Full opinion text
TIMBERS, District Judge. Defendant has made a timely motion, pursuant to Rule 50(b), Fed.R.Civ.P., to set aside the jury verdict in the form of answers to special questions and the judgment in favor of plaintiff entered thereon; for entry of judgment in favor of defendant in accordance with defendant’s motion for a directed verdict; or, in the alternative, for a new trial. Plaintiff brought this action, pursuant to 28 U.S.C. § 1346(a) (1), to recover $478,040.71 of accumulated earnings taxes claimed to have been erroneously assessed and collected for the years 1956, 1957, 1958 and 1959. After an eight day trial, the jury returned a verdict in the form of answers to special questions, attached hereto as an Appendix. The jury found for each of the four years involved (i) that plaintiff had permitted its earnings or profits to accumulate beyond the reasonable needs of its business, but (ii) that plaintiff had not made such accumulations for the purpose of avoiding the surtax on plaintiff’s stockholders. Pursuant to a stipulation entered into between counsel, prior to submission of the case to the jury, for the entry of judgment depending upon the jury’s answers to the special questions submitted, a judgment has been entered in favor of plaintiff in amount of $475,133.35 plus interest thereon according to law. Defendant’s motion raises issues with respect to the correctness of the Court’s denial of defendant’s motion for a directed verdict; the sufficiency of the evidence to support the jury’s answers to the second special question; and the correctness of the Court’s charge to the jury on the second special question. Specifically, with respect to the charge, defendant claims “that the jury was improperly instructed that the proscribed purpose must be the purpose of the accumulations.” The Court denies defendant’s motion. An order has been entered accordingly. The reasons for denying the motion are reflected in the annotations to the charge hereinafter set forth, it being the belief of the Court that the portions of the charge challenged by defendant can best be evaluated in the context of the charge as a whole and in the light of the authorities upon which the Court relied. The Court’s charge to the jury, annotated to indicate the authorities relied upon, was as follows. COURT’S CHARGE TO THE JURY I FUNCTION OF COURT AND JURY THE COURT: Ladies and gentlemen, we have now reached the point in this trial when it becomes our joint function —the function of the jury and the function of the Court — to perform our respective duties. It is the function of the Court to instruct you to the best of its ability with respect to the law applicable to this case. You members of the jury are the sole and exclusive judges of the facts. You will apply the law, which the Court gives you, to the facts as you find them. You then will render a verdict by a unanimous vote. U NATURE OF CASE In this action, plaintiff Duke Laboratories, Incorporated — from this point on I will refer to it as the plaintiff — is suing to recover accumulated earnings taxes paid under protest to the United States Government- — hereafter referred to as the defendant — for the tax years, which are also the calendar years in this instance, 1956, 1957, 1958 and 1959. The case arose as follows: Plaintiff paid the regular corporate income tax upon its earnings in the four tax years involved at the maximum rate of fifty-two per cent. Defendant caused an audit to be made of plaintiff’s tax returns for these four years, which was the defendant’s right, to audit the returns. As a result of the audit, defendant determined that plaintiff had allowed its earnings during these four years to accumulate beyond the reasonable needs of its business. Defendant accordingly assessed the accumulated earnings tax provided by the statute. This resulted in the assessment of taxes and interest, in addition to the regular corporate income tax theretofore paid, against plaintiff in the following amounts for the four years in question. These are the four amounts applicable to each of the tax years involved, not with interest. These are the amounts of principal tax claimed to be due, accumulated earnings tax claimed by the Government to be due from the plaintiff: 1956 — $129,021.56. 1957 —$125,257.35. 1958 —$104,877.71. 1959 — $118,884.09. These amounts, totaling, if my arithmetic is correct, $478,040.71, were paid by plaintiff under protest. Plaintiff has brought this action, as provided by law, to recover this amount, plus interest. The regular corporate income tax which plaintiff paid upon its earnings at the maximum rate of fifty-two per cent for each of the tax years involved, is not involved in this action. What is involved, and the only tax that is involved, is an additional tax known as the accumulated earnings tax, which was assessed because defendant claimed that profits or earnings of plaintiff were accumulated instead of being distributed as dividends to the stockholders, for each of the tax years involved, and the defendant claims that this was done for the purpose of avoiding the income tax of the share-Folders on these dividends, had they been •declared. I might say parenthetically, that not •only is the jury not concerned in any way with the regular corporate income tax of Duke Laboratories, which has been paid for the four years involved, reflected in tax returns which are in evidence, but the jury also is in no way concerned with whether or not the tax of Mr. Herzog individually for those years has been paid. In fact, it is undisputed, and the record is clear that his returns were filed in time, and his taxes were paid in full. You are in no way concerned with either the personal income tax of Mr. Herzog for that period of those four years, or with the regular corporate income tax of the plaintiff corporation. This action is brought against the United States because the taxes sought to be recovered were paid by the taxpayer — that is, by the corporation — to the Treasury Department, an agency of the United States. The plaintiff as a private corporation is a taxpayer. In bringing this suit for a refund, the plaintiff is exercising its right as a taxpayer. The fact that the plaintiff is a corporation, and that the defendant is the United States, makes no difference whatsoever in this action. It is simply a civil action between two parties, as I have indicated. Those two parties, the plaintiff, Duke Laboratories, and the defendant, the United States, are equal before the law. Each should be given the same fair and equal treatment by you. Before taking up the statute which we have here involved and a rather detailed analysis for you ladies and gentlemen of the principles of law which you should apply in answering the two basic questions which will be submitted to you and which are substantially the two that I mentioned to you at the outset of this trial — before getting to those matters, which I think Mr. Wilson quite correctly characterized yesterday in his argument to you as the tax law part of the case — I am going to take up first what Mr. Wilson characterized as the non-tax law aspects of the case. That is, the general rules of evidence which govern. First a brief statement of what the evidence is, what it consists of here, the matter of burden of proof, to what extent you may take into account circumstantial evidence, and how you go about determining issues of credibility. I am going to take