577 F.2d 1038 (6th Cir. 1978), 76-2313, United States v. Fruehauf Corp.

Docket Nº:76-2313.
Citation:577 F.2d 1038
Party Name:UNITED STATES of America, Plaintiff-Appellee, v. FRUEHAUF CORPORATION, William E. Grace and Robert Rowan, Defendants-Appellants.
Case Date:May 05, 1978
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit
 
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Page 1038

577 F.2d 1038 (6th Cir. 1978)

UNITED STATES of America, Plaintiff-Appellee,

v.

FRUEHAUF CORPORATION, William E. Grace and Robert Rowan,

Defendants-Appellants.

No. 76-2313.

United States Court of Appeals, Sixth Circuit

May 5, 1978

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        Argued June 22, 1977.

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        William A. Barnett, Gerald C. Risner, Chicago, Ill., John L. King, Berry, Moorman, King, Lott & Cook, Detroit, Mich., Michael Allen for defendants-appellants.

        Philip Van Dam, U. S. Atty., Detroit, Mich., Scott P. Crampton, Gilbert E. Andrews, Appellate Section, Tax Div., Dept. of Justice, Washington, D. C., Myron C. Baum, Robert E. Lindsay, Charles E. Brookhart, G. Tomas Rhodus, Washington, D. C., for plaintiff-appellee.

        Before WEICK, PECK and LIVELY, Circuit Judges.

        JOHN W. PECK, Circuit Judge.

        Defendants-appellants Fruehauf Corporation, William E. Grace, and Robert Rowan were indicted for conspiring, in violation of 18 U.S.C. § 371, to defraud the United States by obstructing the lawful governmental functions of the Internal Revenue Service, to attempt to have appellant Fruehauf Corporation evade illegally the payment of federal excise taxes, and to aid or assist in the preparation and presentation of materially false and fraudulent excise tax returns for the appellant Fruehauf. Following a lengthy trial without a jury, the district judge found that appellants were guilty as charged. Appellant Fruehauf Corporation was sentenced to pay a $10,000 fine. Appellants Grace and Rowan were each sentenced to serve a prison term of six months and one day (the one day was suspended), followed by a two year period of unsupervised probation, and to pay a $10,000 fine. Appellants perfected this appeal. We affirm.

        I

        District Judge Thomas P. Thornton entered 142 findings of fact in his opinion 1 to support his conclusion that appellants were guilty as charged of having engaged in a conspiracy in violation of 18 U.S.C. § 371. 2 After examining the voluminous record in this case, we conclude that Judge Thornton's findings of fact were supported by substantial evidence and were not clearly erroneous. 3 The following statement of

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facts is based on the findings made by Judge Thornton.

The Indictment: The Parties and the Excise Tax Provisions Involved

        The corporation indicted in the present case, appellant Fruehauf, is a very large and well-known manufacturer of trailers. Appellants Grace and Rowan were top executives of the Fruehauf Corporation. During the period of the alleged conspiracy, appellant Grace served as vice-president (1955-57), executive vice-president (1957-58), president (1958-65), and chief executive officer (1959-65), and appellant Rowan held the positions of controller (1955-64), vice-president (1962-64), and vice-president, finance (1964-65).

        Named in the indictment along with appellant Fruehauf Corporation and appellant executives Grace and Rowan were two other Fruehauf executives, unindicted co-conspirators Kenneth A. Morris and Robert M. Chawner. From 1951 through 1965, Morris was the manager of appellant Fruehauf's Tax Department. In that position, Morris was responsible to appellant Rowan for the correct reporting of appellant Fruehauf's taxes. From 1955 to 1964, Chawner was appellant Fruehauf's assistant controller, and from 1962 to 1964, he was the controller of the Fruehauf Division of the appellant Fruehauf Corporation.

        Section 4061 of the Internal Revenue Code of 1954, 26 U.S.C. § 4061, imposes a tax on the sale of motor vehicles and parts (including trailers) by the manufacturer. 4 The tax is computed by applying the tax rate established in § 4061 to the motor vehicle or part "price." That "price" is defined in § 4216(a) of the Internal Revenue Code of 1954, 26 U.S.C. § 4216(a), as the price for which the article is sold; 5 however,

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§ 4216(b), as amended effective January 1, 1959, provides for a constructive sales price that enables a manufacturer which sells at both retail and wholesale to compute the excise tax on all sales based upon the highest price for which the motor vehicle or part is sold at wholesale. 6

        Appellant Fruehauf Corporation sold 94% of its trailers at retail and the remaining 6% at wholesale. By virtue of § 4216(b) and of a private ruling obtained by appellant Fruehauf in 1949, appellant Fruehauf used its wholesale price as the base for excise tax computations on all sales. 7 Just prior to the beginning of the conspiracy, in December, 1956, distributors of appellant Fruehauf Corporation paid 61.75% of the list price for the trailers, a discount of 38.25%.

