s conelu-

sion that the ‘tcommissiens”’ device was wilfully

employed as a means for distributing corporate

earnings.

If, in the face of such substantial evidence and

the persuasive inferences that may properly be

drawn therefrom (United States v. Mann, 108 F.

(2d) 354 (C. C. A. Tth)), the eourt im fact reversed

because it did not think the evidence sufficient to

support the verdict, it would have been guilty of

a flagrant invasion of the province of the jury.

Burton v. United States, 202 U.S. 344: United

States v. Brown, 116 F. (2d) 455 (C. C. A. 7th);

United States v. Mann, supra. Further, it would

have proceeded in complete disregard of the fun-

damental principles of appellate review that the

reviewing court will only look to the recerd to

see if any substantial evidence appears which

supports the verdict, and, in determining whether

there is such evidence, will view the evidence in

dufrudants as commissions leads to the anomalous conclusion

that only one of the stockholders, the Cecelia Company.

received dividends,

21

the light mast favorable to the Government "

(United States v. Glasser, 116 F. (2d) 690 (C. C.

A. 7th); Maddelin y. United States, 46 F. (2d) 206

(CC, A. 7th); Walker v. United States, 93°F.

(2d) BRB CCL CL A. &th)), and will assume that

all conflicts were resolved against the respondents.

Morrissey v. United States, 67 F. (2d) 267

(C.C.A.8b). .

However, the court attempted to aveid running

afoul of these rules of appellate review, and did

not expressly rule upon the question whether the

evidence supported the verdict. Instead, it re-

versed the judgments upon the ground ‘‘that

where a statute permits a reasonable deduction

for services, a criminal prosecution cannot be

maintained by proof other than that such services

were not rendered”’ (R. 502). And the opinion

indicated further that proof of the rendition of any

compensable service required a directed verdict

(R. 503). The contrary result, said the court (R.

502), would leave to the triers of fact the deter-

" Moreover, belated arguments on the evidence following

the refusal of the respondents to take the witness stand are

entitled to little consideration.

“The argument is one not infrequently presented to an

apreflate court, where the accused is convicted on evidence

which to him seems unimpressive and which he declined to

explain or dispute by his own word spoken from the wit.

hess stand. * * * But, on appeal, when he challenges

the evidence to support a verdict against him, he cannot

fairly ask a court to assume that the prejudicial facts which

are unexplained could have been overcome on various

hypetheses had the aceused testified.” Guzik v. United

States, 54 F. (2d) 618, 620 (C. C. A. 7th).

99

-——

mination of whether the amount charged is unrea-

sonable, with the consequence that the standard

of guilt would be unconstitutionally indefinite.

Cf. United States v. Cohen Grocery Co., 255

U.S. 81.

We respectfully submit that the court erred,

and will contend first that the prosecution ean be

maintained even though some services may have

been rendered, and second that there was no

variance between the indictment, or the Govern-

ment’s theory of the case, and the proof.

I

THE PROSECUTION WAS MAINTAINABLE EVEN THOUGH

SOME SERVICES MAY HAVE BEEN RENDERED

1. The gist of the offense charged by the indict-

ment is net the amount of the tax alleged to have

been evaded, but rather, in the language of

Section 145 (b). mfra, p. 36, the wilful attempt

“in any manner to evade or defeat any tax.”

Gileckman V. United States, 80 BF. (2d) 394, 401

(C. Co A. Sth). certiorarl: demed, 297 U.S. 709.

The Government is not required to prove evasion

of the entire amount charged. Tinhoff v. United

Stiwes, 86 F, (2d) 868, 878-879 (CG, C. A. 7th),

certiorarl denied, 801 U.S. 689. Accordingly, any

Variation from the iidictment figures is whelly im-

material if, as correctly charged by the triai court,

a substantial portion of the payments involved

constituted distributions of corporate profits rather

than time commissions,

23

The court below did not deny that ordinarily a

conviction could be supported if evasion were

proved in a lesser amount than that charged in

the indictment. The narrow ruling of the court

relates solely to the situation where the gvasion

is accomplished by means of improper deductions,

such as deductions for payments of reasonable

compensation. In that situation, said the court

(R. 502), the Government must prove that no

services at all had been rendered, for, if services

had been rendered it would be necessary to deter-

mine their reasonable value, resulting in an in-

definite standard of guilt.” Ilowever, it does net

The path marked out by the court below in reaching this

conclusion, as we follow it, starts with the finding that some

services were rendered, continues with the statement that

services are naturally compensable, and ends with the find-

ing that since business expenses are deductible by statute,

the issue presented to the jury was whether the respondents

had taken deductions of unreasonable amounts for services.

