Earl Warren: Number 306, The Colony, Incorporated, Petitioner, versus Commissioner of Internal Revenue. Mr. Doll, you may proceed.
A. Robert Doll: Mr. Chief Justice, may it please the Court. This is an income tax case rising under the Internal Revenue Code of 1939. Specifically, the question in this case involves the statutory construction of Section 275 (c) of the 1939 Code. Generally speaking, the Internal Revenue Service must assess tax deficiencies or taxes within three years after a tax return is filed. There are certain exceptions including fraudulent returns and where no return is filed, where there's no statute. There's the so-called five-year statute which is the one we're dealing with. That section provides that if a taxpayer omits from gross income, amounts properly includable therein in excess of 25% of the gross income stated in the return then the Commissioner has five years instead of three to make the assessment. The taxpayer's construction of that statute is that omits from gross income means leaving out items of receipt. The Government on the other hand contends that where -- wherever a taxpayer's gross income is understated in a statutory amount regardless of the cause of the understatement, the five-year statute applies. In terms of volume, I think perhaps the petitioner has a better side of the case. This issue of course has been up in the lower courts and the Courts of Appeal for the Third, Fifth, Ninth and Eighth Circuits have construed the statute the way that the taxpayer here is contending. On the other hand, the Tax Court and the Court of Appeals for the Sixth Circuit are construed as the respondent without having construed. I think that the facts in this case point up the issue, the material facts and they are the -- this taxpayer was in the subdivision business subdividing the land. He did not build but he subdivide it. During the years in question, he reported all of his gross receipts from a sale of his lots but he over reported the cost of his lot sold. He overstated them. The principal item of overstatement was the cost of a water supply system which he had allocated certain amounts to that cost to each lot that was sold. The Tax Court held on the merits that he'd overstated the cost and I might point out that they went at some length, I think, they had to distinguish a earlier decision of theirs to decide against the taxpayer on the merits. As you can see --
Speaker: Delivered -- delivered overstated (Inaudible)
A. Robert Doll: No, sir. It was not. It was -- as I pointed out in my brief and the Government made reference to it, this was an innocent overstatement that had a reasonable basis. Now, the Tax Court held as a -- has held in the past that in this case where the overstatement of the cost to good sold resulted in an understated gross income and -- that overstated offset item resulting in an understated gross income that there was no omission. The Court of Appeals for the Sixth Circuit affirm citing an earlier decision of this it -- of its own. I think, however, at least we feel that in its opinion, which is very short, the Sixth Circuit perhaps indicated that it had misgivings because it eluded favorably, we think, to the contrary decisions in the Courts of Appeal for the Third, Fifth, Ninth and Eighth Circuits. The reasons why the petitioner thinks that it is right are as follows. As I've said, our position is that omits from gross income means leaves out items of receipt. First of all, the statutory language itself, the verb in the statute is the word “omits.” The ordinary and normal meaning of that verb according to the dictionary is to leave out to -- not to mention the fail to include or insert. Secondly, going to the legislative history, we feel that that -- that that also supports this. I might, if I may, take you back to when this was put in to the -- the code. It was in the Revenue Act of 1934. In the Revenue Act of 1932, the -- the statute of limitations, they're set out with a normal three-year statute and then they switched over to no statutes of -- no statute of limitations in the case of fraudulent returns and no returns. In the Revenue Act of 1934, when this Section 275 (c) was first proposed, there was an unlimited statute of limitations. We feel that the legislative history shows that what Congress had in mind was to catch situations that were, to certain extent, similar to a fraudulent return or filing no return at all. They -- there was no statute of limitations. But going to the committee reports themselves, if I may just briefly and I'm looking at page 14 of the petitioner's brief. In the -- the first pertinent bit of legislative history was a House subcommittee report starting in the -- at the second paragraph. "Your subcommittee is of the opinion that the limitation period on assessment should also not apply to certain cases where the taxpayer has understated his gross income on his return by a large amount, even though fraud with intent to evade tax cannot be established. It is, therefore, recommended that the statute of limitations shall not apply where the taxpayer has failed to disclose in his return an amount of gross income in excess of 25% of the amount of gross income stated in the return. The Government should not be penalized where a taxpayer is so negligent as to leave out items of such magnitude from his return." Following this subcommittee report, there was a hearing that was held before the full House committee and at that time, Mr. Roswell Magill was with the Treasury Department and he had a -- a discussion which is set out on page 15 of the petitioner's brief with -- with Congressman Jerry Cooper of Tennessee. Now if I may just prefer to the first question and answer, "Mr. Cooper, what we really had in mind was just this kind of a situation. Assume that a taxpayer left out, say, a million dollars, he just forgot it. We felt that whenever we found that he did that we ought to get the money on it, the tax on it.” Following the -- this hearing, the House Committee adopted a report also providing for an unlimited period for assessment and their report which is similar to the one I read, the -- the subcommittee report is on page -- well, 16 and also the Senate Finance Committee report. Now, we feel that when you take the -- the ordinary meaning of the statute and when you go to the legislative history that is clear that -- that what Congress was really concerned with was leaving out items of receipt. After all that -- that is what you put in the tax return. Now, in this case where we have an understatement of gross income that results from -- from an inflated item, there's nothing left out of this return, there's too much put in. And from a logical standpoint, I don't think Congress was -- was aiming at that. For example, when you take your gross income, there is -- there are deductions from gross income. In other words, Section 23 of the 1939 Code permits rent and so forth to be deducted from gross income to get your net income. Well, quite obviously, the statute would not apply regardless of how far overstated these rent items or salary or what have you, these deductible items. Now, we feel that those items, those overstated items where there are errors resulting from a -- from an overstatement below the gross income line that are clearly not -- will not bring a statute into play. The Congress didn't -- didn't have in mind that an error above the gross income line and the cost of good sold that -- that they weren't really concerned with that type of an error. They -- they were concerned with left out items. And I -- I think that perhaps the reason for that -- there's a reason for that. In the case of overstated deductions, as well as overstated cost of good sold, that figures on the tax return. To get the benefit from that figure, you've got to claim it on the tax return. Well, the revenue agents, they don't have the same problems of trying to discover where the error is. It's on the return and they can just verify it from -- from what's already there.
Speaker: You say this is sort of a mathematical error.
A. Robert Doll: That's right. That's -- that's what the -- the Court of Appeals for the Third Circuit in the Uptegrove case found that that was a mathematical error that Congress was not concerned with that type of an error. They were concerned with leaving out.
Charles E. Whittaker: Wasn't that what was held in the Goodenow case also?
A. Robert Doll: I beg your pardon, sir.
Charles E. Whittaker: Is not that the same as was held in the Goodenow case in the Eighth Circuit?
A. Robert Doll: That is correct. Yes, sir. The opinions that have construed the statute as we're now urging or -- it's -- the -- there's the Uptegrove case in the Third Circuit, which was the first case decided and that is exactly the same on the facts to this case. That was a cost of good sold case. The Court, the Third Circuit then decided the Deakman-Wells case where a taxpayer showed his gross receipts on a schedule attached to his return but then subtracted items from it to convert itself to a -- a cash basis. The -- the next decision was -- I think was the Goodenow case in the Eighth Circuit and Slaff versus the Commissioner, which was the Ninth Circuit case and Davis v. Hightower, a Fifth Circuit case. All those cases adopt this construction. There's one further point that I would like to mention -- mention the -- the statutory language, the legislative history and what we think is the logic of the interpretation. In 1954, Congress enacted Section 6501 -- 6501(e) (1) (A), which is the successor to Section 275 (c) of the 1939 Code. In -- and I'm looking at page 23 of the petitioner's brief, the footnote sets forth the new -- the new law. Under A, the general rule, Congress adopted precisely the same language that was contained in Section 275 (c). It made two changes, which aren't -- which are not material, but they adopted substantially the same language. If the taxpayer omits from gross income an amount properly includible therein, then for purposes of this subparagraph, they go down to subsection (i). In the case of a trade or business, the term "gross income" means the total of the amounts received from sale of goods or services prior to diminution by the cost of such sales. In other words, in that subsection (i), Congress is essentially adopting the -- the construction we urge in this case. The Government has contended that Congress changed the law in 1954. We admit that the law was changed to the extent that they started out with the old law and then they added new language. The purpose of that new language, we think, was obviously to approve the prior construction. They agreed with it and we think it was to explain it and to clarify and to say what the proper construction of the predecessor section was. In the committee reports that I referred to, there are in each of those reports, statements of a general nature to the effect and they start out the reports on that thing and I'm looking at page 14, the House Subcommittee report. "Your subcommittee is of the opinion that the limitation period on assessment should -- should also not apply to certain cases where the taxpayer has understated his gross income on his return." The respondent attaches great significance to the use of the word “understatement” there. The Court of Appeals for the Third Circuit held and we think quite correctly that that was of a general introductory nature that after that language in each of the committee reports, Congress wants a specific example of -- of what they were thinking about. The next sentence, for example, “It is, therefore, recommended that -- that statute of limitations shall not apply where the taxpayer has failed to disclose in his return an amount of gross income in excess of 25% of the gross income stated in the return. The Government should not be penalized where a taxpayer is so negligent as to leave out items." In conclusion, we think that the common sense reading the statute is confirmed by the legislative history and the logical approach is to show that that -- that the only way -- what Congress really intended was to give the taxpayer two extra years. He's already -- the -- the Commissioner already has three years, that he was to have two more years where a -- items of receipt were left out of the return, the computation of gross income. Thank you.
