to heavyweight boxing bouts at Madison Square Garden which contained as a part of their legend a notation to the effect that the established price shown thereon included the "State tax." To this established price the Federal Admissions Tax was added and that amount was paid to the Government. The plaintiff contended that the Federal tax should have been based on the established price less the amount paid to the State. The Government contended that the State tax was a gross receipts tax rather than an admissions tax and was paid solely for the privilege of conducting the various events. The Government further contended that the plaintiff was not entitled to recover in any event because the amount of the tax, regardless of how it was computed, was paid by the purchaser of the ticket and that the promoters of the bouts were merely collecting agents of the Government and bore no economic burden. The Court of Claims sustained the Government in both contentions. The definite holding of the Court that the person who buys the ticket is the taxpayer is important in other similar cases which are pending.

b. The case of Ayer Co. v. United States, decided by the Court of Claims is important with respect to excise tax on cosmetics and the determination of the price on which the taxes are to be assessed. This case involved the application of sections 603 and 619 of the Revenue Act of 1932. The taxpayer contended that the tax should be computed on the price at which it sold cosmetics to its wholly owned distributing subsidiary, which price was the cost of production plus 15 percent, or that, in the alternative, if the tax was to be imposed upon the subsidiary's selling price the selling and advertising expenses were deductible before computation of the tax. The Court held that the price at which the plaintiff sold cosmetics to its wholly owned subsidiary was an artificial price and not the proper tax base and that selling and advertising expenses were not deductible before computation of the tax. Inasmuch as section 619 controls the determination of the excise tax not only on cosmetics, but also on a large number of other commodities, such as automobiles, radios, refrigerators, automobile tires and tubes, etc., the holding that advertising expenses are not deductible has an important effect on the revenues to be obtained under such taxes.

15. Tax litigation as affected by the new rules of civil procedure

The new Federal rules of civil procedure continue to be helpful in facilitating the expeditious disposition of civil suits brought by and against taxpayers. This is especially true with respect to the resort to motions to dismiss under subdivisions (b) and (c) of rule 12 and to motions for summary judgment in full or in part under rule 56.

In cases presenting genuine factual issues and not susceptible of disposition upon motion under either of the above rules, resort to depositions, interrogatories, discovery and request for admission under rules 26 to 37 and to the liberalized rule for cross-examination under rule 43 has proven advantageous. The courts have been alert to avail themselves of the new procedure to accelerate the disposition and settlement of litigation.

16. Criminal tax cases

The institution and supervision of criminal presecutions of alleged violations of the Internal Revenue laws, other than those relating to liquor taxes, constitutes an important part of the work of the Tax Division. While the number of criminal cases is relatively small compared to the total number of civil cases handled in the Division, the importance of this class of cases is such that they are handled by a separate section of the Division.

A case which is forwarded from this Division to a United States Attorney for the institution of criminal proceedings is one which has been carefully investigated and then subjected to painstaking scrutiny designed to eliminate those cases where the invoking of criminal penalties is not warranted. Such a case begins with a joint investigation by a revenue agent and a special agent of the Bureau of Internal Revenue. Upon the completion of the agents' investigation, a report of the special agent is sent to the office of the Bureau, and then to this Division, upon reference of the case by the Commissioner. At one or more times during the course of the consideration of this case, the taxpayer has an opportunity to present whatever facts and explanations he desires.

Criminal proceedings are not regarded as merely supplementing the ordinary civil remedies available for collections of taxes. The criminal penalties are separately imposed by statute for wilful violations, and are enforced accordingly. Where it has been finally concluded that substantial evidence of a wilful violation and a reasonable prospect of conviction both exist, the case is prosecuted, and cannot be disposed of by the mere payment of money alone. The only way in which the criminal aspects of such a case may be settled without a trial is by the entry of a plea to one or more of the major counts of the indictment. While the actual prosecution of criminal tax cases rests primarily with the respective United States Attorneys, this Division assists them in every possible way, drafting indictments, furnishing legal authorities, and frequently sending members of its staff to aid in the preparation and trial of such cases. This includes the preparation of briefs and memoranda for the trial of such cases, and in connection with appeals.

The criminal tax cases handled by the Department of Justice arise out of many different forms of evasion and related offenses under the Internal Revenue laws. An outstanding case in the year was that against Joseph M. Schenck the motion picture producer and his accountant Joseph H. Moskowitz. Indictments were returned in the Southern District of New York against Schenck and Moskowitz charging attempts to evade and defeat the income taxes of Schenck. Unlawful deductions for fictitious losses and personal expenditures in connection with Schenck's motion picture productions enterprises were claimed. Conviction followed and a sentence of 3 years and a fine of $20,000 was imposed upon Schenck and a sentence of a year and a day and a fine of $10,000 was imposed upon Moskowitz. The case is presently pending on appeal.

Another important series of income tax evasion investigations in and around Atlantic City, New Jersey, led to indictments against Enoch L. (Nucky) Johnson, a public officer of Atlantic County, New Jersey, Joseph "Zendel" Friedman and Austin Clark, "numbers" operators in Atlantic City, and others. The development of earlier cases revealed that Johnson in his capacity of political boss was receiving substantial sums of money as tribute which he did not report as income. Friedman and Clark were convicted. A sentence of 10 years and a fine of $20,000 was imposed upon Friedman. A sentence of 3 years and a fine of $2,000 was imposed upon Clark. At the close of the fiscal year 1941 the prosecution against "Nucky" Johnson was not completed.3

Convictions were also obtained during the year with respect to evasion arising out of gambling activities in and around Chicago, Ill. Three of the convictions were obtained against William R. Johnson and William R. Skidmore and Edward P. Jones, the latter of whom, with associates, operated illegal lotteries on Chicago's south side. Johnson was sentenced to 5 years and a fine of $10,000. Skidmore was sentenced to 21⁄2 years and a fine of $5,000. A sentence of 28 months was imposed upon Jones.

