Section 145 of the Revenue Act of 1932 provides that 'any person who willfully attempts in any manner to evade or defeat any tax imposed by this title (chapter) or the payment thereof, shall in addition to other penalties provided by law, be guilty of a felony * * *.' 47 Stat. 217, 26 U.S.C.A. Int.Rev.Code, § 145. There are identical provisions in the Revenue Acts of 1934 and 1936. 48 Stat. 725; 49 Stat. 1703. Petitioners were indicted, tried, and convicted in the District Court for conspiracy to violate, and for violation of, this provision. The Circuit Court of Appeals, one judge dissenting, reversed. United States v. Molasky, 7 Cir., 118 F.2d 128. Because questions of importance in the enforcement of this criminal statute and the administration of the revenue laws were raised, we granted certiorari. 313 U.S. 557, 61 S.Ct. 1110, 1111, 85 L.Ed. 1518.
In computing net corporate income subject to tax, a deduction is permitted for 'all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered * * *.' Sec. 23(a) Revenue Acts of 1932, 1934, and 1936, 26 U.S.C.A. Int.Rev.Code, § 23(a). 47 Stat. 179; 48 Stat. 688; 49 Stat. 1658. 'Dividends' distributed from net corporate profits are not allowable deductions. But 'commissions', if incurred as necessary business expenses and as a reasonable allowance for personal services actually rendered, are deductible from gross income. The larger the allowable deduction the smaller are the net taxable income and the tax imposed. The first four counts of the indictment set out attempts by the defendants to evade income taxes of the Consensus Publishing Company for the years 1933 to 1936, through a fraudulent scheme whereby, under the guise of paying commissions which were deducted from gross income, the corporation distributed dividends deduction of which the statute does not permit. The fifth count sets out a conspiracy to accomplish similar results for the years 1929 to 1936.
After an examination of the evidence in the record including numerous exhibits, we are satisfied that the jury could justifiably have found the following facts to be true:
The Consensus Publishing Company, an Illinois corporation, was organized in 1929 to carry on the business of preparing 'rundown' sheets, daily bulletins containing information on horse racing, and selling them to bookmakers. The original stock ownership was distributed among Arnold Kruse (20 shares), James Ragen, Sr. (20 shares), William Molasky (30 shares), and Cecelia Investment Company (30 shares), a holding company controlled by Moses Annenberg, the dominant figure in several other corporations which were engaged in enterprises connected with betting on horse races. Kruse and Ragen were executives in other Annenberg companies. Molasky alone lived in St. Louis, where Consensus conducted its principal business operations, but he delegated to one Gordon Brooks, an employee of another corporation owned by Molasky, the job of collecting receipts, preparing records and reports, and supervising printing for Consensus, work which took Brooks an hour and a half a day on the average except for the one day each week when the preparation of operating reports for the Chicago office required about three hours.
For several years Consensus made a weekly distribution of money to its shareholders in direct proportion to their holdings. In the period covered by the indictment, only the 30% of the distribution going to Cecelia Investment Company was treated as dividends in Consensus' tax returns. The remaining 70%, although referred to in some of the corporation's confidential weekly reports to stockholders during the period as 'dividends', was nevertheless in its income tax return deducted from gross income as 'commissions.' The deductions thus claimed were $10,761 in 1929, $62,961 in 1930, $64,791 in 1931, $57,255 in 1932, $54,538 in 1933, $60,172 in 1934, $76,714 in 1935, and $119,756 in 1936. The bookkeeping system under which 70% of the funds remaining after payment of expenses was charged as commissions was set up in 1929 in accordance with instructions from Arnold Kruse.