Earl Warren: Mr. Goetten, you may proceed.
Joseph F. Goetten: Mr. Chief Justice, may it please the Court. We agree that the single issue in this case is whether the general three-year statute of limitations bars assessment and collection of tax deficiencies admittedly due, as the taxpayer contends or whether if the courts below held the five-year statute of limitations applies. The important facts are not disputed. The taxpayer corporation in this case understated its gain from sales of property by more than 25% of the amount reported as gross income in its return.
Speaker: Could you explain what the -- without too much technicality, what the understatement was of the basis or --
Joseph F. Goetten: Yes.
Speaker: -- or your statement of the basis.
Joseph F. Goetten: In the main part, it consisted of allocating to the various lots sold a portion of the cost of a waterworks that the taxpayer had constructed to furnish water to these various residential lots it was selling. The difficulty with the taxpayer adding that to the cost basis of the lots was that the taxpayer did not transfer that to the purchasers of the lots or to a -- a nonprofit corporation to hold it for them. The taxpayer retained title to the waterworks and sold the water to the lots that was there were not included.
Charles E. Whittaker: But he had spent the money for the waterworks, which he did a portion in this return among the several lots.
Joseph F. Goetten: That's right, Your Honor. He did a portion wrongfully because he kept title that was still his waterworks.
Charles E. Whittaker: Were there any facts concealed? He just allocated a certain portion of the waterworks, the title to which he kept to these lots used erroneously as the information there.
Joseph F. Goetten: Well, I think it's conceded for purposes of this case, erroneously.
Charles E. Whittaker: It was erroneous.
Joseph F. Goetten: Yes, Your Honor.
Charles E. Whittaker: Yes.
Speaker: He committed all the lots.
Joseph F. Goetten: Well, he sold the lots in three different years, Your Honor. Two years --
Speaker: (Inaudible)
Joseph F. Goetten: Yes, he allocated -- he sold some of the lots in the two years before the Court at this time, 19 fiscal years ending at 1946 and 1947, and then he sold some in 1950. He allocated the total cost of the waterworks to the various lots as sold, a proportionate part. Now this understatement of gain here resulted from overstating the cost or adjusted basis of the lot sold. And accordingly, part of the gain from the sales of the lots was not correctly shown as gain, but was erroneously shown as a return of capital investment in the property. Now the statute to be construed in this case is set forth at pages 3 to 4 of the Government's brief. It's very short and very simple, Section 275 (c) of the Internal Revenue Code of 1939. It provides that the Commissioner will have five years after a return is filed within which to assess or collect deficiencies. “If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return.” Now, taxpayer would emphasize the world “omits” in that statute, but the word “omits” standing alone is meaningless. It immediately suggest the questions “omits what from what?” And the statute supplies the answer. It says omits from gross income an amount properly includible therein. Now, gross income is a term of art. It's defined by statute. So defined, it expressly includes gains from the sales of property. Gain from the sale of property in turn is also defined by statute as the excess of the sales proceeds or amount realized over the cost or adjusted basis of the property sold. Applying these statutory definitions here gain from the sale of property is “properly includible” and “gross income.” Total sales proceeds or total receipts are not properly includible. Accordingly on the plain language of the statute, an omission from gross income of a part of the gain from the sales of property is an omission of an amount properly includible therein.
William O. Douglas: Well, how far does that take -- take us suppose that I properly report my -- my salary? But I improperly claim exemptions and deductions so that the -- that the taxable income is reported inaccurately by more than 25%.
Joseph F. Goetten: That would not be an understatement of gross income within the meaning of the statute.
William O. Douglas: Would not.
Joseph F. Goetten: It would not, Your Honor.
William O. Douglas: And how do you distinguish that through this case?
Joseph F. Goetten: Well, Congress could have used the terms “omission of net income” or omissions from the tax itself, more than 25%. It did not use that language. It has not -- there is no indication in the legislative history, the hearings or anything, why they chose the term “gross income.” But I think there's a very good obvious reason. Gross income is the basic figure. There are very few computations in arriving at gross income. Once you get to net income, there are a whole series of computations involved. There are even more when you get to the tax itself. Accordingly, if Congress had talked about a 25% omission from net income as stated on the return, it would be perhaps embodying many mathematical errors of the taxpayer in computing his tax. By picking gross income stated in the return, it picked a figure which does not include many computations. It does include a few. I think that is perhaps the -- the real answer to why the statute is drafted the way it is.
Speaker: (Inaudible)
Joseph F. Goetten: No. Your Honor, Form 1040 --
Speaker: Or whatever the form is.
Joseph F. Goetten: -- or whatever the form is, contains no specific item labeled “gross income” and it's not our position as the taxpayer maintains that if gross income is correctly stated in the various schedules set up for various types of gross income such as dividends, interests, hence received and so forth, if there's any error in carrying that over to the phase of the return or any error adding the figure up, we do not contend that's an omission from gross income. The statute talks about gross income stated in the return. It's our position that means stated in the schedules of various types of gross income and to get back to concealment if an item is not stated as gross income or if it's stated as a -- an excess of cost basis. The Commissioner is not familiar entirely with the facts that took place. He -- it is concealed. It is not disclose. The important factor is that it must be disclosed as gross income. Now, it -- it's also clear from the legislative history of this statutory provision that a taxpayer omits within the meaning of the Section when he understates his gross income on his return. Now, the Committee reports are set forth at pages 19 to 20 of the Government's brief and they both refer to this law in the following language, the change enlarges the scope of this provision to include cases wherein the taxpayer understates gross income on its return by an amount which is an excess of 25% of the gross income stated in the return. They clearly meant “omits” to include the word “understates.” Now it is true as taxpayer has pointed out that the committee reports giving examples also go on to describe omissions as a leaving out or a failure to disclose. But when this language is read in the full context of the committee reports, it's clear that it refers to a failure to disclose as gross income or a leaving out of items of gross income. None of the examples given refers to a failure to disclose or leaving out of gross receipts, gross proceeds of sale or anything other than gross income. Now there are some cases such as salary, dividends where gross income and gross receipts may be synonymous, but none of the examples given is an example of a gross receipt that is not gross income. And the statute proceeds to provide when the omission from gross income of an amount properly includible therein shall be crucial, and I think this is the really important part of the statute. It is crucial only if the omitted amount is in excess of 25% of the amount of gross income stated in the return, and is thus apparent that Congress was primarily concerned with a relative size of the omission. And I should point out here that this very provision makes it clear that Congress was not thinking in terms of how long will the Commissioner need to catch up with the particular error here because it obviously takes him just as long to find an omission of a smaller amount from gross income as it does to find an omission of a larger amount from gross income. The Committee reports make it clear that Congress merely decided that taxpayers failing to state as gross income, relatively large amounts which should be included therein should run the risk of the longer statute of limitations. Congress was concerned with results, not causes, with relatively large omissions and not that those may have been honest omissions. In fact, the Committee reports show that Congress intended to cover honest mistakes in this Section. Dishonest mistakes are covered somewhere else. And it meant to require taxpayers to run the risk of the longer limitations even if they omitted the doubtful item from gross income. In other words, it's all -- it's frequently a difficult question is to whether a particular item of gross income should be reported in one year or another year. And if you leave it out, you don't report it as gross income for a particular year, it's an omission within the meaning of this Section and the committee reports give that specific example. In fact, it was because of this that the House Bill was amended by the Senate. The House Bill would have provided no statute of limitations where it was the 25 -- an omission in excess to 25%. The Senate thought that that was too harsh where the error was an honest error and that applied your -- limitations should be provided. This last part of the statute also provides the measure for the amount omitted. It speaks of 20 -- in excess of 25% of the amount of gross income stated in the return, and as I have pointed out, the only place where gross income is fully stated in the return is in the schedules. And our position has been misconceived by taxpayer. It was misconceived by the Third Circuit in the Uptegrove case where they say that the Commissioner's position is that if the final figure in the gross income computation is understated then there has been an omission from gross income within the meaning of the statute. That is not the Commissioner's position and has never been. If there is an error in transposing an amount of gross income from a schedule to the phase of the return, but the amount is fully disclosed and is disclosed as gross income in the schedule, there's been no omission. If there's a mathematical error, that is an error in adding up the figures on the phase of the return, that is not on omission from gross incomes. We don't look at the last figure. We look at each figure which describes a particular type of gross income either -- either received or approved by a particular taxpayer. And that that is clearly the Commissioner's position is made clear by two factors. First of all, the Commissioner has an old statute of limitations problem with respect to mathematical errors on the phase of the return. There is a 100% mathematical verification of returns. There are so many returns filed. The Commissioner cannot audit all of them, a relatively small number, perhaps 10% are audited. But there is a mathematical verification of returns and the Commissioner needs not -- not even three years to accomplish that objective. And that brings me to the fact that there is -- even in the court a special treatment for mathematical errors. They are treated separately, Section 272 (f), which was added to the code at the same in 1934. At the same time, this statute was added provide its -- provides that the Commissioner does not have to send the 90-day notice of his determination of a deficiency in the case of a mathematical error. If it's in the taxpayer's favor, he merely sends him a letter with a check. If it's in the Commissioner's favor. He sends a letter and tells him to remit. And accordingly, our position is that there is an omission from gross income under the terms and legislative history of the statute. Whenever the gross income stated in the various schedules of the return is deflated by more than 25%. Now we submit that that would be the logical construction of this statute even if the proposition were coming up way back in 1934.
