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United States v. Shotwell Manufacturing Co.

June 15, 1955

UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE,
v.
THE SHOTWELL MANUFACTURING COMPANY, DEFENDANT-APPELLANT. UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE, V. BYRON A. CAIN, DEFENDANT-APPELLANT. UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE, V. FRANK J. HUEBNER, DEFENDANT-APPELLANT. UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE, V. HAROLD E. SULLIVAN, DEFENDANT-APPELLANT.



Author: Schnackenberg

Before LINDLEY, SWAIM and SCHNACKENBERG, Circuit Judges.

SCHNACKENBERG, Circuit Judge.

Shotwell Manufacturing Company, a corporation (sometimes herein referred to as Shotwell) and Byron A. Cain, Frank J. Huebner and Harold E. Sullivan, its officers, were indicted on two counts on March 14, 1952, for allegedly wilfully and knowingly attempting to defeat and evade a large part of the income taxes due and owing by Shotwell to the United States of America for the calendar years 1945 and 1946, in violation of section 145(b) of the Internal Revenue Code,*fn1 in that defendants filed and caused to be filed false and fraudulent tax returns for said corporation.

After trial on pleas of not guilty, the jury found all of the defendants guilty on both counts. Judgments of conviction were entered on the verdict, Shotwell was fined $10,000 on each count, the individual defendants were sentenced to three years' imprisonment on each count (to run concurrently), Cain was fined $5,000 on each count, Huebner was fined $5,000 on each count, and Sullivan was fined $2,500 on each count. The defendants have severally appealed.

The errors relied on arise out of the alleged insufficiency of the evidence to support the verdict; the failure of the court to sustain defendants' motions to dismiss; the failure of the court to sustain motions to suppress documents and information prepared or furnished by defendants for the government during an alleged disclosure; certain rulings on evidence and instructions; and denial of motions for new trial.

1. The trial court was correct in denying defendants' two motions to dismiss the indictment, in the nature of special pleas in bar. These motions were based on the theory that defendants had acquired immunity from criminal prosecution by making a "voluntary disclosure", in reliance upon an announced policy of the Treasury Department not to prosecute in cases where such a disclosure had been made.

There was no statutory basis for the alleged promises of immunity announced by the various Treasury Department officials.*fn2 Thus the making of a voluntary disclosure by the defendants was no legal bar to a criminal prosecution. Only an act of Congress could create such immunity. In the absence of statute, a defendant cannot enforce such a promise and "cannot by law plead such facts in bar of any indictment against him, nor avail himself of it upon his trial, * *" In re Whiskey Cases, 99 U.S. 594, 25 L. Ed. 399, 400.

Defendants contend, however, that there is a statutory basis for the voluntary disclosure policy in the power of the Secretary of the Treasury to compromise any civil or criminal case under ยง 3761 of the Internal Revenue Code of 1939.*fn3 This same argument was squarely met and disposed of in United States v Lustig, 2 Cir., 163 F.2d 85, *fn893a where the court said:

"The compromise statute*fn4 affords no shield to one who has violated the tax laws unless there has actually been a compromise. See Botany Worsted Mills v. United States, 278 U.S. 282, 49 S. Ct. 129, 73 L. Ed. 379. 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 Worsted Mills v. United States, supra, 278 U.S. at pages 288-289, 49 S. Ct. 129, 73 L. Ed. 379. 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 language of the Lustig opinion is fully applicable to the case at bar. The Treasury Department officials did not have the power to confer immunity on persons making voluntary disclosures, defendants' voluntary disclosure was not a statutory compromise of a criminal case and did not entitle them to immunity, and the motions to dismiss the indictment were properly denied.

