[75-1 USTC ¶9340] United States of America , Plaintiff-Appellee v. Edward J. Barrett, Defendant-Appellant

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 73-1477, 505 F2d 1091, 11/8/74 , Affirming unreported District Court decision

[Code Secs. 7201 and 7122]

Evasion of tax: Compromises: Authorization.--Conviction of evasion of taxes for 1967, 1968, 1969 and 1970 was affirmed on appeal. The taxpayer argued that the government had improperly granted the chief witness in the trial civil immunity with respect to a tax liability of more than $700,000. However, authorization is provided to the Secretary of the Treasury, or his delegate, or to the Attorney General, if the matter is before the Department of Justice, to compromise any civil or criminal case. Thus, the compromise was not unlawful. Other claims, such as prejudicial publicity, failure to suppress evidence, etc., were overruled. .

James R. Thompson, United States Attorney, Gary L. Starkman, Dan K. Webb, Assistant United States Attorneys, Chicago, Ill., for plaintiff-appellee. Robert E. Wiss, Thomas A. Foran, 111 W. Washington St. , Chicago , Ill. , for defendant-appellant.

Before HASTINGS, Senior Circuit Judge, and STEVENS and SPRECHER, Circuit Judges.

SPRECHER, Circuit Judge:

This appeal seeks review of the conviction of Edward Barrett, the County Clerk of Cook County, Illinois, from 1955 to 1973, for violation of 18 U. S. C. §1341 (mail fraud), ¹ 18 U. S. C. §1952 (interestate travel in aid of racketeering enterprises) ² and 26 U. S. C. §7201 (attempt to evade income tax). ³

[Purchase of Voting Machines]

I The County Clerk of Cook County has the responsibility for purchasing and insuring voting machines. In 1954, the State's Attorney of Cook County had rendered an opinion that competitive bidding was not required in the purchase of voting machines inasmuch as it was important to maintain uniformity in all of the County's precincts. Since 900 machines had already been purchased from Shoup Voting Machine Corporation, and no one other than Shoup sold comparable machines, the situation was not adaptable to competitive bidding. The president of the Cook County Board of Commissioners, which is responsible for the management of the affairs of Cook County , testified that the 1954 opinion continued to govern the purchase of voting machines as late as 1971.

The 1954 opinion stated that "you may request a bid from the Shoup Voting Machine Co. only," but that any bid required the approval of the County Clerk and then of the County Board. The president of the County Board testified that from 1967 to 1971, four voting machine contracts covering 1,400 machines were submitted to the Board by the County Clerk, that they were unanimously approved by the Board without debate, and that in casting his own vote the president relied upon the County Clerk "to perform his statutory obligation" as to the need and "the best price for this kind of equipment for the County."

Defendant Barrett had become County Clerk of Cook County in 1955 and continued in that office until 1973, upon his conviction in this case.

The Shoup Voting Machine Corporation began to sell its 10-column, 50-row, vertical voting machines to Cook County in the early 1950's. In 1963 or 1964, the Cook County machines were converted to 6-column machines "to give more room for propositions." Irving H. Meyers, then executive vice president of Shoup, was in charge of the Cook County conversion, which took place in Chicago warehouses where the machines were stored. At that time, Meyers met Barrett.

In July, 1965, the ownership of Shoup was transferred to a group of Philadelphia investors. Meyers became a 10 percent owner and the president of Shoup.

[ Sale Agreement]

On September 13, 19 65, "in accordance with your request for bids," Meyers wrote to Barrett, proposing on behalf of Shoup to sell 250 voting machines to Cook County at $1,791 each. Having received no response, Meyers came to Chicago in December, 1965 and met with Barrett in his County Clerk office. Barrett told Meyers that he did not have the funds to purchase the machines at that time but might have the money in the forthcoming budget. Meyers testified:

I said to Mr. Barrett that any dealings between the Shoup Company and the County of Cook in the future would be between he and I. I told Mr. Barrett that I was committed to pay him five percent cash on all voting machine sales to Cook County .

Mr. Barrett said to me that he was getting more money than that before.

I said to Mr. Barrett that this was a new ball game, and that is all the money that I was committed to pay.

Mr. Barrett said that he wanted $200 per machine.

I hesitated for a moment, and then I said to Mr. Barrett that the only way I could pay him $200 per machine would be to raise the price of the voting machine by $100 to the County of Cook, and that I felt that he could vindicate the $100 increase in price, because Cook County had a bastard type voting machine.

He asked me what I meant by that.

I told him that we made two standard models of machine, and it had been the Shoup policy, whether or not we sold a county one machine or a thousand, the price was always the same. But Cook County had a machine like no other county in the United States . So, therefore, there was nothing to compare Cook County 's price against any other price.

Mr. Barrett said that he could take care of the increase. Mr. Barrett said to me, when would he get the money.

I told him, naturally, I would pay him the money after Shoup received the money from the County for the purchase of the voting equipment.

Mr. Barrett said there would be times when he would need money in front.

I said to Mr. Barrett that I would give him half of the money when I received a solid, concrete contract or purchase order from Cook County , and the other half of the money when I received the funds for the payment of the voting machines by our company from Cook County .

He said that would be fine.

I told Mr. Barrett that on any dealings at any time, they would be between he and I alone, that I never wanted to be in a position where there was a third party present, for his protection and also for mine.

Barrett ran for re-election in November, 1966. Meyers made a personal $1,000 campaign contribution, which Barrett acknowledged in two letters, one prior and one subsequent to the election. After the election, Meyers called Barrett to congratulate him. That time Barrett gave Meyers his unlisted home telephone number, which Meyers placed in his personal address book.

In January, 1967, Meyers saw Barrett at the hotel where Barrett was staying in Palm Springs , California . When Meyers asked Barrett when Shoup could expect some business, Barrett replied that he thought there would be some money in the budget and that when Meyers returned to Philadelphia , he should send Barrett a proposal for 300 voting machines.

On January 13, 19 67, Meyers sent Barrett a proposal for the sale of 300 voting machines at $1,898 ($107 above the 1965 bid). The proposal was valid to March 15, 19 67. Before the expiration date, Meyers telephoned Barrett and was told the County did not have the funds to buy the machines.

Barrett telephoned Meyers in October, 1967 and requested another bid for the 300 machines. The second proposal, sent on October 20, 19 67, set the price at $1,890 ($99 above the 1965 bid). The journal of the proceedings of the Cook County Board of Commissioners for November 7, 19 67, showed that the Shoup bid of October 20 was unanimously approved by the Board. Shortly thereafter, Barrett advised Meyers by telephone of the Board approval, whereupon Meyers told him that he would come to Chicago .

[Transfer of Cash]

Meyers flew to Chicago on November 14, 19 67 with a blue zippered plastic valise containing $30,000 in cash. At Barrett's prior suggestion Meyers met him at the air terminal where they had lunch together. At the restaurant Meyers put the valise between Barrett and himself and after lunch Barrett picked up the valise with the money and left.

Meyers explained how he acquired the cash which he paid Barrett:

In 1965, when I became president of Shoup, I devised a method of raising cash where there might be purposes of obtaining business where I did not have a legitimate representative, and by paying cash was the only was to receive the business.

The method that I devised was to pay different persons checks to represent Shoup in certain areas where I did not have representation, or to pay by check different professional people, lawyers or so forth for professional fees for services nonrendered.

When I paid these checks to these people they would pay their income tax and then return to me 40 or 50 percent in cash, and at the end of each year I would send out a 1099 form to these people so that they could report--make sure they would report this money on their income tax.

This is the way or the method that I used to raise cash.

[Evidence of Meeting]

The government introduced the records of the travel agency which booked Meyers' flights to and from Chicago on November 14, 19 67. They showed that the flight arrived at Chicago O'Hare Airport at 12:17 p. m. and that the return flight to Philadelphia left O'Hare at 2:10 p. m. Telephone records showed a call from Shoup's office to Barrett's unlisted home telephone number on November 13, 19 67. Safe deposit company records showed a visit on November 13 to one of two safe deposit boxes in which Meyers kept cash to make payments.

Shoup Corporation received the last payment from Cook County on the 300 machines in early August, 1968. Meyers then called Barrett and arranged to fly to Chicago to see him. On August 9, 19 68, Meyers withdrew $30,000 in cash from his safe deposit box, placed it in a brown manila envelope and sealed it, and placed the envelope in a blue plastic valise. He flew to Chicago where Barrett met him at the airport; they had lunch at the same airport restaurant as before. Again Barrett left the meeting with the valise and the $30,000. Telephone records showed a call to Barrett's County Clerk office on August 7; safe deposit records showed a box entry by Meyers on August 9, 19 68.

At the August 9 airport meeting Meyers and Barrett discussed the sale of an additional 300 voting machines. Barrett had called Meyers in April and had said that Cook County needed 300 more machines for the upcoming presidential election but did not have the money. Shortly thereafter Meyers called Barrett and advised him that Shoup could furnish 200 new machines and 100 reconditioned used machines at a rental of $300 per machine for the November election, with an option to purchase the machines and a credit of the rental on the purchase price. A contract incorporating those terms, with the option-sale price fixed at $1,890 per new machine and $1,790 per used machine, was signed by Barrett as County Clerk and by Meyers for Shoup, dated August 8 and approved by the County Board according to its journal on August 9, 19 68.

At the meeting at the airport on the 9th, Meyers asked whether Barrett thought that the County would exercise the option to purchase the machines. When Barrett assured him that it would, Meyers told him that he would give him $15,000 in a few weeks and another $45,000 when the County paid for the machines. Barrett agreed to that arrangement.

On August 20, 19 68, Meyers telephoned Barrett and told him that he was playing in a Shoup-sponsored golf tournament that week but would send his brother-in-law, Tony Lemisch, "with a package for him." Meyers testified that he had withdrawn $15,000 in cash from his safe deposit box several days before and kept it in a safe in his home. On the 20th, he gave the money to Lemisch in a sealed envelope. Lemisch went to Chicago on that day and delivered the envelope to Barrett in his County Clerk office. Later Meyers telephoned Barrett to verify his receipt of the money. These dates were also corroborated by records showing a safe deposit entry on August 16 and telephone calls to Barrett on August 20 and 22, 1968.

The option was exercised by Cook County and on Febraury 11, 1969, Shoup Corporation deposited an installment check from the County for $278,500. Two days later on February 13, Meyers, who was on his way to Las Vegas for his daughter's wedding, stopped at Chicago . He had placed $45,000 in a manila envelope, sealed it, and put it in a blue valise. Barrett met him at the airport gate in Chicago , took the valise and left. Meyers continued on to Las Vegas . Records showed that Meyers entered his safe deposit box on February 13, 19 69 and that on that date he took a plane from Philadelphia , which landed in Chicago in the afternoon and then continued to Las Vegas .

In October, 1969, Barrett telephoned Meyers and told him that the County was going to purchase 300 more voting machines. Meyers told him that the price had increased and that he would let him know what the new price would be. On November 3, Meyers wrote Barrett advising him that the new price for 300 voting machines was $2,025 per machine. A contract with those terms was signed by Barrett for the County and by Meyers for Shoup Corporation and was approved by the County Board on March 2, 1970 . By letter dated March 4, the County Clerk 's office advised Meyers that the contract had been approved. A few days thereafter Meyers telephoned Barrett and advised him that near the end of March he was going west and would stop at Chicago .

On March 23, 1970 , Meyers withdrew $30,000 from his safe deposit box, sealed it in a brown manila envelope and placed the envelope in a blue vinyl plastic case. He flew to Chicago , met Barrett at the airport and handed him the case with the money. At that meeting, Barrett requested a political contribution because he was running for re-election. Meyers answered that "I gave him a political contribution every time I gave him a blue valise, and that there was no chance that he would not win re-election anyhow." Barrett smiled and left with the money.

In August, 1970, Meyers advised Barrett that the March order for 300 machines could be filled with excellent used machines at a lower price. Thereafter on August 17, the County and Shoup executed a revised contract at a reduced price of $1,897 per machine. Shoup received a check from Cook County for $189,700 dated August 14, which was deposited on August 20, 1970 .

On August 28, 1970 , Meyers withdrew $30,000 out of his safe deposit box and went through the customary procedure to delive it on August 30 to Barrett at the Chicago airport.

The March 2o and August 30, 1970 payments are documented by safe deposit records and used airline tickets purchased by Meyers.

In regard to his paying $180,000 to Barrett in cash, Meyers testified:

I paid this money to Mr. Barrett to insure getting the business, the voting machine business in Cook County . I felt that with Mr. Barrett's recommendation on the purchase of the Shoup voting machines that there would be no problem in passing the board.

In December, 1970, Meyers was subpoenaed to appear before a federal grand jury in Philadelphia and to turn over all Shoup Corporation records. In July, 1971, he was first indicted. In November, 1971, Meyers telephoned Barrett and asked to see him. Barrett agreed, Meyers flew to Chicago on November 9, and the two men had lunch at Club 39.

Meyers brought with him "a brown manila envelope containing my indictments" and told Barrett that he was "in a lot of trouble." Barrett asked if he might become involved and Meyers assured him that he would not. Barrett asked how Meyers obtained the cash he had paid Barrett and Meyers explained the "conduit system" that he used. He then pleaded with Barrett for more voting machine business, explaining that he had resigned as Shoup president but was the exclusive sales agent for Shoup. Barrett told him that the County would probably be purchasing 500 more machines.

Thereafter, on December 20, 1971 , the County approved a contract with Shoup for 500 voting machines at $1,994 per machine. No money was ever paid to Barrett in regard to the last 500 machines.

[Insurance of Machines]

The purchasing of insurance on the voting machines owned by Cook County was the responsibility of Barrett in his ex officio role as Comptroller of Cook County. The Deputy Comtroller was C. R. Hodgman. During the period 1967 through 1971, the voting machine insurance was placed by Hodgman with Arthur J. Gallagher & Company, an insurance agency. Premiums were paid directly to the insurance carrier by Cook County , and the carrier in turn paid a 25 percent commission to Arthur J. Gallagher & Company. The Gallagher firm retaned a 10 percent commission, and paid a 15 percent commission to Barrett. Barrett never reported to the County Board that he was receiving these commissions. Although Edward Keating, vice president of Arthur J. Gallagher, testified that the County received the best possible bargain on the insurance, he admitted that the choice was limited to those insurance companies with which the Gallagher firm had an agency agreement. Further, Keating testified that, at the direction of Hodgman, the Gallagher firm was not identified on the insurance policies, contrary to the customary procedure. Barrett was an insurance broker who received commissions on other business. During the period 1968 through 1970 approximately $6,000 of his $17,000 in commissions was on voting machine insurance.

The use of the mails consisted of the mailing of checks by Cook County to the insurance companies, and the mailing of checks by the insurance companies to the Gallagher firm.

[Taxpayer Indicted]

Barrett was named in a 16-count indictment returned on September 28, 1972 . The first six counts charged violation of the Travel Act (18 U. S. C. §1952), in that Barrett had caused officials of Shoup Voting Machine Corporation to travel in interstate commerce for the purpose of receiving bribes from those officials to influence his acts as County Clerk of Cook County. The next four counts charged Barrett with violation of 26 U. S. C. §7201 by filing false and fraudulent income tax returns for 1967, 1968, 1969 and 1970, in that he understated his taxable income in each of those years. The final six counts charged Barrett with violation of 18 U. S. C. §1341 by using the mail to further a scheme to defraud the people of Cook County by causing insurance brokers' commissions to be paid to him upon premiums paid by the County for insurance coverage of its voting machines. ⁴ The last six counts were dismissed and replaced by similar counts in a superseding indictment returned on January 10, 1973 .

The trial commenced on February 22, 1973 . The jury returned a verdict of guilty on all counts. Barrett was sentenced to three years' imprisonment on each count, the sentences to run concurrently, and was fined a total of $15,000.

[Publicity]

II. Defendant Barrett first complains of prejudicial publicity.

On February 22, 1973 , the day the trial commenced, defendant moved for a continuance on the basis of three types of newspaper publicity. The first type consisted of stories which appeared when the indictment was returned on September 28.

In United States v. Hoffa, 367 F. 2d 698, 711 (7th Cir. 1966), vacated on other grounds, 387 U. S. 231 (1967), we pointed out:

Whenever any person of prominence is charged with a crime, the story usually will receive wide distribution through various news media. It may be impracticable to postpone the trial for a period long enough for public interest to die down. . . .

Here, defendant was a prominent political figure in Chicago and Cook County , having served as County Clerk for 18 years.

The new stories (1) discussed the indictment and did not go beyond the language of the indictment, (2) discussed defendant's political career and in that respect were favorable, and (3) contained self-serving and lengthy comments by defendant and his attorney proclaiming his innocence. This group of stories appeared five months prior to the trial.

A second group of news stories appeared from February 9 thru 15, 1973 and dealt with the insurance premiums on City of Chicago business received by an insurance firm employing the son of the mayor of Chicago , court receivership positions obtained by the president of the insurance firm, and the insuring of receivership properties. Defendant Barrett was not named in this group of news items.

The third group of news stories related to the jury verdict returned in the same Chicago federal court building on February 20, finding former Illinois governor and court of appeals judge Otto Kerner guilty of various crimes including bribery, mail fraud and income tax violations. These stories did not mention Barrett.

At the beginning of the voir dire examination of prospective jurors on February 22 in this case, the district judge strongly emphasized that he was seeking "a fair and impartial trial based entirely on what transpires in this courtroom from now on and not based in any way or influenced by anything that has occurred in other courtrooms in this building." The judge then asked the panel of venirepersons:

Having in mind the recent publicity in regard to the other cases where there were some similar charges, is there any of the jurors who feel that publicity and the knowledge that you gained from that publicity, would have an effect on your verdict in this case?

No one responded. In personally examining the first prospective juror in the presence of the entire panel, the judge asked:

Have you formed any opinions about this case by virtue of any newspaper or television publicity, either in regard to this particular case or any other cases that have been recently tried that would affect your verdict in this case?

When additional panels of venirepersons were brought into the courtoom on two subsequent occasions, the judge re-emphasized the same conditions of impartiality. Each juror eventually selected to serve on the Barrett jury was personally asked whether he would base his judgment only on what transpired in this courtroom during this trial and not what he might have read about or what he heard had occurred in other courtrooms. ⁵

Defendant's counsel was permitted to question the jurors. He accepted the panel, each of whom had been interrogated concerning pre-trial publicity and the effects of other trials of political personages. At no time did defendant's counsel seek a change of venue.

That the public attitude toward general political corruption may appear to be more severe at one time than another does not justify a moratorium on the prosecution of crimes by political figures, absent pervasive prejudicial publicity and failure to screen prospecitive jurors. Here the pre-trial publicity was not extremely pervasive, much of it was directed to political figures other than the defendant, and that concerning the defendant did not go beyond the reciting the charges of the indictment. Most importantly, each prospective juror was carefully screened to expose any possible prejudice. The district judge was correct in denying the motion for a continuance.