William O. Douglas: This would be -- your rule would be applicable to excess the claims for depreciation?
Joseph F. Goetten: No, Your Honor, not if they're in the deduction, if they're treated as a deduction. There are certain instances where by rulings, the Commissioner allows depreciation to be taken out in arriving at a certain item that goes in the gross income schedule. But ordinarily, depreciation is a deduction item and as such, an overstated deduction item would not be an understatement of gross.
William O. Douglas: How do you -- why do you draw that distinction in this case and --
Joseph F. Goetten: Between a deduction item and -- and a --
William O. Douglas: Between depreciation case and your -- this instant case.
Joseph F. Goetten: Because Congress has used the term gross income, it's written the statute in such a way that it -- it expresses concern with omissions from gross income of amounts properly includible therein. It could have said net income and caught overstated deductions. It didn't say so. It could have -- it could have said omissions from the tax itself and even brought more than understated items of gross and overstated items of deduction. But I think the logical reason why they're not doing it is that then, if they talked about net income stated in the return or the tax reported in the return and there are frequently errors, mathematical errors, it would have encompassed that within the statute and I don't think Congress intended to do that.
William J. Brennan, Jr.: Well, maybe this is the same question that the cost of lot sold is of course not a deduction.
Joseph F. Goetten: No, Your Honor. It is not.
William J. Brennan, Jr.: Is that by reason of the definition of gross income?
Joseph F. Goetten: By reason of the statutory definition --
William J. Brennan, Jr.: Of gross income.
Joseph F. Goetten: Of gross income and a gain from sale. There are two definitions (Voice Overlap) --
William J. Brennan, Jr.: Well, that's in fact the statute had made cost of lot sold a deduction. The argument you're making here is not --
Joseph F. Goetten: That is true.
William J. Brennan, Jr.: Could not remain
Joseph F. Goetten: That is correct.
Speaker: (Inaudible)
Joseph F. Goetten: If, Your Honor -- if I understand Your Honor correctly that you included the cost of the trailer in your cost basis of the property and subtracted that in the writing that you gained from sell, my answer is yes. And I think that Congress intended to cover mistakes by that and the five-year statute has made crystal clear by the Committee reports, which I previously referred to on pages 19 to 20 of our -- our brief. In changing the Senate Bill, which would have provided an unlimited period for assessment in this type of case, the House said -- or I mean, the House bill, the Senate said, “Your committee is in general accord with the policy expressed in this Section of the House bill. However, it is believed that in the case of a taxpayer who makes an honest mistake, it would be unfair to keep the statute open indefinitely. For instance, a case might arise where a taxpayer failed to report a dividend because he was erroneously advised by the officers of the corporation that it was paid out of capital or he might report his income for one year, an item of income which properly belonged in another year, which is often a very difficult question. Accordingly, your committee has provided for a five-year statute in such cases." In other words, they intended to cover honest mistakes here, Your Honor. Close questions like in what year does the income go and you put it in a wrong year, it amounts to a 25% omission, the five-year statute applies. It's not because it takes the Commissioner longer to catch the error. It's just that they felt because of the adverse effect on the revenue, a person making a mistake, an honest mistake that large, should run the risk of a longer period.
Speaker: (Inaudible)
Joseph F. Goetten: Yes, Your Honor, even though it is because the -- it's often a very -- not only a legal conclusion but a very difficult legal conclusion as to -- to determine in which year an item of income should go.
Speaker: Even all the facts.
Joseph F. Goetten: Even all -- all the facts have been revealed.
Speaker: (Inaudible)
Joseph F. Goetten: Exactly, Your Honor. We're -- we're trying to collect something that's actually due here and we're dealing with something technical as statute of limitations and whether it bars and accordingly, any statute of limitations as to a certain extent arbitrary. Congress has set one here. We submit it issues, plain language in setting that statute, the legislative history is crystal clear and you would reach this conclusion even if you didn't have a long history of an administrative and judicial construction, but you do have that. This statute was enacted in 1934 and the Treasury Regulations which were issued at that time under the 1934 Act provided that if they are submitted from the gross income stated in the return, they say nothing about any computation or disclosure or anything else, if they're submitted from the gross income stated in the return, an -- an amount -- excuse me --
Speaker: (Inaudible)
Joseph F. Goetten: Omits, I -- I say it means leaves out an item of gross income, fails to disclose an item as gross income or understates gross income. Those are the terms the Committee used, I think, in the same context, Your Honor.
Speaker: (Inaudible) understated.
Joseph F. Goetten: Both in the sense of understate -- yes, the -- the Committee reports used it as understates and when they also go on to use synonymous terms such as leave out or fail to -- fail to disclose, they say leave out items of gross income, fail to disclose as gross income.
Speaker: I'd like to see (Inaudible)
Joseph F. Goetten: Subtraction.
Speaker: Subtraction (Inaudible)
Joseph F. Goetten: It's the alleged cost in this case, but it's an erroneous cost basis.
Speaker: (Inaudible)
Joseph F. Goetten: That's right, Your Honor.
Speaker: (Inaudible)
Joseph F. Goetten: Which is labeled gross revenue, yes, Your Honor.
Speaker: (Inaudible)
Joseph F. Goetten: The statute requires it. I -- I think you have to distort the statute to come to any other conclusion. And as I would like to point out, the regulations interpreted, the 1934 Code provision as applying to an omission from gross income stated in the return, it had to be stated as such, those regulations were adopted under the 1934 Act. The statute was enacted in 1936, 1938 and 1939. The same regulations were repeated under each of those statutes. I think if Congress had disagreed with that construction, they would have said so. Moreover, the judicial construction of this statute was entirely consistent for 19 years after the statute was enacted. From 1934 to 1953, 19 years, this legislation was unanimously construed by the courts as applying to omissions from gross income as defined by statute. The Tax Court in the Malloy case, the Second Circuit in the Ketcham case, the Fifth Circuit in the Foster's Estate case, the Sixth Circuit in Ewald and Reis, and the Ninth in the O'Bryan case so held. We think if there was any doubt initially, it should have been put to rest by these 19 years of consistent administrative and judicial construction, and this brings us to our final point --
Speaker: (Inaudible)
Joseph F. Goetten: In 1953, the First Circuit decided Uptegrove and I'll tell you what the basis of their conclusion was. First, they misstated the Commissioner's position. They said that the Commissioner's position is that income is omitted if the ultimate figure in the computation of gross income is understated. That has never been the Commissioner's position. Then they got into the word “computation” and they wrote that into the statute. They wrote the statute as if it read and an omission from the computation of gross income. It doesn't say that. They had to go further and write in something else because if you talk nearly about an omission from the computation, you might have been omitting a negative item rather than a plus item. So they have to write in an omission from the computation of gross income of a plus item such as a receipt item or a taxable receipt, for instance, if it's a dividend, taxable or taxable dividend rather than nontaxable dividend.
William O. Douglas: But your definition of gross income includes gains and profits derived from any sort, and that requires a competition that -- at a retail store. It has gross -- gross receipts and he has expenses. You have to figure your deductions for this (Inaudible) --
Joseph F. Goetten: Yes, Your Honor. And that is also defined by regulation that gross income in the case of a merchandising or manufacturing concern means gross receipts less the direct cost of good sold.
William O. Douglas: That -- -- that's -- that's what I thought Hastie was worrying about in the Third Circuit.
Joseph F. Goetten: Well, I don't read the opinion. I -- if that was a cost of receipts case, Your Honor, it was exactly like this one and --
William O. Douglas: That's right.
Joseph F. Goetten: -- and he was worried about --
William O. Douglas: You told me that the problem of deduction isn't here, but I would think that -- that you get to the profits or the gains or profits of a retail store and that you get into deduction necessarily.