up those matters and then I will follow that with instructions to you as to the applicable statute and the rules of law which govern, which I hope will help you in reaching a verdict. m WHAT CONSTITUTES EVIDENCE What is evidence? The evidence in the case consists first of the sworn testimony of the witnesses. I believe there were four witnesses on the stand: Dr. Herzog; Mr. North; Mr. Hesse, the bookkeeper of Duke Laboratories, who was made available to identify books; and Mr. Logan, who, I believe, was the Internal Revenue Service agent yesterday. They were the four witnesses who testified. The evidence also includes any depositions or portions of depositions which were read to you or in any way used by counsel on either side. The evidence includes all exhibits, all of which will be with you in the jury room when you begin your deliberations; that is, all exhibits which have been received as full exhibits in evidence. Plus any stipulations of fact which have been entered into between the lawyers in your presence, and which have been brought to your attention. Any evidence as to which an objection was sustained by the Court, and any evidence ordered stricken by the Court, must be entirely disregarded by you. Statements and arguments of counsel are not evidence in the case, unless made as an admission or stipulation of fact. IV BURDEN OF PROOF AND PREPONDERANCE OF EVIDENCE In this case the burden of proof on all issues is on the plaintiff, that is, Duke Laboratories, Incorporated. And that burden of proof never shifts. It remains with the plaintiff throughout the case and throughout your deliberations until you reach a verdict. The burden in this civil case, as in any civil case, is on the plaintiff to establish each essential element of its case by a preponderance of the evidence. What do we mean by a preponderance of the evidence? To establish by a preponderance of the evidence means very simply to prove that something is more likely so than not so. In other words, a preponderance of evidence means such evidence as, when considered and compared with that opposed to it, has more convincing force and produces in your minds the belief that what is sought to be proved is more likely true than not true. In effect, the question which you may well ask yourselves in this connection is: Does the evidence of the party with the burden of proof carry, the greater weight in your mind? Perhaps an illustration, which many of you have heard before, will aptly describe what is meant by the expression “a preponderance of the evidence,” in a civil case. I stress the fact this is a civil case because a good many of you have served in criminal cases in this Court where the burden of proof is on the Government to prove each essential element of the case beyond a reasonable doubt. Here the burden of proof is not on the Government; it is on the plaintiff, the taxpayer, and the burden is simply to prove the case by a preponderance of the evidence, not beyond a reasonable doubt. Just assume, if you will, an apothecary scale. As you evaluate the evidence in going over the entire case, you place on the plaintiff’s side of the scale the credible or believable evidence that supports-its position — that is, which commends-itself to your belief. With respect to the evidence that favors the defendant, you place that on the-defendant’s side of the scale, and you continue that process until you have concluded your consideration of the entire-case. You, of course, take into account the various exhibits that have been offered in evidence by both sides. If, after considering all the evidence and the exhibits and the reasonable inferences to be drawn therefrom, if you then find that the plaintiff’s side of the scale is weighted in its favor, no matter how slightly, then the plaintiff has sustained its burden of proof. If, on the other hand, you find that the scales are in balance, that is, even, or in dead center, then the plaintiff has failed to sustain its burden of proof. And, obviously, if you find the scales tilt in the defendant’s favor, then clearly the plaintiff has failed to sustain its burden of proof. V CIRCUMSTANTIAL EVIDENCE A word or two about circumstantial evidence. Evidence may be established not merely by proof of facts, attested to by witnesses or demonstrated by documents, which are in evidence, but evidence may also be established by inferences which follow with reasonable certainty from proven facts. Thus, both direct and circumstantial evidence is permissible evidence. Each-type should be treated equally. In weighing the evidence, you must consider the defendant’s evidence as well as the plaintiff’s evidence. The defendant’s evidence, both what is brought out on cross-examination of the plaintiff’s witnesses and what the defendant itself has presented in the form of documents or testimony, must be weighed by you along with all the facts admitted and the other evidence in the case, in determining whether or not the plaintiff has established its claims by a preponderance of the evidence. In this connection, I must caution you that, while you may draw inferences ffrom admitted facts, inferences may not be drawn from other inferences; or, put another way, inferences may not be piled ■one upon the other; nor may one presumption be superimposed upon another presumption in order to reach a factual ■conclusion. Finally, you should be careful to avoid resorting to speculation, conjecture, or ¡guesswork — under the guise of relying ■on circumstantial evidence — in order to determine critical facts in this case. VI CREDIBILITY OF WITNESSES As in any case, one of the most important functions of the jury in arriving at your determination of the facts, as judges of the facts, is to evaluate the credibility of witnesses. And that applies here with equal force. Obviously, the plaintiff relies heavily upon the testimony of Dr. Herzog and the testimony of their expert, Mr. North; -the Government in turn relies upon evidence that was brought out on cross-•examination by Mr. Wilson of both Dr. Herzog and Mr. North. Now, here are a few simple common .-sense rules which may aid you in evaluating the testimony of those witnesses. I ,do not mean to exclude Mr. Logan, but I think we all understand he simply authenticated and verified the facts that •-are on the charts, Government’s exhibits •that were put in evidence on the last day. In weighing the evidence, you may use the tests you would ordinarily use in determining the truth of matters important to you in your everyday life. You may consider the demeanor of the ■witness on the stand; any interest which the witness may have in the outcome of the case; any bias or prejudice for or against any party; the witness’ opportunity to observe; any reason to remember or forget; the inherent probability of his story; its consistency or lack of consistency; and its corroboration or lack of corroboration with other credible evidence. In this connection, you may also bear in mind that if you should find that any witness has deliberately testified falsely on any material point, you may take that into consideration in determining whether he has testified falsely on other points. Simply because you find, if you do, that a witness has not testified with respect to one fact accurately, it does not necessarily follow that he is wrong on every other point. A witness may be honestly mistaken on one point of his testimony and may be entirely accurate on