The jury was selected and sworn in on Friday, February 23, 1973 , but the opening statements were not to begin until Monday, February 26. On Friday, defendant's counsel agreed that the jury need not be sequestered over the weekend:

Let's wait until Monday morning and let the jury go home, get their gear together and they won't have anything that would tempt them to dismiss the details of this case.

When the district judge excused the jury for the weekend, he admonished the jurors as follows:

I am advising you now not to read anything about this case in the paper, not to listen to anything about this case over radio or television.

I don't know that they could tell you that you haven't heard in the courtroom, except that we got a jury, and you know that already. So that I don't see how anything you might read would have any effect on you.

But regardless of that, I admonish you not to read anything about it, not to discuss this case with anyone at home.

There are some who, I am sure, will have people say, what are you doing, and when you tell them, they will say, "Well, if I was on the jury, this is what I would do."

Well, I don't want you to listen to people who are not on the jury to find out what you should do. So just tell them that in a couple weeks or less you will be able to tell them everything, but you don't want any preliminary advice from people at home or from people that you will meet socially over the week end [sic].

I am going to question you again on Monday morning as to whether you have followed my admonition in regard to not discussing the case, not reading about it not listening to it.

On Monday, the court asked the jury:

First of all, ladies and gentlemen, last Friday I admonished you to conscientiously and purposefully avoid reading about anything over the weekend involving this case, or to listening to anything on radio or TV involving this case.

Is there anyone on this jury that failed to comply with my request? If so, raise your hand.

No one responded.

Over the weekend one Chicago newspaper carried an article describing the United States Attorney's investigations of various local politicians, including both Kerner and Barrett. A second article was a comparison between Kerner and Barrett, their personalities, trial strategy, and the charges against them. The article speculated that the Barrett verdict would depend on whether the jury believed Meyers or Barrett, but noted it was unlikely that Barrett would testify. Defendant moved for a mistrial on the basis of these articles.

Each case of alleged prejudicial publicity must rest on its "special facts." United States v. Jannsen [65-1 USTC ¶9142], 339 F. 2d 916, 920 (7th Cir. 1964). "The severity of the threat depends upon both the nature of the information so publicized and the degree of juror exposure to it. Moreover, the judge's response is to be commensurate with the severity of the threat posed." United States v. Thomas, 463 F. 2d 1061, 1063 (7th Cir. 1972). As we stated in Margoles v. United States, 407 F. 2d 727, 735 (7th Cir), cert. denied, 396 U. S. 833 (1969):

Thus, the procedure required by this Circuit where prejudicial publicity is brought to the court's attention during a trial is that the court must ascertain if any jurors who had been exposed to such publicity had read or heard the name. Such jurors who respond affirmatively must then be examined, individually and outside the presence of the other jurors, to determine the effect of the publicity. However, if no juror indicates, upon inquiry made to the jury collectively, that he has read or heard any of the publicity in question, the judge is not required to proceed further. . . .

The district court followed this procedure.

Given the Friday admonitions and the negative responses of the jurors on Monday morning, the district court could reasonably conclude that no juror had read any of the weekend publicity. He did not err in refusing to declare a mistrial.

[Failure to Suppress Evidence]

III The defendant contends that his conviction on the bribery charges was contrary to law and a violation of his due process right to a fair trial in that the court failed to suppress illegally obtained evidence.

The only important witness against defendant on the bribery charges was Irving H. Meyers. Defendant filed a pre-trial motion to suppress Meyers' testimony ⁶ because it was indiced by the government's promise of civil tax immunity on the $700,000 which passed through his safe deposit boxes.

The government's promise was one of the terms of the plea bargaining deal negotiated with Meyers in his criminal trial in Pennsylvania . Meyers' part of the deal was to plead guilty to several counts of conspiracy and mail fraud and to two counts of filing false income tax returns which did not report as taxable income portions of the $700,000 fund. Meyers also agreed to testify in other proceedings about what happened to the $700,000. In return, the government recommended a sentence on all counts of one year and a day, to be imposed under a statute ⁷ making Meyers immediately eligible for parole, and to be served at the detention facility at Eglin Air Force Base, Florida. The government also granted Meyers transactional immunity to preclude state prosecutions. In addition, the Pennsylvania prosecutor recommended to the I. R. S. that it exempt Meyers from civil tax liability on any part of the $700,000 which he would testify under oath he had paid as bribes or political contributions to public officials. ⁸

The theory of defendant's motion was that the government in effect had paid Meyers one million dollars to testify against defendant and other public officials. Each time he testified, Meyers was relieved of the obligation to pay income tax and fraud penalties on whatever amount of the cash he said he gave to the official. Defendant claims this arrangement violates 18 U. S. C. §201(h):

Whoever, directly or indirectly, gives, offers, or promises anything of value to any person, for or because of the testimony under oath . . . given or to be given by such person as a witness upon a trial, hearing, or other proceeding . . . shall be fined not more than $10,000 or imprisoned for not more than two years, or both.

Because Meyers' testimony was obtained through inducement in violation of section 201(h), defendant argues, the testimony should have been suppressed.

Instead, the trial court denied the motion but allowed defendant to impeach Meyers on cross-examination by bringing out all the terms of the plea bargain. ⁹ Counsel was allowed to argue to the jury that the civil tax immunity agreement gave Meyers a motive to lie about giving $180,000 to the defendant.

[Civil Compromise Authorized]

The premise of defendant's argument for suppression is that the government has no authority to allow civil immunity in return for testimony. He concedes that a prosecutor would not violate section 201(h) by granting criminal immunity, because 18 U. S. C. §6002 gives the government that power. But granting unauthorized civil immunity, according to the defendant's argument, is giving a witness something of value for his testimony in contravention of section 201(h).

Both parties' briefs overlook 26 U. S. C. §7122:

(a) Authorization.--The Secretary [of the Treasury] or his delegate may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.

It is not clear from the record whether the prosecutors or the I. R. S. representatives were, or believed they were, acting under this statute. Since the case was in the hands of the Justice Department, the Attorney General could have compromised Meyers' civil tax liability without approval of the I. R. S. From the record, it appears that both agencies thought I. R. S. approval was necessary. Whether the government has effectively bound itself to a compromise of Meyers' civil tax liability is a matter between Meyers and the goverment.

The significance of section 7122 for defendant is that the end the government was seeking to accomplish--Meyers' exemption from civil tax liability--was authorized by law. If the government can excuse criminal or civil liability in settling a criminal case, surely it can use that power of compromise to obtain guilty pleas or to procure testimony in other proceedings. Both are legitimate objectives of plea bargaining.

Because the Justice Department is empowered to grant both civil and criminal immunity in tax cases, such a grant to a prospective witness cannot be considered to violate section 201(h). ¹⁰

Defendant's alternate argument for suppression of Meyers' testimony is that the inducement of civil immunity when added to the normal unreliability of accomplice testimony constituted a denial of due process. Our holding that there was no illegal inducement deflates this contention considerably.

The two cases defendant relies on do not compel suppression of Meyers' testimony. The court in United States v. Fishel, 324 F. Supp. 429 (S. D. N. Y. 1971), suppressed a tape recording of an alleged bribery transaction. The government had lost two earlier recordings of conversations which the defendant claimed would have established that he had been entrapped. Suppression of the tape (but not the testimony of the conversants) was the only available remedy in Fishel, because no amount of cross-examination of government witnesses about the earlier conversations would have had the impact that the third tape recording would have had on the jury. In the present case, cross-examination of Meyers fully amplified defendant's theory of Meyers' possible motivations for lying. His testimony was not so tainted by government misconduct that its admission violated due process.

In United States v. Haderlein, 118 F. Supp. 346 (N. D. Ill. 1953), the trial court directed a verdict of acquittal after hearing the uncorroborated testimony of a coconspirator who had been threatened with revocation of citizenship and who admitted perjury in connection with the very facts to which he testified. Haderlein is distinguishable from the present case by the elements of government coercion, the witness' admission of perjury and the total lack of corroboration. Further, the trend of recent cases suggests that the court in Haderlein would have been justified in allowing the jury to hear all the evidence impugning the witness' motives and veracity and to decide his credibility for itself. Giglio v. United States , 405 U. S. 150 (1972); United States v. Tanner, 471 F. 2d 128 (7th Cir. 1972); United States v. Isaacs, 347 F. Supp. 763 (N. D. Ill. 1972).

Because the government was authorized to grant Meyers civil tax immunity and because the defense was allowed to bring out all the terms of the plea bargain to the jury, use of Meyers' testimony did not deprive the defendant of a fair trial.

[Mail Fraud]

IV Defendant contends that the conviction on the six mail fraud counts cannot stand because (1) active fraud rather than constructive fraud must be proved, (2) actual injury, or the capability thereof, must be proved, and (3) Illinois law does not require that the money received by defendant be turned over to the County.

Virtually every argument by the defendant has been answered by Judge Cummings' careful and detailed treatment of a closely analogous fact situation in United States v. George, 477 F. 2d 508 (7th Cir.), cert. denied, 414 U. S. 827 (1973).

In George the purchasing agent for Zenith Radio Corporation received approximately one-third of spurious commissions paid to a third party by a supplier of cabinets for Zenith. Zenith had a conflict-of-interest policy providing that no gratuities of any nature were to be bestowed on its Purchasing Department employees by suppliers. Despite the facts that the kickbacks did not "come out of Zenith's pockets," that the purchasing agent did not request any preferential treatment for the supplier, that the supplier was not given any preferential treatment beyond receiving the cabinet business, that the supplier's prices to Zenith were fair and reasonable and within Zenith's general guidelines for its suppliers' prices, that Zenith was never shown to be dissatisfied with the cabinet supplier's products or prices, and that the purchasing agent insisted on efficiency and quality from the supplier, nevertheless this court affirmed the conviction of the purchasing agent, supplier and the third party under the mail fraud statute.

The court held that Zenith was deprived of its employee's honest, faithful and loyal performance of his duties to the extent that he secretly profited from his agency and concealed from Zenith the knowledge that its supplier was willing to sell the cabinets for a lesser net price. "It is preposterous to claim that Zenith would have spurned . . . [the] discount [paid by the supplier to the third party] if offered." 477 F. 2d at 513.

The court in George held that "[t]he mail fraud statute delineates two essential elements constituting the crime: a scheme to defraud and use of the mails in furtherance of the scheme." 477 F. 2d at 511. None of the three participants disclosed the arrangement to Zenith. The court found the existence of not only a scheme to defraud and a capability of injury to Zenith, but of actual fraud and actual injury. "[T]he fraud consisted in [the purchasing agent's] holding himself out to be a loyal employee, acting in Zenith's best interest, but actually not giving his honest and faithful services, to Zenith's real detriment." 477 F. 2d at 513.

In the present case, as in George, no issue is raised as to the sufficiency of the evidence to establish use of the mails, nor could there be. ¹¹

Instead of a private company's conflict-of-interest policy, here there is the state policy in regard to its public officials. ¹² "No trustee has more sacred duties than a public official and any scheme to obtain an advantage by corrupting such an [sic] one must in the federal law be considered a scheme to defraud." Shushan v. United States, 117 F. 2d 110, 115 (5th Cir.), cert. denied, 313 U. S. 574 (1941). As a specially designated panel of this court recently said in applying the mail fraud statute to an Illinois public official, "[t]he citizens of Illinois were defrauded of Kerner's honest and faithful services as governor." United States v. Isaacs, 493 F. 2d 1124, 1150 (7th Cir.), cert. denied, 42 U. S. L. W. 3692 (June 17, 1974).

Both the Cook County purchasing agent and the chief deputy Cook County clerk testified that during the times involved here the full responsibility for obtaining insurance on voting machines owned or rented by Cook County was vested in the defendant Barrett in his position as Cook County Clerk (Tr. 1022, 1028-29). The president of the Cook County Board of Commissioners testified that Barrett never disclosed to him that he was receiving insurance brokerage commissions on the County's voting machines (Tr. 1088-89).

The vice president of Arthur J. Gallagher & Company, which since 1961 received a 25 percent commission upon the insurance covering Cook County voting machines and delivered 15 percent of that commission to Barrett, was called as a witness by Barrett. Upon cross-examination, the witness testified that, although insurance policies should be countersigned by the resident agents, he was advised in 1961 by the deputy comtroller under Barrett to make certain that the name of the Gallagher firm did not appear on any of the voting machine insurance policies (Tr. 1298). He also testified that although the County received the best possible rates, the choice of companies was limited to those insurance companies which the Gallagher firm represented through an agency agreement (Tr. 1295).

The only distinction between George and this case is the fact that there the commission paid to the third party was spurious, whereas here the Gallagher firm was entitled to the commission for having procured the insurance business. However, in both cases the person saddled with the responsibility for devoting loyal service to his employer concealed his secret profit from his employer and denied to that employer the right to know that the supplier of the product or service was willing to continue the supply at a discount to which the employer was entitled.

We conclude that the conviction of the defendant Barrett on the mail fraud counts was warranted by the evidence and the law. ¹³

[Severance Denied]

V. Defendant's pre-trial motion to sever the mail fraud charges from the bribery and tax evasion charges under Rules 8(a) and 14, FED R. CRIM. P., ¹⁴ was denied.

The government's theory of joinder is that the bribery scheme and the insurance commission scheme were two transactions connected by Barrett's use of his public office for private gain.

In Finnegan v. United States, 204 F. 2d 105 (8th Cir.), cert. denied, 346 U. S. 821 (1953), defendant was an I. R. S. employee charged with three counts of representing private clients and two counts of bribery. He was acquitted of bribery and one of the representation counts. The court held joinder of the five counts was proper under Rule 8(a) (204 F. 2d at 109):

All five of the offenses charged in this indictment were for violations of statutes designed to protect the government. The charge in each of the counts was the acceptance of money either for representing an interest adverse to the government or as a bribe to perform some act adverse to the interest of the government, the defendant being a trusted public official. All the offenses in effect charged a government official with taking the part of private interest in matters in which the government was a party. All of the counts involved directly or indirectly, the use of official position for the benefit of private interest for a pecuniary consideration.

In Egan v. United States, 287 F. 958 (D. C. Cir. 1923), defendant was a public official charged with representing a private party and with taking money to influence his official decisions. The court said the two crimes belonged to the same class.

In United States v. Weber, 437 F. 2d 327 (3d Cir. 1970), cert. denied, 402 U. S. 932 (1971), defendant was a union official charged with Taft-Hartley and Hobbs Act violations. The court upheld the joinder under Rule 8(a) because the violations were connected by defendant's scheme to accept money from New Jersey contractors who employed members of his union.

In the Kerner case, Kerner asked for a severance under Rule 8(a) only of the perjury charge from all other charges. The court held that the perjury and other charges were "all connected with, or arose out of, a common plan to corruptly influence the regulation of horse racing." United States v. Isaacs, 493 F. 2d 1124, 1159 (7th Cir. 1974), cert. denied, 42 U. S. L. W. 3692 (June 17, 1974).

These cases support the government's position that here "[t]wo or more offenses may be charged in the same indictment . . . if the offenses charged . . . are . . . two or more acts or transactions connected together . . .."

A more difficult question arises under Rule 14, ¹⁵ which looks to the prejudice caused a defendant by a joinder of offenses. Obviously any adding of offenses to others is prejudicial to some extent. However, [w]hether a severance of related offenses should be granted must remain largely within the discretion of the trial judge upon consideration of the circumstances of the individual case." American Bar Association Project on Standards For Criminal Justice, Standards Relating to Joinder and Severance, §2.2(b) Commentary, p. 32 (1968). ¹⁶

Reversal of a conviction on the ground of abuse of discretion for failure to sever an offense under Rule 14 is almost nonexistent. Recently such a reversal occurred in this circuit in United States v. Pacente, 490 F. 2d 661 (7th Cir. 1973), but on rehearing en banc the conviction was affirmed, -- F. 2d --, (7th Cir., No. 72-1988, August 6, 1974 ), where this court said:

The grant or denial of severance or separate trials under Rule 14 is discretionary. See, e.g., United States v. Kahn, 381 F. 2d 824, 841 (7th Cir., 1967), cert. denied 389 U. S. 1015; United States v. Quinn, 365 F. 2d 256, 267 (7th Cir., 1966). Denial of relief will produce reversal only if abuse of discretion is shown. United States v. Rogers , 475 F. 2d 821, 828 (7th Cir., 1973).

We cannot say that the district judge abused his discretion in this case.

[Other Errors]

VI. Defendant raises several miscellaneous issues regarding pre-trial and post-trial motions, rulings upon evidence, and instructions.

Defendant filed and the district court denied a motion for a bill of particulars in regard to the six Travel Act-bribery charges, four of which charged travel in a specific month and two of which charged travel in a specified two-month period.

The motion for a bill of particulars is addressed to the sound discretion of the court. United States v. Kaplan, 470 F. 2d 100, 103 (7th Cir. 1972), cert. denied, 410 U. S. 966 (1973). "Of course, every denial of a defendant's request for a bill of particulars may in some measure make the preparation of his defense more onerous. But a demonstration of this generalized kind of prejudice is insufficient to override the broad discretionary power vested in a district court with respect to such requests." United States v. Wells, 387 F. 2d 807, 808 (7th Cir. 1967), cert. denied, 390 U. S. 1017 (1968).

The defendant seeks to demonstrate prejudice by reference to his motion for a new trial based on newly discovered evidence, which set forth the affidavit of Marijan Bojovic, a friend of defendant and his wife, who stated that she visited with the Barretts in Palm Springs, California, in February, 1969, and that Barrett was there from February 5 to February 16.

The indictment charged as to that count that Meyers had visited Barrett in Chicago "about February and March, 1969." Meyers testified at the trial that the visit occurred on February 13, 19 69. Mr. and Mrs. E. B. Smith gave their affidavits that they had dinner with the Barretts and Ms. Bojovic in Palm Springs on February 14 and telephoned Barrett there on the evening of February 13. These facts did not rule out the possibility that Barrett was in Chicago to meet Meyers on February 13 but returned to Palm Springs that evening to receive the Smiths' telephone call and to play cards with Ms. Bojovic.

The motion for a new trial on the basis of newly discovered evidence was properly denied because the "new evidence" was offered simply "to impeach the character or credit of a witness," defendant failed to show diligence in not discovering the evidence prior to or during the trial, and the defendant failed to meet the burden of showing "that the newly discovered evidence is so material that it probably would produce a different result if a new trial were granted." United States v. Curran, 465 F. 2d 260, 264 (7th Cir. 1972).

This being so, and particularly since Ms. Bojovic further swore that she "visited Mr. and Mrs. Barrett in Palm Springs, California, every February from 1966 until 1970," it is very difficult to perceive how the defendant was prejudiced by being informed by the indictment that one of the Meyers' visits was "about February and March, 1969." As noted in United States v. Tanner, 279 F. Supp. 457, 476 (N. D. Ill. 1967), aff'd in part and rev'd in part, 471 F. 2d 128 (7th Cir.), cert. denied, 409 U. S. 949 (1972), the government "need not furnish the exact date, since to do so would limit the Government to strict proof thereof at trial."