2. A timely motion by defendants, supported by affidavits, and later amended, was made before trial to suppress certain evidence in the possession of the government. The motion averred that the evidence had been produced by defendants in reliance on a promise of immunity. More specifically, it averred that the Bureau of Internal Revenue, through the Secretary of the Treasury, the Commissioner of Internal Revenue, and other responsible treasury officials thereunto duly authorized, publicly offered and held out to all of those whose income tax returns contained omissions or misstatements, that there would be immunity from criminal prosecution in any case where the taxpayer who filed such return would come forward before investigation had been initiated and acknowledge the existence in such return of omissions for misstatements, and the Treasury Department in such case would merely assess such unpaid tax, interest, civil penalties, if any, as might thereafter be determined to be due, and that said offer was and had been in full force and effect. The motion likewise set forth that such timely acknowledgment was made to a responsible officer or agent of the Treasury Department in January, 1948 of the returns of Shotwell for the years mentioned in the indictment; that the defendants informed said agents of the Treasury Department, among other things, that said returns contained omissions and misstatements in that they intentionally failed to include, under the heading of gross sales, all or part of the sums received by Shotwell through sales of goods, and they failed also to include under the heading of "costs of goods sold", various payments made by defendants for said goods, which receipts and payments were in excess of the ceiling prices*fn5 as set by the laws and regulations of the United States at the time such goods were purchased. It was also stated in the motion that the defendants at said times stated that Shotwell, through its officers, was ready, able and willing to pay such unpaid tax, interest and civil penalties, if any, as might be determined to be due after inspection and investigation by the agents of the Bureau of Internal Revenue. The motion also set forth that, at the time of the disclosure, Shotwell's over-the-ceiling payments for raw material were not deductible as a part of the cost of goods sold, under the rulings of the Commissioner.

The motion also averred that the officers and agents of the Treasury Department acknowledged the sufficiency and timeliness of the disclosure, and that the defendants, at the request of said officers, caused to be made available to them the books and records of Shotwell, and the individual defendants communicated to them information in their possession materially related to said omissions and misstatements and not available to such officers and agents through said corporate books and records, which information could not have been obtained from the individual defendants in any manner in view of their constitutional privilege and rights, and also that the defendants caused certain accountants to be employed to assist the said agents in obtaining the facts. Shotwell thus incurred and paid auditing charges in excess of $20,000.

The motion also set forth in substance that in pursuance of the foregoing, the Treasury officials examined the corporate books, records and data, and made copies thereof continuously over a period of more than four years preceding the return of the indictment, and did not advise the defendants that said disclosure was untimely or insufficient, or that criminal prosecution was or had been contemplated, or that it might be recommended; that, notwithstanding the foregoing, said officials shortly before the proceedings before the grand jury which resulted in the indictment herein, repudiated the said offer so relied and acted upon by the defendants, without granting to them any hearing or conference, and without communicating to them the amount which, upon such inspection, the Bureau of Internal Revenue had determined to be due, and without affording Shotwell or said officers on its behalf, an opportunity to pay such amount. The motion charged that the said actions of the Bureau of Internal Revenue constituted an improper inducement of a confession or admission of facts upon which a criminal prosecution might be based and an illegal search and seizure of the books, papers and records of the defendants, and that, in consequence, the admission in evidence of all books, records, papers and statements so obtained, and any copies thereof or data procured therefrom as a result of information obtained therefrom, would violate the rights of the defendants under the fourth and fifth amendments to the constitution of the United States.

A hearing was held on the motion to suppress. The following is a statement of the facts proved, including only those facts shown by the government's evidence wherever there was a conflict.

Leon J. Busby, a certified public accountant under the laws of Illinois, was a member of the firm of Busby and Oury, located in Chicago. Beginning in 1942 that firm did the general auditing work of Shotwell for the purpose of certifying financial statements used in credit channels. The firm prepared Shotwell's income tax returns, installed efficiency systems, and did other matters of a general accounting nature.

In January, 1948, at the request of defendant Cain, Busby made a trip with Stanley Graflund, vice-president and comptroller of Shotwell, to the plant of General Confections Company in New York, to determine whether a loan of $50,000 to General Confections, requested by David G. Lubben, would be financially secure. Having made a cursory survey, he reported to the Shotwell officers, including Graflund and defendants Cain and Huebner, that the survey did not justify such a loan.

Although Busby was active in the supervision of the auditing work for Shotwell, he did not know that Shotwell had received over-ceiling or premium payments. During this trip Graflund told him of that condition. In reporting on January 11, 1948 to Cain and Sullivan, Busby recommended against making the loan, and told of Graflund's revelation about the collection of over-ceiling prices for candy sold by Shotwell to General Confections, that Graflund had said that he did not know how much the over-ceiling payments were, and that he (Graflund) also thought "the money had been paid out by Shotwell." Busby said that he told Cain and Sullivan that, while it might not be that Shotwell was in a serious position, they should file an amended return to get the matter on record, and they discussed it for a while. Cain and Sullivan readily admitted the over-ceiling payments. They asked Busby "whether or not it would be in order to discuss the matter with the department." Busby told them that he thought it would and that, even if they made the disclosure, which was, in his opinion, the customary thing to do, "there probably would be nothing to it except that it would clear Shotwell of omissions from the tax returns." Busby directed their attention to the fact that it was a common thing to make disclosures to the department, and in so doing he did not see that there were any serious consequences, and that "there wouldn't be any critical attitude of the department towards them."