others. But if you find that a witness has deliberately lied on any material point, it is only natural that you should be suspicious of his testimony on all points; under those circumstances you are entitled to disbelieve his entire testimony. Whether you do disbelieve it or not lies in your own sound judgment. In passing on the credibility of a witness, you may consider whether that witness has any bias or interest in the outcome of the case; and, if so, whether he has permitted that bias or interest to .color his testimony. It does not follow' simply from the fact that a witness does have a bias or an interest in the outcome of the case that his testimony is to be disbelieved. There are many people who, no matter what their interest in the outcome of the case may be, would not testify falsely. On the other hand, you should always bear in mind, that if a witness has a decided bias or interest in the outcome of the case, that may offer something of a temptation to shade his testimony in accordance with his bias, or sway him to advance his own interest. It may even be that his bias or interest has so operated on his mind that he has come to believe what he wants to believe; he may, therefore, slant his testimony, or even testify falsely without consciously realizing it. If any witness whose credibility you are testing has some bias or some interest in the outcome of the case, that fact is one which you may take into consideration in weighing his testimony. If you find that either party to this action has failed to call a witness under the control of that party, and that such witness, if called, would have been in a position to testify to a material fact in the case, then you may — but you are not required to — infer that the testimony of such witness, had he been called, would have been adverse to the party who had control over the witness but who failed to call him. Whether you draw such inference is entirely within your discretion. The same principle is involved with respect to any document or documents which were not produced by either side. If you find there was such a document under the control of one side or the other, and that it would have contained material information had it been produced, you may — but you are not required to — draw an adverse interest against the party who failed to produce such a document. vn STATUTE Coming now to the statutory provisions of the Internal Revenue Code of 1954, which control in this case, I am going to read them to you. The statute passed by Congress is the basis of this entire case. Everything that I say to you is by way of filling in the outline provided by the basic statute. The following provisions of the Internal Revenue Code of 1954 are here involved, and I charge you that this law controls : “ § 531. In addition to other taxes imposed by this chapter, there is hereby imposed for each taxable year on the accumulated taxable income * * * of every corporation * * * an accumulated earnings tax * * I am omitting the various percentages and method of computing it. That is the basic statute involved. The next section: “ § 532. The accumulated earnings-tax * * * shall apply to every corporation * * * formed or availed of for the purpose of avoiding the income tax with respect to its shareholders * * *■ by permitting earnings and profits to accumulate instead of being divided or distributed. * * * ” «§ 533 * * * [T]he fact that the earnings and profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the income tax with respect to shareholders, unless the corporation by the preponderance of the evidence shall prove to the contrary. * * * ” “ § 537. * * * [T]he term ‘reasonable needs of the business’ includes the reasonably anticipated needs of the business.” As I say, that is the crux of the case, the statutory basis for the case and the claims of the respective parties. I shall now try to explain a little more fully how you go about applying that law to the facts of this case as you find them. vm SPECIAL QUESTIONS TO BE ANSWERED Stated in a nutshell, the ultimate issue in this case is whether the plaintiff is entitled to a refund of the accumulated earnings tax it paid under protest for the years 1956, 1957,1958, and 1959. In order to recover, the plaintiff must sustain the burden of proving by á preponderance of the evidence two things. These are the two issues I mentioned on the first day of the trial. First, that the plaintiff’s accumulations of ■earnings and profits during the tax years were not in excess of the reasonable needs of the business; secondly, even if they were, the plaintiff must prove that such accumulations were not for the purpose of preventing imposition of surtaxes on the plaintiff’s shareholders. Your verdict upon the ultimate issue just stated depends upon your determination of the following two basic questions —questions which you will resolve by applying certain fundamental principles ■of law, which I am about to outline to you under each of these two questions. Your deliberations as a jury in this case will result in your answering certain special questions, which I am going to ¡submit to you in the form of this two-page document. These two basic questions simply reflect the two issues I have stated to you. So that you may wish to follow the balance of my charge in the light of what you are going to have to end up doing, I thought at this .juncture I might just read to you the two questions you are going to answer. Then, depending upon your answers to these questions, the lawyers for both .sides have stipulated that the verdict will be entered automatically through your foreman, and you will not have to stand up here and say, “We find for the defendant,” or, “We find for the plaintiff,” and if for the plaintiff in “X” dollars. That will be done by stipulation and will save you considerable time, if you should reach that point in the case. In other words, you are going to decide this case by answering the critical questions, and from that point on, it is just a matter of mechanical arithmetic. If it is a plaintiff’s verdict, then certain computations have to be made, including interest. The first question you ladies and gentlemen will be called upon to answer is this: “Did the plaintiff, Duke Laboratories, Incorporated, permit its earnings or profits to accumulate beyond the reasonable needs of its business?” The first subdivision will be, “During 1956,” and you will answer that yes or no; “During 1957,” yes or no; the same for 1958 and 1959. You must answer each of those sub-questions either yes or no. If your answers to those first four questions for any year or years is yes— in other words, if you find that there was an accumulation of earnings or profits by the plaintiff beyond its reasonable needs, then, and only in that event, do you go to the second question. Then, with respect to any year where you did find an unreasonable accumulation of earnings, you answer the following question, which is the second basic question, but with respect only to that year or those years as to which you answered the first question in the affirmative. The second question is this: “Were such accumulations, if any, made for the purpose of avoiding the surtax upon the stockholders of Duke Laboratories, Incorporated ?” There, again, there are four specific sub-questions for each of the years involved, 1956, 1957, 1958, and 1959. You will answer that yes or no, depending, as I say, upon how you answered