Earl Warren: -- you may continue.
Ralph S. Spritzer: Mr. Chief Justice, Your Honors. At the recess, I was about to refer before dealing with the particulars of the evidence to certain of the findings of the Court of Appeals to which reference has not yet been made. And particularly, I would like to invite the Court's attention to the statement in Judge Magruder's opinion at record 248 where he states in reference to Judge Dawson's findings that not only were they not clearly erroneous but that they were, and I quote Judge Magruder, the only findings possible on the evidence and that they fulfilled the strictest requirements proof. Now, I emphasized that in the light of the questions which were raised earlier as to whether there was any lack of agreement as between the District Court and the appellate court. Now, I would like to --
William J. Brennan, Jr.: (Inaudible)
Ralph S. Spritzer: I don't think the Court of Appeals' opinion is rested on any imprints --
Felix Frankfurter: Well, the next paragraph --
Ralph S. Spritzer: -- (Voice Overlap) --
Felix Frankfurter: -- (Voice Overlap) --
Ralph S. Spritzer: -- vary to testify.
Felix Frankfurter: Mr. Spritzer?
Ralph S. Spritzer: Yes, sir.
Felix Frankfurter: The next paragraph. Will you think the District Court though did not so might properly have buttressed this problem?
Ralph S. Spritzer: Yes, he's saying the District Court might have gone further. And as to the point that was made in relation to the statement by the Court of Appeals that, conceivably, someone could believe that this question called for a statement of legal occupation, perhaps, it should be pointed out that Judge Magruder went on to find in this case that a worldly-wise man such as Costello, I'm looking at page 250 now, must have realized that his real occupation was bootlegging and that he's dabbling in real estate was but dust in the eyes to conceal his occupation. I would like to summarize very briefly some of the testimony that was given in this case which shows, I think, what the nature and extent of Costello's activities were during the relevant period. Costello got his store in bootlegging in 1921 when he joined forces with one Emanuel Kessler. Kessler testified at this trial. Kessler was a huge operation. He owned numerous boats including an ocean vowing steamer which went regularly back and forth to Europe to bring liquor in. Kessler testified he brought in about 500 cases a night which he landed on the northern shore of Long Island. And that represents at the going price of liquor, perhaps, $15 million worth of liquor a year. Now, Costello and his brother came into this picture, as I say, in 1921.
Hugo L. Black: How old was he then, (Voice Overlap)is that the time --
Ralph S. Spritzer: In 1921, he was in the 20s.
Hugo L. Black: -- is that the time Judge Magruder was talking about as being worldly-wise?
Ralph S. Spritzer: I'm sorry, I didn't hear you.
Hugo L. Black: -- is that the time Judge Magruder was talking about his worldly-wisdom at that time?
Ralph S. Spritzer: Well, by 1925 when he was naturalized, he was somewhere around 30 years of age.
Hugo L. Black: I thought he's born in 1901?
Ralph S. Spritzer: No, I think in 1890 or something as I recall. I think 1891, Your Honor.
Hugo L. Black: 1891?
Ralph S. Spritzer: I think that -- that -- yes, that he was born in 1890s. As I was about to say, Costello joined this operation in 1921. His role being that he was hired to truck the liquor from its landing place to places of storage at Costello's own trucks. They owned storage facilities, a large garage and a large residence which was known as Blackwell Mansion. Now, Kessler went to jail for prohibition violations in 1923 and he moves out of the picture. But the activities of Costello apparently grew a pace because we find Costello testifying that one cash of a quarter of a million dollars worth of liquor, this is a single one owned by Kessler, passed to the hands of Frank Costello after Kessler went to jail. Now, Kessler dealt, necessarily dealt regularly with Costello during the period of 1921 to 1923 because Costello was the man who moved all his liquor and stored it all for him. Kessler testified that the Costellos had a Lexington Avenue office, the same office as the realty company has as its office address. Kessler was in daily communication with that office and he says it was the headquarters for the liquor operation and that so far as he knew and he went to the office frequently in addition to being in daily telephone communication. So far as he knew, there was never any real estate activity at the office. We get another glimpse of the scale of Costello's bootlegging activities from one Albert Feldman, who also testified in this case, also a bootlegger during the 1920s. After Kessler went to jail, Feldman, who had previously purchased liquor from him, began purchasing it from Costello. He recalls well in occasion when he went to Costello's Lexington Avenue office to arrange for Costello to pick up, to store and to sell on Feldman's the half a thousand of cases of liquor which Feldman owned. Feldman says he went to Costello because it was well-known in the bootlegging trade that Costello had large facilities for engaging in the liquor traffic. Costello accepted that proposal of Feldman's and Feldman says that he remembers the transaction well because Costello told him later that the liquor had been hijacked and Costello thereupon refused to pay him anything for it. There were other witnesses who were involved in the bootlegging trade in the period of the 1920s who dealt with Frank Costello at this Lexington Avenue office, none of whom ever saw any sign of real estate activity. I'm going to mention one more witness at this time, and that witness was a Ms. Helen Sausser. She was the daughter of a man named Harry Sausser who died in 1926 and who had been associated that the last years of his life with Frank Costello. Harry Sausser, the daughter testified, was the man who arranged for shipments of liquor from Canada for Costello. Ms. Sausser was in the Lexington Avenue office as the young lady from time to time. She testified that this office was the headquarters of the bootlegging operation and that she never saw any suggestion that any other business was conducted there. She also testified that her father never had anything to do with real estate. Now, that's particularly significant because Harry Sausser's name was given by Frank Costello to the naturalization authorities as a character witness on the preliminary form. Frank Costello listed Harry Sausser's occupation as real -- real estate. Though, according to the daughter, Harry Sausser never had anything to do with real estate and certainly, that bears on specific intent on the question whether Frank Costello sincerely misapprehended an instruction when he wrote real estate down as his own occupation, for he wrote the same down for a man who, according to the testimony, never had any relation to the Koslo Realty Company or any other real estate business.
Earl Warren: How old is she at that time Mr. Spritzer?
Ralph S. Spritzer: She was about 18, Your Honor.
Earl Warren: 18.
Ralph S. Spritzer: Yes, sir. Now, I've spoken thus far of the testimony of some of the Government's witnesses who were engaged in business with Costello during the 1920s. Let me turn now to Costello's admissions on various occasions. Mr. Williams has mentioned that in 1938, Costello stated to an Internal Revenue agent that in the 1920s, he was engaged in the liquor business. In 1938, testifying before federal grand jury, Costello stated that he had operated a bootlegging enterprise until 1926. Now, Costello made further admissions on three other occasions. And these further admissions occurred after wiretapping by New York State Authority. I'm going to refer later to the question whether there was any taint in respect to this evidence. I'd like to refer -- tell Your Honors first what the substance of this evidence was. Now, there were admissions on three occasions after 1943. The first was before a New York State grand jury which was investigating the question of Costello's relationships with Thomas Aurelio in respect to the procurement of a judicial nomination. Concurrently or at least very shortly after that investigation, there was a second inquiry which was made by the -- before a referee of the Appellate Division of New York County, this arose out of the same matter. The referee was conducting a proceeding to determine on behalf of the Court whether there were reasons why Thomas Aurelio should be disbarred or suspended from law practice. Costello made admissions again before New York authorities in a 1947 proceeding conducted by the New York State Liquor Authority. That was the licensing matter of the date. Now, on these occasions, Costello again admitted that in the 1920s, he's been a bootlegger that that has been his activity. He gave some details that he owned trucks for hauling liquor, that he charted boats for that purpose, that the headquarters of the liquor operation was the Lexington Avenue office, that he got liquor from the Canadian sources, that liquor traffic was profitable and he made substantial sums of money from the trade and that the sum of this money made from the liquor business or from gambling he invested in real estate. Essentially, this testimony confirmed Costello's earlier admissions and the specific testimony are given by the people who had done business with Costello in this instant trial. Now, weighing this evidence as to regular extensive day-to-day bootlegging operations directed from the Lexington Avenue office against the evidence that the Koslo Realty Company was organized and concurrently made one purchase of property and that's all that had taken place as of the naturalization date. Then I think it becomes understandable that Justice -- that Judge Magruder concluded that from this record, there was no other conclusion possible but that Costello knowingly misrepresented his occupation. He could hardly have believed since the Immigration authorities were investigating his moral character that he was at liberty to suppress the occupation which was illegal and which would -- reflected adversely. And certainly, there could have been no misapprehension, we believe, in a case in which there was this imbalance as between the one activity and the other. The one activity, as I say, daily far-flung and profitable and the other, at that point, consisting of a single investment.
Earl Warren: Is there any indication that his business grew as time went on, became greater or that he start in that this is a big business?
Ralph S. Spritzer: The real estate?
Earl Warren: No, no --
Ralph S. Spritzer: (Voice Overlap) --
Earl Warren: -- I'm talking about the bootlegging business as you have outlined to assess. That's a rather large proportions of the -- he bought ships and trucks.
Ralph S. Spritzer: He chartered ships, Your Honor.
Earl Warren: Chartered ships.
Ralph S. Spritzer: He owned trucks.