The defendant complains of the exclusion of several exhibits, most of them relating to Meyers' income and cash availability, which were sought to be introduced to impeach him. Most of this material was cumulative of impeachment cross-examination of Meyers and often it went into areas which were clearly irrelevant. "The trial judge has wide discretion in the admission or exclusion of collateral evidence." United States v. Stone, 471 F. 2d 170, 172 (7th Cir. 1972), cert. denied, 411 U. S. 931 (1973). We find no reversible error in the exclusion of exhibits.

Defendant challenges government instructions 49, 50 and 51, regarding mail fraud. We find each of these instructions proper in view of our discussion of mail fraud in Part IV and particularly in view of United States v. George, 477 F. 2d 508, 513 n. 6 (7th Cir.), cert. denied, 414 U. S. 827 (1973).

The defendant in a criminal case is entitled to have the jury consider a theory of defense which is supported by law and which has some foundation in the evidence. United States v. Bessesen, 445 F. 2d 463, 467 (7th Cir.), cert. denied, 404 U. S. 984 (1971). Defendant proffered a theory of mail fraud defense which contained several statements of theories which did not constitute legal defenses to mail fraud. The district court properly rejected it. Nor was there any error in the re-reading of the mail fraud instructions when the jury so requested.

Finally, the defendant contends that he was denied a fair and impartial trial by the prejudicial conduct of the court. We have read the record in this case. We found that while the perfect trial has yet to be tried, this trial was tried as well as any of those we affirm, by an experienced jurist who was careful to preserve the defendant's right to a fair trial. ¹⁷

The conviction is affirmed.

AFFIRMED

¹ Section 1341 provides in part: "Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises . . . for the purpose of executing such scheme or artifice or attempting so to do, places in any post office or authorized depository for mail matter, any matter or thing whatever to be sent or delivered by the Postal Service, or takes or receives therefrom, any such matter or thing, or knowingly causes to be delivered by mail according to the direction thereon, or at the place at which it is directed to be delivered by the person to whom it is addressed, any such matter or thing, shall be fined not more than $1,000 or imprisoned not more than five years, or both."

² Section 1952 provides in part: "(a) Whoever travels in interestate . . . commerce or uses any facility in interestate . . . comerce, including the mail, with intent to--

"(1) distribute the proceeds of any unlawful activity; or

* * *

"(3) otherwise promote, manage, establish, carry on, or facilitate the promotion, management, establishment, or carrying on, of any unlawful activity,

and thereafter performs or attempts to perform any of the acts specified . . . shall be fined not more than $10,000 or imprisoned for not more than five years, or both.

"(b) . . . 'unlawful activity' means . . . bribery . . . in violation of the laws of the State in which committed. . . ."

³ Section 7201 provides in part: "Any person who willfully attempts in any manner to evade or defeat any tax . . . or the payment thereof shall . . . be fined not more than $10,000, or imprisoned not more than 5 years, or both, together with the costs of prosecution."

⁴ See notes 1-3, supra for text of the pertinent portions of the three statutes which Barrett was charged with violating.

⁵ Barbara M. Schoors (Tr. 52-55); Deanetta Mensink (Tr. 64-66); Eli Rungaitis (Tr. 80-83); Robert J. Peters (Tr. 85-87); Richard E. Vincent (Tr. 117-21); Edward Liechtenhagen (Tr. 131-33); Vera C. Lynch (Tr. 140-43); Charles O. Cash (Tr. 160-62); Charlotte R. Bogdan (Tr. 226-29); Joseph E. Kerwin (Tr. 232-35); Robert C. Smart (Tr. 247-50); and Kenneth N. Pearson (Tr. 258-61).

⁶ The motion also applied to the testimony of Anthony Lemisch, a minor witness who made a similar bargain in the Pennsylvania trial.

⁷ 18 U. S. C. §4208(a)(2).

⁸ One peculiar aspect of this bargain is the inconsistency in the government's indicting and convicting Meyers for failing to report some of the safe-deposit-box cash as taxable income to himself, and at the same time excusing his civil tax liability on that income. The government does not attempt to explain the contradition, except at oral argument it did contend that Meyers should have reported the cash as gross income and deducted the bribes as a business expense. Of course such an expense is not deductible. 26 U. S. C. §162(C); Dixie Machine Welding & Metal Works, Inc. v. United States, [63-1 USTC ¶9355] 315 F. 2d 439 (5th Cir.), cert. denied, 373 U. S. 950 (1963). Besides, Meyers was convicted of falsifying his taxable, not his gross, income.

⁹ The decision in Giglio v. Unites States, 405 U. S. 150 (1972), requiring the government to disclose a promise of leniency made to a key witness in return for his testimony, implies that suppression is not an appropriate remedy. See United States v. Isaacs, 347 F. Supp. 763, 767 (N. D. Ill. 1972), where the court added: "We would expect the Court in Giglio not to have ordered a new trial, or alternatively to have ordered suppression of Taliento's testimony in a second trial, if the Government's reward of leniency warranted suppression."

¹⁰ The government's justification for granting civil liability was a denial of giving Meyers "anything of value." It argued that Meyers was a mere "conduit," not the beneficial recipient of the cash; therefore the cash was not taxable income to him. There is obvious difficulty in squaring this explanation with the fact of Meyers' conviction (see note 8, supra). Moreover, the question whether the cash was income to Meyers is a close one that cannot be settled on this record.

On the one hand, Meyers could be considered an agent of Shoup Voting Machine Corporation in raising cash through false vouchers to the company and in using the cash to bribe public officials to buy Shoup voting machines. Cf. Boyle, Flagg & Seaman, Inc. [ CCH Dec. 21,280], 25 T. C. 43 (1955); Paul A. Gorin, T. C. Memo 1968-57; Eph H. Hoover, Jr. [ CCH Dec. 28,890(M)], T. C. Memo 1968-49; Patrick H. Smith [ CCH Dec. 27,011(M)], T. C. Memo 1964-274.

But Meyers, president and 10 percent shareholder of Shoup, carried out his scheme with the knowledge of only one other shareholder, the secretary-treasurer and a salesman. One could argue Meyers embezzled the cash from Shoup, took complete control of it and used it to boost his own sales record. Cf. Estate of Geiger v. Commissioner [65-2 USTC ¶9697], 352 F. 2d 221 (8th Cir. 1965), cert. denied, 382 U. S. 1012 (1966); Barbara M. Bailey [ CCH Dec. 29,541], 52 T. C. 115 (1969); Ernestine K. Alcorn [ CCH Dec. 29,664(M)], T. C. Memo 1969-147.

The record does not show to what extent Meyers controlled Shoup, nor what effect the cash drain to the fraudulent payees and the public officials had on the company's profit margin. Without such information, we cannot say whether Meyers was acting more for Shoup or for himself.

¹¹ The mailings, both of checks by Cook County to the insurance companies and of checks by the insurance companies to the Gallagher firm, were "for the purpose of executing such scheme or artifice. . . ." See United States v. Maze, 414 U. S 395, 405 (1974).

¹² During the times involved in this case, which were all prior to the July 1, 1971 effective date of the new Illinois Constitution, Article X, Section 10 of the Constitution of 1870 provided that all fees or allowances received by county officers in excess of their compensation should be paid into the County Treasury. Ill. Rev. Stat. ch. 53, §49 provides that the County Clerk of Cook County shall be paid "as the only compensation for services rendered in the capacity of county clerk, or in any other capacity, the sum of $25,000 per annum." Ill. Rev. Stat. ch. 38 §33-3 provides that "[a] public officer or employee commits misconduct when, in his official capacity, he commits any of the following acts: . . . [s]olicits or knowingly accepts for the performance of any act a fee or reward which he knows is not authorized by law." The penalties include forfeiture of office, fine and imprisonment.

¹³ The instructions to the jury required a finding of specific intent to defraud as a prerequisite to a finding of guilt as to any and all of the mail fraud counts (Tr. 1621, 1646-47). In addition, the jury was instructed that good faith was a complete defense to the mail fraud counts (Tr. 1647). Finally, in regard to mail fraud, "[i]n determining whether the defendant acted in good faith or with intent to defraud with respect to these six offenses charged in these counts, you should consider all of the facts and circumstances relating to these alleged offenses." (Tr. 1647).

¹⁴ Fed. R. Crim. P. 8(a) states: "Two or more offenses may be charged in the same indictment or information in a separate count for each offense if the offenses charged, whether felonies or misdemeanors or both, are of the same or similar character or are based on the same act or transaction or on two or more acts or transactions connected together or constituting parts of a common scheme or plan." (Emphasis added.)

¹⁵ Fed. R. Crim. P. 14 provides in part: "If it appears that a defendant or the government is prejudiced by a joinder of offenses or of defendants in an indictment of information or by such joinder for trial together, the court may order an election or separate trials of counts, grant a severance of defendants or provide whatever other relief justice requires."

¹⁶ The A. B. A. Standards Commentary also states in regard to joinder: "The joinder together for one trial of two or more offenses of the same or similar character when the offenses are not part of a single scheme or plan has been subjected to severe criticism over the years. . . . Such joinder is allowed under Federal Rule 8. . . ." Section 2.2(a) Commentary, pp. 29-30.

¹⁷ A cautionary instruction was given to the jury as well: "If by any chance you feel that this court has intimated any opinion as to what I think the facts are, which I don't believe I have done, you are to disregard any intimation that you may have got from anything I said. I reiterate, you and you alone are the sole and the exclusive judges of the facts."

[Dissenting Opinion]

STEVENS, Circuit Judge, dissenting:

In order to determine whether the cumulative effect of the several errors in the proceedings below was sufficiently prejudicial to require a new trial, it is necessary to evaluate their effect in the context of the entire record. It is not our function to determine guilt or innocence, but, rather, notwithstanding our own persuasion on the question of guilt, to determine whether the jury's judgment may have been substantially swayed by error. Unless "when all is said and done, the conviction is sure that the error did not influence the jury, or have but slight effect," it is our duty to order a new trial. ¹

This case proceeded to trial against a backdrop of extensive publicity given to allegations of corruption in local government. During the week in which the selection of the jury commenced, unprecedented publicity was given to the conviction of Judge Kerner. Because of its exceptional character, I think the trial judge should have granted a short continuance to allow the impact of the publicity to subside, particularly since there was no valid objection to such a delay. I do, however, accept the majority's conclusion that the denial of the motion for a continuance was a permissible exercise of the trial judge's discretion.

It is, nevertheless, perfectly clear that the publicity did not help the defendant's cause, and may well have tended to develop a "bandwagon" psychology that would make his conviction more likely. Indeed, a volunteered comment by the trial judge on the first day of the trial indicates that even he may have been influenced by widespread publicity about corruption in local government. During the direct examination of the witness Meyers, who was describing his rental of safe deposit boxes in which he kept funds to bribe public officials, the following occurred:

Q. Now, the box that you maintained with your name on it and your wife's name on it, was that ever changed in any way?

A. Yes, to a larger box.

Q. Now, do you recall the names--

The Court: Was it as big as a shoebox?

The Witness: Pardon me, sir?

The Court. Next question.

(R. 427) (emphasis added)

I think we may take judicial notice of the symbolic significance of a shoebox in view of the notoriety which followed discovery of former Secretary of State Paul Powell's cash hoard in such a container. That a federal district judge would make a gratuitous reference to a shoebox during the bribery trial of another public figure, who may well have been associated with Powell in the minds of some jurors, is, to say the least, distressing. His comment reminds us of how difficult it is to evaluate subtle effects of publicity in the trial of a prominent political figure. In view of that difficulty, I believe the possibility that the extensive publicity may have enhanced the likelihood of conviction is a factor we must weigh in evaluating the significance of trial error.

Another factor that compels close scrutiny of any error that may have influenced the jury is the extraordinary character of the government's arrangement with the witness Meyers. Judge Sprecher has demonstrated that Meyers' testimony was admissible. Nevertheless, since the government provided him with such a powerful financial incentive to testify that he paid large cash bribes to Barrett and to others--for every bribe described in his testimony, Meyers was to receive a tax benefit in like amount--there was certainly a strong possibility that the jury would find good reason to doubt Meyers' veracity. Since the prosecution's case rested largely on the credibility of this witness, ² and since the credibility determination is exclusively within the province of the jury, this is a case in which appellate judges have a special responsibility to evaluate the significance of the rather plain errors which did occur. I shall identify those that trouble me the most. ³

1. The joinder of two separate offenses was highly prejudicial to the defendant and, in my opinion, not authorized by Rule 8(a).

Unquestionably the jury's knowledge that for several years Barrett had been accepting secret insurance commissions on County business enhanced the likelihood that they would credit Meyers' testimony about secret cash bribes. Consider the impact of the prosecutor's argument:

"See, it wasn't enough for Edward Barrett to receive $180,000 in bribes. After he got the machines he got a little hungrier and he wanted some more money, and so he went ahead and worked out an agreement where he could insure the machines, something he was required to do under the terms of his job, and then get a kickback in the form of a broker's commission." R. 1484

In its brief in this court the government argued that the insurance arrangement which originated as early as 1961, and the bribery in connection with the purchase of machines in 1967 and thereafter, were "parts of a common scheme or plan." The evidence affords no support at all for that contention and, quite properly, it is not accepted by the majority here. The two arrangements were made with entirely different sets of persons, at different times, and neither was in any way dependent upon the other. As the government states in its brief,

"other than with regard to background information, no one witness testified to events underlying both the bribery and the mail fraud offenses." ⁴

Thus, considerations of trial convenience do not support this joinder.

The theory on which the joinder is upheld is that the two crimes were "connected" because they both involved a breach of Barrett's public trust. No special significance is, or should be, attached to the fact that they both involved voting machines. In my judgment that "connection" is too tenuous to justify such a prejudicial joinder. Indeed, I believe the result in foreclosed by both branches of our decision on the severance issue in the Quinn case. ⁵ There the fact that the unlawful disbursement of funds on April 3, 19 63, and again on July 8, 19 63, both involved a breach of Quinn's fiduciary obligation to the depositors and shareholders of the Beverly Savings & Loan Association was insufficient to justify the joinder. Moreover, the similarity between the two transactions in the Quinn case, both of which involved the same institution, the same source of funds, and an appropriation of a large sum for the defendant's own benefit, was much more marked than the fact, present here, that two different illegal schemes both happend to relate to voting machines. Frank ly, I have some doubt about the validity of the Quinn holding, but even if it were to be rejected, I would disapprove of this joinder. Certainly if Quinn is viable today, prejudicial error was committed in this case.

2. Documentary evidence which tended to support defendant's theory of the case was erroneously excluded.

A restatement of certain facts is necessary to explain the significance of the court's refusal to admit defendant's Exhibit 1-A, a letter to Shoup's customers announcing a 4% increase in the price of voting machines effective July 1, 19 66. That letter listed prices, F. O. B. factory, for eight different models of voting machines, including a "50 Bank/Manual" at $1,862.00. The machines used in Cook County were of that kind, but instead of using the standard 10-column model, Cook County used a modified machine with only six columns. Meyers testified that he told Barrett that that fact would justify a higher price in Cook County than elsewhere. ⁶ If the modification were ignored, defense counsel argued that the cost of transporting machines from the factory to Chicago would produce a delivered price of about $1,890.00 for the 50 Bank/Manual model. The defense took the position, quite properly, that these facts were relevant to an evaluation of the credibility of Meyers' testimony concerning the reason for a price increase in Cook County.

Meyers testified that Barrett's demand for a bribe of $200 per machine made it necessary for Shoup to increase its price on sales to Cook County. This was, of course, an especially dramatic element of the government's proof. The testimony indicated that the bribe demand was made in December of 1965, a few months after Shoup had offered to sell Cook County machines at a $1,791.00 price. Ultimately, in October, 1967, the parties agreed on a price of $1,890.00.

It was the government's theory that this price increase between 1965 and 1967 was attributable to Barrett's demand for a bribe. It was the defendant's theory that the increase was attributable to "higher costs of steel and other manufacturing expenses"--the factors referred to in the 1966 price increase letter--factors which had an impact on prices throughout the country. Whether or not the letter expressly related to sales to Cook County, it unquestionably tended to support defendant's version of the facts.

The colloquy relating to the admissibility of this exhibit is remarkable. Out of the presence of the jury, before the prosecution rested its case, government counsel advised the court that the defendant intended to offer certain documents in evidence before putting on any witnesses, and that although authenticity had been stipulated, the government had reserved the right to object to relevancy. ⁷ The court then asked defense counsel to "go down the list" to avoid unnecessary interruption of the proceedings before the jury. Defense counsel then started to describe Exhibit 1-A and, without any objection being made by the government, a long colloquy between the court and defense counsel ensued.

During the first portion of that colloquy the court's comments suggest that he considered the letter immaterial because it did not prove any wrongdoing by Meyers; ⁸ later the court seemed to suggest that the document was inadmissible because Meyers had acknowledged that it genuine and had given testimony on cross-examination which was consistent with the contents of the letter; ⁹ finally, the prosecutor joined the discussion and suggested that the letter was irrelevant because there was no evidence that it was sent to Cook County, ¹⁰ and, further, because Cook County did not use the standard 50 Bank machine referred to in the letter. ¹¹ The court then observed that the letter made no reference to the six-column 50 Bank machine which was used only in Cook County, and ultimately decided to exclude it.

If the court's ruling was based on the ground that the exhibit was cumulative--as the government argues on appeal--it was plainly erroneous. Unquestionably a document of this character, which can be reviewed at leisure during jury deliberations, may have a much greater impact on the jury than mere recollection of precisely what a witness may have admitted in the course of a lengthy cross-examination. The suggestion that the document was irrelevant is so manifestly frivolous that, to its credit, the government no longer places any reliance on that argument. The exhibits should have been received in evidence; unquestionably its rejection was prejudicial to the defense.

In my judgment, two other categories of exhibits should also have been received.

For its corroboration of the bribery testimony, the government relied, in part, on records of entries to safe deposit boxes to which Lemisch and Hirshorn had access. Accoring to the government's evidence, only two such boxes were used to hoard the cash which was paid to Barrett, and its documentary proof was limited to those two boxes. The defendant offered five records proving that there were additional safe deposit boxes which Hirshorn and Lemisch opened on many occasions. Proof that there were such numerous entries would, of course, have minimized the significance of any particular entry close in point of time to one of Meyers' trips to Chicago. The defense exhibits were, therefore, relevant and admissible. ¹²

The defendant contended that Meyers accumulated his huge cash hoard, on which he paid no income taxes, to finance his own extravagant personal expenses. In support of this contention, defendant offered numerous exhibits tending to prove high expenditures for gambling, travel, rent, the purchase of securities, and other personal items. Although some of these exhibits were received, it seems to me that it was error to exclude those which disclosed Meyers' rent and apartment expenses and his bank statements and income tax returns.

