Case ID: us-ct-cl_65/html/0007-01.html
Source: Caselaw Access Project
Author: {"author": "Moss, Judge,", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

CALIFORNIA WINE ASSOCIATION OF NEW YORK, INC., v. THE UNITED STATES
    [No. E-115.
    Decided February 20, 1928]
    
      On the Proofs
    
    
      Internatoevcwue laws; compromise; incorrect citations of statutes.— A compromise under sec. 3229, Revised Statutes, of a criminal ease arising under the internal-revenue laws, under which plaintiff has made payment of the sum agreed upon, will not be set aside because the parties, in their negotiations, inadvertently made incorrect citations of statutes and regulations thereunder, actual violations of law being admitted, subject to the same penalties.
    
      The Reporter's statement of the case:
    
      Mr. Stanleigh P. Friedman for the plaintiff. Thomas c& Friedman were on the briefs.
    
      Mr. Joseph H. Sheppard, with whom was Mr. Assistant Attorney General Merman J. Galloway, for the defendant.
    The court made special findings of fact, as follows:
    I. Plaintiff, California Wine Association of New York, Inc., was at the times hereinafter mentioned a duly organized and existing corporation under and 'by virtue of the laws of the State of New York, and engaged in the business of manufacturing and selling wines and as a bonded winery, with its principal place of business in the Borough of Manhattan, city, county, and State of New York. Said corporation was at all times a subsidiary of the California Wine Association, a California corporation, with its principal office in the city of San Francisco, State of California, which corporation had been in existence for more than twenty-five years, conducting a wholesale wine business.
    II. In the early part of 1920 the Commissioner of Internal Revenue made an investigation of the business of plaintiff corporation and as a result of this investigation plaintiff corporation was charged with forty-one violations of article 19, Regulations 28, supplement 2, issued pursuant to authority granted the Commissioner of Internal Revenue by section 402, act of September 8, 1916. Plaintiff corporation was charged by the Commissioner of Internal Revenue with making forty-one false entries in Form 702 during the months of October, November, and December, 1919. Form-702 was a daily record required by Regulations 28 to be ke'pt by the proprietors of bonded wine rooms. Such record was required to show, among other things, the quantity of wine withdrawn from bond, the amount of wine tax paid upon withdrawal, and the name of the consignee for whom the wine was withdrawn.
    III. No criminal charge of any kind was made against plaintiff corporation in any of the courts of the United States.
    IY. On or about the 10th day of Januai’y, 1920, plaintiff corporation applied to the Collector of Internal Revenue for the First District of New York and to the Collector of Internal Revenue for the Second District of New York for a permit to deal, in nonbeverage wines under the national prohibition act, dated October 28, 1919.
    Y. Plaintiff’s application for a permit to deal in non-beverage wines under the national prohibition act was denied on the ground that the company was charged with violation of article 19, Regulations 28, supplement 2, issued pursuant to authority granted the Commissioner of Internal Revenue by section 402, act of September 8, 1916, more fully set out in Finding II hereof.
    Several conferences were had between the representatives of the Prohibition Unit and the Internal Revenue Department and representatives of plaintiff corporation in reference to the charges and the application for a permit to engage in business under the national prohibition act.
    VI. As a result of conferences between the representatives of plaintiff corporation and representatives of the Government, on April 24, 1920, plaintiff corporation offered the sum of $5,000 in compromise of the alleged violations, and sent the following letter to the Commissioner of Internal Revenue:
    April 24, 1920.
    Hon. William H. Edwards,
    
      Collector of Internal Revenue,
    
    
      Customhouse, New York City.
    