Such a charge, according to the court below, furnishes no

valid basis for a criminal prosecution as there is lacking a

sufficiently definite standard of guilt to guide the jury in its

deliberations. "The pos: bility that the jury might justifiably

have found that all the distributions in question were divi-

dends is answered by the finding that the trial court’s in-

structions permitted he jupy to determine what portions

were a distribution o po what portions would be

deemed reasonable con pens#ton for services. ‘The logic of

this progression, we sul mit, is at best doubtful. Compensa-

hon may perhaps ordina ‘ily follow the performance of serv-

lees, but. particularly in the circumstances here presented,

the inevitability of the sequence is by no means clear. Stock-

holders do not always receive their rewards for such services

as they may render in the form of salaries and comiissions.

OE a

24

at all follow that even where some services may

have been rendered, the distributions may not be

dividends in their entirety. But even if it may be

necessary to diminish the distributions by the

reasonable value of the services rendered, we

nevertheless submit that the respondents have per-

petrated a fraud upon the revenues and that they

were not subjected to an indefinite standard of

guilt.

2. The decision below rests upon United States

v. Cohen Grocery Co. 255 U.S. 81, and related

cases where it was held that a criminal statute so

vague in terms as to compel a man at his peril to

speculate as to whether his actions fall within the

statutory prohibition, violates the constitutional

requirement of due process. But that doctrine

can have no application to the crimes specified in

Section 145 (bh), for Congress has there provided

for the punishment of ‘fane person who willfully

attempts In any manner to evade or deteat any

tax.” [Ttalies supplied.j This is not language se

vague and indefinite that innocent men must at

their peril grope for an intelligible meaning.

At the very outset, it should be observed that

the court has erroneously extended the doctrine of

the Cohen Grocery case far beyond its proper

limits. That doctrine condemius statutes whieh,

unlike that here involved, contain language so

vague as to be incapable of intelligent interpre-

tation. It does net strike at whatever uncertain-

ty may be engendered in the mind of an individual

25

as to whether or not a jury may find a particular

act to fall within the proseriptions of an unam-

biguous statute. The standard of guilt by which

the respondents were judged is no less definite or

less susceptible of uniform application than stand-

ards applied in eases of manslaughter, for exam-

ple. Where conviction nay turn on whether or not

there was criminal negligence or adequate prevo-

cation ov sufficient time fer a reasonable man to

cool off. Such uncertainty is often present. As

this Court pointed out in Nash v. United States,

229 U. S. 373, 377:

* * * the law is full of imstanecos wi. re

ao man’s fate depends on his estimating

rightly, that is, as the jury subsequently

estimates it, some matter of degree. If his

judgment is wrong, not only may he incur a

fine or a short imprisonment, as here; he

may ineur the penalty of death. ‘*An act

causing death may be murder, manslaugh-

ter or misadventure according to the degree

of danger attending it’? by common experi-

ence we the circumstances known to the

acter.” © * ©

Ct. lonited States v. Wurzbach, 280 U.S. 296, 399.

But even assuming that the doetyvine of the

Cohen Grocery case is otherwise aprlieable to this

type of situation, the court belew inisapplied it

here, It proceeded in comm ** disregard of the

fact that the statute reqvies that there be a

wilful attempt at evasion. ¢ vated States v. Mur-

dock, 290 U.S. 389 This requirement affords

26

tuli protection for the innocent and removes all

grounds for constitutional attack because of in-

definitencss. On several occasions this Court bas

noted that a suceessful attack based on undue

vagueness cannot be made where the sanctions of

the statute apply only if intent or serenter is first

established. Omuechevarria vy. Iduho, 246 U.S.