Joseph F. Goetten: Well, it's gain from sale, if Your Honor please, gain from the sale of property and that itself is --
William O. Douglas: Or from any source, what -- whatever --
Joseph F. Goetten: Yes, but this is a specific source. It is from sale property that's undisputed in Section 111 --
William O. Douglas: I'm was just trying to see how far your theory would be applied. It seems to me that -- that Hastie was not exaggerating, that he has -- I mean I -- I don't understand.
Joseph F. Goetten: Well, Your Honor, I -- I think Judge Hastie with all due respect, pulled many of the statements from the legislative history out of context. He relied on the words leave out and fail to disclose, but if those are read in the full context to the Committee reports, it's clear that they may leave out items of gross income or failed to disclose as gross income. And -- and we think therefore, that since the statute says what gained from sales shall comprised, you follow the statutory language and these are omissions from gross income.
Hugo L. Black: Is gross income anonymous to gross taxable income?
Joseph F. Goetten: I think it is, Your Honor, because for instance, gross income does not include a nontaxable dividend and that's one -- if Your Honor please, that's one of the beauties of this statute, by talking about omissions from gross income. They avoid all these many detailed computations and they also avoid the problem of -- in the case for instance of a dividend, whether it's taxable or not. If it goes in gross income, it's a taxable dividend, so if you'll omit something, it is not a taxable dividend such as a declaration of a common stock dividend and uncommon stock, then you have no problem on the statute. It's not an omission.
Hugo L. Black: Can the tax form set out when you get -- get down to a point where you have income, where do you get the -- what -- what is in the line that says gross income in connection with the sale of property.
Joseph F. Goetten: Your Honor, unfortunately, that has not been printed. There is no sharp dividing line. The -- the returns in this case are in the record and the first one is on page 27. And the first general heading is gross income and then item 15 is a figure called total income, but I would like to point out to the Court that that is not either total gross income or total net income. It's a hybrid figure and I can show by example, item 10, rents received. That is gross income, but turned down to 12 (b) net gain from sale or exchange of property other than capital assets. That is not a gross income figure. It's a net income figure and there's a good reason why they put it up here and take it out this way. Ordinarily, a person who is not in the business of selling property can't take a general deduction for property, expenses of selling property. This net gain figure that goes on the face of the return as subtracted from it, not only the cost of good sold but the expenses of sale. And unless they're grouped together, the sale itself and the expenses of sale as they are in the schedule called for, schedule B, which unfortunately was on the back of this form and hasn't been printed. Unless they're put together, a person checking the form has no idea whether the expenses of sale are deductible or not. It's unfortunate that this form is drafted so as to help the -- the people that have to go over and check it. It would be better for the lawyer to broke --
Speaker: It helps the taxpayer?
Joseph F. Goetten: Well, it helps the taxpayer in the sense, Your Honor, that it makes this computation as easy -- easily -- as easy as possible but it doesn't break it down for the lawyer in terms of gross income, adjusted gross income, net income tax. That is not done on the form.
Earl Warren: Mr. Doll.
A. Robert Doll: May it please the Court. I submit that the respondent's argument is based on hindsight. Mr. Justice Brennan asked the question of whether in defining gross income, you -- this cost a good sold item in there. Now here is what -- as I understand it, what the respondent -- his argument is. Under Section 22 (a), that is the general definition of gross income. It -- they set out certain specific items if dividends are includible in gross income and gains or profits -- from any source, whatsoever. Now, the respondent takes that word “gains” and he goes over -- over to Section 111 of the Code. Now, that section provides that in determining the gain from a sale of property, there's a difference between the gross proceeds from a sale and the cost of the property. Now, he takes two sections of the Code, 22 and 111 and says they that in enacting Section 275 (c), Congress was intending to cover this situation. Now, I submit to you that when Congress enacted 275 (c), they weren't concerned about Section 22 (a) or Section 111, they were concerned with omits from. Now, the reason they use gross income is because as a matter of fact, it is generally synonymous with gross receipts. And the majority of tax returns, the income and the receipts are the same. That's what's includible. That's -- and from that, you take off figures. Now, it so happens that in the case of a manufacturing concern that you take your gross receipts and you subtract from that, your cost to good sold and from an accounting standpoint, you come up with gross income but the only thing includible in gross income are the receipts. The cost are offset items. You subtract from that.
William J. Brennan, Jr.: Well, why -- why is the -- why is the schedule prepared the way it is?
A. Robert Doll: Sir?
William J. Brennan, Jr.: Why is your schedule prepared as it is? You have made -- according to this, you have a schedule of income. You have subheading revenue.
A. Robert Doll: That's correct.
William J. Brennan, Jr.: Gross -- gross receipts of sale.
A. Robert Doll: That's right.
William J. Brennan, Jr.: Then you take off the cost of lot sold. Now, down below that, you have a brand new category called “deduction.”
A. Robert Doll: Well, that -- that is correct, sir. This --
William J. Brennan, Jr.: Why don't they enter into -- what I'm trying to get to is why don't go to deduction equally under any (Inaudible)?
A. Robert Doll: Well, that is what we consider one of the -- the strongest -- the things we rely on for our construction. In other words, under the tax laws or accounting laws, we start off with gross receipts. You subtract from that in the case of a manufacturing concern, the cost of the property being sold and then you come up with gross income. Now, under our tax laws, your advertising, your rent, and so forth are specifically authorized as deductions by law. You subtract those from your gross income to get your net income. Now, we feel because the statute obviously doesn't cover those items. They can be overstated. It doesn't matter how far they're overstated. The deductions authorized by Section 23 --
William J. Brennan, Jr.: Well, I gather the Government conceded.
A. Robert Doll: They conceded as a must, and we say that the cost item, which is similar in nature to those items, they're both expenditures that you report on a return and to get your benefits, you've got to report them. We -- we don't think that Congress intended -- just because it was a cost item, for the statute to apply. It -- it's inconsistent. If they were worried about that type of an error, they would have gone under -- include the deductions that you take from gross income. Did I make myself clear on that?
Speaker: (Inaudible)
A. Robert Doll: We think that when you stand back and look at this statute, what Congress really meant omits from gross income. Now, omits means to leave out items of receipt. That's actually what they had in mind. Now, and there are examples I submit in the Committee reports are exactly that kind of a situation. Take for example in the Senate report, on page 16 in the petitioner's brief. For instance, a case might arise where a taxpayer failed to report a dividend because he was erroneously advised by the officers of the corporation that it was paid out of capital or he might report his income for one year, an item of income which properly belonged in another year. Now, a dividend is a receipt. That's exactly what Congress was aiming at. Now --
Hugo L. Black: Why -- why is that (Inaudible)
A. Robert Doll: Sir?
Hugo L. Black: How can you go from the fact if they mentioned dividend in the report and make the next step to say that's what they were aiming at this implication (Inaudible).
A. Robert Doll: That is our position, sir, that they were aiming at left out receipts. That's what this statute was intended to -- to give the Commissioner a longer period when the taxpayer left out items of receipt from his income.
Hugo L. Black: Gross income?
A. Robert Doll: From his -- from his gross income. That's correct. Now --
Hugo L. Black: When you've made this report for gross income, you first took all -- you talk what (Inaudible)
A. Robert Doll: That is correct.
Hugo L. Black: That's down and your report (Inaudible)
A. Robert Doll: That is correct.
Hugo L. Black: And the receipts that you put down there so far as the gross income was concerned, was there.
A. Robert Doll: That is correct.
Hugo L. Black: That's -- what's the difference in that and the dividend. Either one of them has to put in as a part of your gross income.
A. Robert Doll: Yes, sir. But we think is that -- in -- in the latter situation, the non-dividend situation, the receipts as you say are in there and you subtracted some cost from those receipts to come up from the gain of the sale of the property. Now, we feel that Congress didn't intend to -- was not concerned about errors resulting from the overstated cost items.
Hugo L. Black: Why not? If -- if it's gross income, and that's probably the gross income, the gross income whether up or down, according to the amounts you put, you (Inaudible) we use to compute the gross income (Inaudible)
A. Robert Doll: That's correct, sir.
Hugo L. Black: Why wouldn't it wanted that as much as anything else? You may have 25% error.
A. Robert Doll: Because they were only concerned with omissions from the left out we feel. They -- they weren't concerned -- in other words --
Hugo L. Black: It has error.(Voice Overlap)
A. Robert Doll: That's -- they weren't concerned with all errors. It was simply from left out items of receipt. Now --
Hugo L. Black: But -- but if you leave it out by figuring it, instead of just by not figuring it, what's the difference?
A. Robert Doll: Well, that's the respondent's case. That's his argument. We think there's a big difference. We think it -- that when you read these Committee reports and when you take the normal statutory language that -- that the case that you mentioned there was no omission there. It -- the income was understated. We will admit that in this case, gross income was understated but we deny that there was anything omitted from gross income.
Hugo L. Black: When you entered -- when you entered the list on this report as I just read it, it's made up very wrong. You entered a list provided that you had received as your gross income.
A. Robert Doll: Yes, sir.
Hugo L. Black: You entered a certain figure reached by calculations on a basis which was not right.