Earl Warren: Yes, he owned trucks --
Ralph S. Spritzer: Yes.
Earl Warren: -- at his operation, quite an operation. Is there any indication that that accelerated as -- through the years?
Ralph S. Spritzer: Well, there's this indication that he started out in 1921 with this man Kessler and he was then being paid by the case for trucking and storing the liquor. He apparently did not have a great deal of capital to begin with because Kessler helped him finance the purchase of the trucks. The indication that the bootlegging operation became a big one, one indication is that he succeeded when Kessler went to jail to one unit of liquor which was worth two -- a quarter of a million of loan. So it did become a substantial operation and we have the testimony of people who did business with him that he was known to have large facilities for engaging in this illicit traffic.
Earl Warren: Well, is it true that the -- that the record shows -- I thought I understood Mr. Williams to say so that the -- that his income for 13 years aggregated on a little over $300,000?
Ralph S. Spritzer: That is a settlement which the Government made after Frank Costello had never filed an income tax return and he had no records. And this was the settlement. It was apparently with the Government could prove or dealt.
Earl Warren: Federal Government --
Ralph S. Spritzer: For 13 years, he had not filed any tax returns.
Potter Stewart: And settled --
Ralph S. Spritzer: He ultimately settled with the State and Federal Governments.
Potter Stewart: That was with both --
Ralph S. Spritzer: Now, what -- whether there was income which could never be traced if something which is, of course, not possible to say on this record.
Earl Warren: Well, that -- that -- if that approximated, what -- what is his income was? It -- it wouldn't indicate a very large operation, would it --
Ralph S. Spritzer: There are other --
Earl Warren: -- for the income was about $17,000 a year? I think Mr. Williams said. And if, as you say, it -- it probably increased through the -- through the years until 1932, he -- it might indicate that he's in -- on a pretty small scale in 1925.
Ralph S. Spritzer: Certainly, the facts which the witnesses of this trial testified to make it appear that this was a substantial bootlegging operation.
Hugo L. Black: That it was what?
Ralph S. Spritzer: But -- a substantial bootlegging operation. And the Court found that that was his -- at least his full time activity. That the -- there were daily transactions. Now, we're in the realm of speculation when we attempt to estimate how much money he made from it.
Earl Warren: Who offered that proof? The Government or Costello?
Ralph S. Spritzer: The figures as to income?
Earl Warren: Yes.
Ralph S. Spritzer: Mr. -- Mr. Williams informs me, I believe.
Earl Warren: Who did?
Ralph S. Spritzer: Correct that the Government offered --
Earl Warren: Government.
Ralph S. Spritzer: -- this return. Our case is not, in any event, -- that then upon any finding and there is none as to how large the operation was. It does depend upon the finding that this was his full time activity, that this was the source of his income.
Felix Frankfurter: Who were the witnesses for the details that you gave us earlier as to (Inaudible) and something or how many cases?
Ralph S. Spritzer: Oh, the first witness was the man named Kessler for whom Costello originally did this trucking and storing. Another witness was the man named Feldman who was also a bootlegger and dealt with Costello. A third witness was Helen Sausser who was the daughter of one of Costello's associates. There were others, and I, of course, have not the time to attempt to deal with all the -- to summarize all of the testimony. I -- I summarized that testimony because it shows -- is -- it's the testimony which shows and there's other of like kind that there was a regular business of bootlegging which was conducted through this Lexington Avenue office that people dealt there on a regular or a daily or a weekly basis depending upon the character of the purchases or the character of the arrangements they were making. Now, I would like to go on to the question whether a portion of the Government's case, as Mr. Williams has argued, was tainted by the wiretapping which the State authorities conducted in 1943. Now, again, I think I must give the Court some of the background facts. In 1943, the then New York County District Attorney and also -- still the New York County District Attorney Frank Hogan was investigating suspected criminal activity on the part of Frank Costello. And Hogan obtained from the New York courts an order authorizing the New York authorities to tap Costello's private unlisted telephone. For some months thereafter, and I think that begin in May of 1943, transcriptions of all of Costello's telephone calls were made and reported. In August or September of 1943, there were a number of intercepted communications which seems to disclose a close relationship between Costello and one Thomas Aurelio, a candidate for a Supreme Court justiceship in New York. District Attorney Hogan testified in the instant trial that in all events, there would have been a grand jury inquiry in relation to Frank Costello and his activities. He testified further that when this information, this conversation -- these conversations between Mr. Costello and Mr. Aurelio came to his attention, he decided that there should be a grand -- grand jury inquiry sooner rather than later. And that -- as a matter fact, one should be held immediately in view of the impending election in which Mr. Aurelio was a candidate. And so in the fall of 1943, there was a grand jury inquiry into the question whether Aurelio's nomination had been influenced by improper or criminal influences. And shortly thereafter, there was also the Appellate Division inquiry to which I've earlier made reference. Now, District Attorney Hogan appeared before the grand jury and before the Appellate Division referee. And on both occasions, he did question Costello at length. And he did show him. And he did read into the record numerous transcriptions which had been obtained from this wiretapping. It does not appear anywhere, however, that any of Costello's 1943 conversations related in anyway to his having been engaged in the bootlegging business some 15 or more years earlier.And District Attorney Hogan testified at the trial of this case that no information of that kind was derived from the wiretappings. Now, Hogan did go on and asked Costello at the grand jury inquiry and before the Appellate Division referee what his background and what his history were. Hogan, himself, knew, he tells us, or had reason to believe at least, that Costello had been a bootlegger, he -- that he had word of that from police and other sources. Now, petitioner does not contend in his brief and he has no basis for contending on the proof that the 1943 wiretapping revealed any information about bootlegging, which incidentally had terminated according to Costello some 17 years earlier in 1926. As I've said, the District Attorney of New York testified in this case and the District Court found that the New York authorities got no evidence in relation to bootlegging when they tapped the phone in 1943. And so what Mr. Williams contention really is, is this. First, he says that the wiretapping was illegal. Second, he says that the wiretapping precipitated as it did. A grand jury inquiry precipitated it in the sense that it made a tape place sooner than it otherwise would have. And third, he says that it was on this occasion, on the occasion of the grand jury inquiry that the admissions in question were made.
Felix Frankfurter: That the what -- he what?
Ralph S. Spritzer: That the admissions in -- were made on which the Government relied. Now, certainly, this Court has said in -- in Silverthorne and in the second Nardone case that the policy against the use of illegal or tainted evidence in the federal court is not to be circumvented on the part of law enforcement authorities by substituting for illegal evidence, some other evidence which is immediately derived from that illegal evidence. But in this case, I point out, there was no use of derivity of evidence because there was no evidence of bootlegging operations obtained by the wiretapping activities of the New York police. And thus, there is not here the -- the fruit of wiretapping. There is not the kind of direct or approximate causation which this Court said in the second Nardone case must be present. Rather, we have the claim of -- kind of claim of attenuated relationship which the Court said in Nardone that would not serve as a basis for applying a rule of exclusion. Now, petitioner also --
Hugo L. Black: Can I ask you on that connection?
Ralph S. Spritzer: Yes, sir.
Hugo L. Black: Mr. Williams referred to some evidence on page 23.
Ralph S. Spritzer: Is that his brief Your Honors are referring to?
Hugo L. Black: 23 in the record.
Ralph S. Spritzer: Oh.
Hugo L. Black: In which he said that was the result. That was a statement obtained to the grand jury and the cause of the wiretapping. Is that what you're talking about now in saying that's not correct?
Ralph S. Spritzer: I'm sorry, I didn't quite get the reference Your Honor was making to 23.
Hugo L. Black: On page Costello was questioned by the District Attorney Hogan before New York grand jury --
Ralph S. Spritzer: Yes.
Hugo L. Black: (Voice Overlap) Now, I understood Mr. Williams to say, and I gather that this was -- difference between you as to the facts. I understood him to say that the record shows that this was obtained or derived from the knowledge which has been acquired by wiretapping.
Ralph S. Spritzer: I don't think that Mr. Williams stated that and the -- all of the evidence -- I don't think he could've stated that because all of the evidence is --
Hugo L. Black: I thought --
Ralph S. Spritzer: -- is otherwise.
Hugo L. Black: -- I may misunderstood him but I wrote it down at the time (Voice Overlap) --
Ralph S. Spritzer: I think what Mr. Williams argument was -- was this. He can correct me later if I -- if I misinterpret him, of course. His argument is that but for the wiretapping, the grand jury inquiry wouldn't have been held when it was and if it hadn't been held when it was, then Costello would have been questioned when he was. And if he hadn't been questioned when he was, then he wouldn't have made these admissions.
Felix Frankfurter: The grand jury approved of the tapping.
Ralph S. Spritzer: Yes, in a sense.
Felix Frankfurter: But -- but -- I'm --
Ralph S. Spritzer: Now, there's the most -- there's explicit testimony nowhere contradicted in findings, the testimony of District Attorney Hogan that no evidence of bootlegging was obtained by the New York State wiretapping. There was also a finding that no earlier wiretapping had produced any evidence of bootlegging activity. So the argument has to be, on petitioner's behalf, that whatever was brought out at the grand jury inquiry was tainted, if the grand jury inquiry was prompted by wiretapping.