the first question with respect to each of those years. IX ESSENTIAL ISSUES OF CASE (1) Did Plaintiff Permit Sts Earnings Or Profits To Accnmmlate Beyond The Reasonable Needs Of Its Business? Taking up the first question which you will take up in your deliberations in the jury room, that is, “Did the plaintiff, during the tax years ’56, ’57, ’58, and ’59, permit its earnings or profits to accumulate beyond the reasonable needs of its business?” And from this point on, I am going to be addressing you on that question until I indicate we have gone to the second question. Everything I say from here on relates to this first basic question for you to answer. The plaintiff has the burden of showing that the earnings or profits accumulated for each of the tax years in question were for the reasonable needs of its business. An accumulation is beyond the reasonable needs of a business or the reasonable anticipated needs of a business if it exceeds the amount that a prudent business man would consider appropriate. To aid you in determining what were the reasonable anticipated needs of the business in which the plaintiff was engaged during the tax years in question, you should review the conduct of its affairs during the prior years. You should consider the financial history and development of the corporation, and any special factors related to Duke Laboratories. For example, as I recall, the witness North said in his opinion this was a unique company, unique in its position in the industry, in the fact that it handles two products, two general categories of products, which were the bandages and the cosmetics. All of that you should take into account. Relevant also is the past dividend policy of the corporation and the earnings or profits accumulated prior to the tax years 1956 through 1959, which, depending upon your determination, may or may not have been sufficient to meet the plaintiff’s reasonable business needs during the tax years. While prior events in the corporation’s development, as well as subsequent events, to the extent such events may throw light upon facts existing during the tax years, are relevant to the conditions of the plaintiff during the tax years, the question whether there has been an unreasonable accumulation of earnings is to be determined in the last analysis by conditions as they existed in the tax years involved. The business needs of a corporation are probably best expressed in terms of plans. At least, that is the term that has been used here. You have heard much evidence concerning the plaintiff’s plans for the use of the earnings accumulated during the tax years 1956 through 1959. The matter of those plans of Duke Laboratories are not the only factors to-be taken into account. There are other factors which I shall mention. I believe Mr. Cole, speaking for the plaintiff, and Mr. Wilson, speaking for the defendant,, both indicated in their arguments to yon yesterday that the evidence with respect to these plans of Duke Laboratories was-critical and in many respects represents-the crux of the case. In any event, these-plans are among the critical factors for you to consider in determining whether the accumulations were beyond the reasonable needs of the business. A plan for business purposes; must be more than a nebulous desire to-meet the problems or requirements of a. business. In order to justify an accumulation as reasonable to meet a business-need, the need must be treated with economic reality; mere recognition of the,meed is not enough. In other words, mere recognition of a future problem •with discussion of possible and alternative solutions is not sufficient under our law. There must be substantial proof of a specific plan, objective or contingency, which, in the exercise of good business judgment, demanded the accumulation of the earnings and profits in a reasonable and reasonably definite •amount. In addition to having a definite plan, the corporation must couple this ■plan with some action taken towards its consummation. Remember these two simple terms; put perhaps as simply as possible, it will help, “definite plan coupled with some action.” Justification Tor the accumulation of funds cannot be found merely in subsequently declared •'intentions. The purpose, plan, or indention claimed must be manifested by some contemporaneous course of conduct •directed toward the claimed objective. In short, in considering the plans re•ferred to by Dr. Herzog during the ■course of his testimony, you should con.sider and ask yourselves in your deliberations whether those plans were definite and, if definite, whether they were coupled with some action directed toward "their accomplishment. As examples of action, action to be ■coupled with a definite plan, in the sense ■here used, you may consider, for example, -evidence of expenditures incurred by the plaintiff to further these plans; you may ■consider evidence of correspondence and ■other communications, if there were any, between the plaintiff and others whose assistance was thought to be necessary to accomplish these plans. As further ■examples of action implementing the plans, or coupled with the plans, you may consider inspections made by Dr. Herzog of plants and other facilities in this country and abroad. These are merely illustrations of evidence you may consider in determining whether the plaintiff’s plans were coupled with action. I am not going to go into detail with respect to the evidence concerning these plans. You will recall there was considerable testimony, both on direct examination of Dr. Herzog and on cross-examination, with respect to the expansion of the Norwalk plant; the Paterson plant, the weaving plant; a pension plan; a solvent recovery plant; plans for advertising, professional advertising and direct consumer advertising; and plans to meet the competition presented by the development of the plastic bandage. There may very well have been others. I just mention these by way of illustration of what I referred to here as the plans of the corporation, about which there has been considerable testimony both on direct and cross of Dr. Herzog and Mr. North, and considerable argument by counsel. What these plans were, and whether they met the tests of being specific, definite, feasible, whether they were coupled with action so as to justify accumulation of earnings and profits, are issues for you ladies and gentlemen to determine, based on all of the evidence. The business need of a so-called plan must also be associated with the business at hand; the mere possibility that the accumulation will be used at some indeterminate time in the future for a business purpose is not enough to make the accumulation reasonable. Depending on all the facts and circumstances of the business, the need must be reasonably anticipated. Accumulation for unexpected demands of business or unanticipated emergencies are not accumulations for the reasonable needs of a corporation. An unexpected demand, however, must be distinguished from a contingency, such as a reasonable business risk. A contingency may be a reasonable need for which a business may provide, if the likelihood — not merely the remote possibility — of its occurrence appears reasonable to a prudent business firm. An example of what I refer to, depending on how you find the facts which are solely within your province, of course, which you may wish to consider, is the evidence of the competition the plaintiff faced as a result