This discussion about making a disclosure occurred off and on between these men for a couple of weeks. They assigned Busby to communicate with the department, after having discussed the possibility of sending a lawyer.

About March 15, 1948, Busby went to the office of the Chief Deputy Collector in Chicago, Ernest Sauber, and told Sauber that he had a client which had been engaged in over-ceiling sales and overceiling purchases, which were not reflected in its books, that the client "wants to clean up some omissions from his tax return", that he [Busby] had been asked to prepare amended returns; that he had been unable to ascertain the exact figures and he did not know how he could prepare amended returns without having the figures, and he asked Sauber's advice on how to proceed. In response to Sauber's inquiry, Busby said that these transactions were handled all in cash, the part representing the over-ceiling payments was kept in a cash box, which cash was used to make over-ceiling purchases; that said transactions to a large extent "washed each other"; that when it was no longer necessary to make over-ceiling sales and purchases, the balance in the cash box was taken into the corporate records and declared as income for the year that the OPA ceiling ceased to exist. Busby told Sauber that "we wanted to go into the matter and have the agent come out and examine the situation and see what the real condition was and if there was any net amount due to the Government, we wanted to pay it."

Sauber told Busby that he could not prepare amended returns on the basis of his then knowledge, and suggested that Busby get statements from every individual at Shotwell who had anything to do with these transactions, and therefrom reconstruct the figures necessary for an accurate return, and after the figures had been reconstructed to ask the internal revenue agent's office to audit the Shotwell return. On this occasion Sauber advised Busby that if the disclosure was timely and the facts that he had related to Sauber were correct, the latter saw no reason why the immunity from criminal prosecution policy of the Bureau should not be applied.

The next day Busby met Cain, Huebner and Sullivan and told them that Sauber recommended that one of the officers come forward and disclose the identity of the taxpayer and "that if this were done, they should proceed to determine as nearly as possible how much was involved, and he saw no reason why there should be any trouble with respect to criminal prosecution in case of timely disclosure." Sauber had said that either an officer of the company or its representative could make the disclosure. Busby also told the individual defendants that Sauber said that there was no need for amended returns. Cain, president of Shotwell, told Busby to go to the collector's office and "disclose the whole affair, the whole details."

On one of various visits of Busby to Sauber's office, Sauber asked if Busby knew how much was involved, and when given a negative answer and told that Shotwell had no specific records from which that could be determined, Sauber suggested that Busby gather "such information as we could from any memorandum or memory and summarize it on a form, and in the meanwhile he would contact the office of the agent in charge and have an auditor come out and work with us for the purpose of substantiating or getting together the true facts as nearly as could be accomplished." Sauber said that he would have the Agent in Charge, Mr. Wright, send out an agent to verify the summarization, or to help compile it. He said that the Agent "was to cover an examination of the books which would include just about a routine audit, verification of the tax returns; that he would examine the books and any other data that we had to submit to him."

Within a week Busby brought Cain into Sauber's office and said that Shotwell was the client that he had referred to in the previous meeting. Cain then told Sauber the same story that Busby had told him, and that "they did not know how to proceed in order to correct their tax returns." Sauber gave Cain the same advice he had given Busby, and told him "to ask for an audit of their returns."

Cain told Sauber that he had two boys in school and he was worried about publicity, and Sauber said that there would be no publicity on the case, that the only time an income tax case received publicity was when there was an indictment. Sauber told Cain that in his opinion this was strictly a civil case and that it was not a criminal case, and that he had nothing to worry about so far as publicity was concerned.

About thirty days thereafter (latter part of April, 1948), Cain telephoned to Sauber and said that his advice had been followed, a meeting of all Shotwell people connected with the black market transactions had been held, and that figures had been prepared which he would like to come in and turn over to Sauber. The latter said that he had no jurisdiction in the case, that corporation returns were handled by the Revenue Agent's office, which he should call and request an audit of the Shotwell returns. At Cain's request, Sauber called the Revenue Agent's office. Ralph Johnson, the group chief in that ...


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