Hugo L. Black: Well, that's quite a different question.
Ralph S. Spritzer: Yes.
Hugo L. Black: I have not understood that to be the argument.
Felix Frankfurter: Mr. Spritzer, am I right to -- have I rightly -- have I rightly had deposited in my mind the impression that these taps were voluminous by (Voice Overlap) --
Ralph S. Spritzer: Very. Very voluminous.
Felix Frankfurter: -- extended over a period?
Ralph S. Spritzer: A period of months.
Felix Frankfurter: Of months. At different part time to the days so far as one knows?
Ralph S. Spritzer: I would suspect that it was continuous. I would --
Felix Frankfurter: Well, what?
Ralph S. Spritzer: -- suspect that it was recorded.
Felix Frankfurter: What -- what -- the thought that stirs in my mind is that if it wasn't a bootlegging business and throughout all that period, none of these conversations bore on bootlegging.
Ralph S. Spritzer: He wasn't in the bootlegging business --
Felix Frankfurter: But when does that --
Ralph S. Spritzer: -- in that period.
Felix Frankfurter: Oh.
Ralph S. Spritzer: He got out of the bootlegging business. He says at one time, he says 1926. At another time, he said about 1930 --
Felix Frankfurter: (Voice Overlap) --
Ralph S. Spritzer: But in all events, before the repeal of prohibition.
Felix Frankfurter: I see. Well, that takes care of my --
Ralph S. Spritzer: Yes.
Felix Frankfurter: Go on.
Speaker: (Inaudible)
Ralph S. Spritzer: Pardon.
Speaker: (Inaudible)
Ralph S. Spritzer: The Hogan's wiretapping was between May and November of 1943.
Felix Frankfurter: All of us have to (Inaudible).
Ralph S. Spritzer: Now, there was a claim that there was some tapping back in 1925 by federal authority and the District found on that but they didn't get any evidence. That they didn't get any -- that those taps didn't yield any evidence. There was some tapping done, apparently, by federal authorities of this building which Costello occupied some years before. The only taps which seemed to be seriously an issue in the basis of petitioner's present contention are these 1943 taps, which I have been referring to. And hawking back just one moment to Justice Black's question, I think that the courts below were perfectly clear as to what petitioner's contention was. Because the District Court had Record 41 and 42, summarizes that contention and says, "The petitioner's contention would mean --
Hugo L. Black: Page 41?
Ralph S. Spritzer: 41, bottom of 41. "Would mean that a man whose telephone had been tapped would be granted immunity for any admissions which he thereafter made, not in the telephone conversations, but in answer to any questions in a later investigation." That's very bottom of 41 and the top of 42, Your Honor.
Hugo L. Black: I see it.
Ralph S. Spritzer: Now, petitioner does attempt to buttress this claim of a -- of a cause or relationship by suggesting that Costello might not have been sure. But what he might not had made some statements on the telephone which had something to do with bootlegging or bore on that, and since he would have this lack of servitude as to what he'd said and what he'd been overheard that he might had been induced by that to speak out and tell the truth when otherwise he wouldn't have done so. Now, Costello has, of course, has never testified that he felt himself to be under this constraint. But putting that apart, I suggest that the argument breaks down in all events because Costello was under constraint when Hogan questioned him as to his earlier history because he, Costello, had previously stated on at least two occasions in sworn testimony, once before a Revenue agent and the second time, before a federal grand jury that he had been in the bootlegging business. And so if there was constraint, it came from Costello's own earlier admissions. Now, I should like to deal finally with petitioner's request that the Court take into account in its judgement in this case the substantial lapse of time, and it was very substantial, between the date of naturalization, which was 1925, and the date when the Government filed its first denaturalization complaint, 1952. I think the primary answer to that contention is that Congress has very deliberately decided whether one views its policy in the matter as enlightened or unenlightened. It is very deliberately decided that there shall be no time bar in respect to the bringing of suits to cancel a certificate of naturalization fraudulently obtained. That has been the clear meaning, and I put it to Your Honors, of the cancellation provision since 1906. Now, there has been a succession of changes in the Immigration Act. But this provision relating to cancellation has remained substantially unchanged for over 50 years. And the provision as it now reads in the 1952 Act is set out in the Government's brief at pages 3 and 4, the bottom of page 3. And the Court will note that this cancellation procedure is made specifically applicable by this subsection (i) to any naturalization granted under the provisions of this subchapter and to any naturalization heretofore granted by any court and to all certificates of naturalization and citizenship which may have been issued heretofore by any court or by the Commissioner and so forth. And as I say, that all inclusive language has been in the statute -- in the statute since 1906.
Hugo L. Black: Do you think that the latter provision of that does not qualify in any way? I was just looking at it for the first time when it says under the provision of Section 702 of the Nationality Act of 1940 of amendment.
Ralph S. Spritzer: No. I think, that is -- those alternatives are to take care of every situation. In another words, when you take them altogether, the certificate heretofore issued by any court or by the Commissioner or by a designated representative under that provision or by such designated representative under any other act, then one, I think, has all the circumstances in which a prior certificate might have been issued.
William J. Brennan, Jr.: (Inaudible)
Ralph S. Spritzer: There has not been, to my knowledge. There is some legislative history and it is referred to at page 55 of the Government's brief in connection with the 1906 Act which first put this provision into the law. And that the House report to which we there refer shows that Congress had been concerned -- had become concerned and somewhat alarmed at the gross frauds which in its view were being perpetrated. The report points out that immigration had become very great in volume, that the number of persons naturalized was immense, that the Bureau of Naturalization, as it was then called, was very small in number and that they had to accept the statements made by the applicant at face value. And the Congress went on to state that because of the grossness and number of frauds which it felt were being perpetrated that it wanted to do all that the Constitution permitted it to do, to provide that the Attorney General might thereafter cancel any certificate which had been illegally or fraudulently procured in the first instance. Now, that is the history of the -- of the provision and as I say that is the direct ancestor of the provision that is now in the law and which is set out in our brief.
Hugo L. Black: On page 55 to which you just referred to, right after the quote, you say the Court should not adopt or follow the limitation which Congress had deliberately rejected, has it ever deliberately rejected it? I believe that's what Justice Brennan wants.
Ralph S. Spritzer: I think it is clear that Congress deliberately decided in 1906 that it was going to make this provision for cancellation, which it enacted at that time, applicable to certificates issued in the past and not merely to certificates which would thereafter be issued under the 1906 Act. This Court had that question before it in the Johannessen case and it ruled that the legislation did plainly contemplate that the cancellation provision enacted in 1906 would be retrospective in application and the Court upheld such an application in the Johannessen case. So, the deliberately rejected language is correct, I think, if in -- in the sense that Congress fully intended to make it applicable as I read the history and as I read the statutory language to any certificate granted at anytime, no matter how remotely in the past. Now, if there has been no legislation offered to my knowledge, and I have inquired of the general counsel of the service and he has no knowledge of any bill having been introduced at anytime to establish a period of limitations. So there has been no rejection of -- in that sense of a proposal of a specific proposal to impose a statute of limitations.
Felix Frankfurter: As I remember, (Inaudible) grossly, as I remember, it goes back to more than 50 years ago being shocked as a young assistant U.S. attorney and finding that I think in the case he messed against somebody in this case, the United States, isn't this a case (Inaudible) denaturalization?
Ralph S. Spritzer: There -- there maybe, Your Honor. It doesn't come in my mind.
Felix Frankfurter: May I -- is a -- is a noble end statute, I thought, by the bill of (Inaudible) but I think that was done as the result of what you speak of the 1906 Act. That Act was, I think, followed presidential commission dealing with the whole problem of immigration and naturalization.
Ralph S. Spritzer: There were extensive --
Felix Frankfurter: The basis of which the Act of 1906 was passed.
Ralph S. Spritzer: That is correct.
Felix Frankfurter: Because they were coming as to later on, (Inaudible) and the naturalization to a wholesale?
Ralph S. Spritzer: Yes, that the 1906 Act, as Your Honor correctly recalls, followed a very extensive investigation by a presidential commission in 1905.