    Dear Sir: California Wine Association of New York, Inc., a New York corporation, which is a subsidiary of California Wine Association, a California corporation, has been charged with certain irregularities involving violation of the war-time prohibition act and also violation of the internal revenue laws of the United States. The violations charged consist of the sale of wine to persons other than those mentioned in the permits which were obtained for the sale of wine for sacramental purposes.
    We realize that there can be no compromise of any case, either civil or criminal, arising under the war-time prohibition act. The complaint, however, if well founded, also involves a violation of the internal-revenue laws in that the corporation reported on Form 702 the sale of wine, for example, to the Christian Press Association, whereas it is charged the wine was delivered to parties other than the Christian Press Association. If such a violation has been committed, it may be compromised by the Commissioner of Internal Revenue under section 3229 of the Revised Statutes as a criminal case arising under the internal-revenue laws. We understand that there is no claim by the Government that the corporation has involved itself in any civil liability to the Government.
    After discussion of the evidence with the Government agents in charge of the case the corporation removed at once all of the officers connected with the corporation at the time of the alleged violations who were charged with making a false return and committing the other illegal acts. The entire management of the corporation has now been placed in reliable hands.
    The corporation, without necessarily admitting guilt in the premises, desires to effect an adjustment with the Commissioner of Internal Revenue for the alleged violations of the internal-revenue laws connected with the filing of its return on Form 102. To this end we make the following offer of compromise of the alleged criminal violation of the internal-revenue laws under section 3229 of the Revised Statutes. The corporation now offers and incloses to the Commissioner of Internal Revenue a certified check in the sum of five thousand dollars in compromise of this alleged violation.
    It should be borne in mind in this connection that there has been no evasion of taxes nor is there any claim that the Government has been defrauded in any way of any taxes or other sums which the corporation was legally bound to pay. The corporation regrets the necessity for the Government’s investigation of this matter, of the causes of which it was in complete ignorance, and urges upon the commissioner the thought that any violation was the result of the unauthorized action of officers who, if the violations are true, have proved themselves entirely unworthy of the trust that was reposed in them. As stated above, all of the officers who are charged with responsibility for the alleged violations were immediately removed from office on receipt of the information from the Government agents and have now absolutely no connection with the corporation or its management. The corporation assures the commissioner that under its present management it will be governed strictly in accordance with law.
    It is requested that this offer be forwarded to the commissioner through the proper channels.
    Yery truly yours,
    California Wine Association of New York, Inc.,
    (Signed) B. Kahnweiler, President.
    
    Under date of May 25, 1920, the Commissioner of Internal Revenue rejected the offer of $5,000, and John F. Kramer, Prohibition Commissioner, wrote plaintiff the following-letter :
    Washington, May 25,1920.
    
    California Wine Association,
    
      Washington c& West 11th Streets, New York, N. Y.
    
    Gentlemen: The Commissioner of Internal Revenue has considered the offer of $5,000, submitted by you on April 29, 1920, through the collector of internal revenue, second district of New York, in compromise of liability for alleged violation of article 19, Regulations 28, supplement 2, and has decided to reject the same.
    In view of all the facts in the case this office does not consider that the amount offered by you is sufficient. After careful consideration of this case it has been decided that no offer in an amount less than $100,000 should be given favorable consideration. In order that you may consider this matter, no further action will be taken in this case for 15 days.
    Any additional offer in compromise should be submitted to the Collector of Internal Revenue, Customs House Building, New York City.
    Respectfully,
    (Signed) John F. Kramer,
    
      Prohibition Commissioner.
    
    VII. Subsequent to the receipt of the letter dated May 25, 1920, and on the 8th day of June, 1920, a conference between representatives of plaintiff corporation and Government representatives was held in the office of the Solicitor of Interna) Revenue in the city of Washington, which conference was attended by H. Bartow Farr, attorney for the plaintiff; Stanleigh P. Friedman, attorney for the plaintiff and secretary of plaintiff corporation; Percy A. Vize, an attorney in the office of the Solicitor of Internal Revenue; LewM. Noble, assistant to the chief of the law division, prohibition unit; and Benjamin C. Hilliard, jr., an attorney in the Prohibition Unit. At said conference the proposal to enter into a compromise was discussed by the officials present. It was stated by the Government representatives that there had been forty-one violations of article 19, Regulations 28, supplement 2, issued pursuant to authority granted the Commissioner of Internal Revenue by section 402, act of September 8, 1916, and that the penalty for each violation was $5,000, which made a total maximum penalty of $205,000. Mr. Farr and Mr. Friedman, representatives of plaintiff corporation, contended that Regulations 28, supplement 2, article 19, provided only for a sworn monthly report, and that the violations charged would only result in a maximum penalty of $15,000, being three in number, October, November, and Décember, 1919.
    
      It was also stated at this conference by the representatives of the Government that there were alleged violations of the war-time prohibition act; that these violations could not be compromised, but that a compromise of the violations of Regulations 28, supplement 2, article .19, could be made pursuant to section 8229, Revised Statutes.
    No compromise was effected as the result of this conference, but later, and in the afternoon of the same day, plaintiff’s representatives were informed by the representatives of the Prohibition Unit that the minimum amount which the Government would accept in compromise was the sum of $50,000.
    VIII. Under date of June 19, 1920, plaintiff corporation wrote to the Collector of Internal Revenue for the Second District of New York offering the sum of $50,000 in compromise of the charges growing out of the alleged violations of the internal-revenue laws, which letter read as follows:
    June 19, 1920.
    Hon. Wm. H. Edwaeds,
    
      Collector Internal Revenue,
    
      Second, District, New York.
    