In the fiscal year 1940 the Department of Justice handled the prosecution arising out of the investigation of the Moses L. Annenberg enterprises. In the fiscal year 1941, William Molasky, a distributor of racing news and information in St. Louis, Mo., in connection with the Annenberg organizations, pleaded guilty to charges of attempting to evade his income taxes on income arising therefrom, and upon conviction a sentence of 18 months and a $10,000 fine was imposed.

Other convictions were obtained in the year with respect to racketeering, notably one obtained against George Scalise upon his failure

On July 25, 1941, "Nucky" Johnson was convicted and sentenced to 10 years in the penitentiary, fined $20,000 and assessed the costs of prosecution. It is understood that appeal will be taken in this case.

to report receipts extorted in labor racketeering. Scalise pleaded guilty to charges of attempted income tax evasion and a sentence of 31⁄2 years was imposed, to be served upon the completion of a sentence for State violation.

Other types of evasion in which prosecutions have been had arose out of the failure of a public official to report receipts in connection with public contracts and the failure of a banker and real estate operator to report bonuses derived from real estate loans. The former case was against Otto Rose, who, at one time, was president of the school board of Oklahoma City, Okla. Upon conviction a sentence of 10 years was imposed. Rose has appealed his case. The latter case was against Stanley S. Storch against whom there was also a perjury indictment. Storch pleaded guilty to both charges and concurrent sentences of 21⁄2 years and a fine of $3,000 were imposed.

17. Compromise of civil tax cases

Under the provisions of section 3760 of the Internal Revenue Code, and Executive Order No. 6166, the authority is vested in the Attorney General to compromise cases arising under the Internal Revenue laws which have been referred to the Department of Justice for prosecution or defense.

The efforts of a specially trained group of attorneys are devoted to the settlement and compromise of civil tax litigation. In general, it may be broadly stated that this Division recognizes the desirability in appropriate situations of an administrative as opposed to a judicial process for the disposition of cases and encourages civil settlements where there is a reasonable doubt as to legal liability or as to collectibility.

Compromise offers are referred to the Bureau of Internal Revenue, and, when appropriate, to the United States Attorneys, for their recommendations. Consideration is given to such briefs as may be filed in connection with offers in compromise and counsel for taxpayers are given ample opportunity to make oral arguments in conference. Memoranda are prepared by one or more attorneys in the Division and recommendations are made to the Assistant Solicitor General, who makes a final decision or refers the matter with his recommendation to the Attorney General.

Under section 3777 of the Internal Revenue Code, no refund or credit of certain kinds of taxes in excess of $75,000 may be made until the matter has been before the joint committee of Congress on Internal Revenue Taxation for a period of 30 days. Accordingly, it has been the practice of the Division in recent years to condition the acceptance of offers involving refunds in excess of $75,000 upon the approval of the joint committee.

REPORT OF ASSISTANT ATTORNEY GENERAL

WENDELL BERGE

IN CHARGE OF THE CRIMINAL DIVISION

[O. JOHN ROGGE, Assistant Attorney General to February 20, 1941; WEndell BERGE, Assistant Attorney General from February 21, 1941]

The Criminal Division, with a few exceptions, has jurisdiction over the prosecution of all Federal criminal cases and in addition handles various types of civil cases, such as those arising out of the administration of the Food and Drug Acts, the Immigration and Naturalization Laws, Internal Revenue Liquor Laws, and the Gold Hoarding Laws. The activities of the Division include the supervision of United States Attorneys with reference to trial and pretrial procedure and the supervision of appeals under the immediate direction of the Solicitor General.

The work of the Division is channelized through sections, as follows: Indictment, trial, appellate, general, civil rights, commercial frauds, and national defense. To each section is assigned particular and carefully defined functions. Therefore the activities of the Division will later be discussed in connection with each section.

During the fiscal year 1941, 31,823 criminal cases involving 48,735 defendants were filed and 32,207 cases involving 49,237 defendants were terminated. Of this number 40,100 defendants, or 81.4 percent, were convicted. On a case basis, convictions were had in 96.7 percent of all cases prosecuted to a conclusion. Convictions resulted in 87.4 percent of all cases disposed of, including those by way of dismissal or nolle prosequi. Two thousand two hundred and three defendants were acquitted; nolle prosequis were entered as to 4,151 and indictments were quashed or dismissed in the case of 2,391 defendants.1

The total amount of fines imposed was $6,626,433.11; the total amount collected was $2,114,119.12, a gain of 16.3 percent over the fiscal year 1940.

Although there was a decrease in the number of defendants in cases terminated during the fiscal year, other work devolving upon the Division increased materially. The greatest single accretion has

1 See statistical tables marked Exhibit 3, compiled from the reports of the 94 United States Attorneys, showing the number of defendants in the more important classes of criminal cases filed and terminated during the fiscal year 1941.

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