Charles E. Whittaker: (Inaudible)
Ralph S. Spritzer: Well, I -- I certainly think, Your Honor, that in situations where a doctrine of laches is applicable and the Government argues that it is not here applicable in view of the policy declared in the statute and in view of the settled policy of this Court that laches would not be applied to the United States. But in cases in which that doctrine is applicable, then, certainly, one of the things which an equity court requires to be shown before it holds a person barred by laches is that there has been prejudice. Now, I would suggest to Your Honor that petitioner has not been prejudiced from the standpoint of adequately presenting his case because the burden and let's say, heavy burden, this Court has stated, of proving convincingly that the representation was false is upon the Government and to the extent that the lapse of time or the deeming of recollections makes the case an unconvincing or an unpersuasive one, then it furnishes the basis for holding against the Government and not a basis for holding in its favor. Now, I think in this case, Costello could hardly claim in the light of his own repeated admissions that he wasn't substantially engaged in bootlegging. As for his real estate activity, the Government made a complete search of the records and it put in the evidence of the transactions which took place. If there were any additional transactions, certainly, the defense would be in a position to put in records of such transactions. Such evidence does not disappear with the lapse of time. And Mr. Williams did suggest, the Government didn't put in evidence showing that this Koslo Realty Company didn't do business somewhere else besides New York City. We'll look back there with Costello, himself, testified in the -- before the New York grand jury and his testimony was made a part of this record that he had done a little real estate in New York in Bronx County. And so the federal agents, who investigated this matter, went through the entire records of New York in Bronx County over the entire period of time involved no small task, something which was necessary because they apparently had no access to any of the petitioner's records if any still existed. In addition, it checked the two other principle boroughs of New York City, Brooklyn and Queens. So, the -- the Government did investigate every lead fully. There's no suggestion that the defense couldn't have produced further evidence if they're -- if it thought that this investigation had been in any way deficient. However, the defense offered no evidence. I suggest the only additional evidence which could have had some significance in this case is if Frank Costello, himself, had been prepared to testify that for some inexplicable reason, he didn't understand what was meant three times by the directions "state your present occupation". But if -- if there could've been some special explanation, some alibi, some affirmative defense, as it were, based upon his lack of understanding, he's not understanding these words the way any ordinary person would. Certainly, he was not prejudiced in -- by the lapse time in offering such evidence because he was still here to testify. Now, I would like to comment briefly, though I -- I don't think it is a question that the Court had any occasion to reach upon the repeated statement that the Government knew about all this all the time. I suppose it all depends on whether one views the Government as a unit in which every finger and toe knows all the time what every other finger and toe and toe is doing. Now, it's certainly true that the United States Attorney in the Southern District of New York in 1925 had some reason to believe that Costello was engaged in bootlegging or he wouldn't procured an indictment. It does not follow that the Immigration Service which was then part of the Department of Labor and was administering records which involved literally millions of applicants for naturalization and naturalized citizens, immediately had a light to go in its office when the U.S. Attorney brought a proceeding against one Frank Costello. The only way in which this could've been correlated would've been if the United States Attorney found out in the course of his investigation that Costello was naturalized rather than natural born, if it occurred to him that he might have misrepresented his occupation and if he had brought that to the attention of the Immigration Service. That is -- is not an automatic kind of correlation. And it is a difficult matter. I think Your Honor should appreciate to post audit, as it were, hundreds of thousands of affidavits and applications which have been filed, which have been acted upon in the certificates issued. As a matter of fact, the Immigration Service does not attempt to conduct a continuing surveillance of persons who have been naturalized, when fact do come to its attention which makes it believe that there's basis for charging a fraud than it does proceed. This record does not show when the Immigration Service first had these apparent discrepancies called to its attention. Petitioner's counsel did make an effort to find that out in -- in what has been referred to as the prior trial, the one which the case which came up here ultimately on the affidavit of good cause point. And that record, of course, since that case came to this Court is part of the Court's files and the Court has stated, I believe it was in United States against Pink that it was at liberty to look at a record in a prior case which had come to this Court. And so I called to Your Honors' attention that the attorney who prepared the Government's case and who signed the affidavit of good cause for the institution of this case was questioned at the 1952 trial as to when these matters had first come to the service's attention. And in answer to such a question, he stated, and this is at page 48 of the earlier Costello case, "Frank Costello was arrested for bootlegging activities in December of 1925 and subsequently indicted in connection with that arrest. A trial ensued and a jury disagreement resulted as to Frank Costello." I -- I interpolate parenthetically here that Frank Costello was one of 30 odd defendants in that bootlegging case. Now, resuming the quote "So, certainly, the United States Attorney in the Southern District had some information as to activities on the part of Frank Costello other than real estate at that time." So far as I know, the Immigration and Naturalization Service had no knowledge until 1947 concerning such activities or that the Frank Costello so arrested and tried was the Frank Costello naturalized in September 1925.
Earl Warren: Mr. Spritzer, would you mind addressing yourself for a moment to the -- to what Mr. Williams call the dilemma of the Government on the question of -- of whether he could be called as a witness in the State, if he -- in this kind of a case and if he could, then it was the -- would have been the duty of the Government to call him to prove certain things and not have the inferences as the Court of Appeals said that if these things were best known to him and he could've brought them or on the other hand if --
Ralph S. Spritzer: Yes.
Earl Warren: -- if he couldn't be the situation had been?
Ralph S. Spritzer: Well, I -- I think in the first instance that it is perfectly plain that the District Court regarded the Government's affirmative case made out by its own witnesses, people who had done business with Costello, and has made out by Costello's extrajudicial admissions as a complete and convincing case and that the District Court placed no reliance whatever upon the failure of Costello to testify. I do not read the Court of Appeals' opinion to say, at any point, that it is necessary to make such an inference in order to sustain the District Court's judgment. The Court of Appeals does say that it believes that the District Court might indeed have gone further than it did and made an inference based upon his silence. But the Court of Appeals finds in full agreement as I read its opinion that the District Court's findings were the only findings possible on this record. And so, I think, it has placed no reliance from the standpoint of finding the evidence sufficient to justify affirmance on the fact that Costello did not testify. Now, I'd refer to the fact that Costello if might have testified or might have offered evidence on this point or that if he thought there were additional evidence. I'm not saying, when I say that, that the Government has here made out in its case or relied on inferences to be drawn from silence. I'm merely making the point, and I think it'd be true in any criminal case that there are certain matters which the defense may offer if it thinks it can offer anything more just as a defendant in a criminal case can offer an alibi that he wasn't aware the prosecution's witnesses placed him at a given time. So Costello could've testified if he thought he was -- that the facts justify that he didn't understand the question. But I think the Government has made out a --
William O. Douglas: (Inaudible)
Ralph S. Spritzer: I assume the Government could've called him in all events, Your Honor, under this Court's Wah Suey or Bilokumsky against Tod cases.
Speaker: (Inaudible)
Ralph S. Spritzer: Well, I --I'd --
William O. Douglas: (Inaudible)
Ralph S. Spritzer: The inference there was based upon his failure to answer a question as I recall. Wah Suey was called in a deportation case. And evidence was offered the day a Dr. Wah Suey had written a great many books which advocated revolution. He was called to the stand and he was asked whether he was the author of those books. And -- and he remained silent. And this Court stated in that case that since he did not base his silence upon any claim of privilege that an inference could be drawn. I'm -- I don't think there's necessity in this case for this Court to deal with the question whether inference is ought to be drawn from silence in a denaturalization case because I don't think that the lower court did or that the Court of Appeals' opinion rests on any such inference. But it seems to me if the question is here, then the Court would has, as I read these unanimous opinions of -- I guess Justice Brandeis wrote for the Court in Bilokumsky and Justice Stone in Wah Suey. Those opinions do state that since it is a civil proceeding, an inference from silence maybe drawn, absent and assertion of privilege by the defendant in proceeding.
William O. Douglas: Of course, that's pretty difficult to reconcile with such cases as the Boyd case and other cases involving the exaction of monetary penalties for failing to make a tax return.Those are all under the Fifth Amendment thereto.
Ralph S. Spritzer: Those -- the Wah Suey and the Bilokumsky cases so far as I recall at the moment are the only cases in the field of deportation and -- and denaturalization. And as I say, I -- I read then as indicating that inferences could be drawn from silence but we have not made any full rest argument. I don't know it would make any argument on that score --
William O. Douglas: I don't think in --
Ralph S. Spritzer: -- in the brief --
William O. Douglas: (Voice Overlap) --
Ralph S. Spritzer: -- because we don't view this judgment as raising any such problem for the Court's consideration.
Earl Warren: Mr. Williams.
Edward Bennett Williams: If the Court please. Question was addressed to counsel during his argument as to the volume of real estate transactions that were engaged in by the petitioner prior to his signing the application for naturalization. The record shows that the realty corporation was formed in October 1924. And the record also shows that a number of real estate transactions were engaged in. But contrary to what counsel said to the Court through inadvertence, the record is quite clear that there was a very major transaction engaged in prior to the first application, the preliminary application for naturalization because, if Your Honors will look at the record at page 24, you will see that the Westin Department building was purchased and that the recollection of the petitioner as expressed in one hearing was that it was purchased for $125,000 and that that transaction was entered into, as the record shows, in the month of December 1924 and that the apartment was sold at the same time as the closing on the purchase was entered into and that a profit was realized to $25,000 by the petitioner himself notwithstanding the fact that he had a partner in the transaction. So that there was a substantial real estate transaction engaged in by this corporation in the terms of reference of the time at which it was consummated some 35 years ago. And the profit was realized of $25,000 prior to the preliminary application made on May 1 and this was a major portion of the petitioner's income if you'll look at the evidence which the Government offer itself on his income over the 13 years prior to 1932. Also, if the Court please, the record shows that this was just not an isolated transaction, that it was followed in sequence by other transactions, one of which was many times greater than this when petitioner, through his corporation, purchased some properties that he erected some major apartment buildings within a few months after his naturalization. Now --
William O. Douglas: But was there any -- any question of the forms at that time or subsequently concerning the sources of income?