        Section 6416(c) of the Internal Revenue Code of 1954, 26 U.S.C. § 6416(c), provides for tax credits that reduce the excise tax liability of a manufacturer. 8 A tax credit is given when a finished taxable article sold by the manufacturer includes parts that have previously been subjected to a separate excise tax. Hence, excise tax credits are given when trailers are sold with tires upon which an excise tax, in this case imposed by § 4071 of the Internal Revenue Code of 1954, 26 U.S.C. § 4071, has been previously levied. Appellant Fruehauf Corporation took such credits on the tires that were placed on their trailers.

        Appellant Fruehauf Corporation could thus reduce its excise tax liability by (1) reducing the price at which the trailers were sold at wholesale to distributors and (2) increasing the price paid for tires that were to equip the trailers. If, however, Fruehauf Corporation were to cut its excise

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tax liability simply by reducing its wholesale trailer prices and increasing the prices paid for tires, the net income total would be reduced more by the decreased gross income and increased tire expense than increased by the excise tax savings.

        The indictment in the present case, brought November 9, 1970, alleged that appellants conspired to obtain by two fraudulent schemes the best of two worlds, excise tax savings and income unaffected by reduced wholesale trailer prices and increased tire payments. The first scheme, which involved a supplemental billing plan, sought to reduce the excise tax base without reducing gross income. The second scheme was directed at generating excessive excise tax credits by computing the tire tax credit on invoice prices without adjustment for rebates. As overt acts charged to have been committed to further the conspiracy, the indictment alleged the filing of quarterly manufacturers excise tax returns for 37 consecutive quarters, beginning in the final quarter of 1956 and extending through the last quarter of 1965, returns which understated the excise tax liability of appellant Fruehauf Corporation in the amount of $12,344,587.31.

The Supplemental Billings Scheme

  1. The Meeting in Washington, D.C.: Approval of the Supplemental Billing System.

            On December 13, 1956, appellant Rowan and co-conspirator Morris met with appellant Fruehauf's Washington, D.C. counsel, Raymond Cushwa, of the law firm of Davies, Richberg, Tydings & Landa, and with W. K. Engel, of the accounting firm of Touche, Niven, Bailey & Smart. The purpose of the meeting was to obtain Cushwa's and Engel's approval of a "supplemental charge plan" that had originally been drafted by co-conspirator Chawner. The supplemental charge plan would break out of the price of a trailer charges for certain "extra" services allegedly rendered to appellant Fruehauf's distributors and would bill for those services separately. At the same time, the discount to distributors would be increased, and by lowering the wholesale price of the trailer, appellant Fruehauf's excise tax liability would also be reduced because the excise tax base for both retail and wholesale sales was computed on the wholesale price.

            Engel, in an inter-office memorandum written five days after the meeting, summarized the proposal presented on behalf of appellant Fruehauf by appellant Rowan and co-conspirator Morris.

    Fruehauf performs certain services for its wholesale customers which it does not perform for its retail customers. In the past the charges for these extras has been included in the invoice price to distributors and consequently in the excise tax base. Fruehauf has concluded that the charges for these extra services should be made separately and not included in the invoice price of the trailers in order to make the invoice price of trailers to distributors comparable to that to retailers. It is anticipated that the extra charges to be billed separately to distributors would approximate the $260 reduction in selling price due to the proposed additional discount so that the total received per trailer from distributors would be what it is at present. The advantage would be in obtaining a lower wholesale base on which excise tax would have to be paid and thus a saving in excise tax of about $26 per trailer on both wholesale and retail sales.

    The extra charges to distributors which Fruehauf has proposed are as follows:

    EXPENSE EXPENSE BASIS FOR CHARGE PER UNIT Advertising National advertising charge ÷ total units sold $ 34.00 General sales Executive sales expense expense per unit sold 58.00 Interest 4½ of average balance of equipment accounts receivable which are at present carried by Fruehauf until units are sold by distributors 164.00 Sales engineering Estimated 5.00

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    Sales manuals, Estimated 2.00 technical bulletins, etc. Legal and Estimated 5.00 accounting services _______ $268.00

    (Government Exhibit 16).

            Cushwa and Engel approved this proposal, stating to appellant Rowan and co-conspirator Morris that...

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