United States v. Shotwell Manufacturing Company

PETITIONER:United States
RESPONDENT:Shotwell Manufacturing Company, et al.
LOCATION:Shotwell Manufacturing Co.

DOCKET NO.: 1
DECIDED BY: Warren Court (1957-1958)
LOWER COURT: United States Court of Appeals for the Seventh Circuit

CITATION: 355 US 233 (1957)
ARGUED: Oct 17, 1957
DECIDED: Dec 16, 1957
GRANTED: Feb 25, 1957

ADVOCATES:
George B. Christensen – for the respondents
Phillip Elman – for the petitioner

Facts of the case

Shotwell Manufacturing, along with several employees, was convicted of evading income taxes. The U.S. Court of Appeals for the Seventh Circuit reversed the conviction because the district court had denied Shotwell’s motion to suppress evidence of certain disclosures. Shotwell allegedly made these disclosures in good faith, thinking they would shield them from liability. After the government petitioned for certiorari, they moved to remand the case to the district court in light of new evidence. If true, this new evidence could prove Shotwell lied while testifying about making the disclosures in good faith.

Question

Is it in the interest of justice to remand the case for findings on a pre-trial motion to suppress evidence in light of new evidence?

Earl Warren:

United States of America versus the Shotwell Manufacturing Company, Byron A. Cain, Frank J. Huebner, et al., Number 1 on the docket.

Mr. Elman.

Philip Elman:

Mr. Chief Justice, may it please the Court.

This case is here on certiorari the United States Court of Appeals for the Seventh Circuit the writ being limited to the questions presented by a motion to remand which the Government has filed in this Court and by the answer made thereto by the respondents.

This is a criminal tax evasion case in which the defendants, the respondents here were convicted after a trial lasting five weeks.

The record in the case is of formidable proportions covering some nine volumes and 5,000 pages of testimonies and exhibits.

But nevertheless we believe that the only issue that’s presented to Your Honors at this posture of the litigation is a very narrow one that it is essentially a question of judicial administration that does not call for any adjudication on the merits by the Court.

Now, in broad outline, the case is this.

The defendants were the Shotwell Manufacturing Company, the Chicago Illinois Corporation engaged in the manufacturing sale of candy and its three chief officers and stockholders, Cain, its President, Sullivan, its Executive Vice President and general counsel, and Huebner, its Vice President and general manager.

The indictment returned in March 1952, charged them with willfully attempting to evade a large part of the corporations income taxes the years 1945 and 1946.

The unreported income alleged by the indictment consisting of almost a half million dollars in cash in the nature of so-called black-market payments which the company received from its customers in excess of the OPA ceiling prices.

Now after the indictment was returned but before the trial, the defendants filed a motion to suppress certain evidence which they said they had turned over to the Government as part of a voluntary disclosure made in January 1948 in reliance of what was then the voluntary disclosure policy of the Department of the Treasury.

Now, at this point by way of background, I should describe briefly what that general policy was.

It was first publicly announced in 1945.

It continued for about seven years until January 1952 when it was publicly abandoned and withdrawn by the then Secretary of the Treasury, Mr. Schneider.

It was never promulgated in the form of statute or regulations or any other such formal forms.

The found expression gathered in press releases and speeches that were made by treasury officials during that period.

And as described by these officials, the policy was intended to encourage delinquent taxpayers to come forward voluntarily in their own free will before any investigation have been begun by the Treasury, and to make a full disclosure of their liability.

And if that was done, if there were such a disclosure that was made in good faith disclosure that was sufficient, disclosure that was timely then the policy of the Treasury Department as it was stated was not to recommend criminal prosecution to the Department of Justice.

But in each of these pronouncements by the officials concerned always two elements were stressed.

First, the disclosure had to be a real disclosure.

It had to be intended to reveal information and not to conceal it.

It had to be made in good faith and it had to be a full disclosure.

The second requirement was that it would be timely that had come before the Treasury was on dissent of something wrong that come before the investigation and not after.

Now —

How long that policy had been a disclosure policy?

Philip Elman:

It started in — it was publicly announced as a policy in 1945.

It was withdrawn in 19 — early in 1952 for a period of about seven years.

We are not — I would not wish the Court to understand that the Government is contending that because the policy was expressed in an informal way but that detracted in any way from its validity or from its significance.

It was the policy.

Philip Elman:

The fact, however, that it was expressed that way did detract from its — from the clarity and the precision of the policy and there were considerable uncertainties and fuzziness as to just exactly when a disclosure was timely and when it was sufficient and those were the reasons which led Secretary Schneider in January 1952 to abandon the policy is unworthy.