Edward Bennett Williams: No, sir. There was none. There was no question like that, Mr. Justice Douglas. I might say to you that contrary to the record on his real estate transactions which are most specific, the testimony with respect to the bootleg -- leg transactions do not specify any transactions at all in the year 1925. There were some witnesses who testified 35 years almost after the facts which they purported to relate. Their recollections as you will see from a first reanalysis of the testimony was deemed in vague and most nebulous and attenuated with respect to any of these transactions. But Mr. Kessler testified only with respect to transactions before 1923. Mr. Feldman testified only to transactions before Mr. Kessler's conviction in 1923. Mr. McCloud testified only with respect to one Harry Sausser. Mr. Kelly, another witness testified only with respect to a transaction about whisky aboard a ship called Vinson A. White (ph) and his testimony regarding the petitioner was that he may have overheard this conversation which he had with one spill of coffee. The testimony of Helen Sausser, the daughter of the deceased Harry Sausser, is most vague and nebulous with respect to the time at which these alleged conversations that she heard between her deceased father and the petitioner took place. They were -- she was dipping back some 35 years. So that the record is much clearer from the Government's own proof with respect to the petitioner's occupation vis-à-vis real estate transactions which is a matter of record than it was with respect to any bootleg operations. Now, on this question, if the Court please, I think that the Government would interpolate the question to prefix the word "principal" or -- or they would add an S and expect that the petitioner should've revealed all of his occupations that wasn't asked. There was no question directed to him with respect to whether he had done anything which smack of criminality or which partook of immoral conduct. This wasn't designed to elicit that information and no question was propounded which was. On the question of the wiretaps, I would like to restate my position because I'm not sure that counsel has accurately paraphrased it to the Court. My position on that, if the Court please, is that the lower court which considered these wiretaps found in excluding them and holding them to be tainted in the record of the first case of which counsel referred at page 103 found this. It appears to me that the use of these transcripts vitiated the alleged admiss -- admissions in the aforementioned hearings by the defendant from the standpoint of their use as evidenced in this Court because all of that testimony must be deemed to comprise parts of a continuous process in which all of these records became affected by this illegality. The Court of Appeals agreed with the fact that the admissions were elicited by the use of the wiretap records, although saying that the wiretapped records could've gone in because they were state wiretaps. The Court of Appeals said this, "These transcripts suggested that state officers had indeed tapped the defendant's phone in 1943 as a result of which he testified before the three bodies to facts which he might not otherwise have revealed." And the record here shows that the first admission that he made with respect to bootlegging came after he was confronted with a wiretap of a conversation between him and one O'Connell who was a co-indictee with him in 1925. That comes at page 102 of the record. When he's confronted with that, he makes his first admission.
William J. Brennan, Jr.: (Inaudible)
Edward Bennett Williams: The Court -- the -- the Circuit Court in this proceeding, Mr. Justice Brennan, did not discuss at although that question was raised very vigorously by us in that Court. But they do not discuss this question.
William J. Brennan, Jr.: (Inaudible)
Edward Bennett Williams: I think they do for this reason. I think if the argument which I made early today with respect to the order of dismissal by Judge McGohey pursuant to the mandate of this Court has -- has any effect, if -- if we reject the argument that I make on res judicata and this Court says that he did not reach the merits and that this did not reach the merits. If the Government would contend that, it may not contend it certainly that it does not have a binding effect with respect to the effect of these wiretap conversations on the admissions that were elicited from this petitioner because both the lower court and the Court of Appeals unequivocally found that these were the things which produced though -- the admissions which were relied upon by the trial court in its findings of fact and by the Appeals Court in affirming those findings.


Earl Warren: Number 26, United States versus Anderson, Clayton and Company. Mr. Holland.
H. Brian Holland: If the Court please. This -- this case comes here on a writ of certiorari to the Court of Claims like the Glenshaw Glass and the Goldman Theatres cases decided at the last term. This case involves the scope or a particular application of the question of the scope of the concept of taxable income under in the Internal Revenue Code. In those cases, the question was whether punitive damages were taxable income. In the instant case, the question is whether the respondent corporation having purchased certain shares of its own stock realized taxable income when a few years later, it resold some of those shares at a prize in excess of the prize that they've had paid for them. The facts are these. The respondent corporation was incorporated under the laws of the State of Delaware in the year 1929. Had his principal place of business in Houston, Texas. It was engaged in the cotton merchandising business which according to the findings of fact of the court below is primarily a management business, dependent for it's success upon the skill and experience of it's principal executives who are called upon to make difficult day-to-day decisions as to purchases and sales of spot cotton and dealings in cotton futures both domestic and foreign. The corporation was capitalized at the outset with $26,000,000 of preferred stock representing the value of the assets of a prior business which it took over in 1929 and 100,000 shares of common stock which was issued to and held exclusively by its executives. The common stock was no per stock with a stated value of $1 a share and was designed according to the findings below to provide a vehicle for the distribution of future earnings among those who were responsible for the success of the corporation business. It was understood from the outset that the common stock should be held exclusively by the management that no outsider should be permitted to own any and that the holdings of common stock should be adjusted from time to time in accordance with the varying capacity and responsibilities of the several members of the management group.
Speaker: -- corporate requirements?
H. Brian Holland: I beg your pardon sir?
Speaker: -- corporation?
H. Brian Holland: No. That was a -- that was at first a general understanding and then in 1931, that understanding was incorporated in a written agreement to which the corporation and the then common stockholders were parties. At the time their agreement was executed, the holders of the common stock deposited their stock with a trustee, retaining the right to the dividends and the right to vote and executed this formal agreement which contained a number of previsions, all of which were designed to keep the stock closely held. For example, the agreement provided that no common stock should be sold that is by any of the holders without the approval of holders of 75% of the common stock. The agreement provided that on the death of any common stockholder, the corporation should purchase his shares. It provided that a common stockholder could withdraw at anytime, withdraw from the stock holding group involving his resignation as an officer of the corporation and that the corporation would purchase his shares from him. It also provided that the holders of 75% of the common stock could at anytime require a holder of that stock to sell any product of his holdings. There were provisions in this agreement for the fixing of the price at which purchases and sales where to be made. In the case of the death of a stockholder, the price was based -- the price to be paid his estate by the corporation under the agreement, was to be based on the balance sheet of the corporation as of the end of the preceding fiscal year adjusted to reflect unrealized appreciation and depreciation in it's assets, all as determined by the executive committee of the corporation. And after that basic prize had been determined based on the balance sheet then there was to be added interest of 4% from evaluation date to the date of the stockholders death. Similarly, there were provisions made with which were not immediately concern now for the termination of the price in the case of purchases and sales arising on the other circumstances then for the death of the stockholder. The agreement also provided expressly, that any stock purchased by the corporation in accordance with the terms of the agreement might be resold at anytime on -- on such terms as should be determined by the holders of not less than 75% of the common stock. Now, in 1939, one of the principal stockholders of the corporation died and in accordance with the terms of the agreement, the corporation purchased his shares which at that time numbered 18,574. Paying for those shares, a price determined in accordance with the provisions of the contract of $50.79 per share. Those shares were not retired. In fact, shortly after they have been purchased some of them were resold -- some of them were resold during the year 1939, some more, I think, during the year 1940, in both instances at prices lower than the prices paid by the corporation to the estate of a deceased stockholder. We're not now concerned with those sales but we are concerned with sales which occurred in the year 1943, December 18th, 1943 of 6500 of these shares which had been acquired by the corporation in 1939. These sales in 1943 being made to five of the executives, I think, junior executives of the corporation at the price determined in accordance with the contract formula which I have mentioned which as of that time was $112.68 a share or $51.89 more than the corporation had paid for those shares in 1939. Now, on the books of the corporation, when the shares were purchased from the decedents estate that cost $50.79 a share was charged to a treasury stock account and for balance sheet purposes, the common stock capital was reduce by the stated value of $1 per share and the remainder of the cost of $49.79 per share was charged to surplus. When the 6500 shares were resold in 1943, the treasury stock account was credited with the original cost of those shares and the excess of the selling price over the cost was credited to surplus. At that time the corporation apparently, although the record isn't too clear on this, had setup a separate capital surplus account and it appears that the excess of the proceeds over the cost was credited to that capital surplus account. And that result of these transactions, the purchase of 1939 and the sale in 1943 of these 6500 shares was that the corporation ended up with an increase of approximately $400,000 in its net worth. That or rather the tax on that amount is the subject matter of this litigation.
Speaker: It means it did not go to capital account (Inaudible)
H. Brian Holland: It went to capital surplus.
Speaker: Capital surplus.