3. The trial judge made prejudicial and inaccurate comment on the testimony.

In support of his theory that Meyers used cash hoards for personal expenses rather than bribes, defendant attempted to establish that Meyers habitually carried large sums of cash on his person. On cross-examination, Meyers was asked about conversations with a policeman who had been called after a burglary of Meyers' apartment. He was unable to recall telling the policeman that he had won $1,600 at the races earlier that day (R. 838-839) or that his wife had told the officer that he carried large sums of money on his person. Without any objection having been raised by the prosecutor, a colloquy then ensued in which, it is fair to say, the trial judge belittled defense counsel, and the witness categorically denied having had "a bad habit of carrying large sums of money on [his] person." ¹³

Later in the trial, the defense produced the police offcer; he testified that both Meyers and his wife had, in fact, made the statements that Meyers had been unable to recall. In each instance, without any objection from the government, the trial judge volunteered a comment incorrectly indicating that the officer was corroborating, rather than contradicting, the substance of what Meyers had said:

Q. Mr. Witness, did Mr. Meyers tell you at that time, during that conversation, that he had been to the racetrack the day before and hit the big exacto for around $1600?

A. He did.

The Court: There is no impeachment there.

Mr. Foran: Exactly the opposite, your Honor, Mr. Meyers had denied that he had told the police that.

The Court: This is cross examination. He is not impeaching Mr. Meyers' statement. He said he told them that. (R. 1204-05)

And a few minutes later:

Q. Mr. Witness, did Mrs. Meyers tell you at that time that Mr. Meyers had a bad habit of carrying large sums of money on his person and was quite careless about showing it?

A. Yes, she did.

The Court: Now you have corroborated Mr. Meyers. That is what he said to you.

Mr. Foran: Your Honor, he denied that very thing.

You Honor, I have a motion, your Honor, and I would like to make it out of the presence of the jury.

The Court: Hold your motion. We have had enough motions, until ten minutes to 4:00. We will rule on it after the jury leaves. We are not going to run a swinging door courtroom this afternoon.

What is the next question?

(R. 1209) ¹⁴

The comments by the trial judge are significant not merely because they were inaccurate, but more importantly because they must have given the jury the impression that the judge fully credited the testimony of the government's key witness. I do not believe the impact of such an incident can be completely cured by a subsequent instruction "to disregard and intimation that you may have got from anything I said."

Defendant has called our attention to other comments by the trial judge that may have implied approval of Meyers' testimony. Those comments are consistent with defendant's interpretation, but, as they appear in a cold transcript on appeal, I am unwilling to characterize them as prejudicial. ¹⁵

4. The trial judge also made certain comments outside the presence of the jury that revealed a judgment, formed before all the evidence had been heard, that the defendant was definitely guilty.

For example, during a colloquy in which the subject of renting a larger safe deposit box was under discussion, the following exchange occurred:

The Court: And when did they open the joint box?

Mr. Foran: Not until 1967, your Honor.

The Court: Well, they didn't need to open one because they hadn't met Mr. Barrett yet. Maybe the boxes that they had were sufficient, but when they met him they needed bigger boxes. (R. 1146)

The comment was not heard by the jury and I am sure it did not intimidate the defendant's experienced trial counsel. Nevertheless, it was a highly improper remark for the presiding judge to make and may well have had an impact on the defendant himself when, presumably, he may have been considering whether or not to take the witness stand. He did not testify. Notwithstanding the cautionary instruction to the jury about drawing no adverse inference from his failure to do so, the fact that an important public official did not personally deny the serious charges which Meyers had made almost certainly had an influence on the jury's deliberations. It is less clear that the decision of this 73-year old defendant was influenced at all by the trial judge's hostile comment. Instead of speculating about the actual impact of the comment, however, I consider it so manifestly improper that I would presume that it was prejudicial. Certainly it makes me wonder if it is appropriate to construe other ambiguous comments made in the presence of the jury as having been harmless.

As I reflect on the record in this case, I must confess to some doubt as to whether the errors warrant a new trial. For the evidence of guilt is indeed strong, and the crimes of which Barrett has been convicted involve the shabbiest kind of breach of trust. It is, therefore, unusually tempting to acquiesce in a decision which may well represent the just and inevitable conclusion of this matter in all events. The temptation is particularly strong when I note the professional manner in which the prosecutor tried the case. ¹⁶ Nevertheless, because more enduring values are challenged whenever there is reason to doubt that a notorious public trial has been conducted in an even-handed manner, I feel obligated to resolve my doubts in favor of a position which would minimize the danger that fair and regular procedures may be compromised in the future.

This case brings to mind the trial of Titus Oates, a guilty man who was convicted by improper methods. Macaulay's observation about that trial is worth repeating:

"That Oates was a bad man is not a sufficient excuse; for the guilty are almost always the first to suffer those hardships which are afterwards used as precedents against the innocent." ¹⁷

I respectfully dissent.

¹ Kotteakos v. United States, 328 U. S. 750, 764. In a passage which is too long to quote, but which is well worth rereading, Justice Rutledge carefully explained the distinction between the jury's function to determine guilt or innocence and the appellate judges' function, notwithstanding their own persuasion on the question of guilt, to determine whether the jury's judgment may have been significantly affected by error. See id., at 763-765.

² The corroboration, though extremely persuasive, was not entirely unambiguous. Thus, the safe deposit entries were sufficiently numerous that the entries shortly before Meyers' trips to Chicago were not unusual; the records of telephone calls to Barrett are innocuous since, admittedly, the negotiations relating to the purchase of voting machines were conducted by Meyers and Barrett; the airline records indicated that Meyers was in Chicago on the dates to which he testified, but, of course, told the jury nothing about what he did or whom he met; and the price increase attributed in his testimony to Barrett's demand for a bribe on Cook County sales was effective throughout the country and arguably justified by legitimate cost factors.

³ I should also express my agreement with the majority's conclusion that under the law of this circuit a violation of the mail fraud statute was proved, although I would rest that conclusion on the holding in United States v. Isaacs, 493 F. 2d 1124, 1150 (7th Cir. 1974), cert. denied, -- U. S. --, rather than United States v. George, 477 F. 2d 508 (7th Cir. 1973), cert. denied, 414 U. S. 827, because I believe this record, unlike the record in George, forecloses the contention that the County, as a purchaser of insurance, may have suffered a pecuniary injury. Disclosure of the commercial bribery in the George case might have enabled Zenith to buy supplies at a lower price; here, however, the uncontradicted evidence indicates that disclosure of the commission payments to Barrett would not have enabled the County to obtain insurance on any better terms.

⁴ Government's Brief at p. 43. The statement is made in support of the government's position, which I accept, that there was no significant risk that the joinder would tend to confuse the jury. The possibility of confusion, however, is not the source of prejudice which troubles me about this joinder. Rather, it is the vice of using evidence of one crime to prove the defendant's disposition to commit another. I think the government is correct in suggesting that Judge Hand's analysis in United States v. Lotsch, 102 F. 2d 35, 36 (2d Cir. 1939), would lead to approval of this joinder. I believe, however, that prevailing opinion favors the views expressed long ago in Kidwell v. United States, 38 App. D. C. 566, at 570 (1912), as follows:

"It is doubtful whether separate and distinct felonies, involving different parties, not arising out of the same transaction or dependent upon the same proof, should ever be consolidated. But it should not be permitted where the crimes charged are of such a nature that the jury might regard one as corroborative of the other, when, in fact, no corroboration exists."

⁵ United States v. Quinn, 365 F. 2d 256, 263-267 (1966). The court held both (1) that the joinder was improper and (2) assuming no misjoinder, that the potential for prejudice required a severance.

⁶ This statement is based on Meyers' direct testimony. (R. 406-407) I recognize that he testified on redirect examination that the cost to manufacture Cook County machines was actually less than the cost of Shoup's standard 10-column model, and that converting a standard 10-column manual machine to a 6-column machine enabled Shoup to use four columns of parts in the production of their machines. (R. 918-919). Such testimony relates to the weight the jury might properly give to the price increase letter but, in my judgment, clearly does not affect its admissibility.

⁷ R. 1122-1124.

⁸ The Court: Does an automobile salesman commit a crime because he doesn't charge the suggested factory price of an automobile?

Mr. Foran: I am not saying that Meyers commits a crime at all, your Honor, but I am saying that--

The Court: I mean, prices are pretty flexible. If you want to sell machines real bad, you can shave a little bit. (R. 1129)

⁹ The Court: You have got all that in verbatim from his lips. He has--

Mr. Foran: Your Honor--

The Court: He has acknowledged sending this out. He has explained it on your cross examination. Nobody has tried to shake him from what he said. Nobody has made a motion to strike what he said. It's in the record. I don't know why you need a piece of paper in there.

Mr. Foran: Because, your Honor, it's in his own handwriting.

The Court: He has already acknowledged that.

Mr. Foran: Well, your Honor, just as a matter of argument, I can show them that for once the only way that I could make the man tell the truth was when I could show him something in his own handwriting.

Your Honor, that's an essential piece of evidence. It--

The Court: I mean, if I followed your logic, Mr. Foran, the government would have to bring in sixty-five calendars that Friday, the 28th--or that the 28th or August was on a Friday, brcause one calendar isn't enough.

You have got this in the record from his lips, and it's uncontradicted and it's undenied, and I don't know why you need a piece of paper since he has acknowledged, in the presence of the jury, what that thing says.

Mr. Foran: And so therefore I should be able to show it to the jury, show them what we acknowledged, your Honor. (R. 1131-32)

¹⁰ R. 1132-33.

¹¹ R. 1135.

¹² I am not by any means suggesting that they disprove the government's theory of the evidence; I merely make the point that they should have been included in the record for the jury to evaluate.

¹³ Q. And in that same conversation, your wife also informed the officer that the victim had a bad habit of carrying large sums of money on his person, and was quite careless about showing it, didn't she?

A. I don't recall my wife ever saying that.

Q. Did she say to them in your presence--

The Court: Are you going to call his wife to impeach him with that statement?

Mr. Foran: No, your Honor, but I certainly can call the policeman whom she made the statement to, in his presence.

The Court: You can't impeach his wife on the basis of what his wife said to a policeman.

Mr. Foran: I am not trying to impeach his wife.

The Court: You can't impeach him on the basis of what his wife said to a policeman:

By Mr. Foran:

Q. Well, is it true, Mr.--

A. I don't recall the statement.

The Court: He is about to ask you a question. Let's see what happens now, after he says, "Is it true. . . ."

By Mr. Foran:

Q. Is it true, Mr. Meyers, that you do have a bad habit of carrying large sums of money on your person, and that you are quite careless in showing it?

A. No, sir.

Q. That every time you leave a restaurant, you stand outside and pull out your bankroll and count it in plain view of somebody passing by?

A. Is that a--

The Court: Are you going to have a passer-by to impeach him?

The Witness: Is that a serious question?

Mr. Foran: What I'm saying, your Honor, is that this man was present after--he has testified here that he did not keep a lot of cash on hand.

The Court: That's right.

Mr. Foran: He has testified that he did not carry large bills around with him.

The Court: That's right.

Mr. Foran: And now--

The Court: Now are we going to have some witnesses that say that he stands in front of restaurants and waves his bills in the air to all passers-by?

Mr. Foran: I asked him whether he was present at a conversation where his wife told the policeman that in the course of this burglary. He said he was not, and I am asking--

The Court: That doesn't impeach him, whatever his wife said to a policeman. The objection is sustained.

(R. 842-844)

[The "objection" which the court sustained does not appear in the record.]

¹⁴ What happened after the jury was excused is not apparent from the transcript before us. However, the substance of the court's action is apparent from his comment at the commencement of the next session:

The Court: Case on trial.

The Court: Are there any Monday motions?

The Monday motion for a mistrial is denied.

Mr. Casey: Your Honor, in reviewing the transcript from Friday, although Defendant's Exhibit--

The Court: One newspaper says I overruled it and one newspaper said I didn't. If a have done it already, I will do it a second time, and if I haven't done it, I will do it the first time, on the motion for a mistrial.

Mr. Casey: O. K., Judge.

The Court: So at least it is done at least once and maybe twice. (R. 1244)

¹⁵ For example, during the attempt to establish Meyers' excessive expenditures, he was asked what stock he owned. Without an objection having been interposed, the trial judge interjected:

"Well, now, this is not the Governor requiring somebody to make a net worth statement if he works for the State of Illinois. He is not required to disclose to you what stocks he owns now." (R. 788).

¹⁶ This should not be construed as approval of the prosecutor's position on the Bill of Particulars question. I think the government should have been required to provide the defendant with a more definite statement of the dates on which Meyers traveled to Chicago to deliver bribe money to Barrett. The specific dates were established by airline records, and I see no reason why this information should not have been made available to the defense in advance of trial. A rule which would have denied the government the right to introduce evidence as to dates not specified would have done no harm in this case, since there was no uncertainty as to its theory of the evidence. It there had been doubt as to the dates of the meetings between Meyers and Barrett, an appropriate caveat in the government's response to the order would have preserved its ability to place proper evidence before the jury.

Perhaps, as the government argues, defendant cannot demonstrate specific prejudice, but certainly the refusal to provide precise information which was readily available made the preparation of the defense more difficult.

¹⁷ Macaulay's History of England, Vol. 1, p. 440.

 

 

 

[75-2 USTC ¶9765]Six Seam Company, Inc., Plaintiff-Appellee (73-2169), Plaintiff-Cross-Appellant (73-2170) v. United States of America, Defendant-Appellant (73-2169), Defendant-Cross-Appellee (73-2170)

(CA-6), U. S. Court of Appeals, 6th Circuit, Nos. 73-2169, 73-2170, 524 F2d 347, 10/17/75 , Aff'g in part, rev'g in part and remanding unreported District Court decision

[Code Sec. 382]

Net operating loss carryover: Limitation: Change of business.--The Appellate Court affirmed the District Court's decision that the taxpayer corporation at the time of its change in ownership was not actively engaged in its active business operations, and, therefore, could not carry over losses from previous years. .

[Code Sec. 1245]

Gain from depreciable property: Sale to controlled corporation.--The Appellate Court held that the transfer of certain mining equipment to the taxpayer (a controlled corporation) by X corporation, the owner of the taxpayer's stock, was a tax free transfer. Thus upon the sale of the property to a third party, the taxpayer's basis was that of X and it was therefore required to include as income the depreciation taken both by itself and X in prior years. BACK REFERENCES: 75 FED ¶4773G.30.

[Code Sec. 7122]

Compromises: District Court did not review issue: Appellate Court lacked jurisdiction to hear matter.--The issue as to whether or not a settlement agreement was reached, what the terms of such agreement were, and whether the terms were followed was remanded to the District Court since the matter was factual and should first be decided by the District Court. BACK REFERENCES: 75 FED ¶5697.025.

Charles F. Wood, James E. Shafter, Wood, Pedley, Stansbury, Rice & Warner, 545 Starks Bldg., Louisville, Ky., for plaintiff-appellee, plaintiff-cross-appellant. George J. Long, United States Attorney, Louisville, Ky., Scott P. Crampton, Assistant Attorney General, Meyer Rothwacks, Ernest J. Brown, Gilbert Andrews, Richard Perkins, Stephen M. Gelber, Department of Justice, Washington, D. C. 20530, for defendant-appellant, defendant-cross-appellee.

Before: EDWARDS and ENGEL, Circuit Judges, and RUBIN, District Judge. ^*

ENGEL, Circuit Judge:

This suit was commenced in the district court by Six Seam Co., for a refund of federal corporate income taxes for the years 1963, 1964 and 1965. Six Seam appeals from a district court grant of summary judgment in favor of the government denying it the right to deduct certain net operating losses incurred in the fiscal years 1960 and 1961, from it profits in 1963 and 1964. In its cross-appeal, the government challenges the district court's holding that the sale of certain mining equipment from Coiltown Mining Company to taxpayer Six Seam was a bona fide sale and that, therefore, Six Seam upon disposition of the assets to a third party, was not required under Section 1245 of the Internal Revenue Code to restore to its income the depreciation which Coiltown had claimed prior to the date of sale.

Six Seam was incorporated in 1959 and until April, 1961, its business consisted solely of operating a tipple used in the preparation of coal for commercial sale. The tipple crushed, sorted and washed coal. At no time during this period did Six Seam itself engage in the business of actually mining coal. Rather, it purchased raw coal from various local mines and merely processed the coal through its tipple. The coal tipple itself was leased by Six Seam from a third party, the Kington family. Taxpayer incurred net operating losses of $73,017 and $24,437 during fiscal years of 1960 and 1961 respectively. In March, 1961, Six Seam, heavily in debt, ceased operating the tipple. In April, 1961 it sub-leased the use of the tipple to one of its suppliers, Walnut Grove Mining. Initially, Six Seam had attempted to sell the tipple rights to Walnut Grove, but the latter was not in a position to purchase the facility. The sub-lease to Walnut Grove was not exclusive since Six Seam reserved the opportunity to process any of its coal through the tipple. The record indicates that Six Seam never subsequently availed itself of this reserved right. When Six Seam executed the lease, it notified various governmental agencies that it was terminating its business.

The Board of Directors of Six Seam on March 20, 19 61, authorized the acceptance for surrender and cancellation of the stock of any shareholder who desired to tender his shares to the corporation. The resolution provided no consideration for the surrendered shares, but relieved the shareholder of his personal guarantee on a $75,000 note executed by Six Seam to a Kentucky bank. In May, 1961, the shareholders of Six Seam agreed to sell their stock to Coiltown Mining Company, Inc. for a total of $100 plus the full assumption by the latter of Six Seam's corporate liabilities. Coiltown was a coal mining company which for many years had been engaged in extracting coal from the Klondike Mine in Kentucky under contracts for the sale of coal to the Tennessee Valley Authority. During the remainder of 1961 and throughout 1962, Six Seam, now a wholly owned subsidiary of Coiltown, did not engage in any active business except to receive rental income from the lease of the tipple to Walnut Grove.

In 1961 and prior years Coiltown had encountered increasing difficulty in completing a coal supply contract with the Tennessee Valley Authority. The shareholders were concerned that potential liabilities in contractual damages would be incurred by the corporation if Coiltown defaulted on its contract with TVA. Since Coiltown had been accumulating liquid reserves in preparation for liquidation of the corporation and distribution to the shareholders, the specific fear was that a large contractual liability would deplete the "nest egg" of over $1,000,000 in cash and marketable securities. Therefore, to insulate the liquid assets of Coiltown from potentially ruinous liability on the TVA contract, the shareholders of Coiltown decided, as found by the district court,

". . . to reactivate Six Seam, a whollyowned, but dormant, subsidiary of Coiltown, and endeavor to persuade TVA to substitute it for Coiltown on the T-4 Contract and to release Coiltown and the surety on its $325,000.00 performance bond from that contract . . ..