Now, in this particular case, the Government opposed the motion to suppress.

It denied that there had been a voluntary disclosure that was sufficient and timely and made in good faith.

The factual issues does raise were canvassed by the district judge, Judge Nordbye sitting by special designation.

At a three-day hearing —

Charles E. Whittaker:

Judge Nordbye from Minneapolis including in Chicago.

Philip Elman:

Judge Nordbye of Minnesota sat in this case by special designation of the then Chief Justice.

The issues at that hearing were issues as to which the defendants of course being the moving parties has the burden of proof.

At the close of the hearing when all of the evidence was in, Judge Nordbye found that the motion to suppress should be denied.

Later he filed a memorandum setting forth in detail his findings of facts and his reasons for finding that this disclosure was not a disclosure at all.

It was made not in good faith for the purpose of revealing information but rather that it was made for the purpose of misinforming the government agent for the purpose of concealing information that was relevant in the computation of a tax liability.

That it was a fraud.

Now, the defendant’s version of the facts as set forth at the hearing was that they had disclosed the receipt of this — of these black-market payments.

But however, that they had expended all that money to their suppliers from whom they could purchase raw materials only by paying over-ceiling prices.

And they had — they said that these payments to their suppliers in effect cancelled out payments that they had received from their customers.

And that while on their returns they had reported neither the receipts nor the payments.

There was in effect a washout from the tax standpoint since as they claim as it’s the law the payments were deductible.

However, they refused to reveal the names of the persons to whom these payments were made and Judge Nordbye found their story that they had turned over hundreds of thousands of dollars in cash to face this man which was the term given by the defendants in their testimony.

He found that story completely unworthy of belief and on a basis of — of the facts or in the basis of the evidence I’ve indicated plus the fact that as Judge Nordbye found not only that the defendants concealed information, refused to cooperate with the Treasury agency in giving information that was relevant in concluding that tax.

Beyond that, they had destroyed records which they had in the black-market transaction.

They fabricated figures as to the amounts involved which they — the figures which had been turned over to the Treasury agents where as Judge Nordbye found admittedly fictitious.

Charles E. Whittaker:

Mr. Elman, may I ask you that.

Were the records that were destroyed, those relating only to access prices over-ceiling prices paid for raw material or did those destroyed records also include the receipts by the taxpayer for over-ceiling prices for goods sold.

Philip Elman:

They were both sir.

Charles E. Whittaker:

Both?

Philip Elman:

Yes, Your Honor.

Thank you.

Now, I like to add further on this — on the basis for Judge Nordbye’s findings.

That he found a destruction of the records as to the black-market transactions in all aspects.

He found that the story in the figures that were given were taken out of thin air, were wholly fictitious.

Charles E. Whittaker:

As to receipts as well as to disbursements or just the letter?

Philip Elman:

Well my recollection of the record sir is that it was both.

I stand corrected I’m sorry.

It’s just that this disbursements as to the hearing before Judge Nordbye, my recollection of the trial record was that the records covered both black-market purchases and the black-market with that of the sales.

Charles E. Whittaker:

The reason I ask these questions is that I think this has some bearing upon the treatment given by the Court of Appeals.

Isn’t it true that when the taxpayer went to the bureau’s agent the bureau’s agent said, “We will not under our present policy allow offsetting claims for excess prices paid for raw material?”

And did not the taxpayer then say, “Well we litigate about that, we’ll pay whatever taxes you — on receipts we’ve had and then we will sue for refund on the remainder.

Philip Elman:

That’s — that is their — that was their testimony sir.

But even on the basis of that version of the facts they were claiming a deduction.

They were offering these alleged facts as a basis for they’re not having paid any taxes.

It was certainly the obligation of the revenue agents to determine whether these deductions that were being claimed had any substantial basis in facts, whether in fact this black-market money that came in to Shotwell has been dispersed as business expenses.

It’s part of the materials that entered into the manufacturing of the product which they’ve sold.

Now, I should add further to that that the defendant’s story as told to the revenue agents was that all of the money that came in went out in precisely the same amounts.

So that therefore, in or — if you were going to consider only the question of computing how much came in the Shotwell which is concededly gross income, since there was a parallel between that amount and the amount that went out, the revenue agents would have every justification for inquiring.

Charles E. Whittaker:

But does not the Court of Appeals find out that the bureau at that time have not acquiesced the cases holding that excesses paid for raw materials over-ceiling prices was not deductible.