of the development of the plastic bandage; it is for you to decide whether such competition constituted an unexpected demand or a contingency for which a reasonably prudent business should make provision. Related to the plans of the plaintiff as described by Dr. Herzog, is the company policy of using its own resources for financing projects rather than borrowing money or issuing stock to the public. There is no requirement that a corporation must borrow or issue stock to the public to finance its business and growth. The existence of the plaintiff’s policy not to borrow or issue shares to the public to finance its business and growth, but to do so through retained earnings, is within the law, and should be considered by you, among other factors, in determining whether the plaintiff accumulated earnings beyond the reasonable needs of its business. A corporation is not required by law to distribute all of its earnings, even though it may be able to borrow working capital for its present or foreseeable needs. The accumulation of working capital so as to avoid borrowing must, of course, be a reasonable amount in relation to the-plans and operations of the corporation in using the accumulated funds. In short, the corporation cannot accumulate working capital beyond the reasonable-needs of the corporation. You have heard Dr. Herzog’s testimony to the effect that the plans he was considering for the plaintiff were not recorded in the minutes of the board' of directors, but were informally discussed by him, Dr. Herzog, and his two fellow directors, also officers and shareholders. This testimony, of course, may be considered by you in determining-whether these plans had the required-definiteness. But you should also take-into account that formal entries in the company books are not the only way of' substantiating reasonable business needs-which may be established by other-means. Nor is there a requirement that a corporation’s plans be reduced to writing so long as testimony satisfactory to you establishes that the plans were specific, definite, and feasible, and coupled with some action aimed at their fulfillment. In a nutshell, this is really just a matter of common sense. As the witness-North said, and I think it is perfectly obvious to everybody in the courtroom, Duke Laboratories is a unique, peculiar-business in the sense that it is a closely held small corporation, of which Dr. Herzog is the driving force. You should consider all of these factors which I am outlining to you, since these factors are spelled out in the law which I am bound to submit to you, and which you in turn-are bound by your oath to follow. But the law, spelled out in the statute and decisions by the courts, necessarily must be considered and applied in the light of the peculiar facts and circumstances of a particular company involved, here Duke Laboratories, Incorporated. In considering the reasonable business needs of the plaintiff for the tax years 1956 through 1959, you also should consider Dr. Herzog’s testimony, he being a corporate officer and director, concerning the plans that were formulated. A corporation is entitled to exercise its own sound judgment about its business and its business needs, both present and reasonably anticipated in the future. The business judgment of those entrusted with the management of a successful and growing enterprise is not to be ignored. But it is also not conclusive. The ultimate determination of the reasonableness of accumulations is for you ladies and gentlemen. The testimony of management, here by Dr. Herzog, is important; but it is just one of the many relevant factors for you to consider. You should also consider the requirements of the plaintiff to keep funds on hand to meet the operating, or day-today, expenses of the corporation. Such funds, of course, represent part of an accumulation and should be distinguished from funds accumulated to provide working capital for specific projects. The amount which may be set aside each year for operating expenses is really dependent upon the needs of the particular business. Therefore, you should consider the particular needs of the plaintiff company for operating expenses in determining what was, if there was, a reasonable amount to be set aside for that purpose. For your guidance — but not binding upon you — an accepted rule of thumb is that the accumulation of funds to meet operating expenses of at least one year is reasonable I am referring here to funds to meet operating expenses as distinguished from funds necessary to meet the demands of special plans or projects, which has been the subject of much of the evidence here. Another factor which you may consider when judging the reasonableness of the accumulation of funds by the plaintiff is the ratio of current assets to current liabilities. Current assets are those which are in cash or assets which may be quickly converted into cash. Thus, under the law applicable in this Circuit and this Court, which you ladies and gentlemen must follow, you may exclude, in determining what were the current assets, the fixed assets and the accounts receivable of Duke Laboratories. Current liabilities are those debts or obligations which will or may become due and payable in the near future. The really important question here is whether, in the light of the business needs of the corporation, it was reasonable to keep on hand the amounts of current assets shown by the evidence. Although the reasonableness or unreasonableness of accumulations of earnings is to be determined by the conditions as they existed in the tax years in question, you may also, as I have mentioned briefly heretofore, consider subsequent events in so far as they shed light upon the conditions which existed during the tax years. Subsequent events, for instance, may be relevant as to the specificity, definiteness, and feasibility of plans claimed by the plaintiff to have been formulated prior to or during the tax years, and as to the implementation of those plans. Hindsight,. of course, may not determine the reasonableness of the corporation’s accumulation during the tax years. A prudent business man, under the conditions present during the tax years, might consider accumulation of funds appropriate while subsequent events might prove his judgment to be wrong. A mistaken belief as to the necessity for accumulation of funds, if made in good faith, will not render that accumulation unreasonable. In summary, then, with respect to this first question for you ladies and gentlemen to decide, the question of whether the accumulation of funds by the plaintiff for the tax years 1956 through 1959 was for the reasonable needs of the business, is a question of fact to be determined by you ladies and gentlemen from all the evidence you have heard, and from all of the documents. (2) Were Plaintiff’s Accumulations Of Earnings Or Profits Made For The Purpose Of Avoiding The Surtax On Plaintiff’s Stockholders? If your answer to this first question for any one or more of the years involved is that the accumulated funds were for reasonable needs of the business, then you answer this first question in the negative for such year or years. If you find that the accumulations were not reasonable for any one or more years, then and only in that event do you proceed to the second question. Assuming you get to the second question, and whether you get to it is entirely dependent upon how you find the facts with respect