H. Brian Holland: As I understand it.
Speaker: (Inaudible)
H. Brian Holland: Well, there is an indication in the record that -- that sometime between 1939 and 1943, the corporation, which as far as I can make out, had only surplus account prior to that time, readjusted it's surplus in some way and apparently divided it between an earned surplus account and a capital surplus account. The corporation did not treat this $400,000 as taxable income but the Commissioner of Internal Revenue held that it was taxable as a long-term capital gain. The respondent contended and the Court of Claims held that under the applicable statute and the regulations, this $400,000 was not income at all and therefore of course not subject to tax. Among the findings made by the Court of Claims were several findings which I think amount to conclusions of fact. One being that the purchased of these shares by the corporation, amounted to a withdrawal by the selling stockholder of his share of the earnings accumulated during the period of his ownership of the stock. And that the resale of the shares in 1943 by the corporation amounted to a contribution of capital by the purchaser of the shares equal to accumulated earnings so as to equalize the common equity of all of the stockholders. The Court of Claims also made a finding that the shares were not purchased by the corporation for investment or for the purpose of dealing in its own shares as it might in the stock of another corporation. Now, that latter finding has reference to a provision of the regulations which I will come to in a moment.
Speaker: Now, what relation (Inaudible)
H. Brian Holland: The record doesn't indicate sir -- actually there wasn't any market. I think this was a very closely held stock and I think there was no market. The applicable statute of cost is Section 22 (a) of the Internal Revenue Code of 1939, the definition of gross income which defines gross income as including gains or profits and income derived from any source whatever. That's the catch-all provision which the Court end up, head into consideration last term in the two cases that I mentioned. This Court has said with respect to that catch-all provision that evidences -- the intention of Congress to exert its taxing power to the fullest. The Court has also pointed out that the language of that provision is so general that an interpretative regulation is appropriate and almost since the beginning of the income tax law, the regulations have dealt with this question of the tax effect of the transactions by a corporation in its own share. At the beginning or almost at the beginning under the Revenue Act of 1917, the regulations flatly provided that gain was realized by a corporation when it's sold shares which it had held in its treasury. However in -- or under the 1918 Act, the Treasury Department apparently change his mind because it promulgated a new regulation which said in effect that the proceeds of sale of the treasury shares should be regarded as capital and not income and therefore, of course not subject to income tax.The rule remained that way, so far as the regulations were concerned from about 1918 until 1934. In 1934, as a result of some court decisions which had thrown some doubt on the correctness of the regulations at least in other respects. The Treasury Department promulgated a so-called treasury decision 4430 which later became a part of the regulations and which is the regulation applicable in this case. That is reproduced on page 3 of the Governments brief and in view of its importance to a case, I think perhaps I should read it. It says, “Whether the acquisition or disposition by a corporation of shares of its capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction which is to be ascertain from all its facts and circumstances.” The receipt by a corporation of the subscription price of shares of its capital stock upon their original issuance gives rise to neither taxable gain nor deductible loss whether the subscription or issue price be in excess of or less than the prior or stated value of such stock. But, if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as well as the corporation were dealing in the shares of another. So, also if the corporation receives its own stock as consideration upon the sale of property by it or in satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the same manner as though the payment had been made in any other property. Any gain derived from such transaction is subject to tax and any loss sustained is allowable as a deduction that were permitted by the provisions of the Internal Revenue Code. Now, this Court had the section of the regulations or a predecessor which was substantially identical with it. Before it, in the Reynolds Tobacco Company case which was decided, I think, in the year 1939. However, the question involved in that case had to do only with the retroactive application of this change in the regulations which as I have said took place in 1934. The Treasury decision purported to make the new regulation retroactive as far back, I think, as 1924 or 1926, the transaction involved in the Reynolds Tobacco case have taken place in 1929 and the question was whether the new regulation or the old regulation applied to that transaction. The Court held that the old rule the pre-1934 rule under which a corporation was held to realize either gained or loss on the sale of treasury stock had acquired the force of law through repeated reenactment of the underlying statute without any substantial change, and that therefore the new regulation could not govern the tax consequences of a transaction which took place in 1929, five years before it was adopted. The Court expressly reframes from passing on the question whether the rule of the old regulation could be altered for the future by administrative action or whether legislative action was necessary. However, in later cases such as the Wilshire Oil case in -- in volume 308 and the Reynolds case, not the Reynolds Tobacco case, the Reynolds case in volume 313, the Court did deal with that question of a prospective change in regulations and held that administrative regulations, even though buttress by repeated reenactment of the underlying statute did not become so completely frozen into the law as to preclude the possibility of a change for the future through an appropriate exercise of the administrative rule making power. The Court of Claims in the instant case didn't expressly pass on this question of the validity of the regulation because it found it possible to decide the case in the taxpayer's favor on other grounds. However, in an earlier decision in the (Inaudible) case, which is cited in the Governments brief, cited in 1945 which involved this regulation. The Court of Claims expressly approved the regulation, sustained its validity and all of the Courts of Appeals, there have been six of them which have considered this question of the validity of the new regulation have sustained it. And I submit that in the light of the Wilshire Oil and the Reynolds cases, there can't be any doubt about the power of the Treasury Department to change the rule for the future, notwithstanding the implied Congressional approval of the earlier rule. The Court of Claims -- what the Court of Claims held was that under what it considered to be the correct interpretation of the regulations, this $400,000 excess of the proceeds of sale of these treasury shares, over their cost to the corporation was not income because as the Court of Claims construed the regulation, the respondent corporation engaging in these transactions and it's own stock was not dealing in it's own shares as it might in the shares of another corporation. And the reason that the Court of Claims gave for that conclusion, the principal reasons were these. It said first that the corporation did not purchased these shares at opportune times that is it wasn't purchasing -- purchasing them with a view to striking a bargain or for what the hope of getting them cheap and making a profit on them at latter date. Second reason it gave was, that in -- in purchasing the shares the corporation was fulfilling a contractual obligation that is the obligation under this 1931 agreement to purchase the shares held by the estate of the deceased stockholder. The third reason that it gave was, that the time of the resale of the shares was not dictated by the potentiality of profit. In other words, the shares were not resold by the corporation because it could get a good price for them, but they were resold in accordance with its policy of the distributing shares among the management group. The Court also stressed the fact that the overall purposed of the purchases and the resales was not to make a profit but to restrict the ownership of the stock and to provide an incentive to the management. In brief, the Court of Claims took the view of the regulations which has been rejected by -- as I have said all of the Courts of Appeals which have considered the question, namely that a corporation is to be deemed as dealing in its own stock as it might in the stock of another corporation only if it is engaging in transactions in its own shares with a profit motive typically, when it buys and sells it shares on the open market. Now, strangely enough in its earlier decision in the (Inaudible) case, which the Court said here without any explanation was distinguishable on its facts. In its earlier decision in that case, the Court had relied on some of the Court of Appeals decisions, the reasoning of which it now repudiates. The -- the position taken by the Court of Appeals on the other hand with respect to the meaning of this regulation is that the motive with which shares of stock of a corporation are bought or sold by the corporation is immaterial. That it's immaterial that purchases on sales are made in the fulfillment of some contractual obligation that the corporation may have assumed that what is important and the only thing that's important is what the corporation does, and not why it doesn't. The distinction that the Court of Appeals at least the more articulate opinions in the Court of Appeals draw -- the distinction that is drawn between taxable and non-taxable transactions by a court in -- in dealings by a corporation in its own stock, is the distinction between transactions which involved an adjustment of the corporations capital structure and those which don't involve an adjustment of the corporation's capital structure. That this is the distinction that the regulations seek to draw, I think, is indicated by the origin of the regulation. The change in 1934, followed upon decisions of several of the courts, particularly, the decision of the Court of Appeals for the First Circuit in the S. A. Woods Machine Company case in 1932 and as a matter of fact this language that this case revolves around that if a corporation deals in it's own shares, as it might in the shares of another corporation was lifted almost verbatim from the opinion of the Court of Appeals for the First Circuit in that Woods Machine Company case. That case involved a somewhat different question, the question in that case the corporation had accepted shares of its own stock held by one of its shareholders. In settlement of a claim which it had against the stockholder for a patent infringement and the question was, whether in receiving those shares in that manner and for that purpose, the corporation realized income. The Court of Appeals reversing the Court of Tax Appeals said that it did and it's opinion it drew this distinction, which I have mentioned between capital transactions which it defined as being transactions in connection with readjustment of the corporation's capital structure on the one hand and on the other hand, transactions not connected with the readjustment of the corporation's capital structure which it defined as transactions in which the corporation deals in its own shares as it might in the shares of another. That is transactions in which the stock of the corporation is treated essentially no matter what -- what the correct theory maybe, but it's treated as practical matter essentially as though it were any other kind of an asset.
Speaker: What do you -- what do you understand in that provision the regulation to mean, where it says it may deal as it may deal with the shares of another corporation? What's that mean?
H. Brian Holland: Well, I --
Speaker: Just simply mean the power to buy?
H. Brian Holland: I think it means buying and selling its own shares as it might --
Speaker: Well, just to --
H. Brian Holland: -- say as to another corporation.
Speaker: -- if it just have the power to buy the shares of your corporation and -- and the -- and have the power to buy shares of another corporation, is that enough?
H. Brian Holland: Well, I think it's -- I think it's a question of what -- what you do. Of course if --
Speaker: That's all that was done here, wasn't it? They just bought their own stock.
H. Brian Holland: The -- the authority is part of it and this corporation have the authority both under the Delaware law and under its own charter.