A. Robert Doll: That's correct.
Hugo L. Black: And you put that in there and the Government lost a tax on it by then.
A. Robert Doll: That --
Hugo L. Black: Because it was not included, that the right figure was not included in the list of gross item, the gross income you received.
A. Robert Doll: That is correct, sir. Our cost were overstated and our -- our gross income was understated but we --
Hugo L. Black: The deduction comes in quite a different way. That comes after you figured up all your gross income.
A. Robert Doll: That's correct. But we -- we don't think because our gross income was understated. There was no omission from gross income.
Hugo L. Black: Whether you call it understated or not is what -- as much as it was.
A. Robert Doll: That's correct.
Hugo L. Black: -- as much as it was.
A. Robert Doll: We -- we admit that. That's true. One further point, if I may, that the respondent has stated that there is a long -- that there is quite a bit of judicial history that there've been in a long period of time where the cases adopted one view. We -- we don't think that is true in this particular case, this type of situation. The cases by and large that the respondent relies on, the real issue in that case was where there were on a schedule attached to a return, statements to the effect that certain alleged receipts were nontaxable. The courts in the early cases held that that was not a sufficient disclosure and that therefore, that was an omission. I think the -- that type of situation would then -- cured by the 1954 law in the second subsection. We think it actually -- the -- the issue didn't come to our head, really, until the Uptegrove case, which was the first conflicting case with the Reis case as far as the Circuit Court of Appeals go. Thank you.
Earl Warren: Thank you.


Earl Warren: Number 488, Junius Irving Scales, Petitioner, versus United States of America. General Taylor.
Telford Taylor: Mr. Chief Justice and members of the Court. This case is here on certiorari to the Court of Appeals of the Fourth Circuit. It's an appeal from a conviction under what is known as the membership clause of the Smith Act. The case has been here before. It came here in the 1956 term, after the petitioner had been tried at his first trial and convicted. And, at that time, the constitutional and statutory questions were argued. The -- the Court set the case for re-argument at the beginning of the 1957 term. But before it was reached, the Jencks case, having come down in the mean time, the Solicitor General confessed error under the Jencks case and this Court reversed in a short per curiam opinion on the authority of Jencks, leaving those constitutional and statutory issues untouched that we had argued before. The case was, of course, remanded. The petitioner has now been tried a second time. He has been convicted again. The Court of Appeals has again affirmed and the case is again here on certiorari. The principal issues that were argued when the case was here before are here again in substantially the same form. There are also some important new issues which arise chiefly out of the evidence and the evidentiary rulings at the second trial and out of the intervening decisions of this Court, especially in the Yates case. And I will come to some of those new questions presently. But, I would like, first, if I may, to call the Court's attention to the statute which is most closely involved here, the membership clause, which appears in the appendix to our brief, page 2A, because the wording of that clause and its setting in the Smith Act as a whole is rather critical importance to almost all the issues that we have to deal with this morning. Court will recall, within the Smith Act, paragraphs (1) and (3) deal with advocacy and organizing. And, most of the Smith Act prosecutions, so far, have been for conspiracy to violate those two paragraphs. Those are the ones that were involved in the Dennis case, and the Yates case, and the Mesarosh case, and the other Smith Act cases that have been here before. Then, in paragraph (3), there's a second clause which describes “whoever becomes or is a member of or affiliates with any such society group or assembly of persons knowing the purposes thereof and that such society refers back to a group which teaches or advocates the overthrow of the Government by force and violence.” Now, this case and a few others, pending in the lower federal courts, have been brought under that clause. One of them, for example, was up here as a companion case two years ago, the Lightfoot case, and reversed on the same ground under the Jencks rule, remanded to the Court of Appeals in Chicago, and is pending there. And has been stayed pending the outcome of this case. Another one is the Noto case from the Second Circuit which is pending here on petition for certiorari now.
Speaker: Were those cases had been tried?
Telford Taylor: The Lightfoot case has not been tried again. It was stayed pending the outcome of this case. The Noto case, Justice Harlan, was tried before this case came up originally has been pending in the Second Circuit a long time. There are several others that we have listed in our brief. If I may now state without, at this point, developing the two major issues that were here before and that are here again, the first is the constitutionality of the membership clause on its face under the First and Fifth Amendments. That clause was not involved in the Dennis and Yates cases and, therefore, it has not yet been passed on here. And, secondly, the effect on the membership clause, if any, of Section 4 (f) of the Internal Security Act of 1950, enacted 10 years later. That's set forth in the appendix to our brief, pages 3A to 4A, and that says that neither holding office nor membership in any Communist organization shall per se constitute a violation of any criminal statute. Now, that clause, we contend, was intended to be and it is a bar to prosecutions of Communists under the membership clause and, therefore, the indictment fails to state a cause of action, state -- state an offense. The new questions I will come to presently, but let me say now that since this Court has for two days been hearing argument revolving around the Jencks case and 18 U.S.C. 3500. This case -- the second trial in this case was after both the Jencks decision, of course, and the statute. And, the trial judge followed the procedures set forth in, I think it's paragraph (c) of the Jencks statute. That is to say, he examined, in Camara, reports made to the FBI by witnesses of the Government and excised portions that he deemed irrelevant, so that the constitutionality of that feature of 3500 is raised here. Most of the other questions that the Court has been concerned with the last two days are not. Now, a word about the facts and the course of proceedings are heretofore in this case. The indictment is important. The indictment is to be found on page A2 of the record, first page of the record. The Court will see, it was very short and simple. The charge is that the Communist Party is a group that advocates violent overthrow and has done so since January 1946. The charge is that the defendant, Scales, was a member of the Communist Party and, I may say, that that -- the fact that he was then a member at the time of his indictment is not denied. It's charged that the defendant had knowledge that the Party was a group which advocated force and violence. And, finally, it is charged that the defendant personally intended to bring about governmental overthrow. That last charge lies outside the specific language of the statute because the clause does not, in so many words at least, comprehend intent, as well as knowledge, as an element. Now, the petitioner was convicted at his first trial and sentenced to six years imprisonment. The Court of appeals affirmed and it was reversed here, as I've already stated. The second trial was in February of 1958, a little more than a year ago, found guilty, sentenced again to six years and I may say that, so far as I know, this is the only sentence under the Smith Act which exceeds five years. There, of course, has been a five-year-ceiling on conspiracy convictions until recently and I know of no other case that is -- that has governed this sentence. The evidence -- the evidence in the Government's case is summarized in the briefs and, at some length, in the Government's brief. I think, at this point, it is enough to say that the Government's evidence fell under two general categories. There was, to begin with, evidence about the doctrinal teachings of the Communist Party which was presented, for the most part, through witnesses who did not know the defendant had never seen him and gave no testimony touching the defendant personally, but who told about what had been said at Communist meetings in various parts of the country, largely, statements made by teachers at so-called Communist schools largely in the 1930s and 1940s. Then, the balance of the Government's case was largely the evidence of persons who had joined the Communist Party as informants for the Federal Bureau of Investigation in North Carolina and who had known the defendant there and testified about his activities and his statements. There were some overlap but, generally speaking, that was the scope and nature of the case. This evidence about the Communist Party as to whether it engages in the proscribed advocacy, that is one of the things which raises important new questions or at least were not here in this form on the previous occasion. For example, in the Yates case, it was held that, on the basis of the record made in that case in Los Angeles, there was not enough to conclude that the Communist Party advocates force and violence in the sense of the called action. That it -- and that it did not engage in action in citing advocacy on the basis of the record made there. Well, the question arises, was there anything in this trial in Greensboro to justify coming to a different conclusion about the Communist Party on the record made in Greensboro, as compared to the record made in Los Angeles. Then, another important question arising out of that evidence, we contend and I will in a moment develop, that some of the new evidence offered by the Government in an effort to meet the criteria laid down in the Yates case resulted in an unconstitutional application of the statute in this case, so that even if we were to assume that the statute is not void on its face that it had been unconstitutionally applied here because of evidence offered and rulings made thereon. There are other questions in the case which I will mention, if time permits at end, but I think that those I have described are the major problems. Now, it will be apparent to the Court from what I've said so far that there are issues here which, if our position is sound, would warrant reversal without touching the constitutional issue. At the same time, it is equally clear that the conviction cannot be affirmed unless the validity on its face of the membership clause is upheld, so that the constitutionality of that clause it's -- is at the core of the Government's case and is basic to the case as a whole. And, I would like to begin with the constitutionality of the clause, then pass to its constitutionality as applied here, and then discuss the effect of Section 4 (f) of the Internal Security Act.
Felix Frankfurter: Surely, if you're right about last, we don't have to consider the former. So, it isn't at the core of the case.
Telford Taylor: It is at the core of the case if I am wrong about the others, Your Honor.
Felix Frankfurter: Yes, I know, but I am talking about --
Telford Taylor: Of course, I hope that I'm not wrong about the others.
Felix Frankfurter: The lawyers usually start with the farther streets instead of the one that could dispose of that fact.
