The opinion of the court was delivered by: SUGARMAN
At the end of the government's case in the trial of the indictment herein, all defendants moved for judgment of acquittal, Fed.Rules Crim.Proc. rule 29(a), 18 U.S.C.A., on all counts.
The five count indictment here charges in counts 1, 2 and 3 that, in 1948, defendant Hyman H. Klein filed a federal income tax return which was false in that it treated as a capital gain in 1947 that which was his individual income in 1944, 1945 and 1946; that this constituted an attempt at evasion of Klein's individual income taxes for 1944 (count 1), 1945 (count 2), and 1946 (count 3) and that the eight remaining defendants in said first three counts aided and abetted Klein in each such attempt.
The indictment here further charges in count 4 that the nine named defendants and two co-conspirators combined to attempt to evade the 1944, 1945 and 1946 individual income taxes of said Klein and three other defendants, residents of Canada. The fifth count will be discussed later.
If there were the attempt charged in the first three counts to evade, or the conspiracy charged in the fourth count to attempt to evade, they can only be spelled out of a finding that certain foreign corporations were a sham and that the income of those corporations in 1944, 1945 and 1946 was in reality that of the defendants, the evasion of one of whose individual taxes was attempted, as charged in the first three counts, or the evasion of four of whose individual taxes was conspired about, as charged in the fourth count.
The recital most favorable to the government of the operation of these foreign corporations is substantially as follows: During 1944, liquor was purchased from a Canadian distiller by Corporation A, a Cuban corporation. It was shipped directly by the distiller to an American wholesaler who was a customer of an American importer. When the invoice for that purchase was received from the Canadian distiller with the necessary shipping papers in Baltimore, Md., in an office of an officer of Corporation A, an employee of that officer would bill the American importer (to whose wholesale customer the shipment had been made) at an increased price. The employee would then present the shipping documents at the New York bank of the American importer and collect against an irrevocable letter of credit. Corporation A would then pay the Canadian distiller.
In 1945 and 1946 the operation was different in that a Panamanian corporation, became Corporation A and was injected (apparently to reduce Cuban taxes) between the distiller and the Cuban corporation so that the transaction then was as follows:
Liquor was purchased from a Canadian distiller by Corporation A, a Panamanian corporation. It was shipped directly by the distiller to an American wholesaler who was a customer of an American importer. When the invoice for that purchase was received from the Canadian distiller with the necessary shipping papers in Baltimore, Md., in an office of an officer of Corporation A, an employee of that officer would bill Corporation B, a Cuban corporation, at an increased price and would on behalf of Corporation B simultaneously bill the American importer (to whose wholesale customer the shipment had been made) at a further increased price. The employee would then present the shipping documents at the New York bank of the American importer and collect against an irrevocable letter of credit. Corporation B would then pay Corporation A or Corporation D, another Panamanian corporation, its share of the proceeds as represented by its invoice and Corporation A or D would then pay the Canadian distiller the amount of its original invoice. Corporation A and/or B and/or D later transferred the retained share of profit to Corporation C, another Panamanian corporation, where the money remained until the liquidation of Corporation C.
Upon such liquidation in 1947 Hyman Harvey Klein, the principal of Corporation C, resident in the United States (the three others were Canadians) paid a capital gains tax on his liquidated share.
Thereby the government claims he fraudulently attempted to evade individual income taxes in 1944, 1945 and 1946 on the profits of the transactions in those years.
If the Cuban and Panamanian corporations were doing business and were not the sham, concealing the joint venture of the United States resident Klein and his three Canadian associates, which the government claims they were, then the first four counts of the indictment must fall. For, if these corporations were commercial enterprises, their income was not that of Klein and his three Canadian associates and, in the absence of such personal income, no attempt to evade tax thereon as charged in the first three counts and no conspiracy to attempt to evade tax thereon as charged in the fourth count could have occurred.
Upon the argument of the motions for judgments of acquittal it was agreed that the test to be applied is: 'Giving the government the benefit of all reasonable inferences that might logically flow from the evidence, if a reasonable person could conclude guilt therefrom the motion for judgment of acquittal must be denied and conversely if a reasonable person could not conclude guilt therefrom the motion must be granted'.
Such test requires that it be assumed on this motion that this syndicate was erected by the American resident defendant Klein and his three Canadian associates as a tax maneuver; that a contract with an American importer under which almost half of the whiskey was sold was shaped and supplemented so as to except from United States income tax the profits realized thereunder; that that contract reserved to Klein and his associates dominion over the approval and even selection of salesmen for the American importer and wholesalers to whom it sold and of allocations of the quantities of whiskey to be sold; that in the performance of this contract and all other sales into the United States, defendant Klein, for himself and his associates was the indisputable dominant figure; that Klein and his associates dictated the policies of the seventeen Panamanian and Cuban corporations and of the importers insofar as they concerned this whiskey; and finally that the syndicate and operations in the United States and elsewhere for the entire period were scrupulously geared to gain the immunity suggested by tax counsel (another defendant -- Haas) under the decisions of East Coast Oil Co., S.A.
and Ronrico Corp.
Under this state of facts the government contends that the jury could find that the seventeen Cuban and Panamanian corporations were mere empty shells and a sham or device to escape United States income taxes and that therefore the profits ostensibly of the syndicate were in truth those of Klein and his Canadian joint venturers.
In my view, the Government's position on the first four counts is untenable. On the testimony and exhibits in the case, submission to the jury as an issue the question whether the corporate syndicate above described was an effective shield to the joint venturers against personal income tax liability for the profits of the syndicate in the years when earned would, in effect, have the jury pass on a question of law, namely, whether for tax purposes, any or all of the constituent corporations ...