Speaker: They were speculating in --
H. Brian Holland: No. They weren't -- they weren't --
Speaker: -- they were buying it for an investment?
H. Brian Holland: No. They weren't.
Speaker: They bought it for the three specific purposes that the Court of Claims said they bought it.
H. Brian Holland: I think that's correct, Mr. Justice. But what --
Speaker: I don't -- I -- I'm wondering what the -- what that -- what that means, is what you have to -- have to -- to show as to dealing with other shares.
H. Brian Holland: Well --
Speaker: How much dealing must there be?
H. Brian Holland: What -- what I was trying to suggest was, that the -- the meaning of that phrase can be determined by seeing the context in which it was used in its -- in the place it originally came from which is in this decision of the -- the opinion of the Court of Appeals for the First Circuit, where the Court attempted to draw this distinction between the transactions and stock, which are connected with the readjustment of capital structure. That would be typically an original issue of stock or reduction of capital on the one hand and transactions of all other kinds which the Court described in this language, which we now find in the regulations, that is dealing in its own shares as it might in -- in any kind of an asset.
Speaker: How much dealing must there be?
Speaker: Mr. Holland, what -- what would be the difference between purchasing if -- if they had reduced their capital and that have been sold -- increase the capital again at a higher price of shares. Would that been just like this transaction?
H. Brian Holland: Well, I think as the regulation says it would depend on all the facts and circumstances.
Speaker: Well, take the circumstances in this case. Instead of carrying this stock in -- in their treasury as I understand it then, they have to use the amount of capital understanding of shares outstanding of the amount they bought. And later reinstated the original amount and had sold at the price that they received for these shares that they sold.
H. Brian Holland: Well --
Speaker: As I understand it, they did put it into a surplus account.
H. Brian Holland: They -- they held it in a -- in a so-called treasury stock account so that --
Speaker: If they -- if they've done what I suggest, there would not have been (Inaudible)
H. Brian Holland: Well, Mr. Justice, I think that's an arguable question. Ordinarily, I agree that if a corporation retires shares in the formal sense and reduces its capital and then sometime later for some reason decides to -- to issue some more shares that -- that would not be considered a -- a transaction in which taxable gain would be involved. On the one hand, if there is such a relationship between the purchase on the one hand and then there -- the issue of the new shares, I mean if they all seems to be a part of -- of one plan then I think perhaps a different result might be justified.
Earl Warren: Mr. White.
John C. White: May it please the Court. In the fall of 1943, in Anderson, Clayton after reviewing its operations, concluded that certain men had -- had and were contributing considerably more to the management operations of the business. And that they were entitled to a greater participation in earnings. Mr. Holland has pointed out that this is a management business and whether it makes a profit or not, depends on the experience and the ability of the management and therefore, that subject has required constant attention from the corporation. To accomplish this purpose of giving these men a greater participation in earning, the directors approved the sale to them of the 6500 shares of treasury stock, at a price of a $112.68 a share. Now, that price was determined by an analysis of the surplus of the corporation, which was prescribed by the charter itself. That charter is a very unusual charter, it's very difficult to work out and it's worked only in connection with a stockholders agreement also. But the price of a $112.68 was just the representative of what had been accumulated by the corporation in the way of earnings prior to the transfer to these shareholders. Now, they had held some stock previously, but these were additional amounts to most of them. They gave for these shares their demand notes under which they had the right to attorney stock in settlement of a note or to pay the amount which was $112.68 per share. The treasury stock had been acquired at the death of Mr. Anderson and at that time its share -- his share in the distributed or undistributed earnings was $50.79 or that amount less $1. This stock was originally issued to him at $1 a share and he received $943,373.46 for it or his estate received that because that was the earnings which had been accumulated while he owned it and under the -- the contract while he was entitled to share in those earnings. Taxpayers approach to this problem has been a simple one.We raised no question as to the validity of the treasury regulations. We simply said to the Court of Claims, "Apply the treasury regulations to the facts of this case." Now, there was little controversy as to the facts either. As a matter of fact, there was a joint request for findings of fact and the Court followed that request almost verbatim including this finding that in substance, these transactions involved in the case of purchases by the corporation, a withdrawal of the earnings and the -- for the fact that in the case of sales by the corporation, it amounted to contribution of capital and the deposited earnings by deposit of the same amount which other common stockholders had at risk from that day forward. When we turn to the regulations, we say that the real nature of the transaction must be ascertained from all its facts and circumstances and that among those, is did the taxpayer deal in its own stock as it might those of another corporation. This regulation under the Helvering versus R.J. Reynolds Tobacco case is certainly, it seems to me, an order. True they left -- you left open there the question of whether a rule which should become incorporated in the statute could be changed by regulation rather than by Congress. But in the Wilshire case, you seem to say that for the future a regulation can be changed. But we said to the Court and we say to this Court that the regulation was not changed insofar as it applies to this particular case and to the facts which the Court of Claims found here. Now, just about the time this case we decided, Congress had this subject onto consideration and it enacted the rule which the Court of Claims put into effect here. It said that no gain or loss shall be recognized to a corporation on the receipt of money or other property in exchange for stock including treasury stock of such corporation. That is in the 1954 Act and, of course, it was not applicable to the particular transaction. The Committee reports pointed out that on the present law whether the disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductable loss depends under certain decisions. Those were the decisions of the Court of Appeals, which were four which had reversed Tax Court decisions upon whether the transaction constitutes a dealing by a corporation in its own share, which is to be ascertained from all the facts and circumstances. That seemed to us to say, that so far as Congress is concerned the rule was it, the question depends on whether the corporation dealt in its own stock as it might dealt with another corporation. The purpose of this section is to remove the uncertainties of the present law.Now, turning to the facts, we've said that for three reasons here the corporation did not deal any stock as it would to have another corporation because of the very nature of the stock, because of the used made of it and because of the effect. Its nature I have already pointed out it was unique, it was issued at $1 a share, back of some $25 million of 6.5% preferred originally. At this time, it stood back of 16 million long-term debentures and 32 million preferred stocks which were -- both of which were irredeemable. There were no preemptive rights, none of the charters the directors have had and were given full discretion as to the persons to whom it could be issued and the price that which it could be issued. If it were retired, as Justice Reed suggested, it could be immediately reissued at any price, the directors might think it was appropriate.
Speaker: Well, if this stock had not had these special provisions, would then would you come out the other way?
John C. White: As to the -- we think that again that is one of the facts and circumstances which the Court of Claims was required by this regulation to consider and I don't' know that the change in that one fact would change the total picture. But because this is, in its nature, so very unique and obviously can be used only for a purpose of this sort, it has no marketable value. That it was not permitted to be marketed that we think that that is an important fact. As I say, I don't know that we've come out the other way, but that is a strongly supporting fact. Another feature of this stock was that after 1938, when a company was reorganized that it had in a sense, a preference of its own. After 4% accumulated was earned on preferred, then $5 a share on its share of this common was turned over to a common stock surplus which was setup by the charter itself on the books of the corporation. And that $5 plus 4% on the amount in the common stock surplus was a preference to common. Then after that had been set aside, preferred got one-half of the remainder of the earnings and these 100,000 shares of common got the other half of the earnings. Now, as I say we -- we think that the nature of the stock is important, then its holding was limited to the actual participating management. Upon the death, it was retired immediately and automatically under the contract at a price which was designed to approximate the earnings of the corporation during the period the man had held the stock. It was subject to reallocation if the management concluded that Mr. (Inaudible) and Mr. (Inaudible) wasn't earning and wasn't performing functions which entitled him to the amount he was receiving, he could be directed to sell it to transfer to someone else. If Mr. (Inaudible) decided that he was tired of the business and wished to retire, he could turn it back into the corporation and the corporation was legally obligated to distribute to him in payment the amount which has been earned while he held that stock. In short, there's a Tax Court found in an earlier case involving same stock and at 8 T.C.706, and by the way these findings of the Tax Court, a part of the record here by stipulation, this stock was not marketable but for use to distribute profits in proportion to active participation in business. It was not only designed for that purpose, it was used for it while before Anderson's death, 23,000 shares had been transferred by Mr. W.A. Clayton and Mr. M.D. Anderson to junior members of the management because those junior members of the management were assuming greater responsibility and performing more important duty. The payments made out for the stock was solely made in case of death and in the case of M.D. Anderson as I say, he received $900,000 more than he originally paid for. Sales made by the corporation which were of this stock which has been acquired in the case of death or acquired of that stock were made only to management. Now, as the affected of the transaction that's been indicated in part but this stock was issued for $18,574. Corporation paid $943,000 for it. It immediately sold or shortly thereafter sold 3000 shares of it at less than it paid for it because of a change in the common stock surplus. If the loss was not deducted, the loss -- there'd be a loss because it was regarded as a capital transaction. Then the -- this 6500 shares was sold for the $732,000 derived in a way I have pointed out. It was treated on the books of the capital transaction. The $732,000 was entered into the common -- charged to the common stock surplus of the corporation. I have mentioned the findings of -- Mr. Holland also did, that in substance, this was in the case