Telford Taylor: Well, the Government will have to be discussing it before long, Your Honor, and so --
Felix Frankfurter: In answer to all and I --
Telford Taylor: I'd like to say a word of it now.
Felix Frankfurter: I'm expressing my disagreement with the procedure.
Telford Taylor: Well, I must persist on this issue at this time and before passing to the others.
Felix Frankfurter: I even think privately that you know better.
Telford Taylor: With respect to the constitutionality of this clause, we have, in our brief, tried to give the Court the benefit of whatever historical background there is on this which may be pertinent. It is an unusual statute in the sense that it attaches criminal consequences to association by membership. There have been a few precedence but, as the Court will see from our brief, they are not many and I ask the Court to consider what this statute undertakes to imbue with criminal character.There is no charge that the defendant advocated violent overthrow or anything or that he incited anything. There's no charge of organizing. There is no charge of conspiracy. There is no act charged except for remaining a member of the party. There is no concert of action or agreement with anyone else charged. There is nothing but membership and the state of mind. And, we suggest that the constitutional infirmities under the First Amendment are pretty plain on the face. Whether we regard these as restrictions on free speech or on freedom of assembly might perhaps be debated. In Whitney against California, Justice Brandeis, in his concurring opinion, seem to think that both of them were involved when he was analyzing a statute somewhat like this one, and he expressed very grave doubts on behalf of himself and Justice Holmes about the constitutionality of this kind of attributing criminality to association. It is true that the majority opinion in that case leans the other way, but this Court has said in the Dennis case that the later decisions of this Court have followed the rationale of the Holmes-Brandeis opinion rather than the majority and, of course, that is true. The Holmes-Brandeis opinion develops, for example, the incitement versus advocacy distinction that was developed by this Court later in the Yates case. Then, two, I think it's plain that the membership clause lacks the elements that this Court relied on in Dennis in sustaining the other provisions of the Smith Act. There, we were dealing with defendants who were charged with conspiracy. They were the people who were supposed to attach this conspiracy in 1945 in New York. The danger of such a conspiracy was very much stressed in all of the majority opinions. That's not present here, but I think equally compelling are the arguments that have been made to sustain the constitutionality of the membership clause by the court below and by the Government. The court below has dealt with this problem simply by saying that conspiracy is the same thing as membership. I call the Court's attention to what it said there at my brief page 28. The membership clause is, of course, nothing more or less than a statute denouncing and making criminal a conspiracy to overthrow the Government by force or violence. Well, with all respect to the learned judge who wrote that, it seems to me utterly untenable. To begin with, the Smith Act does not punish a conspiracy to overthrow the Government. That's accomplished by statutes that have been on the books a long time, since the War Between the States. This is a statute touching advocacy and that is why the First Amendment is brought into play. Then, this interpretation simply renders the membership clause redundant duplicate of the other portions of the Smith Act. Nothing is left of it. It is quite true again that, in the majority opinion in the Whitney case, there are some remarks that might be used to buttress this view that membership is the same as conspiracy. It seems to me that Justice Brandeis' opinion is very clear on his point and, even if he had not done this task for us, I think the differences between conspiracy and membership are plain enough. You have to charge if there are coconspirators. You have to name them if you know the names. There are no conspirators named here, no coconspirators. There has to be an agreement in pursuit of some unlawful objective or method. There is no agreement charged here. Under the statute, in federal courts, you have an overt act, that's not here. So, none of those elements that constitute conspiracy, that are part of the safeguards around that defense are present here, and it seems to me wholly impossible to simply say this is a conspiracy statute and punish it on that basis. Now, the Government's defense of this statute is a little different. They like the result reached by the court below, but there seems to be some distrust of the logic because they have gone about it a little differently. They seek to save the statute by extensive judicial amendment by reading into the statute words which are not there. In our reply brief, on page 2, we have set forth the membership clause as it would be, if you read into it, the various words which the Government seeks to import. I might say that one word they import is left out of there and that is “intent.” It is arguable that intent could be implied into the statute. We think not for reasons given in the brief, but even if that hurdle be jumped then the Government wishes to read in all the italicized words on page 2 there, so it would read “or becomes or is an active court pursued, rigidly disciplined, high-level member of or affiliates with any tightly disciplined quasi-military, deeply conspirational such society.” Come right back to conspiracy again, not quite all the way back perhaps, as the lower court did, but certainly very close to it. Well, now, I think that method simply will not do. What the Government has done, of course, is to confuse what may be proved in a particular case about an individual or an organization with what may be read into the statute and the indictment. It seems to me, it is indefensible as a matter of statutory construction. Chief Justice Taft has had something to say about this sort of problem years ago. He called this making the statute a nose of wax. He was dealing with an identical situation, a Philippine statute, at which the constitutionality was dubious. The council made efforts to amend it, just as is being done here by reading in the many words that went there, and this was the phrase that Justice Taft -- Chief Justice Taft used in saying that would not do. He also observed that the words that are in the statute “or affiliates with,” this covers not only membership but affiliation. It's clearly suggest to me that Congress envisaged getting at a loser sort of association here than the Government is now trying to confine it to. Well, I will not labor the arguments on constitutionality further. I think I have made a fair and full statement of our contentions on it, and I would now like to pass onto the new issues that have arisen here involving the constitutionality as applied in this case.
Felix Frankfurter: May I ask you whether we actually would have to read in more into this statute than the Court read into the Screws statute?
Telford Taylor: It seems to me, the -- certainly quantitatively and qualitatively, both. This is a rather more marked departure, but I would have to say, Your Honor, that if the Screws case read as much in, it is wrongly decided, but I don't think so.
Felix Frankfurter: That's the showing of that, isn't it?
Telford Taylor: The amendments here are really not trying to arrive at a new interpretation of words that are there. It is the interlarding of many more words that have nothing to do with the case at all. Constitutionality is applied here. One of the problems arises out of one of these words that is attempted to be read in here, the word “active.” When the case was here before, the Solicitor General, in his supplemental memorandum, suggested that the statute should be applied so as to cover only active membership in the party. I think Justice Harlan, you had considerable colloquy with the Government on that point at the time. In that memorandum, they suggested that this is not an element of the offense in the sense that it has to be put to the jury and found by the jury, but is what they call an overwriting constitutional limitation to be found by the judge. Well, we don't think that much can be said for that view but how that might be. When this case is on trial, the Government requested that the jury be instructed. They couldn't find him guilty unless he were found to be an active member of the party. The judge did not make this finding, the jury made it.
Speaker: Can you give me the portion of the judge's charge on that result?
Telford Taylor: Yes. The charge is in the -- is in the front of the record there, pages 839 to 841. Yes, it's on page 841, Chief Justice Harlan. It was first determined whether he was an active member, not enough that he simply be a member. Now, in this Court, the Solicitor General has reverted to his original position here and says that that is not a question for the jury, but is a question for the Court, what clear and present danger. Of course we don't think that the word should be read into the statute. We don't think, if it were read into, would help very much on constitutionality because, as the Yates case certainly held, activity by itself is insufficient for any criminal implications here. The indictment says nothing about activity and we made timely objection to the failure to make that -- to allege that element if the Government were going to rely on it as an element of crime. But, all this now seems rather academic because the Court didn't find activity. It sent it to the jury and, so, on the Government's own theory, there was error committed by sending it to the jury. The situation can be better understood in the light of the Noto case, pending here, which was tried before the Solicitor General espoused the activity limitation and, therefore, there was no instruction there about activity. It didn't go to jury. So, there is a problem there. It seems to us that this is one of the pitfalls of reading into a statute, words -- after a case have been tried, words that aren't there and can't reasonably be implied. Now, another and I think even more serious problem as the statute as applied here arises out of the evidence introduced to meet the criteria laid down in the Yates case. The Court said in the Yates case that there must be proof of advocacy which amounts to concrete action for forcible overthrow of the Government. It seems to us that the prosecution, in this case, overlooked those last words, “for forcible overthrow,” and went on the assumption that if you could show incitement to action of any kind that that was going to meet the standard of the Yates case with the result which I will now come to. The evidence in question here, Your Honors, consists of Government Exhibits 64, 65, and 66 and they appear in the record between pages A18 and A22. They don't appear. They are quite complete, but the bulk of the three exhibits are there. These are three documents which strongly attack American policy in Korea and conduct of the War in Korea. They are publications a pamphlet, an article, and a book. And especially Government Exhibit 66 which is this book, extracts and which appear on page A21. The Court will see that this is a very repellant document. I will forebear to read what is there, but it is indeed a repellant document. But, for all the unattractive features of these documents, there's nothing in there that has anything to do, so far as we can see within inciting the violent overthrow of Government. Nevertheless, these were three documents out of a group of about half-a-dozen that the Government offered at the trial for the specific purpose avowed in colloquy at the bench, which appears in the record here, that these were being offered to prove incitement to action in order to meet the standards described in the Yates case. There was objection from the defense.There was extensive colloquy. There was more argument about the -- the judge reserved his ruling. There is more argument about it after the Government's case closed when we had our motion to -- for a directed verdict of acquittal. When the judge denied the motion for acquittal, he, at the same time, ruled on this group of documents. He allowed these three to be received and excluded about three others. He did not say why he excluded the ones he excluded, why he received the ones that he received. After they had been thus received, these three documents that aren't guarded, the prosecution then read extensively from these documents to the jury. They then made a special request that these documents be sent to the jury. The defense moved for mistrial on the ground that the documents were both remote and exceedingly prejudicial and inflammatory. That was denied. The prosecution then, after the evidence was closed, in its summation to the jury, specifically called the jury's attention to this Exhibit 66 here and asked the jury to see whether or not there is language in that exhibit that would incite you to action. In other words, this document was relied on expressly before the jury to prove incitement. We asked for charge to -- so the jury would not feel free to find incitement on the basis of this document -- this sort of document alone. It was denied. The Government objected and it was denied. Now, we suggest to the Court that this raises a most profound constitutional problem that if, on the theory of the court below and the Government, documents which are nothing more than polemical attacks on Government policy which consist of publications, books, articles, and so forth which are means of expression expressly protected by the First Amendment, if those can be relied on as evidence of incitement to violent overthrow and if, indeed, the jury can be left free to find incitement on the basis of that alone, that this indeed has ran afoul of the First Amendment. We think that the theory of the court below that because this is a thing which blackens the Government's reputation and so its dissention, that that means that it is weakening the Government against the potential revolution, that this theory would carry it so far that there will be very little indeed left for the protection of the First Amendment.