to the first basic question, but in the event you determine the first question with respect to any one or more years against the plaintiff, that is, in favor of the Government, then for that year or those years as to which you find there was an unreasonable accumulation of earnings, then you proceed to the second question, which is this: “Were the unreasonable accumulations made to avoid the surtax upon the stockholders ?” If you find that the plaintiff’s earnings were accumulated unreasonably, you must then determine whether that accumulation for the year or years involved was made with the intent to avoid the income tax with respect to shareholders. At this stage in your deliberations the statute which I read to you earlier, you will recall, raises a presumption that the purpose of any unreasonable accumulation, if you find there was such, was to avoid the income tax unless the corporation, by a preponderance of the evidence, shall prove to the contrary. This presumption places the burden on the plaintiff, the corporation, to show by a preponderance of the evidence the absence of any intent to avoid the income tax with respect to its shareholders, regardless of whatever other purposes for accumulation the plaintiff may have established. The intent to avoid the income tax with respect to shareholders need not be the sole or dominant intent in permitting the accumulations. By way of illustration, whatever the motive may have been, when the practice of accumulation was adopted, an intent to avoid the income tax which induced or aided in inducing the continuance of that practice, is sufficient to impose the tax on the accumulated fund, that is, the accumulated income tax. In determining whether an unreasonable accumulation of funds was made with the prohibited purpose in mind, you may consider the amount of taxes which the shareholders would have had to pay if the accumulated funds had been distributed. Since Dr. Herzog actively directed the corporation and stated that he knew that a distribution in the form of dividends would increase his income tax liability, you may attribute that knowledge on the part of Dr. Herzog to the plaintiff corporation. I must caution you, however, that the mere fact that shareholders of a corporate taxpayer would have paid more taxes on their incomes if earnings and profits had been distributed, does not alone establish that the purpose of the unreasonable accumulation was to avoid the surtax. It is simply one fact among all others to be taken into account and weighed in the scale. If you answer the second question in the affirmative, with respect to any one or more of the tax years involved — that is, if you find that there were accumulations made for the purpose of avoiding the surtax upon the stockholders of Duke Laboratories — that will result in a judgment for the defendant, for the Government, as to such year or years; if you answer in the negative, a judgment for the plaintiff will follow for that year or years. The amount of any judgment which may be entered as a result of your determination of these questions, as I said at the outset, will be handled by the Court as a matter of arithmetic, your job being simply to answer the two basic questions, broken down into the four years for each question. X EXPERT WITNESSES I should say a word about the testimony of expert witnesses, since there has been such testimony in this case by Mr. North. The rules of evidence ordinarily do not permit a witness to testify as to his opinions or conclusions. So-called expert witnesses, for example, in this case, Mr. North, on the subject he testified to, generally that of financial analysis, more particularly, his study of the cosmetics industry — such expert opinions are an exception to this rule. A witness who, by education and experience, has become an expert in any art, science, profession, or calling, may be permitted to state his opinion as to a matter in which he is versed, and which is material to the case, and may also state the reasons for such opinion. You should consider any expert opinion received in evidence in this case, and give it such weight as you think it deserves; and you are free to reject it entirely if you conclude that the reasons given in support of the opinion are unsound. The jury is the sole and exclusive judge of the facts as to which there has. been expert testimony in this case: just the same as with respect to any other facts. Now, Mr. North did testify, if I recall correctly — and I caution you again that your recollection controls, not mine — but if I recall correctly, Mr. North did testify, I think towards the end of his direct examination, that, in his opinion, based on his experience and his analysis of the plaintiff’s situation and including his. study and analysis of the cosmetics industry, he testified that in his opinion the accumulations by Duke Laboratories, were not at all unreasonable. And if I further recall correctly, he said that that opinion — I think this was-on cross-examination, although I am not sure — but I believe he stood on that conclusion that he believed, as a matter of opinion, that regardless of the so-called plans and projects of the company —in other words, he said just by looking at the liquid assets available, and the-needs of the company, or operating needs,, that he could justify the accumulations, in each of the years involved, without, reference to the so-called plans and projects. Now, the reason I mention that is simply by way of an example of the care with which you must weigh, evaluate, and consider expert testimony. On the one hand, you have a witness who did state to you his qualifications, his experience, and I leave it to you as to what sort of an impression he formed in your minds. He testified with respect to his opinion as to a critical issue in the case. That opinion is not controverted. There is no contravening evidence or expert testimony to weigh against his. So, in a sense, Mr. North’s testimony, both with respect to that critical matter and others, is uncontroverted testimony. And you must be scrupulously careful in weighing that testimony, evaluating it, to bear in mind that neither Mr. North, in an expression of his opinion — nor Dr. Herzog, in his declaration that there was not an unreasonable accumulation, nor was there any intent on the part of the corporation to avoid surtax on shareholders — by the same token, anything that I say to you in my charge to you ladies and gentlemen — -you should be scrupulously careful not to let any of those things supplant or substitute for your sole and exclusive function and duty as judges of the facts to determine what the facts are. CONCLUSION In conclusion, ladies and gentlemen, take this case with you to the jury room. Determine the facts on the basis of the evidence, as you have heard it; apply the law as I have attempted to outline it to you; then render a verdict fairly, uprightly, and without a scintilla of prejudice. When you reach your answers to these questions, you must be unanimous. In other words, all twelve jurors must agree before your answers to these special questions may be rendered. It is the duty of each juror to discuss and consider the opinions of the other jurors. Despite that, in the last analysis, it is your individual duty as an individual juror, to make up your own mind, and to decide this case upon the basis of your own individual judgment and conscience. You are answerable to no one