"The plan adopted and authorized by the Coiltown directors at a special meeting held on February 19, 19 63, was for Coiltown to purchase for cash additional Six Seam stock 'in an amount sufficient to allow that company . . . to be able to perform the TVA contract' and 'thereby induce TVA to release Coiltown Mining Company from its contract' . . .. This plan also contemplated that Six Seam would purchase all of Coiltown's mining assets at a fair price with cash thus received and that Six Seam would pay all of its outstanding obligations and have enough cash working capital left over to commence mining operations, thereby enabling Six Seam to persent a balance sheet showing a net worth sufficient to satisfy both TVA and the bonding company that would be needed to write the necessary $325,000 performance bond on Six Seam in favor of TVA."

Pursuant to the plan, Six Seam on April 1, 19 63, issued and Coiltown purchased an additional 3,030 shares of Six Seam stock for $303,000. On the same date Six Seam purchased all of Coiltown's mining equipment for $145,000 and all of its mining supplies for $41,291. Out of the remaining cash, Six Seam paid all of its outstanding debts and obligations, including an account payable to Coiltown of $66,000. When these transactions were completed, Six Seam owned all of Coiltown's mining assets and in addition had approximately $50,000 working capital to begin mining operations. Concerning this transaction, the district court found that

"The sole pupose and intent underlying the transfer by Coiltown of its mining and other operating assets to Six Seam on April 1, 19 63, was to enable Coiltown's shareholders to get out of the coal mining business at the minimum possible risk of loss. And that those assets were not transferred to Six Seam pursuant to any plan to reorganize Coiltown so that its shareholders could continue in the coal mining business in modified corporate form to Six Seam. . . . Similarly, there is credible testimony in the record, which is not inherently improbable and which is not disputed or contradicted, that the $145,000 Six Seam paid to Coiltown for its mining equipment and other depreciable assets was a fair price, inasmuch as the sale was for cash and the assets were to remain in place. . . . Accordingly, this court finds as a fact that the sale by Coiltown of its mining and other depreciable assets to Six Seam on April 1, 19 63, was a bona fide sale of those assets and, for the reasons heretofore given, was made for the legitimate purpose of protecting Coiltown's liquid assets in the event of a default on the T-4 contract . . .."

By September 1964, the earlier production difficulties had been resolved and Six Seam was able successfully to complete performance under the TVA contract. Six Seam subsequently leased the mining equipment it had obtained from Coiltown to Pyro Mining Company. Pyro exercised the option under the lease and in January, 1965, purchased the mining equipment for $320,000.

I. The Loss Carryover

On its 1963 corporate income tax return, Six Seam claimed a net operating loss deduction of $48,219 against its mining income from the TVA contract, leaving a balance of $53,316 in loss carryover which it claimed as a net operating loss deduction on its 1964 return. The Commissioner of Internal Revenue disallowed the net operating losses for both 1963 and 1964 pursuant to Sections 269 and 382(a) of the Internal Revenue Code of 1954. In the district court, summary judgment was rendered in favor of the government on the ground that the deductions were disallowed by Section 382(a). ¹ The court did not pass upon the Section 269 issue.

Section 172 of the Internal Revenue Code of 1954, 26 U. S. C. §172, in providing for the carryover of net operating losses in a given tax year to offset income which may be earned later, is the current statutory expression of a Congressional belief that "the allowance of a net operating business loss carry-over will greatly aid business and stimulate new enterprises". H. R. Rep. No. 855, 76th Cong. 1st Sess. 9. While its decisional authority may have been superseded by the 1954 amendments to the Internal Revenue Code, the following observation in Libson Shops, Inc. v. Koehler [57-1 USTC ¶9691], 353 U. S. 382, 386 (1957), still has validity:

"Those providions were enacted to ameliorate the unduly drastic consequences of taxing income strictly on an annual basis. They were designed to permit a taxpayer to set off its lean years against its lush years, and to strike something like an average taxable income computed over a period longer than one year."

Prior to the 1954 amendments to the Internal Revenue Code, the only statutory vehicle to avoid potential abuse of the loss carryover provision was found in Section 269 which authorized the Commissioner of Internal Revenue to disallow a deduction, credit or allowance not otherwise available, in cases where the control of a corporation was acquired principally for the purpose of tax evasion and avoidance. The effectiveness of this provision, however, was impaired by difficulty in establishing whether, in a given case, tax avoidance was the principal purpose of the acquisition. This led to the enactment of Section 382 which had the dual purpose of avoiding abuse of the carryover provisions "through trafficking in corporations with operating loss carryovers, the tax benefits of which are exploited by persons other than those who incur the loss" while at the same time providing an "objective standard governing the availability of a major tax benefit." U. S. Cong. & Admin. News, 1954, Vol. 3, page 4067. (House Report No. 1337). See generally, Maxwell Hardware Co. v. C. I. R. [65-1 USTC ¶9332], 343 F. 2d 713 (9th Cir. 1965).

Section 382(a) provides that if at the end of a taxable year of a corporation there has been a 5 percentage point change of stock ownership in relation to the beginning of the taxable year or the prior taxable year, then the net operating loss carryovers, if any, from prior taxable years of the corporation to such taxable year and subsequent taxable years shall not be included in the net operating loss deduction; provided that the corporation "has not continued to carry on a trade or business substantially the same as that conducted before any change in the percentage ownership of the fair market value of such stock". Taxpayer concedes that the requisite percentage change of ownership has occurred. The only point of contention is whether there has been a change in taxpayer's business, or a break in continuity of business activity.

As a preliminary matter, we reject the government's argument that a change of taxpayer's business compels disallowance because Six Seam's assumption of the TVA contract and entry into the mining business was substantially different from the business of operating the coal tipple. Assuming that the two operations are sufficiently dissimilar to constitute a change of business within the meaning of §382(a), the government's argument nevertheless fails to consider the time frame of the statute. The change of ownership occurred in May 1961. The alleged change of business, however, did not occur until April of 1963. In Frederick Steel Co. v. C. I. R. [67-1 USTC ¶9279], 375 F. 2d 351, 354 (6th Cir. 1967), cert. denied 389 U. S. 901, we held:

"Section 382 of the 1954 Code, insofar as here applicable, provides for disallowance of net operating loss carryovers when two factors occur--when there has been both a 50% change in value of stock ownership, and a change in the nature of the business.

Both factors--change of nature of the business and change in ownership--are determined at the close of the taxable year for which benefit of the deduction is sought; and the change of ownership is measured by comparison with the beginning of that taxable year or the prior taxable year, or (by virtue of Section 394(b) of the 1954 Code) June 22, 19 54, whichever occurs later; and the change of business, by comparison with the business carried on prior to the change of ownership.

In the instant case there was, then, a change in the nature of the business; but the second factor is lacking--a change in the ownership of the business within the period specified in the statute. Accordingly, under the provisions of Section 382, the net operating loss carry-over is not here to be disallowed to petitioner.

Thus at the end of the 1963 taxble year of Six Seam (June 30), the year in which the deduction was sought, while the alleged change of business may have occurred, the requisite change of ownership had not occurred in either the 1963 taxable year or the prior taxable year. Under the government's theory, the disallowance provisions of §382(a) are not applicable.

If this were the sole issue, we might be obliged to reverse. There exists, however, another basis for disallowing the deductions. Treasury Regulation 1.382(a)-(1)(h)(6) provides that the net operating loss deduction is disallowed "if the corporation is not carrying on an active trade or business at the time of such increase in ownership". The regulation is based on the implicit requirement of the statute that not only should the business after the stock ownership change be substantially similar to the business before the change, but that also the corporation has continued to carry on a business. The statute "seems to convey the idea of continuous operation, without any substantial break. It hardly envisages the resumption of an operation carried on the distant past, with intervening operations of a different kind. Nor does it envisage the resuscitation of a business long since discontinued". Glover Packing Co. v. United States [64-1 USTC ¶9249], 328 F. 2d 342, 348 (Ct. Cl. 1964). "We do not think it was either unreasonable, or an inadvertence, that the statute requires both that the nature of the business not be changed and that operations continue despite the change in ownership. On the contrary, the general purpose of this type of deduction dictates both of these requirements". C. I. R. v. Barclay Jewelry, Inc. [66-2 USTC ¶9704], 367 F. 2d 193, 196 (1st Cir. 1966).

Thus the question becomes what degree of activity is necessary to sustain the characterization "active trade or business". In this light it should be noted that even a corporation in the process of formal liquidation will to some degree be engaged in business since the cessation of business activities necessarily involves a period of time. That a corporation may be earning income on its assets is not by itself determinative of whether it is engaged in an active business. We believe that the correct standard in determining whether such limited activity amounts to continuing a trade or business under the statute is whether it evidences only an intent to wind up corporate affairs, or whether instead the company is simply maintaining a low profile with an intention to resume operations should the business climate improve.

"In the case at bar there was not a mere temporary suspension of operations. It was a discontinuance of them, without any firm purpose to resume them in the future . . . When the Rath Company decided it did not want to buy plaintiff's property or to buy the stockholders' shares, the stockholders gave up, and charged off their stock as worthless. This was evidence of an intention to abandon the enterprise as hopeless."

Glover Packing Co., supra, at 348 (emphasis added)

In United States v. Fenix and Scisson, Inc. [66-1 USTC ¶9407], 360 F. 2d 260, 167, 268 (10th Cir. 1966), cert. denied, 386 U. S. 1036, the court, in deciding whether the acquired corporation was engaged in an active business, observed:

Certainly the fact that the company was incurring some fixed expenses and filing tax returns doesn't mean it engaged in a trade or business. The expenses for the most part were to preserve the remaining equipment until it would be disposed of. As for the rentals and equipment sales, we find nowhere an argument made that Oronogo was engaged in the business of equipment sales and rentals. At any rate such an argument would carry little weight for the company was not maintaining an inventory for such purpose by replacing the equipment sold and rented. Furthermore, there is no doubt that at one time it held out between eighty and ninety per cent of its equipment, excluding trucks, for sale to the public.

* * *

In any event, Oronogo's attempt to sell nearly all of its equipment is incompatible with the idea that it was merely standing by intending to resume operations should business factors improve. Had they been completely successful in selling equipment, they would have been unable to resume operations short of repurchasing necessary equipment.

The intent standard is consistent with the two Tax Court cases Six Seam cites as supporting its position that a forced suspension from business due to economic condition does not violate the continuity-of-business requirements. We agree with the Fifth Circuit in Coast Quality Construction Corp v. United States [72-2 USTC ¶9548], 463 F. 2d 503, 510 (n. 5) (5th Cir. 1972), that "an analysis of the suspension cases is consistent with an exception carved out by the Tax Court in Clarksdale Rubber Co. [ CCH Dec. 27,650], 45 T. C. 234 (1965), and H. F. Ramsey Co. [ CCH Dec. 27,220], 43 T. C. 500 (1965). In those cases where the business was suspended because of economic circumstances and at all times it was intended that business would resume when conditions permitted, and it did in fact resume eventually, the court held the loss carryover deductions not barred by §382(a). The taxpayers never fully divorced themselves from one endeavor."

From the undisputed evidence in the record, Six Seam at the time of change of ownership had suspended its active business operations with the intention of winding up its corporate existence. It had ceased operation of its only physical asset and had leased it to a third party. The redemption and sale of Six Seam stock at a nominal price is "evidence of an intention to abandon the enterprise as hopeless . . .," Glover Packing Co., supra. As in Fenix, supra, the attempt by Six Seam to sell its sole asset, the coal tipple, "is incompatible with the idea that it was merely standing by intending to resume operations should business factors improve". Finally, the record indicates Six Seam informed the Division of Unemployment Insurance of Kentucky of its transfer of the coal processing tipple to Walnut Grove on April 1, 19 61, and in answer to the question "Type of business retained" filed in the form "None". Similar notice was given to the Internal Revenue Service. Other than the collection of rentals, Six Seam was not engaged in any corporate activity from March of April of 1961 until April 1, 19 63 when the coal mining assets were transferred. Even receipt of rentals ceased in late 1963.

Accordingly, we agree with the determination of the district court that the provisions of Section 382(a) compel the disallowance of the net operating loss deductions, and affirm the judgment of the district court in this respect. ²

II. Recapture of Depreciation

The government in its appeal contends that Six Seam is required to restore to its income, under §1245 of the Code, the depreciation Coiltown claimed prior to April 1, 19 63 on the mining assets Coiltown sold to Six Seam and which were later sold to Pyro Mining Company. The district court granted judgment to the taxpayer on this issue on a finding that the transfer of the mining assets to Six Seam constituted a bona fide sale.

Section 1245 requires that a taxpayer, upon the sale of specified depreciable property, must recognize as ordinary income that portion of its gain which represents prior deductions for depreciation. Six Seam concedes that it must restore to its income prior depreciation deductions; however, it argues, that only those depreciation deductions that it itself had incurred are properly added to the adjusted basis to calculate the recomputed basis. The government argues that Section 1245(a)(2) provides that the recomputed basis shall be calculated by adding those depreciation deductions which are ". . . reflected in such adjusted basis on account of deductions . . . allowed or allowable to the taxpayer or to any other person for depreciation. . . ." 26 U. S. C. §1245(a)(2) (emphasis added). The government's next step is to assert that the transfer of the mining assets to Six Seam constituted a transfer of property to a controlled corporation and consequently the transferor's (Coiltown's) basis is assumed by Six Seam. Therefore Six Seam's basis "reflects" the prior depreciation deductions taken by Coiltown. The issue is thus whether Six Seam assumed Coiltown's basis in the mining assets. Six Seam and the district court rely on the argument that that transfer of the assets constituted a bona fide sale and consequently Six Seam's basis in such assets is the sale price.

The government, in its attempt to prove a tax-free transaction, alleged that the transaction between Six Seam was a taxfree reorganization within the meaning of 26 U. S. C. §368(a)(1)(D). The district court rejected this argument finding that the facts indicated a complete liquidation. This finding is not disputed on appeal. The government's other contention in district court is that the transaction between Six Seam and Coiltown was subject to the dictates of Section 351 which provides that:

"No gain or loss shall be recognized if property is transferred to a corporation . . . by one or more persons solely in exchange for stock or securities in such corporation and immediately after the exchange such person or persons are in control (as defined in Section 368(c)) of the corporation."

If the transaction is within Section 351, then the provisions of Section 362 automatically apply to require the assumption of the transferor's basis. The transferred basis would trigger the recapture provisions of Section 1245.

The intent of Section 351 is to allow a taxpayer or group of taxpayers to rearrange the structure of a business without incurring tax costs. Without Section 351, if a proprietor of a business decided to incorporate, the paper transfer of the business assets from the ownership of the proprietor to the new corporation would result in taxation of the difference of the fair market value of the assets over the adjusted basis. Congress believed that a mere change of form of ownership without the relinquishment of control of the property was insignificant to justify taxation.

"There is in short a transfer in form only, a technical transfer, not one of substance. The section is designed to give present tax relief for internal rearrangements of the taxpayer's own assets, accompanied by no sacrifice of control and no real generation of income for the owner--and to defer taxation until a true outside disposition is made."

DuPont v. United States [73-1 USTC ¶9183], 471 F. 2d 1211, 1214 (Ct. Cl. 1973).

The operation of Section 351 is mandatory when a transfer of property to a controlled corporation occurs. "No gain or loss shall be recognized . . ." Thus if a transaction is within the scope of Section 351, taxable gain is postponed and the basis remains the same.

If Coiltown had contributed the mining assets to Six Seam's capital structure in exchange for 3,030 shares the literal provisions of Section 351 would have been invoked, since there would be a transfer of property to a corporation solely in exchange for stock in such corporation. Since Coiltown controlled Six Seam as a wholly owned subsidiary, the only question is whether the transfer of cash to Six Seam for stock and its return on the same day to Coiltown for the mining equipment should have a different tax consequence. Without the cash infusion by Coiltown, Six Seam would have been unable to "purchase" the mining equipment. The capital contribution to Six Seam and the "sale" occurred on the same day. In short, the two steps constituted an integrated plan. In apparent agreement are the district court's own findings (see pages 3-4 supra). Under such circumstances we are compelled to hold that even "though the form of the subject transaction was that of a sale, it is clear that substance, not form, controls in determining the effect of the transaction for federal income tax purposes." Stanley, Inc. v. Schuster [69-1 USTC ¶9225], 295 F. Supp. 812, 815 (S. D. Ohio 1969), aff'd per curiam [70-1 USTC ¶9276], 421 F. 2d 1360 (6th Cir. 1970); cert. denied 400 U. S. 822.

The district court did not address itself to the question of whether Section 351 was applicable, but rather made a finding that the price paid for the mining assets was reasonable and consequently the sale was bona fide. However, the reasonableness of the price paid for property transferred to a controlled corporation is irrelevant. If a transaction is within the scope of Section 351, Section 362 mandates that the basis shall remain the same without regard to the fair price of the property. Nor do we consider ourselves bound by the district court determination since "this case hinges . . . on the legal characterization, for federal income tax purposes, of the transactions between the parties. That characterization is not a question of fact, but rather one of law". Union Planters National Bank v. United States [70-1 USTC ¶9372], 426 F. 2d 115, 117 (6th Cir. 1970), cert. denied, 400 U. S. 827. Therefore since the basis of the mining equipment in Six Seam's hands reflected the prior depreciation deductions incurred by Coiltown, Six Seam must under Section 1245 recoup such deductions as ordinary income.

III . Settlement Issue

A further dispute between the parties is whether the district judge was obliged to incorporate in the final judgment the provisions of a purported settlement reached between Six Seam and the government. According to the government the alleged agreement conforms to a letter addressed to the Tax Division of the Department of Justice on January 31, 1973 and signed by S. Russell Smith, counsel for Six Seam. We note, however, no formal entry of a stipulation. The government argues that the result of this agreement was a concession by the taxpayer of additional deficiencies pertaining to the tax years of 1963 and 1964, which would have been offset against any refund which might ultimately have been determined due by the district court for 1965. The judgment initially entered on June 27, 1973 , provided that pursuant to Rule 15-b of the Federal Rules of Civil Procedure, the government should file a counter-claim within ten days after entry of judgment "properly setting forth its claim to recover plaintiff's income tax deficiencies for 1963 and 1964 (which said amounts had been netted against the plaintiff's refunds set forth in paragraph I above)." Thereafter counsel for the taxpayer Six Seam moved the court to enter an order amending the June 27 judgment so as to delete any provision for a counter-claim, it being alleged that the government failed to file the counter-claim within the time specified. This motion was allowed and on September 4, 1973 , the district court entered an "amended and substituted judgment" providing for the refund in accordance with its previously entered opinion, but without allowance of the setoff claimed by the government. The government claims that a counter-claim was not possible since the prerequisite assessments were barred by the statute of limitations, and that in any event a settlement agreement is binding on the parties and should be enforced by the court without regard to formal claims and counter-claims.