Speaker: There's all the evidence in the record on the incitement issue?
Telford Taylor: Oh, by no means, Your Honor. There is other evidence on this that the Government relies on incitement. We do not believe the other evidence is compelling or sufficient, but I do not mean to suggest that this is the only evidence the Government relies on. But, the judge did leave it open to the jury to find incitement on only this evidence because we expressly requested that they'd be charged, that this alone would not be enough, and the judge refused and there is no other language in the charge that would fill the bill there.
Felix Frankfurter: Did he -- did he charge then that they could find on this evidence alone?
Telford Taylor: He charged nothing one way or the other.
Felix Frankfurter: Or did he -- or did he reject your charge on the ground that that was otherwise taken cared of?
Telford Taylor: He rejected it on the ground that he did not wish to advert to specific kinds of evidence. He may have thought it was taken cared of elsewhere, but I do not think so, and I have read the charge carefully, needless to say, to try to see if there is anything there that could be relied on to fill the same function and I am unable to find anything.
Felix Frankfurter: Do you mean this charge -- this case was given to the jury without a survey, an unbiased fair survey of the evidence of both sides? This is just an abstract -- one of those awful abstract unguiding charges?
Telford Taylor: No, Your Honor. I would not so characterize it. I suppose --
Felix Frankfurter: But you -- the reason I asked that --
Telford Taylor: I --
Felix Frankfurter: Because you said he didn't -- he thought it would go into evidence.
Telford Taylor: Well, he didn't go into any specific evidence and he wouldn't. He did charge, in very general terms, about the evidence. We do believe --
Felix Frankfurter: Well, I --
Telford Taylor: The charge in the respect I am adverting to now is seriously deficient and we made other objections and he denied other requests we made, but this, we regard, is the most serious and crucial lack in his charge.
Felix Frankfurter: I get that but, just for my own information, I want to know because I neatly disapprove of this abstract charges to jury, I want to know whether this complicated case was left to the jury merely on generalities about reasonable doubt and all the rest of it.
Telford Taylor: I think it's fair to say that it was left to the jury on generalities on reasonable doubt, on incitement, on advocacy, that there was language taken from this Court's opinions that were relied on in presenting the problems to them but there was no discussion of the evidence, I think, in the terms you are asking about now, Justice Frankfurter.
Felix Frankfurter: I've been on to the school that thinks that nothing is felt about the worst way. That could be one of the worst errors in the charge.
Potter Stewart: Mr. Taylor, was it alleged that -- that the petitioner wrote any of this material on pages A18 to 21 --
Telford Taylor: Oh, no.
Potter Stewart: -- or merely that he distributed it?
Telford Taylor: No, the connection with the defendant was simply that he had given these three documents to one of the informant-witnesses who had joined the party. So, it was connected with him, but there is no evidence that he ever read it or that he invited any part of it to be read. He may or he may not have. We do not know. He gave it to somebody.
Felix Frankfurter: I -- I need some more clarification. If the judge didn't leave with any evidence in the sense that I've indicated, then I -- then I can -- he can -- then the ground on which he rejected the charge is a valid ground unless you take the broader ground that it's his duty to fairly lay out the evidence for the indictment.
Telford Taylor: That would be one --
Felix Frankfurter: Because why should he pick one piece of evidence rather than the other?
Telford Taylor: It seems to me that, in this case, that there was abundant reason to pick this evidence because he had already had to caution the jury on its inflammatory character. The matter had been much mooted before him. And it was plain that there was grave argument about whether this was relevant evidence on incitement or not.
Felix Frankfurter: On that, he had to rule. He ruled on that there.
Telford Taylor: Yes, he ruled on that and then he then cautioned the jury. But it was also plain from his caution to the jury that this thing had an impact, and the prosecution had specifically cited it to the jury as sufficient proof of incitement.
Felix Frankfurter: You mean the speech by the -- by the U.S. Attorney?
Telford Taylor: The -- his summation to the jury.
Felix Frankfurter: But I put it to you, if -- if you ask him to negate it that they may not find him guilty on this specific evidence, you have a right and ask him to negate it that they couldn't find on any -- on --
Telford Taylor: Well, of course, Justice --
Felix Frankfurter: -- on several items and, contrary-wise, the Government may ask the Court to charge that they couldn't find on this or that or not -- could withhold findings, and that's one of the difficulties, in my point of view, of giving more of this to me or pay the uninformative charges.
Telford Taylor: We did not ask that the judge single out this document and say --
Felix Frankfurter: But you did ask him if they couldn't find on this or not.
Telford Taylor: We asked --
Felix Frankfurter: But didn't you make the same request about --
Telford Taylor: May I --
Felix Frankfurter: Many of the items?
Telford Taylor: May I direct your attention to the charge which we did asked which is in the record at page A33, proposed instruction number 7.
Felix Frankfurter: What page?
Telford Taylor: A33, it's near the beginning.
Felix Frankfurter: A30?
Telford Taylor: A33, yes.
Felix Frankfurter: I beg your pardon.
Telford Taylor: And, you will see that what we asked was an instruction that --
Felix Frankfurter: 6 or 7?
Telford Taylor: 7, well, I think it speaks for itself. I need not read it. It was an instruction which was phrased in general terms but adverted to the type of evidence that these documents consisted of.
Speaker: May I ask, Mr. Taylor --
Telford Taylor: Yes?
William J. Brennan, Jr.: What appears in A40, the paragraph of ladies and gentlemen, if that's all there is in the charge dealing with incitement?
Telford Taylor: At A40 -- which page, Justice Brennan?
William J. Brennan, Jr.: A40.
Telford Taylor: A40.
William J. Brennan, Jr.: The charge of the act of ladies and gentlemen citing words or languages (Inaudible)
Telford Taylor: Well, he goes on to the abstract doctrine and went through on the next paragraph, and --
William J. Brennan, Jr.: But this is the place where he dealt it.
Telford Taylor: That is correct. I'm just trying to see if there is any other place later, but I believe not. I think that is the principal place that he dealt with incitement. With the Court's permission, I would like to come to the statutory question before my time runs out. This arises under the Internal Security Act, as I mentioned before. This provision passed in 1950 which appears in our brief in the appendix, page 3A, “Neither the holding of office nor membership in any Communist organization by any person shall constitute per se a violation of (a) or (c) of this Section or of any other criminal statute.” What is the effect of that provision on prosecutions under the membership clause? Now, may I cite first that we know why it is in this statute. The Internal Security Act provides for an elaborate system of registration of members of the Communist Party. Would there not be a danger that registration as a Communist would incriminate one and could they not, therefore, decline to registration pleading the Fifth Amendment? Well --
Potter Stewart: This is the Act of 1950?