but yourself, and your conscience, for your verdict in this case. With that, the jury may retire to the jury room. Elect one of your number as foreman or forelady. Proceed to your consideration of the case. When you have reached your verdict in the form of answers to these special questions, inform the bailiff who will be outside of your room. Then return to the courtroom, and through your foreman or forelady announce your answers to these questions. That concludes the charge, ladies and gentlemen. I have made arrangements for you to be taken to lunch at just about this time. I had guessed it might be about 12:30. I would suggest you go out to lunch now. You will be in the custody of the marshal from this point on, until you reach your verdict. You will not only be in the custody of the marshal, but you will be his guest for lunch. I suggest that you do not actually begin your deliberations until you return to the courthouse. At that time the exhibits and the pleadings in the case will be delivered to you in the jury room. That will be the signal for you to start your deliberations. The reason I mention that detail is that, as many of you know, under the rules, I am required before the jury begins to deliberate, to entertain any objections from counsel to the Court’s charge, and to consider any requests for further charge to the jury. When those matters have been heard by the Court and ruled on, the signal that you have a green light to proceed with your deliberations will be that the exhibits will be sent to the jury room, and I think by the time that you get back from lunch, they will be there. Thank you very much. You may be excused. (The jury was excused on Thursday, May 23, 1963 at 12:35 p. m.) # * * May 23, 1963 at 5:00 P.M. (The jury entered the courtroom.) THE COURT: Good evening. You may be seated. I simply wanted to call you in, partly to give you a little recess because you have been at it now for two and three-quarter hours, if my arithmetic is correct, but more to the point, I simply wanted to inquire, if I may, as to what the wishes of the jury are, not on the merits of the case — I am not calling you in for that purpose at all — but your wishes with respect to continued deliberations. Let me say at the outset, I propose to follow whatever course you wish to follow. All I want to find out is what you want to do. Is there anything that the Court and our personnel here can do to accommodate you ? It seems to me that there are perhaps three alternatives: One, to continue deliberations as you have been for as long as you want, without recess; The second alternative, you might like to recess and go to dinner, and then return and continue your deliberations until whatever time you choose to work tonight; Or thirdly, you may, if you wish, be excused for the night and return in the morning and resume your deliberations at that time. There may be another alternative that does not occur to me. At least, I can think of those three. All I would like to do is to accommodate you ladies and gentlemen, or a majority of you, if you can agree on how to proceed. Any way you wish to do it is entirely agreeable to the lawyers, to whom I have spoken about this before you came in, and myself. I will be here as long as you wish to be. Would you prefer to go out and take a caucus and send a message in, and let me know how you want to proceed ? THE FOREMAN: May I make a statement, your Honor? The jury has not been in agreement as of yet. We are just compiling a request, your Honor, for interpretation of certain sections of your charge which might clarify the situation, and have it come to a fruition. THE COURT: Would you suggest perhaps we just wait until you have been able to complete that question or interrogatory to the Court? And when you are ready, let us know and come back. THE FOREMAN: We could be back in a few minutes, and send the question in. THE COURT: It is our practice here to have such questions reduced to writing. They are usually written out by the foreman and signed by the foreman. I prefer to do it that way rather than by oral questions in the courtroom, for obvious reasons that I am sure the jurors understand. That gives me a chance to apprise counsel of the question or questions; and, secondly, have my response prepared to the question so there will not be any misunderstanding when the jury gets in. So I think the best thing to do, if I may suggest it, is to write out whatever inquiries you have, and send them to me through the Marshal, and then I will call the twelve jurors in the courtroom and try to answer your query. The way you are going about it is just the right way. I had neglected to tell you this morning, but I am sure most of you know, anyway, that you are entitled to have any portion of the charge re-read. You are entitled to have any portion of the record, the stenotype record, the transcript of the testimony, re-read. We usually do not, except under the most unusual circumstances, give any further or additional charge than I have already given. To embark on any new statement is contrary to our practice. But I assume what you have in mind is the re-reading of a portion or portions of the instructions I gave you, and identify those the best you can. I will try to respond. We will stand in recess. (A recess was taken.) (In the absence of the jury, 6:27 p. m.:) THE COURT: Gentlemen, it is now 6:27, and I have received the following message from the jury. It is in two parts. I will read the second part first: “In a caucus of said jury, majority would like to recess until Friday morning for further deliberations and instructions as outlined in above request.” The above request reads as follows: “Judge William Timbers: “Your Honor, the jury for the case in question is not as yet in agreement. No. 1, a clarification of your Honor’s charge in regard to Mr. North’s testimony; No. 2, is the jury to consider as legal evidence, conversation Dr. Herzog had with others in regard to building and advertising plans schedules?” That is the end of the message. It is signed Edward W. Blake, Foreman. I am glad they have given me overnight to think about it, and I will invite counsel’s earnest attention to these two matters. I would not attempt to instruct the jury about them now. I will in the morning. I am going to excuse them until 10:30 in the morning. I suggest I meet here with counsel at ten o’clock in the morning, and I will be glad to receive any views that the lawyers on either side wish to advance. Having in mind what I said to the jury that, except under the most unusual circumstances, I prefer not to depart from the charge as given. I will try to locate the portions of the charge that they have asked for. I think particularly as to the second inquiry some slight amplification may be necessax-y. MR. BENTLEY: Would you be kind enough to read the secoxxd questioxx ? THE COURT: I will read the two questions they have put. “No. 1. A clarification of your Honor’s charge in regard to Mr. Nox-th’s testimony; No. 2, is the jury to consider as legal evidence, conversation” — I do not know whether that is “conversation” or “conversations”' — -“Dr. Herzog had with others in regard to building axxd advertising plans schedules ?” Now, among other things, I think counsel ought to go over their notes or the transcript, and flag the evidence with respect to that latter matter. As I recall in the charge, I simply made a passing reference to such convei’sations