Counsel for Six Seam asserts in response that this question is not properly before us since the district court made no determination and was never requested to determine (1) whether a settlement agreement was reached between the parties; (2) what the terms of such an agreement were; (3) whether the terms had been followed. Six Seam claims that such questions are factual and should be determined in the first instance by the district court. We agree. We are unable upon the record before us to determine the truth of the matter, or whether, in fact, any agreement was ever reached between the parties. Since this case must in any event be remanded to the district court, it therefore seems appropriate that we decline to decide the question raised by the government, leaving the district court free to reconsider the issue. However, should be district court find that there was no settlement agreement between the parties, then it will be necessary for the district court to reconsider the unlitigated issues intended to be covered by the agreement since it appears that the court inadvertently adopted part of the agreement insofar as concessions were made by the government to the taxpayer.

Lastly, as urged by the government, the district court should dispose of the still pending government motion to amend the judgments in the ten cases involving questions of shareholder tax liability which were consolidated in the district court, but not appealed to this court for lack of a final order.

Affirmed in part, reversed in part, and remanded to the district court for further proceedings consistent with this opinion.

^* The Honorable Carl B. Rubin, United States District Judge for the Southern District of Ohio, sitting by designation.

¹ Section 382(a) provides:

(1) In general.--If, at the end of a taxable year of a corporation--

(A) any one or more of those persons described in paragraph (2) own a percentage of the total fair market value of the outstanding stock of such corporation which is at least 50 percentage points more than such person or persons owned at--

(i) the beginning of such taxable year, or

(ii) the beginning of the prior taxable year,

(B) the increase in percentage points at the end of such taxable year is attributable to--

(i) a purchase by such person or persons of such stock the stock of another corporation owning stock in such corporation, or an interest in a partnership or trust owning stock in such corporation, or

(ii) a decrease in the amount of such stock outstanding or the amount of stock outstanding of another corporation owning stock in such corporation, except a decrease resulting from a redemption to pay death taxes to which section 303 applies, and

(C) such corporation has not continued to carry on a trade or business substantially the same as that conducted before any change in the percentage ownership of the fair market value of such stock,

the net operating loss carryovers, if any, from prior taxable years of such corporation to such taxable year and subsequent taxable years shall not be included in the net operating loss deduction for such taxable year and subsequent taxable years.

(2) Description of person or persons.--The person or persons referred to in paragraph (1) shall be the 10 persons (or such lesser number as there are persons owning the outstanding stock at the end of such taxable year) who own the greatest percentage of the fair market value of such stock at the end of such taxable year; except that, if any other person owns the same percentage of such stock at such time as is owned by one of the 10 persons, such person shall also be included. If any of the persons are so related that such stock owned by one is attributed to the other under the rules specified in paragraph (3), such persons shall be considered as only one person solely for the purpose of selecting the 10 persons (more or less) who own the greatest percentage of the fair market value of such outstanding stock.

(3) Attribution of ownership.--Section 318 (relating to constructive ownership of stock) shall apply in determining the ownership of stock, except that sections 318(a)(2)(C) and 318(a)(3)(C) shall be applied without regard to the 50 percent limitation contained therein.

(4) Definition of purchase.--For purposes of this subsection, the term "purchase" means the acquisition of stock, the basis of which is determined solely by reference to its cost to the holder thereof, in a transaction from a person or persons other than the person or persons the ownership of whose stock would be attributed to the holder by application of paragraph(3).

² In addition to citing regulation 1.382(a)-a(h)(6), the district judge relied on Euclid-Tennessee, Inc. v. Commissioner [65-2 USTC ¶9763], 352 F. 2d 991 (6th Cir. 1965), cert. denied, 384 U. S. 940, as authority for the proposition that "the holding of rental property is not a trade or business within the meaning of Section 382(a)(1)(C)". We read neither Section 382 nor Euclid so broadly, although we do note that Treas. Reg. 1.382(a)-1(h)(4) provides that:

"[4] For purposes of this paragraph, the holding purchase or sale for investment purposes of stock, securities, or similar property shall not be considered a trade or business unless such activities historically have constituted the primary activities of the corporation." (emphasis added).

In disallowing the carryover of net operating losses in Euclid-Tennessee, Inc. supra, we held "that the post-merger renting and holding of what was the old brewery real estate as an insignificant incident to taxpayer's whole purpose was not the carrying on of 'trade or business substantially the same as that conducted [by the brewery] before the [the merger]', i. e., holding and renting its remnant assets awaiting complete liquidation . . ." at 994. In the next sentence, we intimated our doubts whether in the first instance the "Gerst Brewing Company's holding and rening of its remnant assets constituted 'a trade or business'", but in any event found that unnecessary to decide since the change of business was sufficient to deny the deduction. We believe that this suggested alternative holding does not imply that renting real estate is automatically within the prohibition of Reg. 1.382(a)-1(h)(4) without any regard to investment purposes. Rather that language is more easily subsumed within the inactive business rule of Reg. 1.382(a)-1(h)(6) as explained in this opinion.

 

 

 

[71-1 USTC ¶9355]Charles Joseph Reimer, Plaintiff-Appellant v. United States of America, Internal Revenue Service et al., Defendants-Appellees

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 30486 Summary Calendar ^*, 441 F2d 1129, 4/26/71 , Aff'g an unreported District Court decision

[Code Secs. 7122 and 7421(a)--Result unchanged by '69 Tax Reform Act]

Suit to restrain collection of tax: Compromises: Authority to compromise: Adequate remedy at law.--The District Court properly denied taxpayer's suit seeking an injunction against the collection of an income tax assessment. The IRS did not waive any right to a further assessment by agreeing to a settlement and the IRS agent had no authority to compromise taxpayer's tax liability. In addition, the taxpayer had an adequate remedy at law by paying the assessment and suing in the district court for a refund. BACK REFERENCES: 71 FED ¶5697.075 and 71 FED ¶5779.738.

Charles Joseph Reimer, pro se, 86 Dattner, Houston, Tex. Anthony J. P. Farris, United States Attorney, James R. Gough, Assistant United States Attorney, Houston, Tex., K. Martin Worthy, Chief Counsel, Internal Revenue Service, Washington, D. C. 20530, Johnnie M. Walters, Assistant Attorney General, Meyer Rothwacks, Department of Justice, Washington, D. C. 20530, for defendants-appellees.

Before WISDOM, COLEMAN, and SIMPSON, Circuit Judges.

PER CURIAM:

Reimer appeals from the district court's dismissal of his suit seeking an injunction against the collection of an income tax assessment.

26 U. S. C. §7421(a) provides that, except in certain listed situations not applicable here,

no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.

In Enochs v. Williams Packing Co., 1962 [62-2 USTC ¶9545] 370 U. S. 1, 82 S. Ct. 1125, 8 L. Ed. 2d 292, the Supreme Court noted a further exception to the restriction where it is apparent that, under the most liberal view of the law and facts, the government cannot establish its claim and where no adequate legal remedy exists so that equity jurisdiction may properly be invoked.

Reimer attempts to place his case within the Enochs exception.

Reimer argues that the IRS waived the right to collect the tax by agreeing in 1961 to a settlement of his tax liability for 1959. Yet the very IRS form on which Reimer bases this claim explicitly informs the taxpayer that the IRS is not waiving any right to a futher assessment. Additionally, under 26 U. S. C. §7122 the IRS agent named by Reimer had no authority to compromise his tax liability. Reimer's other arguments on the merits equally fall short of the Williams Packing Co. requirements for an injunction.

Finally, Reimer has an adequate remedy at law. He can pay the assessment and sue in the district court for a refund. Reimer has made no attempt to show that this is not an adequate remedy.

The district court's dismissal of the suit for an injunction is AFFIRMED.

^* Rule 18, 5 Cir.; see Isbell Enterprises, Inc. v. Citizens Casuality Company of New York et al., 5 Cir. 1970, 431 F. 2d 409, Part I.

 

 

65-1 USTC ¶9274]Henry J. Brubaker and Civilla J. Brubaker, Plaintiffs-Appellants v. United States of America, Defendant-Appellee

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 14647, 342 F2d 655, 2/26/65, Affirming District Court, 64-1 USTC ¶9279

[1954 Code Sec. 7122(a)]

Compromise: Settlement construed: Renegotiation matters as including excess profits taxes.--An excess profits tax assessment against one of several corporations was not included in a settlement contract resulting from an offer to settle renegotiation claims against the other corporations where there was no renegotiation dispute involving the corporation in question and, though this corporation was named in the headings on the letters in which the offers were made and was included in the named corporations for which the offer was made "in full settlement of all renegotiations claims," no reference was made to excess profits tax. Furthermore, the Attorney General has no authority to compromise an excess profits tax dispute until the Commissioner of Internal Revenue refers it to the Department of Justice. BACK REFERENCES: 65 FED ¶5697.075 and 65 FED ¶5697.105.

Harold F. Ronin, 1 N. LaSalle St., Chicago, Ill., for plaintiffs-appellants. Louis F. Oberdorfer, Assistant Attorney General, Lee A. Jackson, Melva M. Graney, Thomas L. Stapleton, Department of Justice, Washington, D. C. 20530, Edward V. Hanrahan, United States Attorney, John Peter Lulinski, Assistant United States Attorney, Chicago, Ill., for defendant-appellee.

Before DUFFY and CASTLE, Circuit Judges, and GRANT, District Judge.

GRANT, District Judge:

This appeal is from the District Court's [64-1 USTC ¶9279] judgment in a suit for refund of excess profits tax in the amount of $25,312.09, and interest in the amount of $20,572.73 on that tax paid by the taxpayer to the Collector of Internal Revenue on or about March 25, 19 57. The excess profits tax in question had been assessed in 1952 against the Des Plaines Oil Company, the assets of which taxpayer was the transferee, for the period from May 12, 19 44, to April 30, 19 45. The taxpayer bases his claim for refund on the contention that a 1955 compromise agreement purporting to settle certain renegotiation matters entered into between the United States and a group of individuals represented by attorney Harold F. Ronin included the presently contested excess profits tax liability of this taxpayer. The District Court entered judgment for the United States, rejecting taxpayer's contention and holding that the renegotiation matters were and are distinguishable from the excess profits tax assessment, and that the latter was not specifically referred to and thus not included in the 1955 settlement contract. ¹

[Statement of Facts]

The facts of this case are complicated, but not disputed. They were the subject of a stipulation between the parties in the District Court, which stipulation was adopted in toto in that Court's findings of fact. Briefly, they may be stated as follows:

The taxpayer, Henry Brubaker, ² became a principal stockholder during World War II in an Illinois Corporation called Des Plaines Oil Company. This company, which had been one of several business entities utilizing substantially the same personnel and facilities formed for the purpose of selling silica gel to the military, became inactive after the war and its assets were transferred to several individuals and former stockholders, one of whom was the taxpayer.

In November, 1951, the Commissioner of Internal Revenue assessed certain tax deficiencies against this corporation for the period May 12, 19 44, to April 30, 19 45. These deficiencies included $65,168.83 in excess profits taxes for the period and $24,944.40 in interest thereon. The reason for this deficiency assessment was the disallowance by the Commissioner of certain deductions claimed by the company in computing its income for that period. These deductions were $40,767.30 characterized as "royalties" by the company but found to have been distributions of earnings to the several stockholders and $53,192.30 characterized as "commissions" but found to have been a means of draining off company profit for the exclusive benefit of five members of the joint venture, one of whom was the taxpayer.

In March, 1952, the Commissioner proceeded to make an assessment against each of the transferees of the Des Plaines assets limited in each case to the value of assets each had received. The assessment against the taxpayer as a transferee of the assets for the deficiency in excess profits taxes was $25,312.09 with $10,178.93 in additional interest. Subsequently, on February 19, 19 57, and March 26, 19 57, the taxpayer paid this assessment with accrued interest in the sum total of $45,884.82. After disallowance by the Commissioner of taxpayer's claim for complete refund of this payment, taxpayer instituted the present suit.

[Renegotiation Proceedings]

Coincident with much of the above-described activity involving the Internal Revenue Service, taxpayer--also by virtue of his business capacity in the various concerns producing silica gel--was involved in certain renegotiation proceedings conducted by the War Contracts Price Adjustment Board (WCPAB). The Board, acting under the authority of the Renegotiation Act of 1943 ³ to recover overcharges on war-time contracts with the military, demanded payment in the following amounts from the following business entities, as reduced by statutory tax credits. ⁴

Joliet Chemicals, Inc., successor of the partnership, Joliet Chemicals, Ltd., for the fiscal year ending January 31, 19 46 ⁵--$89,484.98.

Joliet Industrials, Inc., for the fiscal year ending April 30, 19 46--$90,032.74.

Des Plaines Oil Company, for the fiscal year ending April 30, 19 45--$63,229.19.

The basis for the Board's determination against the Des Plaines Oil Company was a finding that certain items designated by the company as contract expenses were in effect additional profits and overcharges not contemplated by the contracts. The Board found that $40,767.30 designated as "royalties" were not royalties but additional payments to stockholders, and that $35,986.00, in a category called "commissions", were not legitimate contract expenses. ⁶

On October 27, 19 48, certain stockholders and partners in these firms filed petitions in the Tax Court under Section 403(e) of the Renegotiation Act for a redetermination of the fact and amounts of overcharges of Joliet Chemical, Ltd. (three petitions were filed, the taxpayer's name appearing on one), and of Joliet Industrials, Inc. (one petition). The Des Plaines overcharges were not disputed by anyone and no petition for redetermination disputing the fact or amount of the Des Plaines overcharges was filed by any party. While these petitions were pending, on November 14, 19 50, the United States commenced proceedings in the United States District Court for the Northern District of Illinois to enforce the findings of the WCPAB.

Negotiations were then conducted between attorney Harold F. Ronin, acting in behalf of the aforementioned business entities and the several stockholders, including the taxpayer, and the Department of Justice. For purpose of this cause, it appears that the negotiations commenced with Mr. Ronin's offer, made on behalf of his clients, of November 17, 19 50, contained in his letter of that date. The negotiations were concluded upon the Department of Justice's acceptance of an amended offer, submitted by Mr. Ronin in the interim, the same effected by the Department's letter of October 17, 19 55. It is the fruit of these negotiations--the contract of settlement or release arising out of the aforementioned offer and acceptance--that is at issue in this cause. Specifically, the sole issue for our consideration is whether the contract of October 17, 19 55, admittedly a settlement of the renegotiation liability of the various parties, was also intended to, and in fact did, settle the taxpayer's excess profits tax liability. We feel that it did not, and that the District Court was correct in entering judgment for the defendant-appellee, United States.

The only evidence of the terms of the settlement contract is the correspondence between the parties. While the "Stipulation of Facts", agreed to by both sides and submitted in the District Court proceeding, makes mention of at least eleven separate letters exchanged by the parties, and while all have been evaluated by the Court, disposition of this issue can be effected by a specific reference to six of this number.

[Compromise Offers]

Mr. Ronin's letter of November 17, 19 50, addressed to the Assistant U. S. Attorney in Chicago, states:

I have been authorized to submit a firm offer of $5,000.00 in full settlement of all renegotiation claims against Joliet Chemicals, Inc., Joliet Industrials, Inc., Des Plaines Oil Co., Joliet Chemicals, Ltd. and all of the individual partners. (Italics supplied.)

The letter also states that three of Mr. Ronin's clients, including the taxpayer, have "agreed to raise that amount to dispose of all of the various renegotiation claims." Without doubt, this, the original, offer was intended to relate to the renegotiation claims exclusively of all others the taxpayer may have been subject to at the time.

The March 29, 19 54, letter of Mr. Ronin to the Assistant U. S. Attorney in Chicago is relied on heavily by the taxpayer. With reference to the offer of compromise submitted by Mr. Ronin, the letter states that "All claims of the contractors against the Government . . . would be released. . ." In another place is found: "The sum of Five Thousand Dollars ($5,000.00) in cash would be paid . . . in full satisfaction of all claims against the individual partners of Joliet Chemicals, Ltd." It is this language, taxpayer contends, that materially altered the original offer of November 17, 19 50, to extend the subject matter of the proposed settlement to include taxpayer's excess profits tax liability. In support of its contention, taxpayer points out that the reference heading on the letter was as follows:

Re: Des Plaines Oil Co.

Joliet Chemicals, Ltd.

Joliet Chemicals, Inc.

Joliet Industrials, Inc.

Inasmuch as there was no renegotiation dispute involving Des Plaines Oil Company, the reference heading to that entity had to refer to the claim against it for excess profits taxes, argues the taxpayer. However, this, plus one other questionable reference to the excess profits tax dispute cannot overcome the fact that nowhere in the letter is that dispute mentioned explicitly. Furthermore, it is quite clear that the Government did not understand the March 29, 19 54, offer as distinct from the original offer of Novermber 17, 1950. The letter sent to Mr. Ronin in reply to his letter of March 29th, dated July 26, 19 54, contained the reference heading

Re: Des Plaines Oil Co. Renegotiation Liability--1945

Joliet Chemicals, Ltd. Renegotiation Liability--1946

Joliet Industrial, Inc. Renegotiation Liability--1946

and noted that

While you refer to the Des Plaines Oil case in the caption of your letter (of March 29, 19 54), no reference is made to any action pertaining to that case in your letter.

There can be no question that the Department of Justice understood and construed the letter of March 29th to in no way broaden the base of the proffered settlement to encompass the taxpayer's dispute with the Commissioner of Internal Revenue.

In retrospect, we can say that this point in the settlement negotiations was crucial to taxpayer's contentions here. The Government's letter of July 26, 19 54, raised important questions as to Des Plaines Oil Company, both as to its financial condition and its place in the proposed settlement. Much depended upon Mr. Ronin's reply to the Government's request for information.

Mr. Ronin's reply was forthcoming in his letter to the Department of Justice dated October 22, 19 54. Unlike the letter of March 29, 19 54, he noted explicitly that it was his "desire to amend the proposal." Three amendments were proposed in that letter, the last of which is determinative of the issues raised in this appeal:

Paragraph 6. Add this paragraph.

All of the foregoing will be done in consideration of the release and in full satisfaction of all renegotiation claims against Des Plaines Oil Co., Joliet Chemicals, Inc., Joliet Industrials, Inc., and the individual partners of Joliet Chemicals, Ltd. (Italics supplied.)

Thus, the inquiries of the Department of Justice as to Des Plaines Oil Company were resolved to the effect that its liability in the renegotiation matter was to be included in the subject matter of the settlement, notwithstanding the fact that this liability had not been disputed by the taxpayer or anyone else by the filing of a petition for redetermination of the fact and amount of the overcharges in the Tax Court.

[Acceptance of Settlement Offer]

Inclusion of the renegotiation liability of Des Plaines in the offer of settlement was apparently proposed to make the package complete, for the reason that, inasmuch as there was no Des Plaines proceeding pending in the Tax Court, it could not have been done "to avoid the continuing expense of litigation." ⁷ That this "concession" was made by the Department of Justice, and no more, is evidenced by the language of its acceptance of the offer of settlement. The acceptance was made in a letter from the Department of Justice to Mr. Ronin, dated October 17, 19 55, which contained the following reference heading:

Re: Joliet Chemicals, Ltd. Renegotiation Liability--1946

Joliet Industrials, Inc. Renegotiation Liability--1946

Des Plaines Oil Company Renegotiation Liability--1945

Joliet Chemicals, Ltd. v. U. S. Tax Court Docket Nos. 818-R, 819-R

Joliet Chemicals, Inc. v. U. S. Tax Court Docket No. 820-R

Joliet Industrial, Inc. v. U. S. Tax Court Docket No. 821-R

The acceptance of the offer of settlement is found in the first paragraph:

Please be advised that the Attorney General had accepted the offer in compromise pertaining to the above referenced proceedings, as submitted by you in your letter dated March 29, 19 54, as amended by your letter of October 22, 19 54, conditioned upon the execution of the escrow agreement submitted to you by our letter dated September 30, 19 55, and the deposit of funds pursuant thereto.

