Appeal by corporation and its former president for tax fraud conviction after jury trial in the United States District Court for the Southern District of New York, Robert L. Carter, Judge, finding the defendants willfully engaged in scheme to overstate "LIFO" inventory through pretended purchase of raw sugar in 1975 and conspired to do so in 1976. Affirmed.
Oakes and Winter, Circuit Judges, and Metzner, District Judge.*fn*
This appeal is by a corporation and its former president from judgments of conviction for tax fraud by means of year-end LIFO ("last-in-first-out") inventory overstatement. The principal arguments of both defendants before the jury in a trial in the United States District Court for the Southern District of New York, Robert L. Carter, Judge, were that the inventory was not overstated because the corporation in fact had legal title on the year-end date to the property in question -- raw sugar -- even though it had previously agreed to resell it to its seller, and that in any event the element of willfulness was negated because the tax laws were too unclear for the defendants to have known that they had committed a crime. Other arguments based on evidentiary ruling, the court's charge, the statute of limitations, the proof, and a claim that a corporation as a matter of law cannot be convicted of perjury under 26 U.S.C. § 7206(1) are made on appeal. We affirm the convictions.
The appellants include Ingredient Technology Corp., which used to be known as SuCrest Corp., and its former president, Robert M. Rapaport. These two were charged in a five-count indictment along with SuCrest's treasurer, Allerton D. Marshall, who was acquitted on all charges. SuCrest and Rapaport were convicted on Count One for conspiracy to evade SuCrest's corporate income tax for fiscal 1975 (18 U.S.C. § 371). Count Two, on which the jury was unable to agree, is irrelevant here. SuCrest and Rapaport were convicted on Count Three for conspiracy to defraud the United States by impeding the Department of the Treasury in the collection of revenue in connection with SuCrest's federal income tax for fiscal 1976 (18 U.S.C. § 371). SuCrest was convicted on Count Four for its subscribing to a false federal income tax return in fiscal 1975 (26 U.S.C. § 7206(1)); this is the count for which SuCrest claims it cannot be liable as a matter of law. Rapaport was convicted on Count Five for assisting SuCrest in the presentation of a false corporate federal income tax return for fiscal 1975 (26 U.S.C. § 7206(2)).
During 1974 through 1976 SuCrest, a publicly traded company with annual sales in the hundreds of millions of dollars, was principally in the sugar refining and sales business, buying raw sugar for refining from brokers (operators) who either imported raw sugar or bought it from domestic producers. SuCrest had never been in the business of selling raw sugar or buying raw sugar for resale. Rapaport, who was president and chief executive officer of SuCrest, actively participated in the operation of the Sweetener Division which refined and resold refined sugar, and in the tax years in question his approval was required for every purchase of raw sugar. These purchases at any one time involved ten to twenty tons.
In 1974 the price of raw sugar began to fluctuate widely and although SuCrest was making large gross profits as a result of price fluctuations upward, taxes on those profits and the escalating cost of raw sugar depleted its income. Like many other United States sugar refiners, SuCrest switched in 1974 to the LIFO inventory accounting method for its "raw sugar and raw sugar content in goods in process and in finished goods." Under LIFO, of course, the most recently purchased raw materials represent the cost of inventory attributable to costs of goods sold. In this inflationary period, therefore, LIFO produced a higher cost of goods sold which in turn resulted in lower taxable income than the FIFO (first-in-first-out) method formerly used. Moreover, LIFO more accurately reflected real costs because profits had to be reinvested in increasingly expensive raw materials. Thus in the fiscal year in which SuCrest adopted the LIFO accounting method -- 1974 -- it was able to report and to carry forward a loss of about $14.7 million as opposed to a taxable income of $12.2 million which it otherwise would have had to report. This substantial tax saving occurred as a result of large purchases of raw sugar; SuCrest accumulated an unusually large inventory of about 194 million pounds which thereupon constituted what is called the "LIFO base." In SuCrest's case this was valued at about ten cents per pound and, as the accountants insist to those who adopt the LIFO method, it was important to maintain this LIFO base, because if the amount of sugar fell below its level, then an equivalent amount of sugar valued at only ten cents per pound (as opposed to higher subsequent prices) would have to be attributed to that given year's cost of goods sold, with the result that profits and taxes would be increased.