or communications Dr. Herzog had, as axi example of what they might, if they chose to do so, find to be action coupled with a plan. I do not recall ixx the charge if I went into it in any more detail than that. However, I think this jxxry should be excused because they want to go home. Bring them ixx. I will hear counsel at ten o’clock in the morning on what nxy proposed response to the questions should be. (The jury entered the courtroom at 6:28 p. m.) THE COURT: Good evening again, ladies and gentlemen. I am going to gx-ant your second request first, the request that you be pexnxitted to resume in the morning, which I think probably is sensible under all the circumstances. Maybe I can speak louder in the morning, too. Then I will do my best to x*espond in a way that will be helpful to you, to the two specific inquiries you have made. I will do that in the morning. It will give me a little more time to get a portion of the charge transcribed. I think Mr. Gale will have to do that. What time would be convenient for you ladies and gentlemen to x-esume in the morning? Would the usual time of 10:30 be all right? How many would px-efer to come at 10:00? The 10:00 o’clocks win out. That will be fine. I will give you your instructions at ten o’clock, axxd you should be back and able to resume your deliberations by 10:30, and you can take as long as you wish. Let me just say this: What goes on in the jury room, of course, is your business and your business alone. Do not disclose to a soul outside of your own group of twelve, what has gone on in the jury room. I am not concerned, and counsel are not concerned, as to any disagreement or division within your number. It is perfectly normal. I hope eventually that you will be able to agree. But the important thing is, do not go out tonight and talk to anybody about this. It could upset all the work and investment of time that all of you, and all of us, have had in the case. Go home and have a good night’s sleep. Have your dinner and come back refreshed in the morning. I will do my best to help you out with these questions that you have put. I think maybe with a fresh start, we can make some progress. Three or four hours of deliberations up to this point in a case of this sort is not unreasonable, by any means. On the contrary, it reflects or confirms what I had suspected from the outset, that we have a very intelligent jury here, and I do not think I would be letting any secrets out of school if I were to say to you what I said to counsel in your absence, on one occasion during this trial: That I think this case is being tried before just as intelligent a jury as can be obtained in any United States District Court in the country. I think I know some of you people pretty well, having seen you here during the past few months. I am not trying to butter anybody up for anything. But do not be disturbed if any of you feel there has been any tension or any argument in the jury room. I would simply say that it is for the good. It is a healthy situation. I much rather see you take your time, and be sure of your results, than to come to a hasty decision. In any event, have a pleasant evening. I will see you in the morning at ten o’clock. Thank you very much. (Whereupon, Court was adjourned at 6:40 p. m., until Friday, May 24, 1963, at 10:00 a. m.) * * * FIRST SUPPMEMEWTAL CHARGE May 24, 1963 at 10:00 a.m. (In the presence of the jury) THE COURT: Good morning, ladies and gentlemen. I trust you all had a restful evening and are refreshed and ready to go to work again this morning. I have taken up with the lawyers, as I told you I would, the two questions that the jury submitted last night, just before you recessed, and particularly I have informed the counsel as to how I propose to answer these questions. I will proceed to do so as follows: (1) Expert Testimony The first question that was submitted through Mr. Blake, your foreman, reads as follows: “No. 1, a clarification of your Honor’s charge in regard to Mr. North’s testimony.” Now, the first thing I am going to do in attempting to comply with the jury’s inquiry in that respect is to read to you a short extract from the charge which Mr. Gale has prepared word for word as it was given, and I think with a few additional comments by me at the end, I hope this will comply with the jury’s inquiry. I charged you yesterday, and I reaffirm the charge in this respect as follows, on the subject of expert testimony. “I should say a word about the testimony of expert witnesses since there has been such testimony in this case by Mr. North. “The rules of evidence ordinarily do not permit a witness to testify as to his opinions or conclusions. So-called expert witnesses, for example, in this case, Mr. North, on the subjects he testified to, generally that of financial analysis, more particularly his study of the cosmetics industry — such expert opinions are an exception to this rule. “A witness who by education and experience has become an expert in any art, Science, profession, or calling, may be permitted to state his opinion as to a matter in which he is versed and which is material to the case, and may also state the reasons for such opinion. You should consider any expert opinion received in evidence in this case, and give it such weight as you think it deserves; and you are free to reject it entirely if you conclude that the reasons given in support of the opinion are unsound. “The jury is the sole and exclusive judges of the facts as to which there has been expert testimony in this case: just the same as with respect to any other facts. “Now, Mr. North did testify, if I recall correctly, and I caution you again that your recollection controls, and not mine, but if I recall correctly, Mr. North did testify, I think towards the end of his direct examination, that in his opinion, based on his experience and his analysis of the plaintiff’s situation and including his study and analysis of the ■ cosmetics industry, he testified that in his opinion the accumulations by Duke Laboratories were not at all unreasonable. “And if I further recall correctly, he said that that opinion — I think this was on cross-examination, although I am not sure — but I believe he stood on that conclusion that he believed, as a matter of opinion, that regardless of the so-called plans and projects of the company — in other words, he said just by looking at the liquid assets available and the needs of the company, or operating needs; that he could justify the accumulations in each of the years involved, without reference to the so-called plans and projects. “Now, the reason I mention that is simply by way of an example of the care with which you must weigh, evaluate, and consider expert testimony. “On the one hand, you have a witness who did state to you his qualifications, his experience, and I leave it to you as to what sort of an impression he formed in your minds. “He testified with respect to his opinion as to a critical issue in the case. That opinion is not controverted. There is no contravening evidence or expert testimony to weigh against his. “So in a sense, Mr. North’s testimony, both with respect to that critical matter and others, is uncontroverted testimony. And you must be scrupulously careful in weighing that testimony, evaluating it, to bear in mind that neither Mr. North, in an expression of his opinion — nor Dr. Herzog, in his declaration that there was not an unreasonable accumulat