Philip Elman:

Yes, sir.

That was then the Treasury’s position that the issue was in litigation and ultimately the Treasury acquiesced in a possession taken by various Courts of Appeals that they were deductible.

Charles E. Whittaker:

And that was the basis or one of the bases of the Court of Appeals in holding was it not, that a full disclosure had been made because the income of excess over ceiling prices had been disclosed.

And it was immaterial as to whether or not the excesses paid could be deducted because the taxpayer had said that they litigated about that question and meanwhile pay whatever the Government said was due.

Isn’t that the basis of which the Court of Appeals acted?

Philip Elman:

The Court of Appeals did act on the basis that the information as to what Shotwell did with the black-market cash that came in was wholly irrelevant and the determination of the tax consequences of the receipt.

Now, there is — the Government certainly takes issue on the law of the Court of Appeals but I don’t think if it’s necessary for this Court to go in to the merits of that but I do think I should point out that from the standpoint of the agents in 1948 when this alleged disclosure as on the defendant’s version was made to them.

They certainly would have been wholly remiss in their duties if they had — if they had accepted the defendant’s statement that all these money went out and — to persons who were unidentified in amounts that were admittedly fabricated.

Charles E. Whittaker:

Do that make any difference though if the taxpayer was willing to pay without regard to those deductions?

Philip Elman:

Well, the taxpayer’s position was that he held no additional taxes at all.

When Shotwell’s accountant and President Cain came in and as they said in January 1948, there’s some dispute as to when that meeting took place, their story was not — we have defrauded the Government.

We are here to furnish you with amended tax returns and we are tendering additional payments of tax.

Their story was we failed to include in our tax returns some items of gross income amounting to several hundred thousand dollars.

However, we don’t know of any additional taxes because we also neglected to report in our returns that we paid out these hundreds of thousands of dollars.

And for that reason, we don’t owe you anything but we’re just telling you this.

Charles E. Whittaker:

And it wasn’t right then — was it right then if I may interrupt that the agent, revenue agent said, but we wouldn’t allow it anyway.

It’s out policy not to allow such payments and therefore the taxpayers were reported in this evidence you have said and the Court of Appeals finds they did.

That we’ll pay the tax regardless of those deductions and then we will litigate in an action to refund about the other question.

Isn’t that what they said?

Philip Elman:

Well, that’s what the Court of Appeals found that had happened.

Charles E. Whittaker:

Yes.

Philip Elman:

Now, the question as to whether that really happened, whether that was actually what took place is — I would say a question on the merits which this Court at least the Government, the petitioner here is not asking Your Honors to review.

We have taken the position throughout this entire litigation and beginning to end and I reiterate it now that from the Government’s — from the Government’s view that is not what happened.

But even if it did happened that way, certainly, a revenue agent who asked for information as these taxpayers were questionably asked at a later stage after this first meeting with the man named Sauber, he was the Chicago Field Deputy who, which I shall point out later, is now been indicted for a charge of conspiracy and perjury.

But certainly, at a later stage, there was absolutely no question and the defendant so testified that they refused to give that information even when the Treasury agents asked for it.

Even after the tax court in November or December 1948 had held in the Sullenger case that so-called — these so-called black-market disbursements were deducted.

And there was no question at all that it was very much of a legal issue.

And after (Voice Overlap) excuse me.

Felix Frankfurter:

Are any of these questions now before us?

Philip Elman:

Not at all.

Felix Frankfurter:

Isn’t this question before us —

Philip Elman:

Not at all.

Felix Frankfurter:

— even assuming that the Court of Appeals, assuming it was right on the record that it had which this Court does not seem fit to review.

Assuming that it was right and one must start with that assumption in the state of this record.

That on the record before the Court of Appeals it reached the right result.

Developments have occurred since then which the Government thinks call for consideration on what you call reasons of judicial administration.

Isn’t that the only case before it?

Philip Elman:

That is our — that is our position, sir.

This — at this stage of the litigation, our position is this.

The Court of Appeals reversed Judge Nordbye’s findings of facts that there was not a valid disclosure.

The Court of Appeals found either rightly or wrongly, we think at this point is not important, we think wrongly.

In any event (Voice Overlap) — in any event, the Court of Appeals made a finding of fact on this record that Judge Nordbye was required on the evidence presented to him to conclude that the disclosure was valid.

And beyond that, the Court of Appeals found affirmatively that the disclosure was timely.

Judge Nordbye had refrained from making any finding as the timeliness of the disclosure as to when the investigation has began because on his view there never was a disclosure at all.