    Dear Sir: We enclose certified check to your order for $45,000.
    This check together with certified check for $5,000 received from us May_ 5th, 1920, and still held by you, makes a total of $50,000, which has been agreed upon with our attorneys by the representative of the Hon. Internal Revenue Commissioner at Washington, D. C., to settle amount of alleged violations referred to in a letter from the Hon. John F. Kramer, dated Washington, D. C., May 25th, 1920, Pro-Legal-31171-P K-E E P.
    Respectfully,
    CaliforNia Wine Association of New York,
    B. Kahnweiler, President.
    
    Under date of September 10, 1920, the Commissioner of Internal Revenue accepted the offer of $50,000, submitted by plaintiff on June 19, 1920, in compromise of liability for alleged violations of section 402 of the act of September 8, 1916, by letter which read as follows:
    
      Washington, September 10, 192 — .
    California Wine Association,
    
      Washington da 11th Streets, New York, N. Y.
    
    Gentlemen: The Commissioner of Internal Revenue has considered the offer of $50,000, submitted by you on June 21, 1920, through the collector of internal revenue at New York, New York, in compromise of liability for alleged violation of section 402 of the act of September 8, 1916, and has decided, with the advice and consent of the Secretary of the Treasury, to close the case by the acceptance of your offer, as follows: $50,000 in compromise of liability under the internal-revenue laws; costs, if any, to be paid by you.
    Respectfully,
    John F. Kramer,
    
      Prohibition Commissioner.
    
    IX. The $50,000 offered in compromise was forwarded to the Collector of Internal Revenue for the Second District of New York and later covered into the Treasury of the United States. Immediately following the payment of said $50,000 a permit was issued to plaintiff corporation authorizing plaintiff to do business under the national prohibition act. On the same date the Commissioner of Internal Revenue wrote a letter to the United States attorney in New York recommending that no criminal prosecution be instituted against the plaintiff.
    X. On or about June 16, 1921, plaintiff corporation filed with the Commissioner of Internal Revenue a claim for refund of the sum of $50,000 paid by plaintiff to the Government in compromise of alleged violations of Regulations 28, supplement 2, article 19, of the internal-revenue regulations, issued pursuant to authority granted the Commissioner of Internal Revenue by the internal-revenue act of September 8, 1916, on the ground that at the time the compromise was effected and the money paid the revenue act of September 8, 1916, had been repealed. Plaintiff’s claim for a refund -ivas rejected by the Commissioner of Internal Revenue by letter dated May 8, 1923, as follows:
    Mat 8,1923.
    Thomas & Friedman,
    
      Attorneys do Counsellors at Law',
    
    
      2 Rector Street, New York, N. Y.
    
    Gentlemen: The petition of the California Wine Association of New York, Inc., for the refund of its offer of $50,000 in compromise of violations of the internal-revenue laws of the United States and your brief in support thereof have been given careful consideration.
    The decision of this office is that your client is not entitled to the relief requested for the following reasons:
    1. The original offer of $5,000 was submitted to compromise a violation of the internal-revenue laws of the United States and the subsequent offer of $45,000 was submitted as an additional or supplemental offer to such original offer of $5,000.
    2. Reference in certain correspondence to article 19, Regulations 28, supplement 2, issued under the revenue act of 1916, was clearly due to inadvertence. This regulation and law at no time embodied the requirement that resulted in the alleged false returns in question, and could not have been in contemplation of the parties. Such requirement was contained in Treasury Decisions 2788 and 2940, issued under the revenue act of 1918; and in making such false returns under this requirement, the California Wine Association of New York, Inc., violated section 3451, R. S., an internal-revenue law.
    3. On June 26, 1920, the Solicitor of Internal Revenue, pursuant to section 3229, R. S., advised the acceptance of such offer of $50,000 in compromise of liability under the internal-revenue laws.
    4. On September 7, 1920, also pursuant to section 3229, R. S., the Commissioner of Internal Revenue, with the advice and consent of the Secretary of the Treasury, accepted the offer of $50,000, “ as advised by the Solicitor of Internal Revenue.”
    If you desire further hearing, your request therefor should be submitted within a reasonable time; otherwise this decision will stand as the final determination of the matter by this office.
    Respectfully,
    D. H. Blair, Commissioner.
    
    The court decided that plaintiff was not entitled to recover.
   Moss, Judge,

delivered the opinion of the court:

This is an action by the California Wine Association of New York, Inc., to recover $50,000 paid to the Government on June 19,1920, in compromise of penalties for violations of the internal-revenue laws on the ground that the specific statute and the regulations with which plaintiff was charged with violating were not in force at the time the offenses were committed, but had been repealed several months prior thereto. Plaintiff was charged with forty-one separate and distinct acts, each of which constituted a violation of law under the revenue act of 1916 and Regulations 28, supplement 2, promulgated thereunder.