343, BAR; Hyyrade Provision Co. vy. Sherman, 206

U.S. 497. 501°) The most recent recognition of

the confining force of the requirement of intent is

found in Gortn v. Cnited Stafes, 212 U.S. 19, in-

volving couvictions under the Espionage Act of

June 15, 3917. In discussing the contention that

certuli sections of that Act were too indefinite,

this Court said (p. 27):

Birt we find no uncertainty in this statute

Which deprives a person of the ability to

predetermine whether a contemplated action

Ix criminal under the provisious of this law.

This Court has never held a statute invalid for indefi-

niteness Where sect nfer was clearly required for the violation.

Section 4 of the Lever Act was held invalid in (nitfed States

Vv. Cohen Grocery Co. supra, The statute as quoted in 255

U.S. at S86 reads as though intent were required. But the

full text of the section. a= set Gut 255 U.S. at S182. shows

that inteng was no part of tlie clauses under attack. As stated

In Grorin NV. Conited States, G12 UL S 19. v6. chat eae “Dolmts

tides

ont that the statute there > > consideration forbade neo

specific act. that it really pan'tshed acts ‘detrrmental to the

public miterest when unjust ead unreasonable’ moa jury's

\ ew.” To thie sithe eff. cl, S02 Commonite ath Vv. R. Wy, 4s

Mass. 1.4-7. 142 N. Eo 915.918 (Mass. 1924: : Usary vo State,

Liz os. W. (2d) 7. 10-11 (Tenn. 1988).

27

The obvious delimiting words in the statute

are those requiring “intent or reason to be-

lieve that the information to be obtained is

to be used to the injury of the UWhited

States, or to the advantage of any foreign

nation.’ This requires those prosecuted to

have aeted in bad faith. The sanctions

apply only when serenter is established,

It seems clear, then, that even assuming that

the court below properly construed the charge

against the respondents, the rule against indefi-

niteness has no relevance here. However, we con-

test the narrew construction placed upon the

charge by the court below. The respondents were

indicted on the charge that they had wilfully at-

tempted to evade and defeat taxes in violation of

Section 145 (b). That section does not particular-

ize the means ef violation, but covers all wilful

+e ,

attempts to evade any tax “in any manner.’

And ‘** * * by the words fin any manner’ in

Section 146 (6) fof the Revenue Act of 1928, sub-

stantially identical with the provisions of Section

145 (b) involved bercin], Congress indicates an

intention te cever ail possible methods of eva-

sion; * * *."" United States v. Miro, 60 F.

(Pd) 58, 60 (0. CL. AL Pd). **The real character

of the offense lies, not inthe faihire te tile a return,

or in the filing of a false return, but rather in the

attempt to defraud the government by evading the

tax. ‘The technique may differ, but te opus is the

same” Binanteh vo United States, 298 Fed. 5. 9

Ww

ms

(CO. C. A. 6th), certiorari denied, 266 U. S. 608.

See also Capone v. United States, 56 F. (2d) 927

(C. C. A. 7th); Paschen v. United States, 70 F.

(2d) 491 (C. C. A. 7th).

Whether attempts to evade taxes take the form

i

of false deductions" or failure to file a return or

omission of items of gross income, the erime and

the standard by which it is measured remaii the

same. ‘The standard involved in the trial of this

case, we submit, is that presembed by Section 145

(b) which defines the crime charged against the

respondents. ‘Phe court below, however, has «dis:

regarded that standard and passed over the re-

quirement that there be a wilful evasion. Inste rd,

it has seized upon the eivil provisions mn Seeteu

23 (a), permitting deduction of reasonable business

expenses and, mn effect, has viewed the prosecution

as bused on that section. In so doimg, it has read

an impertant and whelly unwarranied limitation

Inte Section 345 Cb).

This deciston means that a taXpayer taking any

deduction, so long as itis claimed under a provi

* The court below. in stating that “we find pe case where

the esasion charged was based upen an improper deduc

tion” GR. 302), overtooked such eases as Tako vo United

States, score. invelviog falve deductions for bad debi-:

United States v. fredte x, Ww F. (2d) 912 (CC. C. AL 2), Ine

Voiviog fraudulent depreciation deductions: amd Ty/fe.