Telford Taylor: 1950, 10 years later, Justice Stewart, yes. And, this danger which might arise to the functioning of the statute from the plea of the Fifth Amendment was pointed out to Congress by the late John W. Davis in a letter and it was his letter which led to this language now in the statute. Originally, that language only applied to Sections 4 (a) and 4 (c) of the Internal Security Act itself, but then it was amended on the floor by adding the phrase “any other criminal statute,” and the legislative history shows pretty clearly that that was done with the membership clause in mind. So, with this language in front of us and knowing the purpose, how do we interpret it? The Government says that the words “per se” show that this is only to apply to membership without more, that it does not apply to membership plus knowledge and, therefore, is not a part of this sort of prosecution. The Government uses the phrase “mere membership,” that this is a bar to the prosecution for mere membership but not for membership with knowledge. We do not think this view will stand analysis. We think it does bar prosecutions of Communists under the membership clause. It bars prosecutions unless there is other evidence of criminally significant acts or conducts, such as under the substantive provisions of the Smith Act or elsewhere in federal statutes. Now, what is the matter with the Government's position here? To begin with, so that we go to the face of the statute before legislative history, on its face here, Section 4 (f) doesn't apply merely to membership and there are the words “or the holding of office,” so that it goes outside of membership right on its face. And, the significance of that is rather greater than the mere presence of those words, “office holding.” In the Government's brief, for example, when they come to the matter of how evidence is to be weighed, we find that the Government, and I'm looking at the Government's brief, page 85, Scales was an officer of the Communist Party. He had been Chairman of the District of North Carolina and we find, in the Government's brief at page 85, acknowledging his role as a party functionary, that is an officer, petitioner contends that the evidence is not enough to show his knowledge of the Party's character, and so forth. Then, it goes on. Of course, Petitioner's status as a leader of such a rigidly disciplined and indoctrinated organization is, in itself, strong evidence against the suggestion that he might have not known what the party was about or might not have purposed the furtherance of its ends. Now, I don't know much Latin but “in itself” I think means, in simple English, the very same thing as those Latin words “per se” in Section 4 (f). And, if we are confronted with a situation where being an officer is, in itself, strong evidence of knowledge and intent and if being an officer is not guilt and cannot be under Section 4 (f), it seems to me, plain enough, that Section 4 (f) does comprehend something more than what the Government calls mere membership. Office holding does carry with it, according to the Government itself, evidentiary implication in terms of knowledge and intent. So, on the face of the statute, that view, we think, will not stand up. The Government's position, we think, is also squarely in the face of basic questions and basic principles of statutory construction. A base -- such a basic principle is to give effect to the words of the statute, so they're not nugatory and redundant. Section 4 (f) applies specifically to Subsections 4 (a) and (c), and via the phrase “any other criminal statute” to the membership clause. All three of those statutes, Section (a), Section (c), and the membership clause, all specifically require knowledge as an element of the offense. So that, if we say 4 (f) applies only where there is knowledge, there is absolutely no statute, no part of the Internal Security Act which can apply, no other statute which can apply, and it is left with absolutely nothing to apply to. Finally, though, I think we do have to look to some extent of the congressional purpose here and, if we do, it becomes even plainer. What Congress wanted to do is to create an effective system of registration of Communist Party members. To do that, it had to, so far as possible, remove the bar of the Fifth Amendment so that people could decline to register on the ground of self-incrimination. Whether it was successful doing that is not at issue here but, certainly, that's what they were trying to do. Now, the effect -- the practical effect of the Government's construction here is that only those Communists who do not know the teachings of the party could be required to register. All the others would remain subject to prosecution under the membership clause for membership plus knowledge, could plead the Fifth Amendment, and defeat registration that way. So that, it seems to us that, in terms of congressional purpose, this would simply reduce the Act to a futility. The Government says again and again, in its brief, that it seems inconceivable that Congress would have exempted Communists from the membership clause in 1950. We think that overlooks that there are a variety of legislative techniques for dealing with Communism and its relation to Internal Security. In 1950, Congress, we think, made a judgment that it was more important for this registration system to function than to -- than to prosecute members under the membership clause. It's a very easy one to make. There had been substantially no prosecutions under the membership clause. The other provisions of the Smith Act remained available anyhow and, so, it would have been entirely compatible with congressional intent to say it's much more important that we make this machine work than to keep on the books a clause which hadn't been put to any practical use up to that point.
Felix Frankfurter: Now, they could accomplish that by not calling -- by not bringing in the clause of immunity provision?
Telford Taylor: I beg your pardon, Justice Frankfurter.
Felix Frankfurter: They could accomplish that result by not availing themselves of this 1950 provision.
Telford Taylor: By not availing themselves of --
Felix Frankfurter: Yes.
Telford Taylor: I'm afraid I have not followed. They have availed themselves the membership clause by the fact to prosecution.
Felix Frankfurter: Yes, they did, but I mean they -- they would not -- what you are saying is the 1950 Act automatically goes into effect.
Telford Taylor: Yes.
Felix Frankfurter: There it is --
Telford Taylor: Yes.
Felix Frankfurter: The duty and the --
Telford Taylor: Yes.
Felix Frankfurter: Immunity is part of the duty.
Telford Taylor: Yes.
Felix Frankfurter: So, it isn't a case where the district attorney has to say “you must testify. You must incriminate yourself because you get immunity in exchange.”
Telford Taylor: Certainly not.
Felix Frankfurter: That's just one.
Telford Taylor: Certainly not. The -- there are other points in the case. I'm afraid the time -- pressure of time will permit me to touch on only two of them very briefly. There is, as I mentioned earlier, a problem of the sufficiency of evidence under the Yates case here. The evidence is extensively analyzed in the briefs and in the record. Our Record A25 to 32 is a replica of our memorandum comparing the evidence here with the -- with the evidence in the Yates case.We think that the Court will be unable to find any evidence of a different kind or evidence which meets the deficiency that the Court noted in the Yates case. The Government says, in their brief, that there were new witnesses this time. That is true. There were witnesses in the second trial here that were not in the first trial but, surely, that is irrelevant. It's not whether they are new or old. It's what they say. And the witnesses that were new in the second trial here were all old witnesses in the sense of having testified in plenty of other Smith Act cases anyhow. It stands to reason, I think, that when the Government has tried 17 or 18 Smith Act cases over the course of five or six years, it is very difficult to prove different things about the Communist Party the 19th time when you prove maybe the eighth attempt. In the nature of things, the -- the evidence about the party could not be very much altered and, indeed, it wasn't. The main thing the Government has relied on here is more extensive evidence of teachings at these party schools and statements attributed to Communist instructors and lecturers. It may be there is a little more such evidence here than in the Yates case but it's the same kind of thing. It all took place at places far along with the Petitioner, so there's a problem of connection with the -- with the defendant here, too, that I really don't have time to develop fully but is developed in the brief. There is a very difficult problem here in the way the evidence was handled and, in the erroneous admission, both in terms of the order of evidence and the kind of evidence that the Court allowed in. There was what I can only describe as an unchecked avalanche of testimony for a whole week that had nothing to do with the defendant.
Felix Frankfurter: How long was the trial, Mr. Taylor?
Telford Taylor: The trial took approximately two-and-a half weeks, and I believe I am correct in saying that the defendant's name was not mentioned for about the first six days. Now, we may assume that some evidence is admissible on the party that doesn't touch the defendant. Nonetheless, when you have a week of testimony, and some of this is admitted subject to connection, the jury cannot possibly keep such an amount and such a variety of evidence straight as to whether it later is or is not connected up. We objected at the outset to this order of proof and this volume of proof unsuccessfully. There is evidence so remote as to be totally indefensible here. There's some evidence going back to Communist meetings held in 1930 in Seattle, in Cleveland, and New York when the defendant was a pre-high school child. How he can be bound by testimony of that sort? I do not know. There was a lot of testimony about controversial subjects like the Stockholm Peace Appeal, and whether the Rosenberg should have clemency. And, one thing and another, the Government seemed to think had something to do with incitement of force and violence but which, for the life of me, I cannot see bears on this at all. That kind of evidence, of course, may be effective with juries in a case of this sort, but all this built up into a mountain of -- of prejudicial irrelevancy from start to finish, a -- a tangle that the jury could not possibly unravel after three weeks of this.Unaided by the instruction, which Justice Frankfurter thought, in a way of charge, might have been helpful here especially.
Felix Frankfurter: How many is the -- are the stenographic minutes of the trial here?
Telford Taylor: They are, Your Honor.
Felix Frankfurter: About how many pages are there, do you know?
Telford Taylor: I think I'm right in saying about 2500 is right there. I would check and tell Your Honor after recess.
Speaker: What do these records represent at the excerpts?
Telford Taylor: This record represents the agreed, between the Government and defense, selections from that which have been printed. This -- the first part of it was the appendix to our brief in the Court of Appeals. The second part is substantially the Government's brief in the Court -- record in the Court of Appeals, the appendix to their brief plus a little addition. And that -- that is the transcript on the table there, Justice Harlan.
Felix Frankfurter: As between you and the Government, is there available -- are there available more than several stets of the stenographic minutes?
Telford Taylor: We will be glad to leave this one here. The Court has one.
Felix Frankfurter: We have one already in the Clerk's office.
Telford Taylor: We have --
Felix Frankfurter: Have we --
Telford Taylor: -- some more here.
Felix Frankfurter: Have we one in the Clerk's office?
Telford Taylor: Yes, sir, there's one in the Clerk's office.
Felix Frankfurter: Maybe the Government would be generous to me.
Telford Taylor: I will reserve the balance of my time, Your Honor.
Earl Warren: We'll recess now.