Proprietors of all “bonded premises” were required under said regulations to forward to the Bureau of Internal Revenue at the close of each month a sworn statement, on a certain prescribed form, known as Form 702, containing daily entries of business transacted during the month. Plaintiff conducted and maintained a bonded wine room which comes within the meaning of the term “ bonded premises.” During the months of October, November, and December, 1919, as the result of an investigation by the Commissioner of Internal Revenue, it was shown that forty-one sales of wines had not been delivered to the parties named in the monthly reports, but had been diverted to an illegal use. The punishment for such violation under the act of 1916 was a fine of not exceeding $5,000, or imprisonment for not more than five years, or both. Prior to the date of the compromise the Commissioner of Internal Revenue had refused to issue to plaintiff a permit required by section 6, Title II, of the national prohibition act, 41 Stat. 305, which provides as follows :

“ No permit shall be issued to any person who, within one year prior to the application therefor or issuance thereof, shall have violated * * * any.law of the United States * * * regulating traffic in liquor.”

This was the situation when the compromise in question was effected. The revenue act of 1916, 39 Stat. 756, was repealed by the act of 1918, 40 Stat. 1057. It is true that the offenses charged against plaintiff were committed after the repeal of the act of 1916; and it is plaintiff’s contention that inasmuch as the acts of which complaints were made were committed after the repeal of the act of 1916 there was no basis for a compromise, and no consideration for the payment of the $50,000. It appears, however, that the act of 1918 provides the same penalty for the offenses with which plaintiff was charged as that provided in the act of 1916. Subdivision (f) of section 402 of the act of 1916 reads as follows:

“ That any person who shall evade or attempt to evade the tax imposed by this section, or any requirement of this section or regulation issued pursuant thereof, * * * shall, on conviction, be punished for each such offense by a fine of not exceeding $5,000, or imprisonment for not more than five years or both, * *

Section 620 of the revenue act of 1918 provides—

“ that whoever evades or attempts to evade any tax imposed by sections 611 to 615, both inclusive, or any requirement of sections 610 to 621, both inclusive, or regulation issued pursuant thereto, * * * shall, on conviction, be punished for each such offense by a fine of not exceeding $5,000, or imprisonment for not more than 5 years, or both, * *

The provisions contained in Regulations 28, supplement 2, promulgated under the act of 1916, were continued in effect under the act of 1918, by Treasury Decisions, 2788 and 2940, dated February 6, 1919, and October 29, 1919, respectively. Proprietors of bonded warehouses under the 1918 act, and the regulations thereunder, as under the act of 1916, and the regulations under same, were required to make a monthly report to the Internal Revenue Bureau showing the daily record of the business transacted. It was necessary to show the date of each shipment of wine, the name “and address of each consignee, the number and date of his permit, the quantity and alcoholic content of the wines, and the serial number of the packages contained in the shipment. Charges of making false entries in its records, carried into its sworn monthly statements, constituted the foundation of ■ the compromise. It should be noted that plaintiff energetically urged the settlement of its difficulties by a compromise of the penalties. Its permit to conduct its business had been denied, and while these charges existed a permit could not issue under the law. It was liable, under the law, for a total fine of $205,000, or imprisonment of not exceeding five years, or both, in each case. Its very existence was at stake. There was no denial of the charges. With the payment of the agreed amount, $50,000, and acceptance of same by the Government, plaintiff’s permit was at once issued, and it was agreed that no criminal prosecution would be instituted; it was a closed transaction. Plaintiff received the full benefits resulting from the compromise, which it has ever since enjoyed, and now it is seeking to recover said sum from the Government on the sole ground that in the correspondence and negotiations concerning the charges against plaintiff, and the compromise of same, both plaintiff and the Government inadvertently made references to a statute, and to certain departmental regulations, which at the time of the commission of the offenses under discussion had been repealed, although superseded by another statute and other regulations in force and effect at the time the offenses were committed, containing the same provisions, and providing precisely the same punishment as the prior act.

The only question at issue between plaintiff and the Government at the time of the negotiations for a compromise was the amount which plaintiff should be required to pay in settlement of admitted violations of law. Neither party was concerned in the least with the incidental references occurring in the correspondence. Such references were in no real sense material. The facts were fully known and the charges were undenied. The payment was voluntarily made pursuant to an agreement authorized by section 3229 of the Revised Statutes providing for the compromise of any civil or criminal case arising under the internal-revenue laws, which statute was specifically invoked by plaintiff itself in urging upon the Commissioner of Internal Revenue his authority to accept a payment in compromise.

It is the opinion of the court that plaintiff is not entitled to recover back the money paid, and it is so ordered.

Graham, Judge; Booth, Judge; and Campbell, Chief Justice, concur.