States. Lemeiecnvre, WS Fo etady a0 oO C. AL thy. | See

also Wormer vy. Dcted Stacex, UES Fo (2d) SOL (CLC. AL Oth

certierart cemed Oereber do, THE Noo IS present Terr.

wit a Cog ietion: for tak evasion bused A fetid persis

bad delit tied atl ited leper sf bal

OQ

sion Which permits a reasonabie deduction, 1s im-

mune from prosecution, no matter how great the

fraud, if only some propertion of the deduetion can

be shown to be legitimate. Many provisions of the

incone-tax laws require or permit adjustments in

eross Income or in deductions which are not capable

of precise mathematical calculation.” Under the

decision of the court below, for example, it would

~The following sections of the Internal Revenue Code

(53 Stat.) are illustrative: See. 23 (a) (1), “All the ordi-

nary and necessary [ business} expenses * * * including

a reasonable allowance for salaries”; Sec. 23 (k) (1), "Debts

ascertained to be worthless”: See. v3 (1). °A reasonable al-

lowance™” for depreciation and obsolescence; Sec. 23 (m), “a

reasonable allowance for depietion” ; Sec. 23 (p) (1), “a rea-

sonable amount transferred” to a pension trust: See. 25 (a)

(4) (A). "8 reasonable allowance” for the taxpayer's personal

services; See. 27 oa) (4), “reasonable” amounts set aside to

retire indebtedness: See. 27 (dy. fe). (Cf). “fair market

value’; See. 101 (4), building and Joan associations “sub-

stantially all the Lu-iness of whieh is confined” to menmber-

ship loans; See. ddl 6). organizations “ne substantial part

of the seciveties of which is carrying on propaganda’; See.

M1 (2) agrieulieal cooperatives “it substantially ali” their

stuck is owned by producers: See. 102 (a). corporntions

“formed or availed of for the DHT pose of preventing the rm-

position Of the surtax upon its shareholders”; See. TOL (eo),

varnings “permitted to accumulate beyond the reasoneble

nets of the business": See. 104,01) and gas properties “the

prineipal value of? whieh has been demonstrated by the tax

payer's exploration: See. liz (bh) 6b). *preperty held fer

productive use in irade or business or for investment. (not

* * © hel pritagriiv for sale * * *)"%: See, 113 cb)

(1), “Proper adjustmen:” for expenditures, depreeiation,

ete.; Sec. Ti Cb). “expenses, losses, and other deductions

properly apportioned or allocated” te income from within

the United States: Sees. 166 and 167, Ssubstantial adverse

interest” in the (lispostiion of the trast or its income,

3G

seem that none could be convieced of a wilful

evasion of income taxes so long as he showed that

his property had suffered ay depreciation, or so

long as he eould show that he had imneurred any

business expense of the char nged type. Tax re-

tums of necessity invelve judgment as well as

mathematical computations. That omen may

differ on matters of judgment should afford no

protection to these whe wilfully make false re-

turns. Any other rule would grant a leense to

evade taxes to those astute or facile enough, in

their efforts te cheat the Government, to perpe-

trace their fraud through exaggeration and dis-

tortion rather than through reports of wholly

Wnaeinary transactions,

We urge that the intentionally broad scepe of

the enforcement Provisions of the revenue laws

should not be, and, in faet are not, subject to se

serious a restriction. The crime with which the

respondents were charged is clearly embraced

Within Seetion 145 (b), and the jury by its verdict

has found them guilty of that erime. ‘That ver-

diet. we believe, was fully warranted by the evi-

deree and should stand.

1]

THERE WAS No VARIANCE BETWEEN THE INDICTMENT,

OR THE GOVERNMENT'S THEORY OF THE CASE, AND

THE PROOF: THE CHARGE To THE JURY WAS PROPER

lL. The court below sugeests (Re. 502, 503-504)

that the indietment. as well as the theory uper

31

which the case was tried, argued, and briefed,

placed upon the Government the burden of estab-

lishing that the defendants had net rendered any

services. Thus, the court asserts that the indict-

ment charged, impliedly in the first four counts and

explicitly in the fifth count that “none of the de-

fendants ‘rendered siv services to the said cor-

poration.’ ’? This isa clear misreading. The first

four counts of the indictment are wholly silent as

ithe rendition of services. The fifth count does

ot allege that mo services had been performed.