But the Court of Appeals affirmatively made such a finding.

Philip Elman:

The Government’s petition for certiorari considering that in this case there had been a departure from the established standards governing appellate review of factual determinations in such a degree as to why they’re invoking these supervisory powers of this Court.

That was on October, 1955.

Within a period of about six weeks, they began to develop a sequence of events that did not detracted from the unusual character of this case.

The matters have been brought to the attention of this Court and they form the basis of the submission which the Government is making here that the case should not be decided on the merits.

The Government’s request for review of the case on this record should not be accepted at this time but rather that in the broad interest of justice in the interest of judicial administration, the case should be remanded to the District Court for further proceedings.

Now what are these new matters upon the basis of which this unusual request is made?

It was called to the Court’s attention that beginning — that some time in the middle of 1955 while this case was pending in the Court of Appeals, they began to be entertained in the minds of some officials of the Internal Revenue Service in Washington, suspicion as to the regularity or irregularity in handling of tax cases in the Chicago field office.

That as a result of those suspicions, a full scale investigation was initiated.

On December 1st, 1955, the Department of Justice was informed by the Chief Counsel of the Internal Revenue Service that that investigation has gone forward sufficiently to justify the conclusion that there — that in the record of the Shotwell case, this case, there were false, perjurious statements that were made.

On the basis of that representation, the Solicitor General asked this Court the preferred consideration of its — of the Government’s petition.

And thereafter, the motion to remand which is the basis of — which is before Your Honors in this argument was — was filed in October of last year.

Now, the investigation initiated by the Internal Revenue Service led to a grand jury inquiry.

The grand jury inquired into the question of whether in the trial of this case there had been perjury, bribery, corruption, fraud, obstruction of justice.

As the result of its inquiry, the grand jury in February of this year has returned an indictment.

The defendants named in the indictment are the Shotwell Company, Cain, one of the defendants, one of the respondents here, Sullivan, and two agents of the Internal Revenue Service, one of them being Sauber who is the man to whom this alleged disclosure in January 1948 was supposed to have been made.

The conspiracy is in ten counts.

The indictment is in ten counts.

Count one, the main count of the indictment to set out in the appendix to the petitioner’s brief.

Felix Frankfurter:

May I ask you — well, I caught right that the indictment of which you speak into which you are about to refer was after the various proceedings which led to the — to the granting or to the final papers filed either by the Government or by the respondents on the various petitions and motions before this Court.

Philip Elman:

Well, a chronology is set out in appendix for our brief.

The answer to your question is yes.

Felix Frankfurter:

All right.

Philip Elman:

The motion to remand originally was filed in October of 1956.

Certiorari was granted and limited the questions I’m now arguing.

I believe —

Felix Frankfurter:

February 25.

Philip Elman:

— February 25 and several days later came the indictment.

That — that is the present posture of litigations.

Your Honors have before you not only the indictment which alleges that there was a conspiracy among all these people to conceal information at the time the alleged disclosure was made that there was a conspiracy to evade taxes as to the proceeds of these black-market transactions.

But in addition, the indictment on page VII, specifically charges that it was a part of that conspiracy that the defendants and coconspirators would make false and fraudulent representations and statements to the Internal Revenue Service, the Department of Justice and to the District Court in this case, concerning alleged voluntary disclosure purportedly make the Internal Revenue Service in 1948.

Philip Elman:

And it alleges specifically on page XVI that Cain, Busby, the accountant for Shotwell and Sauber.

The three parties to this alleged disclosure gave false testimony at the suppression hearing before Judge Nordbye as to this disclosure.

Felix Frankfurter:

Let me ask you this question, Mr. Elman.

Assuming — assuming that the proceedings today do not, as a matter of law, preclude consideration by this Court of this motion which you’re addressing this time, that for one reason or another, the motion can’t reopen what is not reviewed now namely the judgment of the Court of Appeals.

Is there any — there is passing on the motion — is passing on the motion possible except for a tribunal that has power to hear witnesses and subject them for examination and cost of damage.

Philip Elman:

We think — we think not.

We think that the only court which is equipped to hear this — to determine whether these charges and only are this charge — whether these charges have any factual basis, and if so, what the significance and legal consequences should be as to trial court.

I would add only one further fact in addition to the indictment.

We have in this case the extraordinary fact that one of the three defendants, one of the three respondents in this Court has, in effect, repudiated the testimony of his codefendant at the trial and he has joined with the Government in asking for (Inaudible).

Thank you, sir.