# Brief for the United States — United States v. Ragen > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386401_0477%3A03 ## Record - **Collection:** Supreme Court brief - **Document type:** Brief for the United States - **Published:** January 1, 1942 - **Citation:** 314 U.S. 513 ## Text Nos, 04-06 cvthe Supiemed ourt of the Gmited States th fourR Piano, Pal taMis \} BR vel ~ tNerkep So ates oF AMERICA, PRITIIONER Viohp \\ KRES BRIEF FOR THE UNITED STATES ae ae es ee ee ee ‘aaa t =~) rave Leas i I Ve ~s a? 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