Thus we have an offer and acceptance as well as a series of correspondence wherein this taxpayer's excess profits tax is never explicitly mentioned and the supposed allusions thereto are specious at best. ⁸ The offer of March 29, 19 54, which conceivably could have contained some ambiguity, was subsequently amended by Mr. Ronin to erase all doubt by the insertion of the phrase "in full satisfaction of all renegotiation claims." (Italics supplied.) Finally, the Government, by its reference to the renegotiation claims (as it had in all its correspondence) and incorporating the same in the terms of its acceptance, adhered to the only reasonable interpretation of the amended offer, an interpretation not thereafter challenged or controverted by the taxpayer until the filing of this suit.

The well-established principles of construction as applied to agreements such as the one at issue are clearly stated in 6 Corbin on Contracts (1962), Section 1277, pp. 117-122, as follows:

The process of making an accord, of interpreting the words and acts of the parties, and of determining the legal effect thereof, is the same as in the case of other contracts. In order that a performance rendered by an obligor shall operate as a satisfaction of the claim against him, it must be offered as such to the creditor. There must be accompanying expressions sufficient to make the creditor understand, or to make it unreasonable for him not to understand, that the performance is offered to him as full satisfaction of his claim and not otherwise. If it is not so rendered, there is no accord, for the reason that there are no operative expressions of agreement--no sufficient offer and acceptance.

* * *

So, where there are two or more claims, the payment of the amount of the one of them may reasonably be taken by the creditor as intended to settle the one claim alone; it will not operate as a satisfaction of both claims unless the debtor, when paying, clearly expresses to the claimant an intention that it shall so operate.

[Burden of Establishing Release]

Furthermore, it is also well-settled that the burden of establishing a release is on the party relying on it and such party has the burden of showing the applicability of the release to the controversy forming the subject matter of the action. 76 C. J. S. 705 (Release, §65); see also, Sanders v. Commissioner [55-2 USTC ¶9636], 225 F. 2d 629 (10th Cir. 1955); Kerr v. Schrempp, 325 Ill. App. 614, 60 N. E. 2d 636 (1945). The District Court correctly concluded that, as a contract, the parties themselves had the complete and exclusive right to determine its terms, and, as such, could either have included or excluded the excess profits tax assessment against the taxpayer. Inasmuch as that liability was not expressly included, it is incumbent upon the party alleging its inclusion to show that such was the mutual intent of the parties or the proper interpretation of the language of the agreement as written.

Principles of law converse to the foregoing have been briefed and argued by the taxpayer. However, the argument that, as to a general release, the burden is on the party seeking avoidance of release to show expressed or implied exceptions thereto is inapposite to the issue here presented. Furthermore, it virtually begs the question in a situation such as this where the issue is the determination of the breadth and scope of the release agreement. It cannot be merely assumed that the settlement here agreed upon by the parties was "general."

Finally, it is noted that the theory propounded by the taxpayer is further complicated by the fact that he is asserting that a settlement was concluded by the Apporney General which was, in fact, beyond his authority to bind the Government. As the Government notes in its brief, the excess tax liability dispute was with the Commissioner of Internal Revenue and such liabilities cannot be compromised by the Attorney General or the Department of Justice unless and until the Commissioner refers same to the Department for prosecution or defense. Internal Revenue Code of 1954, Section 7122(a); Internal Revenue Code of 1939, Section 3761(a). Prior to such reference to the Department of Justice, Congress has prescribed action by the Secretary of the Treasury or his delegate as the "exclusive method by which these liabilities could be compromised." Botany Mills v. United States [1 USTC ¶348], 278 U. S. 282, 288, 289 (1929); Royal Indemnity Co. v. United States [41-1 USTC ¶9487], 313 U. S. 289, 294-295 (1941). A party entering into an arrangement with a representative of the United States has the responsibility of ascertaining whether that representative acts within the bounds of his authority. This is so where the scope of this authority is explicitly defined by Congress or limited by delegated legislation, properly exercised through the rule-making power. Federal Crop Ins. Corp. v. Merrill, 332 U. S. 380, 384 (1947).

Judgment is therefore ordered affirming the orders of the District Court.

Affirmed.

¹ The text of the settlement reads as follows:

AGREEMENT

Agreement made and entered into this 29th day of December, 1955, between the United States of America, acting through its United States Attorney at Chicago, Illinois, hereinafter referred to as the party of the first part, and Kenneth F. Nash, H. P. Brubaker, E. A. Gilchrist, Frederick A. Nash, R. F. McCartin, J. H. Lahman, E. H. Pester, G. E. Brubaker, C. B. Brubaker, Lela L. Arnould, and W. C. Lehman, formerly partners, doing business as Joliet Chemicals, Ltd., a limited partnership; Joliet Chemicals, Inc., a corporation; Joliet Industrials, Inc., a corporation; and Des Plaines Oil Company, a corporation, all hereinafter jointly referred to as the parties of the second part.

Whereas, the War Contracts Price Adjustment Board determined that Joliet Chemicals, Ltd., a limited partnership, composed of Kenneth F. Nash, R. J. Brubaker, E. A. Gilchrist, Frederick A. Nash, W. E. McCartin, J. H. Lahman, Floyd D. Higby, Sr., R. N. Pester, C. A. Brubaker, C. B. Brubaker, Lela L. Arnould, Robert L. Foltz, and W. C. Lahman, and Joliet Chemicals, Inc., successor, had realized excessive profits during the fiscal year ended January 31, 19 46; and

Whereas, the War Contracts Price Adjustment Board determined that Joliet Industrials, Inc., a corporation, had realized excessive profits during its fiscal year ended April 30, 19 46; and

Whereas, the War Contracts Price Adjustment Board determined that Des Plaines Oil Company had realized excessive profits during its fiscal year ended April 30, 19 45; and

Whereas, the indebtedness due the party of the first part as a result of the determination of the War Contracts Price Adjustment Board has not been paid; and

Whereas, the party of the first part has instituted actions against none or all of the parties of the second part in an effort to liquidate the indebtedness referred to above; and

Whereas, by letter dated March 29, 19 54, as amended, the parties of the second part offered to compromise the claim of the party of the first part by, among other actions, the payment of a certain sum of money; and

Whereas, one of the terms of the said offer read as follows:

4. Payments totalling approximately $8,000.00 made by former limited partners, Lloyd Higby, Sr. and Robert E. Foltz, shall also be applied as partial payments in conjunction with this offer. (These payments were made by the aforenamed partners after demand upon them by the U. S. Attorney for payment of their pro rata share of the order of the WCPAB).

and

Whereas, upon examination it has been ascertained that said payments in the amount of $8,000 were not in fact made as stated in said paragraph 4; and

Whereas, the parties of the second part wish the party of the first part to process the offer as submitted; and

Whereas, the party of the first part is willing to accept a deposit in escrow of $8,000 in lieu of the amount of $8,000 referred to in paragraph 4 above,

Now, Therefore, it is agreed as follows:

(1) Upon execution hereof, there shall be deposited with the Chicago Title and Trust Co. of Chicago, Illinois, hereinafter referred to as the escrow agent, cash in the amount of $8,000.

(2) It is understood that the party of the first part will seek to obtain judgment against the said Robert E. Foltz and Floyd Higby, Sr., for the sum of their indebtedness to the party of the first part as indicated above.

(3) If a sum of $8,000 shall not be paid to the party of the first part by Floyd Higby, Sr. and Robert E. Foltz, either as a result of judgment obtained against them individually and/or collectively as a result of their indebtedness to the party of the first part as indicated above, or if a judgment is not obtained by the party of the first part against the said Floyd Higby, Sr. and Robert E. Foltz and after a demand by the party of the first part against the said Floyd Higby, Sr., and Robert R. Foltz to pay to the party of the first part the sum of $8,000, then 60 days after demand by the party of the first part to the escrow agent the escrow agent shall pay to the party of the first part such part or the whole of said $5,000 as may be necessary to make up the balance of the $8,000 remaining as not having been paid by the said Floyd Higby, Sr. and/or Robert E. Foltz.

(4) It is understood that the parties of the second part will pay to the escrow agent any costs or expenses accruing or arising as a result of this agreement.

(5) The balance remaining of said $8,000 after payment of the party of the first part's claim shall upon certification by the party of the first part be returned to the parties of the second part.

In Witness Whereof the parties have caused these presents to be executed on the date above written.

United States of America

By/s/R. Tieken

United States Attorney

Party of the First Part

Kenneth F. Nash, H. J. Brubaker, E. A. Gilchrist, Frederick A. Nash, W. B. McCartin, J. H. Lahman, E. H. Pester, C. R. Brubaker, C. J. Brubaker, Lela L. Arnould, and W. C. Lahman, formerly partners, doing business as Joliet Chemicals, Ltd., a limited partnership; Joliet Chemicals, Inc., a corporation; Joliet Industrials, Inc., a corporation and Des Plaines Oil Company, a corporation.

By/s/Harold F. Ronin

By/s/J. C. Ryan

Parties of the Second Part

² Although Civilla J. Brubaker sued as plaintiff in this action and apparently filed with Henry J. Brubaker a joint return of their income for 1945, the transferee liability for the excess profits tax of the Des Plaines Oil Company was assessed only against Henry and satisfied (with the interest) by him. No right, or interest, of Civilla in the recovery of that tax appears, and she would not be entitled to a judgment against the Government in any event. See McMahon v. United States [59-1 USTC ¶9395], 172 F. Supp. 490 (R. I. 1959); Internal Revenue Code of 1954, Section 7422(a). Henceforth, "taxpayer" will be used in the singular to refer to Henry J. Brubaker.

³ Renegotiation Act, c. 247, 56 Stat. 226, 245, Sec. 403, as amended by Sec. 701(b), Revenue Act of 1943, c. 63, 58 Stat. 21, 78.

⁴ Under Section 3806 of the Internal Revenue Code of 1939.

⁵ Demand was made for repayment by the taxpayer as a general partner for his share of the excessive profits in the amount of $26,790.00, less the tax credit of $11,824.04, or a balance of $14,965.96.

⁶ These "royalties" and "commissions" were also disallowed by the Commissioner of Internal Revenue in computing the excess profits tax due under the Internal Revenue law. The Commissioner, however, disallowed "commissions" totalling $53,192.30 and "royalties" of $40,767.30, as already indicated.

⁷ Mr. Ronin, in his letter to the Department of Justice dated March 29, 19 54, prefaced the recital of the terms of the proposed settlement by saying:

In a sincere effort to dispose of the various items of dispute and to avoid the continuing expense of litigation, the contractors have authorized us to submit the following offer of compromise. . . .

⁸ There is only one further bit of language in all the correspondence which is helpful to taxpayer's position. Such is found in a letter to Mr. Ronin, dated September 14, 19 55, from the Department of Justice wherein it is stated that "You (Mr. Ronin) will recall that there is an offer pending which, if accepted, would dispose of these (renegotiation) cases as part of the compromise without further litigation in the Tax Court . . ." The words "as part of the compromise" relied upon by the taxpayer, however, receive their most plausible interpretation from the fact that, by Mr. Ronin's own offer of settlement, dismissal of the renegotiation cases itself constituted only part of the proposed agreement. In addition to the dismissals, there were also provisions for the payment of $8,000.00 into escrow, $5,000.00 in cash, and release of a $20,000.00 refund due on the claim of Joliet Chemicals, Inc.

 

 

 

 

[60-2 USTC ¶9680]Reid G. Jonson, Appellant v. United States of America, Appellee

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 16,784, 281 F2d 884, 8/24/60, Affirming an unreported District Court decision

[1954 Code Sec. 7122]

Compromises: Fact-finding.--The Government's receipt of a taxpayer's check and application of funds to a liability under investigation do not comprise a compromise which can be a bar to later criminal prosecution. BACK REFERENCES: 60 FED ¶5697.075.

Jack R. Dean, Empire State Bldg., and Harvey Erickson, Spokane, Washington, for appellant. Dale M. Green, United States Attorney and Robert L. Fraser, Assistant United States Attorney, Spokane, Washington, for appellee.

Before CHAMBERS and MERRILL, Circuit Judges, and EAST, District Judge.

Opinion

Jurisdiction

EAST, District Judge:

Appellant was indicted ¹ on July 20, 19 59, and was thereafter convicted by jury on two counts of income tax evasion for the tax years of 1955 and 1956, in violation of 26 U. S. C. A. §7201. A judgment of conviction was entered and this appeal is therefrom. This Court (Title 28 U. S. C. A. §1291) has jurisdiction.

Specification of Errors

A detailed specification of the errors relied upon are as follows:

(1) That the trial court erred in failing to grant the defendant's Motion for Judgment of Acquittal for the charge of violation of Title 26 U. S. C. A., §7201, Case No. C-8546, at the conclusion of the prosecution's case.

(2) That the trial court erred in failing to grant the same motion at the end of all the testimony.

(3) That the trial court erred in failing to render a judgment of acquittal or to grant a new trial in response to the motion for new trial filed therein.

[Question: Was Tax Liability Compromised?]

Appellant's only argument in this appeal is that he was entitled to a judgment of acquittal under Rule 29 of the Federal Rules of Criminal Procedure on the ground that as a matter of law there was a full compromise of all tax liability, criminal and civil, prior to return date of the indictment. Title 26 U. S. C. A. §7122--Compromises.

Factual Situation

Appellant had been employed by the United States Government for several years preceding the indictment in a supervisory capacity as a military-installation civilian engineer near Spokane, Washington, and at the same time he was a party to an architectural contract with Walter G. Meyers & Son, engaged in government contracting, agreeing to do architectural work for the contractor at a compensation equal to 31/2% of contract prices. The admitted unreported income of Appellant came from Walter G. Meyers pursuant to this contract.

Appellant was first investigated by a representative of the Internal Revenue Service during June, 1957. This interview dealt with the auditing of travel expenses and a refund on account thereof. During January of 1958, a member of the intelligence unit of the Internal Revenue Service commenced an "investigation which was continual from January, 1958, until November, 1958".

Appellant asserts that he "believed that the agents with whom he was dealing were endeavoring to help him compute his tax so that it could be paid."

Appellant was advised by a letter of the Internal Revenue Service, under date of December 18, 19 58, that he was under investigation for willful tax evasion. A second letter of similar advice was received by Appellant "about the 4th of January, 1959," following which Appellant visited the Seattle office on January 8, 19 59. ² On April 17, 19 59, a special agent of the Federal Bureau of Investigation took a signed statement from the Appellant, concerning itself solely with a possible violation, later dealt with in the second indictment.

It was following this interview that Appellant "for the first time obtained counsel and sought advice about his tax problems," whereupon he was advised to and did pay the tax, ³ per his following mailed letter:

(Letter)

June 23, 1959

Spokane, Washington

Director of Internal Revenue Tacoma, Washington

Re: Reid G. and Arlene J. Jonson N. 4020 Hemlock Street Spokane, Washington

Dear Sir:

Enclosed herewith are amended returns for 1955 and 1956. Also a cashier's check for $4830.88 to cover the delinquency with interest at 6% from the date the tax was due, plus a 5% penalty for failure to pay on account of negligence. (Section 6653 a-I. R. C.)

As indicated by these amended returns certain monies received from Meyers Construction Company of Spokane were not reported in 1955 and 1956 on the 1040 forms. It was my belief that these amounts should have been reported after receiving the full amount from Meyers Construction Company. They still owe about $2300.00 which they have not yet paid. I have been anticipating the receipt of this money but it has not yet materialized.

On January 15, 19 58, agents Clifford Rice and another agent, Meldin Smith, were consulted by me. I called Mr. Rice and told him that I had some income which I believe should have been reported but was it advertently omitted. I took my records down to him and he asked to keep the records to compute the tax.

In October or November Mr. Meldin Smith and Mr. Turk of the Spokane Internal Revenue Office questioned me about my earnings. Smith said that he had to send his computations in to Seattle for verification and that I would then get a bill. Since this procedure has taken considerable time and the interest meanwhile accumulating, I desire to pay the penalty and interest to date to avoid further interest charges. If there has been any error in these computations please advise.

Since I do not have my books available, there are certain records which are unavailable to me which would entitle me to additional exemptions. I desire however to file the amended returns on the basis of the information available so that the matter may be terminated. I have been advised that the interest did not terminate by my going to the revenue agents and turning the records over and indicating a desire to pay the tax. Since I have discovered that, I have a desire to get this over with. The money to pay this tax had been reserved.

Yours very truly,

Reid G. Jonson

At no time prior to the trial had the Internal Revenue Service ever made any assessment for any unpaid taxes against Appellant.

The District Director at Tacoma, Washington, received the Letter, together with the enclosures mentioned, in due course, and credited the proceeds of the cashier's check in the amount of $4,830.88 to the Director's "Advance Payments."

Developments At The Trial

The Letter, enclosed amended tax returns, and method of handling the proceeds of the cashier's check were offered into evidence by the Appellee as part of its case in chief. Appellant testified in his own behalf and offered evidence at the trial. However, at no time did he testify that he had compromised his criminal tax liability or had attempted to do so, or that the agents of the Internal Revenue Service ever intimated or offered any suggestion of a compromise.

Appellant's motions referred to in the specifications of error above were timely made.

Regarding the Letter, enclosed amended returns and tendered payment, the District Court instructed the jury as follows:

"You are instructed that there is a distinction between the civil liability of a defendant and the criminal liability of a defendant under the income tax laws of the United States. This is a criminal case. The defendant is charged under the law with the commission of a crime, and the fact that he has or has not settled the civil liability for the payment of taxes claimed to be due to the United States is not to be considered by you in determining the issues in this case, except as it may throw some light on the intent of the defendant."

Appellant did not except to this instruction and did not request of the District Court any proposed instruction covering an issue of compromise settlement of criminal liability other than two requested instructions referring only to the element of "intent," nor did he except to the District Court's failure on its own motion to instruct the jury on any factual issue of compromise settlement of criminal liability.

Conclusions

There can be no doubt but that any substantial evidence, whether adduced through the Government's or the defendant's case which will tend to support a defense of compromise settlement of criminal tax liability, pursuant to an enabling statute, presents a question of fact for the jury. Rau v. United States, ⁴ 260 Fed. 131, 134 (2nd Cir. 1919).

