The opinion of the court was delivered by: WEINFELD
EDWARD WEINFELD, District Judge (orally):
While many witnesses have testified and many exhibits have been received in evidence, with a tendency at times on the part of counsel to proliferate matters by the introduction of doubtful relevant testimony and exhibits, the issues presented are comparatively simple.
Thus, it is desirable to start with the indictment, to consider the essential elements of the crime charged, and to determine whether the government has sustained its burden of establishing these essential elements beyond a reasonable doubt.
Count 1 of the indictment charges:
"On or about the 17th day of June 1963, in the Southern District of New York, SOL BERGER, the defendant, who was then and there the President and Chief Executive Officer of Colonial Corporation of America, a corporation, unlawfully, wilfully and knowingly did attempt to evade and defeat a large part of the income tax due and owing by the said corporation to the United States of America for the calendar year of 1962, by preparing and causing to be prepared and filing and causing to be filed with the District Director of Internal Revenue for the Manhattan District, New York, New York, a false and fraudulent income tax return, wherein it was stated that the taxable income of the said corporation for the said calendar year was the sum of $1,360,287.06 and that the amount of income tax due and owing thereon was the sum of $690,024.48, whereas, as the defendant then and there well knew, the taxable income of the said corporation for the said calendar year was the sum of approximately $1,654,430.72, upon which said taxable income there was due and owing to the United States of America an income tax of approximately $842,979.19. (Title 26, United States Code, Section 7201; Title 18, United States Code, Section 2)."
A similar charge is made for the years 1963 and 1964, but the amounts of alleged evasion of tax are different in each year.
With respect to each count, the burden of proof is upon the government to establish beyond a reasonable doubt:
(1) that a substantial tax was due and owing from Colonial Corporation of America in addition to that reported in its return;
(2) that Sol Berger, the defendant, made an attempt to evade or defeat the additional tax due; and
(3) that he did so willfully.
At the outset, issue is joined on the first element, that additional taxes were due -- a matter of sharp dispute. The defendant, in the years in question and in preceding years, was the chief executive officer of Colonial Corporation of America (hereafter Colonial, or the parent corporation). Originally, he and his wife owned 100% of its capital stock. The corporation achieved a substantial success and growth in the manufacture, sale and distribution of low-priced shirts, blouses and related items. Subsequently, in the latter part of 1959, the stock was sold publicly, and in the period in question the defendant and his wife owned at least 38% of Colonial's outstanding stock. The corporation had various wholly-owned subsidiaries which manufactured products and sold most of their output to the parent corporation.
In 1959, the defendant caused the organization of another wholly-owned subsidiary, Colonial Shirts of Jamaica, Ltd. (hereafter Jamaica, or the subsidiary), under the laws of Jamaica, British West Indies, a so-called offshore corporation, which had the benefit of tax exemption for a period of seven years. In addition, another advantage was an available labor supply at lower wages than that obtainable in the domestic market, where other subsidiaries of Colonial also manufactured shirts, as well as other products.
Colonial bought for resale to its retailers the entire production of the finished products manufactured by Jamaica. The price at which the manufactured product was shipped to and exported from Jamaica, British West Indies, to Colonial in the United States was the constructed value, referred to hereafter. In the manufacture of the shirts so acquired by the parent corporation the subsidiary used piece goods, which had been imported from Japan, which the vendors there invoiced to Jamaica, the subsidiary. A portion of the cost of these piece goods, as well as trim and supplies -- $294,251 in 1962, $237,023 in 1963, and $383,412 in 1964 -- although invoiced by the vendors to Jamaica and used by it in the manufacture of the finished product, was entered on the books of Colonial as its purchases. The net effect, no matter how stated, is that the entries in Colonial's purchase journal -- treating the cost of piece goods and the other items as Colonial's cost, and deductible as such -- reduced the gross income of Colonial of America as shown on its tax returns, and correspondingly reduced its tax in each year. Stating it somewhat differently, had Jamaica, the subsidiary, been debited with the entire cost of the piece goods, as well as items of supply and trim, used by it to manufacture the finished product which it exported to its parent, the taxable income of the parent would have been increased, as shown by the exhibits submitted by the government in the amounts stated in the indictment. Whether or not those amounts of additional taxable income are precise, they are substantial and the tax due and owing substantially more than that reported. And this is so, even eliminating the trim and supplies, since the piece goods formed the greatest part of the items so entered. The piece goods debits alone amount to $261,370 for the year 1962; $192,121 for the year 1963; and $307,668 for the year 1964.
The government's position is that entering these items on the purchase journals of Colonial and treating them as a part of its cost of goods sold was fraudulent in that the cost was a part of Jamaica's cost of manufacture, and that the defendant caused such items to be debited to Colonial's ...