of purchases by the corporation, a withdrawal of earnings and in the case sales a contribution of capital. And the fact, that these findings were jointly requested by the taxpayer and the Government. So, we have said that the fact as they are and as the court -- as the Government agreed they were and as the Court of Claims found them, brought that Court to deflect questions whether the fact that shares acquired back from M.D. Anderson were not legally retired, legally compelled the decision for the Government regardless of all other facts and circumstances and regardless of the substance of the transaction which it had placed before it. That was frankly an open position of the Government and the court below. Despite Government active thoughts, the taxpayer believed that, that must be the Government position here. The -- this Court has recognized that findings of fact to the Court of Claims are either binding on it or at least entitled to the greatest respect. And of course so far as any tax or trial tribunal is concerned, it has recognized that the facts found by them are to be respected in such cases, (Inaudible). I think the care with which the Court of Claims examined the facts here as shown by the fact that this decision was written by Judge Littleton who wrote the decision of the Court in the (Inaudible) case which the Government counsel mentioned. The both decisions by the way were unanimous. Judge Littleton brought the facts in that case, justified -- making it taxable and the facts in this case showed that the transaction was -- did not amount to dealing in its stock as it would those of another corporation. So far as that question of whether it's traded share or an issue to shares that are sold. It seemed to us and the Court points out that that's the question of mechanics of form rather than substance under these particular facts where $1 a share was the total capital involved on -- in connection with the stock whether the corporation actually retired that stock was meaningless from every economic point of view. This treasury stock too had none of the important qualities of -- of stock while it was in the hands of the corporation. It couldn't -- it didn't vote, it couldn't be counted for forum, it didn't receive any dividends and as a matter of fact, no investor would pay a cent more for it than for the property of the corporation because it held the stock in its treasury. We've also pointed out that in other tax fields, the Government has treated this question of whether treasury stock is unimportant. And the question of stock dividends for instance, originally attempted to say that treasury stock is property and therefore when it's distributed it is taxable, even though the stock dividends paid from an issued stock are not taxable. That was decided against it by the Tax Court in the Bruckheimer case and then the Treasury in P.D. 5290, went along with the decision of the Tax Court. In the question of whether a -- a particular purchase or redemption is equivalent to a dividend, the courts have held that the question of whether the stock is retained, the retired is unimportant. And then the case of invested capital again it has indicated that it regards that question is unimportant. I might also say, that so far as the S. E. C. is concerned it -- it is required that treasury stock be treated as a not being property and it's also required that any income made from it be placed in a capital account rather than placed in earned surplus. We have thus concluded that in substance of this transaction, insofar as the corporation is concerned was its receipt of this $112.68 under --- under a binding agreement to return it to the payor upon his demand or if he wish to, he could turn it back to the corporation in payment of his notes. It's difficult to see how the corporation made any profit from this contract. From the point of view of the other stockholders, if you look at the corporation as being an irrigation of stockholders, it's equally difficult to see how they profited when all the contribution affected was an equalization of the position of the two -- of -- of these new shareholders with those of the stock, then outstanding.
Speaker: A problem -- between the time that the corporation acquired the stock when it sold it while the -- the stock that was in the treasury went for and decided this the same as the other stock. It didn't belong to the other people. It didn't belong to the present stockholders. They get an addition when they sold?
John C. White: No. So far -- so far as the other stockholders were concerned they were left in the exactly the same position because as the -- under the charter and as this value was calculated it was $112.68 a share, the value that each one of their share is representing. Now, assume that this was sold, each share still represented $112.68 per share so that, it meant nothing to the other stockholders. The Government in this brief and Mr. Holland both indicated that they have a question as to whether the view or purpose for which the transaction is entered is of any importance. I'd like to point out that in the question of gifts. This Court said its important. The question of whether a man is a traitor or a dealer, it's regarded as very important. The question of hedging is regarded as rather important whether or not he has a motive of balancing his risks or not. In the questions of whether a certain payment to a corporation is a contribution to capital, the motive is also of considerable importance. And now, as to the Court of Appeals decisions, actually no Court of Appeals decision involved this question so closely until long after the transaction here involved took place. The Tax Court's decision for uniformity and along the lines of the Court of Claims decision and it was not until later that any Circuit Court of Appeals reversed those cases. We have felt that these Courts of Appeals did not really analyze the regulations in a way that the Court of Claims did. Now, the -- through it, the regulation originated with the Woods decision that Wood's decision can be supported only the ground that the corporation sold a property or right of another sort and received its stock in exchange. It kept that stock -- stock by the way and did not retire and the new regulation --
Speaker: The Tax Court has now joined the Court of Appeals has it not?
John C. White: The Tax Court, the same day about that this Court of Claims handed down its decision, threw up its hands and said, cited four decisions of the Court of Appeals and -- and went along with them. But it did not admit that it was wrong, I would say [Laughter] in its analysis of even those facts. And I might say this again that I believe that there are no other facts comparable to those that are involved in this case in any of the Tax Court decision.
Hugo L. Black: May I ask you this question?
John C. White: Yes.
Hugo L. Black: Suppose this has been just regular stock and it didn't have these conditions that you speak of, that you possibly point out. They have both the -- the exact amount of stocks all together (Inaudible). They've held that this is a waste of time, then had sold as to this same officials for the price they did or (Inaudible). I think it was sold or whatever it was. Would you say that it was taxable under the regulation involved, for the corporation?
John C. White: I think it -- it would certainly be a -- a different fact situation, but the question to my mind is -- is open. You have said that whether or not a transaction is capital or income that in the gain derived from labor or -- or from capital or that including from a sale or conversion of capital assets. Well, now there's a question where their treasury shares in the hands of the corporation are capital assets or assets of any nature. There are decisions in Justice -- Judge Learned Hand has insisted in great many cases that it's a -- meaningless to say that the corporation holding its own stock has anything because it hasn't any dividends, it hasn't any right to vote, it had -- has only the chance of disposing of it for renewing a contract to some other shareholders. In the stock dividend cases, it's where the Government first said here as an asset, they abandoned that position. So, I -- I would say that -- that there is a question as a Court of Claims have, as to whether any dealing in treasury stock is not a capital transaction.
Hugo L. Black: So that if it's just a regular corporate -- say the Texas Company buys 6000 shares of its stocks (Inaudible). What would you say about that?
John C. White: I think first that, the Dow Chemical case might be taken into the decision of the Court of Appeals on some facts about like that. And the Court said, that it could not imagine facts more like those of dealing in another corporation stock that were involved in that case. The corporation simply went into the market and bought some shares and then later time sold them. It had -- it treated as if it were an asset on its books. Its purpose was to realize the profit because they thought the shares were low at that time. It sold them their profit. There to my mind is the type of case which this regulation is designed to cover and which it may properly cover. Although as I say, the Court of Claims indicates that it had a sincere doubt as to whether any transaction in treasury shares could be regarded as taxable rather than capital in nature.
Hugo L. Black: If you're right in that, all the stockholders preceding the company would have to pay any increase of value and all those stockholders who could preceded the ownership of the company would have to pay but there would be no tax collected for the increase value during the time the company (Inaudible).
John C. White: The question of what increase in value is of a -- of a nonexistent --
Hugo L. Black: That's your (Voice Overlap) --
John C. White: -- chosen action (Voice Overlap) --
Hugo L. Black: That's your point.
John C. White: Yes, it is my point.
Speaker: I cannot understand why -- why there wasn't a profit made during this time of -- that they held a stock with the sale because the corporation, I'm going to say, earned a million dollars the -- before this, they divide it among all the shareholders including Mr. Anderson. Now, when that stock went into treasury, it no longer have to pay dividends (Inaudible). Is that much more to the other people.
John C. White: There was that much greater share in --
Speaker: Much greater income to --
John C. White: In the future earnings.
Speaker: In the future earnings.
John C. White: That's correct. It affected -- his death meant that the members (Inaudible) who were previously getting say 5% might being -- now getting 6% (Voice Overlap) --
Speaker: -- they're just doubled.
John C. White: For -- for instance, this sale of 6500 share was only 84,000 outstanding meant that common stockholder are that -- that there was 50,000 additional preference to this -- this common stockholder and it meant that each of the --
Speaker: It's -- it's only when you consider it does -- as the Court of Claims did, as I understand it, as a retirement and a further issuance of shares to escape the earnings --
John C. White: Well, you mean escape of redistribution of -- of future earnings.
Speaker: Yes.
John C. White: Anytime you retire shares or anytime you reissue them, you effect that same redistribution. Nothing in the world except none recognition of its importance --
Speaker: -- simply a retirement and a reissue.
John C. White: If in -- Except from the strict legal point of view it was because under the terms of the contract, the stock became meaningless and serve no purpose. It could have been -- we could have retired it and reissue -- resold this -- reissued this without any difficulty whatsoever other than (Inaudible) mechanics.
Hugo L. Black: You claim that there had been no -- consequences at all.
John C. White: None whatever.
Hugo L. Black: To anybody.
John C. White: Yes. We had absolute control of both the stock in the treasury and the stock in the unissued stock if -- if this has been retired. No preemptive rights and with the director's being given full responsibility for its reissuance. Thank you, sir.