Raitier, it atleges that none of the defendants per-

formed any services for the corporation by virtue

of the so-called employment contracts CR. 23).

This follows naturally upon the cotmpanion charge,

Sup pel red by substantial evidence, that these con-

tracts, Which had been executed mm gross and dated

back, were spurious. Contrary to the court's as:

sertion, then, the Government did not assume thie

burden of establishing the affirmative of the prep-

osition that none of the defendants had performed

any services.” Its burden was limited to the

single issue of whether the respondents attempted

snd conspired to evade and defeat im any mamtier

the lnewome taxes of the Consensus Publishing

The sane ertor im presen: in the answer of the court

below te the CGeverpraent’s srouinent that every mewn al-

lev} tna COLUSPUPaACY lreedt mot byes proved, namely, that here

there Wits Yyiit cove? Teretatis nilegeci “ariel that was that the

defendant Ciripsed Coy, Chim is ta take a ei wbuietion ne COLEUS

sions When to serviecs sere rendered * * *" (RL de,

32

145 (hb).

Whether or not some services were performed by

Company in violation of Section

sorae of the respondents is not alone decisive of

this issue. If profits were distributed as divi-

dends to stockholders, the fraud was no less be-

cause some of the stockholders may have rendered

services to Concensus. That is merely one fact

among many, all of which, together with the in-

ferences that may properly be drawn from tliem,

must be considered. In the aggregate they con-

stitute substantial evidence of guilt and fully justi-

fied the verdict of the jury.

Again, according to the court below, “*the Gov-

ernment in its brief and in oral argument * * *

asserts that the deduetions m= question must be

treated either as dividends in their entirety, and

if so as unlawful deductions, or as commissions im

their entirety, and therefore properly deducted”

CR. 502). From this it appears that the court

understood the Government to contend that these

deductions must be either wholly dividends or

Wholly commissions, and that convietion was im-

possible inlesss they were proved io be dividends i:

their entirety. We respectfully assert that the

Government made no such contention; it did net

rety upen any such “tall or nothing” theorv. “The

Government did contend that all the distributions

were ne fact dividends and that the evidence wa-

ampiy sufficient to warrant a finding by the jury

that such was the faet. But the whole inelades

33

all its parts, and it was entirely proper for the

jury to determine that at least part of the dis-

tributions were dividends. The Government’s

position that the distributions were dividends in

their entirety did not carry with it the implication

that if they were not dividends in their entirety no

part thereof could be dividends.

Thus, the indictment did not allege, nor was it

incumbent upon the Government to prove, that

none of the respondents had performed any serv-

ies for the company. In any event, the respond-

ents were under no misapprehension as to the

charge against them, which was the distribution

of profits in the guise of salaries and commis-

sions. Aeceordingly, even assuming that a vari-

ance existed, it was immaterial. Berger vy. Voted

States, 295 US. 78; Bennett v. United States, 227

CLS. 333

2. The preceding discussion discloses also the

absenee of any tenable basis for the suggestion of

the court below that the eriticeized portion of the

charge to the Jury was neither consistent with the

indietment nor the theory upon which the case was

tried (R. 508). Further, we believe that viewed

as a Whole.” as of course it must be, the charge

was ‘fexceedingly thorough and fair’? (Kerner,

C. J.. dissenting, R. 505). The jury was fully

~The court belaw conceded thet “this particular portion

of the charge appears less harmful «ren read in conpeetion

with the charge as a whole than when standing alone”

(Rh. 4 3

34

and correctly instructed as to the tre issues in-

volved, and when returned to its proper context

the unexceptionable character of the portion

singled out for criticism becomes manifest. Its

purpose was clearly to advise the jury of the

settled principle that the Government is met re-

quired to prove the entire amount of the tax

charged to have been evaded. Tinkoff ve Cirted

Slates, supra; Glechman V. United States, supra.

It is difficult to conceive how the jury could be

misled by this charge. Indeed the only exception

taken te it by the respondents was that it em-

bodied the ‘doetrine” that the jury might find the

respondents guilty if it) found they evaded ans

substantial part of the tax CR. 473). That exeep-

tion is, of course, groundless.”