[Compromise Was Never A Real Issue]

And this reviewing Court in exercising its guardianship might notice it to be a defect "affecting substantial rights," even in absence of request for such, for a trial court to fail to instruct a jury on the issue of an alleged compromise settlement of criminal liability being a bar to prosecution if such an issue is genuinely raised by the evidence; however, such cannot be said here, as there is no such genuine issue of fact.

It is not necessary for us to determine whether as a matter of law a compromise settlement of a criminal tax liability in order to constitute a bar to a subsequent prosecution shall be in "full dress" compliance with the statute, as claimed by the Appellee citing Botany Mills v. United States, 278 U. S. 282 [1 USTC ¶348].

As from the facts before the District Court and the record here, there cannot be even a tongue-in-cheek suggestion of a semblance, let alone a substantial compliance by Appellant, with Title 26 U. S. C. A. §7122. We have only

(a) Appellant's Letter; and

(b) The retention of the proceeds of the cashier's check by the Director

as evidence of

(a) An offer of compromise by the Appellant; and

(b) Acceptance of the offer of compromise by Appellee

upon which to build the claimed defense of compromise settlement of criminal liability on the part of Appellant. Neither of which is evidence of anything other than, as Appellant testified

(a) The late payment; and

(b) Receipt of overdue taxes and penalties--

no distortion of the English language nor counsel-envisaged mala fides on the part of the revenue agents to the contrary.

"The (Director's) receipt of (proceeds of the cashier's check) under (the above) circumstances, their application to a taxpayer's liability and their deposit in the general tax funds do not by themselves represent an accord and satisfaction, or any similar final determination binding upon the Government as the recipients of the funds. Cf. Thorsell v. Commissioner, 13 T. C. 909, 915 [ CCH Dec. 17,306]." United States v. Webb Trucking Co., 141 F. Supp. 569, 572 (DC Mass. 1956) [56-2 USTC ¶9619], aff'd Bird v. United States, 241 F. 2d 516, 518 (1st Cir. 1957) [57-1 USTC ¶9470].

The following language of Judge Augustus N. Hand in United States v. McCormick, 67 F. 2d 867 (CA 2nd 1933) [3 USTC ¶1187], best describes the position of Appellant before the jury:

". . . But we find nothing in the present record to indicate that the payment was made to compromise claims for criminal liability. The most that can be said for defendant on account of his disclosures and payment of taxes is that such acts tended to show innocence. The argument is stronger that they only showed a desire to place himself in a safer position when it had become certain that his illegal acts were about to be discovered . . ."

In this respect, the District Court's mentioned instruction to the jury gave Appellant his full reward.

Each of Appellant's specifications of error is without merit. The judgment of conviction shall stand.

Affirmed.

¹ A second indictment, alleging violation of Title 18 U. S. C. A. §434 (selling of contracting officer's influence) resulted in an order of dismissal.

² Appellant's direct testimony, Tr. 265:

"Well, when I received the second letter my wife brought out the other letter that was from San Francisco and one of the letters said that I was going to be prosecuted and the other one said, 'We are thinking about prosecuting you,' and I was pretty concerned, naturally, and my biggest concern on prosecution was that this, I mean, I would lose my license, my professional ratings, I would lose my right to practice as a professional man by this. So, I thought that he indicated I could talk to him, to come over, I called him and 'I would be in Seattle, anyway, and I would sure like to talk to you,' I said."

³ Appellant's direct testimony, Tr. 273:

"A Well, I immediately went to Mr. Dean, who called Mr. Erickson and explained the whole thing to them.

Q Well, you don't need to relate the conversation, what did you do?

A I paid the tax, they said to pay the tax.

Q Did you pay the penalties?

A Yes, sir, I paid the penalty. We sat down and computed the interest and the penalties and the tax and I went and drew my money out of the bank and got a cashier's check and mailed it in."

⁴ "If the defendant, in good faith, made the payment of the tax and penalty for the purpose of compromising the impending action, he is entitled to full protection and the benefits derived therefrom. If the money was accepted with the promise of immunity from further punishment in a criminal proceeding, it would be a complete defense to this indictment. Willingham v. United States, 208 Fed. 137, 127 C. C. A. 263." [Italics supplied.] Relied upon by Appellant.

 

 

[47-2 USTC ¶9325]United States of America, Plaintiff-Appellee v. Henry Lustig, E. Allan Lustig, and Joseph Sobel, Defendants-Appellants In the Matter of Henry Lustig Co., Inc., Restaurants & Patisseries Longchamps, Inc., Fifth Empire, Inc., Lexington Longchamps, Inc., 624 Madison Avenue Corporation, Broadway and Forty-First Street Corporation, 253 Broadway Corporation, Henry Lustig, E. Allan Lustig, and Joseph Sobel, Petitioners-Appellants, for an order suppressing the use of certain evidence and directing the return of certain books, papers, records, memoranda and other documents illegally obtained from them

(CA-2), United States Circuit Court of Appeals for the Second Circuit, No. 20473, 163 F2d 85, July 21, 19 47, Cert. denied, 332 U. S. 775, 68 S. Ct. 88

Appeals from the United States District Court for the Southern District of New York. Appeals consolidated by stipulation with this court's approval (1) by Henry Lustig, E. Allan Lustig and Joseph Sobel from a judgment of conviction and sentence rendered July 10, 19 46, after a trial before Hon. Harold M. Kennedy and a jury, and (2) by appellants and Henry Lustig and Co., Inc., Restaurants & Patisseries Longchamps, Inc., Fifth Empire, Inc., Lexington Longchamps, Inc., 624 Madison Ave. Corporation, Broadway and Forty-first Street Corporation and 253 Broadway Corporation from an order of said court entered July 15, 19 46, after the judgment of conviction, denying an application made in advance of trial for the suppression and return of evidence; from an order of the District Court entered February 21, 19 46, striking out pleas in abatement, and one of April 25, 19 46, denying a motion to dismiss the indictment under Rule 12, subdivision b, of the new Rules of Criminal Procedure for the United States District Courts.

Penalties: Voluntary disclosure: Evidence.--Records furnished after the start of a government investigation of taxpayer's income tax liability were not obtained as a result of a confession induced by a promise of immunity, and the trial court properly ruled on their admissibility.

Compromises: Fact finding.--On the evidence, taxpayers entered into no compromise under Code Sec. 3761.

Evidence: Admissibility.--The findings of the trial court on the admissibility of evidence were not clearly erroneous. Affirming judgments of the District Court, for the Southern District of N. Y., 67 Fed. Supp. 306, 46-2 USTC ¶9318.

Wegman, Spark & Burke for appellants (Nathan L. Miller, J. Bertram Wegman, Richard J. Burke, and I. Maurice Wormser, counsel). John F. X. McGohey, U. S. Attorney, for appellee (Bruno Schachner and Frederick H. Block, Assistant U. S. Attorneys, counsel).

Before AUGUSTUS N. HAND , CHASE, and FRANK.

[The Facts]

AUGUSTUS N. HAND , Circuit Judge:

The defendants Henry Lusting, E. Allan Lustig and Joseph Sobel were indicted upon 23 counts, the first 22 counts for violations of 26 USC section 145(b), and the 23rd count for violation of 18 USC section 88, by conspiring to violate sec. 145(b), supra. The first 22 counts charge wilful attempts to evade and defeat income, declared value excess profits, excess profits, and defense taxes for fiscal and calendar years ending during the years 1940 to 1944, inclusive, of seven corporations owned by the appellant Henry Lustig, by the filing of false returns understating gross and net income. The total net income was understated by $3,455,755.41 and the resultant tax liability by $2,872,766.62.

The conspiracy count charges that the above defendants and two others, namely, Martin Platt and Wallace Platt, who pleaded guilty, agreed to commit the offenses detailed in the preceding 22 counts; further, that they would overstate purchases by $2,000,000 and understate sales by $1,800,000. Among the overt acts it is charged that more than $2,000,000 was withdrawn by Henry Lustig in cash; that he maintained a safe deposit box to hide currency, and that a large part of the hat check gratuities was diverted by him.

Henry Lustig, the main defendant, owned all the stock of Henry Lustig Co., Inc., which in turn owned all of the stock of Restaurants & Patisseries Longchamps, Inc., and the latter in turn owned all of the stock of 253 Broadway Corporation, 624 Madison Avenue Corporation, Broadway and Forty-first Street Corporation, Lexington Longchamps, Inc., and Fifth Empire, Inc. In addition to being the owner he was the president and treasurer of all these corporations.

Henry Lustig Co., Inc., the top holding company, was engaged in the wholesale produce business, catering both to independent customers and to its subsidiaries. Restaurants & Patisseries Longchamps, Inc., the intermediate holding company, owned and operated a number of restaurants in the City of New York and each of its subsidiaries owned and operated a restaurant in the City of New York. All the corporations maintained one office at 408-10 West 15th Street, New York, N. Y.

E. Allan Lustig, the nephew of Henry Lustig, was the secretary and general manager of all of the corporations. Joseph Sobel was a certified public accountant who acted as chief accountant for the corporations. He had practically no other clients and devoted his full time to the supervision of the accounts of the Lustig corporations. Martin Platt and Wallace Platt are brothers. Martin was the office manager and cashier at the main office, and he and Wallace also acted as bookkeepers for the Lustig corporations.

The three defendants were convicted by a jury on all counts and thereafter sentenced by the court. Each one of them has appealed from the judgment of conviction. It is not questioned that there was a wilful attempt on the part of the defendants to evade the payment of taxes and a conspiracy to accomplish such a result. But the conviction is attacked because of an alleged "voluntary disclosure" said to have been made under a promise of immunity. Upon this appeal the following questions are raised:

[The Issues]

(1) Were appellants deprived of constitutional rights by the introduction of certain evidence, allegedly obtained as a result of a confession induced by promise of immunity?

(2) Did they acquire immunity by reason of the policy of the Treasury Department not to recommend prosecution of tax frauds in case the taxpayer discloses his fraud before the start of an investigation?

(3) Was relevant evidence excluded?

[Opinion]

There can be no doubt that the information as to the understating of the income of the seven corporations, as to the overstating of purchases, the understating of sales, as to the cash withdrawals by Henry Lustig and as to the diversion by him of hat-check gratuities could have been obtained by an examination of the books and records of the seven corporations and the records of the Federal Reserve Bank, even if the defendants had not submitted "voluntary" statements. They rely on the claim that these statements were furnished after a promise of immunity and before investigation was initiated by the government. But the trial judge found that during the period from February 28, 19 45 to March 28, 19 45, the defendants and corporate-taxpayers withdrew $1,800,000 in cash from the vault of Henry Lustig, Inc., and deposited it in some twelve bank accounts and also purchased tax anticipation warrants aggregating $800,000; that, during the period of withdrawals and deposits, employes of the banks had called the attention of the defendants and the corporate-taxpayers to the possibility that these transactions might be reported to the government; that on March 16, 19 45 the transactions were reported by the Federal Reserve Bank to the Foreign Funds Control Division of the Treasury Department, and on March 24, 19 45 were referred by that division to the Special Agent in Charge of the Treasury Intelligence Unit for the New York Area; that as a result of the foregoing the Special Agent accompanied by the Commissioner of Internal Revenue on March 26, 19 45, called upon the officials of the Federal Reserve Bank in connection with the affairs of the defendants and the corporate-taxpayers, and Special Agents of the Intelligence Unit were designated to commence an investigation in conjunction with the Agents of the Office of Internal Revenue.

The defendants argue that their original disclosure was made when they deposited in various banks the funds they had withdrawn from the safe deposit box and were informed that such deposits might be reported to the government. It is fantastic to suppose that the making of these deposits amounted to a "voluntary disclosure" of tax deficits on the part of the defendants made to the government in response to a promise of immunity. Indeed they only slightly press this contention and mainly rely upon an alleged disclosure which they say was made to Collector Pedrick on March 26, 1945. They claim that on that date E. Allan Lustig had an appointment with Pedrick and said to him "We * * * made some wrong returns in previous [years?] and * * * had accumulated a large sum of money in the company vault. * * * I came to him for his advice and told him we wanted to get square with the Government, * * * I told him the returns that were filed in February and March that year were also incorrect. * * * He said he was glad that I came to see him about this matter because coming in to see him and telling him * * * made this thing a disclosure and he said it took the criminal aspect out of the case and made it a civil case, there might be civil penalties but there are no criminal penalties when you come in in a case of this sort." The making of such a disclosure to Pedrick and the statement attributed to him in connection therewith were denied by the latter and found by the trial judge to be untrue. This finding was made not only on the testimony of Pedrick but on other corroborative evidence. The trial judge also found that the deposits of currency during the month of March 1945 were prompted by the belief that currency in bills of large denominations might in effect become contraband, and not by any desire or intention on the part of the defendants voluntarily to disclose frauds on the revenue, and at no time prior to April 25, 1945, did the defendants disclose fraudulent practices to any government official. On the last mentioned date a meeting had taken place at Pedrick's office at which defendants' counsel had filed letters with the Collector indicating that the tax returns of the corporations understated their tax liability, without disclosing the amounts or years. They also submitted Exhibit CC, which was a typewritten memorandum of the tax deficiencies of each of the Longchamps corporations, present by one Oestreicher, a tax expert employed by the defendants.

The defendants argue that the admissibility of corporate books, records and documents, even though it would ordinarily have been warranted, was unlawful in the present case because they were the "fruits" of a "confession" given in response to a promise of immunity. It appears from what we have already said that there was no disclosure of tax deficiencies until April 25, 19 45, when Collector Pedrick referred the disclosure made on that date to McQuillan, Special Agent of the Intelligence Unit of the Bureau of Internal Revenue at New York. McQuillan testified that at a meeting on April 26 he informed Oestreicher that the government "had been working on the case for some weeks and he was a little too late." We think it clear from the findings and the evidence which the trial judge credited that the investigation began at the latest on March 24, 19 45, when the Treasury Department referred the report of the Federal Reserve Bank to the Special Agent in charge of the Treasury Intelligence Unit, New York Area.

It follows from the foregoing that the corporate records were in no sense the result of any promise of immunity. They were furnished long after the government investigation had begun.

The defendants object to the findings we have referred to on the ground that the question whether the disclosure preceded the investigation and was made under a promise of immunity was one for the jury and not for the trial judge who made the findings. This question was one of the admissibility of evidence. In Steele v. United States, 267 U. S. 505, it was held that where property seized under a search warrant was offered in evidence against a defendant, the question whether it was admissible was one for the court, and not for the jury, and that the former should determine whether under the facts and the law there was probable cause for the issuance of the warrant under which it was seized. The same ruling in effect was made by the Supreme Court in Nardone v. United States, 308 U. S. 338, 341. See also Ford v. United States, 273 U. S. 593, 605; Gila Valley Ry. Co. v. Hall, 232 U. S. 94, 103; United States v. Adelman, 107 Fed. 2nd 497, 499; United States v. Bianco, 96 Fed. 2d 97, 98. It can make no difference whether the question of admissibility is directed to the fruits of an alleged unlawful search and seizure, or to any other evidence thought to be unlawfully obtained. In the case of the ordinary confession, its trustworthiness is for the jury even if the judge admits the confession. See 3 Wigmore sec. 861. But the defendants here do not contend that the corporate books and records, which they claim to be the fruit of their disclosures, were not in themselves reliable evidence of guilt. The contention that in such cases as Lyons v. Oklahoma, 322 U. S. 596, 602 and Lisenba v. California, 314 U. S. 219, 237-8, the Supreme Court required the jury to pass on the question of the admissibility of confessions is not borne out by those decisions, for it was only dealing with appeals from courts of states where the practice was for the jury to pass both on the admissibility and the probative value of confessions when admitted by the judge. The rules of evidence in this respect differ in different states and have no bearing on the procedure required in the federal courts by their practice or the provisions of the United States Constitution. In United States v. Wilson, 162 U. S. 613, 624, the court said in a dictum that: "When there is a conflict of evidence as to whether a confession is or is not voluntary, if the court decides that it is admissible, the question may be left to the jury with the direction that they should reject the confession if upon the whole evidence they are satisfied it was not the voluntary act of the defendant." This, in our opinion, does not mean that a jury in a federal court shall pass on the admissibility of evidence, but only on its probative value. Even if the dictum be thought to refer to admissibility, it at most indicates that the question of admissibility may be left to the jury, not that it must.

The foregoing considerations in our opinion are a complete answer to the defendants' answer to the defendants' claim that their constitutional privileges were invaded.

As for the contention that the defendants received immunity under the compromise statute, it is even more illusory than the one we have already discussed based on an alleged invasion of constitutional rights. The compromise statute ¹ affords no shield to one who has violated the tax laws unless there has actually been a compromise. See Botany Mills v. United States, 278 U. S. 282 [1 USTC ¶348]. It is not even claimed here that there was more than an offer to make a compromise. None of the formalities prescribed by the statute and treated by the Supreme Court as necessary to effect a compromise were observed. Botany Mills v. United States, supra, pages 288-289. There was no issue of fact for court or jury as to whether a contract of compromise had been made. Accordingly there is no merit in the defense of immunity.

The defendants assign error because the court refused to grant a continuance on the ground that the witness Eisner was ill. At the time Mr. Eisner had suffered a coronary thrombosis. In the circumstances the question of a continuance for the purpose of attempting to introduce testimony which, if ever attainable, would only have been cumulative to that of Allan Lustig and Oestreicher was a matter within the discretion of the trial judge.

Defendants also assign error because they were not permitted to prove that some time after March 26, 19 45, and before April 1, 19 45, Allan Lustig requested an employee of Lustig's to take two large packages from the novelty department of the Longchamps Restaurant to the apartment of Collector Pedrick. This testimony was offered to answer the denial of Pedrick that he met Lustig on March 26 and informed the latter that the disclosure which Lustig claimed to have made on that date would avert criminal prosecution. Such testimony not only would not have shown that Pedrick did not tell the truth when he denied meeting Allan Lustig on March 26 but would have involved the trial of the collateral dispute as to whether Pedrick ever received or knew of the receipt of the packages. The matter was probative of no issue involved in the case and was highly collateral. We think it was properly excluded.

The correctness of the findings of fact objected to depended, so far as not already discussed, upon conflicting testimony or inferences therefrom. The findings so far as material cannot be regarded as clearly erroneous.

[Conclusion]

For the foregoing reasons the judgments of conviction are affirmed.

¹ 26 USC Sec. 3761.

Compromises--(a) Authorization.

The Commissioner, with the approval of the Secretary, or of the Under Secretary of the Treasury, or of an Assistant Secretary of the Treasury, may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General may compromise any such case after reference to the Department of Justice for prosecution or defense.

(b) Record.

Whenever a compromise is made by the Commissioner in any case there shall be placed on file in the office of the Commissioner the opinion of the General Counsel for the Treasury Department, or of the office acting as such, with his reasons therefor, with a statement of--

(1) The amount of tax assessed.

(2) The amount of additional tax or penalty imposed by law in consequence of the neglect or delinquency of the person against whom the tax is assessed, and

(3) The amount actually paid in accordance with the terms of the compromise. * * *