In 1975 and 1976, with both raw sugar prices and interest rates increasing, SuCrest operated its refineries with as little raw sugar on hand to be processed as possible, slightly less than 100 million pounds or about half of the 1974 year-end inventory or LIFO base. Because this would have caused large 1975 profits and taxes, it was determined to add enough raw sugar to the inventory level so as not, in accounting terms, to "invade" the LIFO base before the end of the fiscal year, in this case May 31, 1975. SuCrest could have done so simply by purchasing raw sugar on the open market, but such a purchase would involve market risks, capital outlay, possibly high interest expenses, and the like. Management set upon another course, resulting in the instant convictions.
The method adopted had the overall effect of involving no financial risk, with title to sugar being taken before the end of the fiscal year but immediately thereafter resold to the seller, with the sugar never entering any flow of raw materials for the refining process, and the only expense being the payment of a small fee to the cooperating operator. More specifically, what was done was the following.
Arrangements were made with one of SuCrest's operators, Czarnikow-Rionda Co. (Rionda), whereby it would sell to SuCrest the quantity of raw sugar SuCrest needed to protect its LIFO base and SuCrest would then sell the raw sugar back to Rionda so that SuCrest would be able to claim formal title without having to take physical delivery and with neither side making a profit on the transaction. In addition, SuCrest and Rionda engaged in an elaborate pricing formula hinged to the market value of raw sugar on the futures exchange because the volatile price fluctuations in the sugar market could result in a resale at a price different from the original purchase price so that either SuCrest or Rionda would stand to lose on what was intended to be simply a bookkeeping transaction. It was agreed that Rionda would sell sugar to SuCrest at 1.075 cents per pound above the July 1975 futures price on the New York Coffee and Sugar Exchange on the day of the sale and buy the sugar back at 1.0 cent above that same futures price on the day of the resale, with the difference of.075 cent going to Rionda as the only SuCrest expense in the transaction. Then SuCrest and Rionda each agreed to take opposite and identical futures positions on the Exchange, which in turn assured no gain or loss for either party since any gain from the resale of the physical sugar as the result of an increase in sugar price would be matched and offset by an equivalent loss on the futures contracts or vice versa.
SuCrest's contract to purchase 50,000 long tons of raw sugar from Rionda, executed on April 18, 1975, the day SuCrest and Rionda opened their futures positions, was in writing. Rionda's agreement to repurchase was not. Supposedly because of "gossip among sugar buyers," SuCrest brief at 12, Rapaport cautioned one of his juniors not to discuss the details of the Rionda transaction "on the street."
Prior to the close of the SuCrest fiscal year, Rionda in accordance with the purchase contract "declared" to SuCrest title to the cargoes of the two ships Ally and St. Etienne involving 41,755 long tons of raw sugar. It turned out that the remaining 8,245 long tons due under the contract were not required by SuCrest to maintain its LIFO base and they were declared after the end of SuCrest's fiscal year in June 1975. Almost immediately thereafter and while the vessels were still at sea, the same sugar was resold to Rionda. Checks were exchanged for the purchase and resale and for the net changes in the futures positions. SuCrest never actually drew on its funds to pay the nearly $29 million due for the sugar. Rionda made its "commission" of $84,000. Except for satisfying the accountants and the lawyers and ultimately the Government, the transaction was at an end.
Significantly, two facts were not disclosed until a later time. One was that Rionda's vice president, who had entered into the understanding with SuCrest as to the overall transaction, had about a week after April 18 asked for a letter that would set out the terms of the resale, a letter which a SuCrest executive and the Rionda vice president sealed with wax and placed in the latter's safe. After the transaction was completed, the two men met and destroyed the letter. Significantly also, after Rionda had declared title to the sugar to SuCrest but before the resale, Rionda declared title to the sugar on board the St. Etienne to another customer pursuant to a contract that had been made several weeks earlier. In other words, the ...