Not only was the instruction in question proper:

it “Was a requisite toa fair and complete charge.

It is conceivable that the jury might have returned

aless sweeping verdict. A dividing dine might have

been drawn by the jary between the periods before

and after the issuance of the new stock certificate:

in August IS04. or the execution of the so-called

There is a serious question whether the exeeptian |

to the trial court's charge was sufficient te present any ques

tion for appellate revew. The ground on which the exces

tien Was express}. based has no merit. and an exceptier

furnishes ne bani for reversal upon any ground other toan

the one <pecutioaliy called to the attention of the trial court

Vnited StatesV Ub nited States Fidclity Co. 236 US, S12. i:

Paschi ns. Enid Stites, TOK. (2d) 49d, 508 6CL CL AL Te

35

employment contracts, and at one or the other of

these times the respondents, or some of them, might

save been found to have exehanged the garb of

stoekholders for that of employees. Again, the

jury might have found that Molasky, who reported

his distvibutions as dividends in his own tax re-

turns for the vears 1933, 1934, and 1935, did not

participate in the seheme of tax evasion until, as

president of the company, he executed the new

stock certificates, or, if the employment contracts

were believed spurtous by the jury, until le exe-

cuted sach an agreement. In each of these hypo-

thetieal ‘nstanees the charge in question would have

been essential for convietion.

CONCLUSION

For the reasons set out above, it is respectfully

submitted that the respondents were properly con-

vieted and that the decision below shouid be re-

versed.

Respy etfully submitted,

CHARLES Fatty.

Acting Solicitor General,

SAMUEL O. CLark, Jr.,

© Assisient Mtorney General,

VArwoup Ran,

Gorpon B. TWErpy,

Mryer Roriwac ks,

Special Assistants to the Attorney General,

OcToRER 1941,

APPENDIX

Revenue Act of 1932, 47 Stat. 169:

Sec. 23. DepUCTIONS FROM GROSS INCOME.

In computing net ineome there shall be

allowed as deductions:

(a) Expenses.—All the ordinary and

necessary expenses paid or incurred during

the taxable year in carrying on any trade

or business, including a reasonable allow-

ance for salaries or other compensation

for personal services actually — rend:

mat ' *

* * om * * * 7

Sec, 145. PENALTIPS.

+ * * * *

(b) Any person required under this title

to collect, account for, and pay over any tax

imposed by this title, who willfully fails to

collect or truthfully account for and pay

over such tax, and any person who willfully

attempts in any manner to evade or defeat

any tax imposed by this title er the pay-

ment thereof, shall, in addition to other

penalties provided by law, be guilty of a

felony and, upon conviction thereof, be fined

not more than $10,000, or imprisoned fer

not more than five years, or both, together

with the costs of prosecution,

* 7 * o *

Revenue Act of 1954, 48 Stat. 680:

Section 23 (a) is identical with Section

2? (a) of the Revenue Act of 1982 above

quoted, (U.S. C., Title 26, See. 23.)

Section 145 (b) is identical with Section

145 (b) of the Revenue Act of 1932 above

quoted. (U.S. C., Title 26, See. 145.)

36)

37

Revenue Act of 1936, 49 Stat. 1648:

Section 23 (a) is identical with Section

23 (a) of the Revenue Act of 1932 above

quoted.

Section 145 (b) is identical with Section

145 (b) of the Revenue Act of 1932 above

quoted.

Treasury Regulations 77, promulgated under

the Revenne Act of 1982:

Art, 126. Compensation for personal

serviecs.—Among the ordinary and neces-

sary expenses paid or incurred in carrying

on any trade or business may be included a

reasonable allowance for salaries or other

compensation for personal services actually

rendered. The test of deductibility im the

case of compensation payments is whether

they are reasonable and are in fact pay-

ments purely for services. * * *

Treasury Regulations 86, promulgated under

the Revenue Act of 1954:

Article 23 (a)-6 is identical with Article

126 of Treasury Regulations 77 above

quoted,

Treasury Régulations 94, promulgated under

the Revenne Act of 1956:

Article 23 (a)-6 is identical with Article

126 of Treasury Regulations 77 above

quoted.

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