## Facts

- Ingredient Technology Corporation (formerly SuCrest Corporation) operated a sugar refining and sales business and adopted the LIFO inventory method for raw sugar in 1974.
- To avoid “liquidating” older, low-cost LIFO inventory layers (which would increase taxable income) in fiscal years 1975 and 1976, the company sought to keep its reported year-end raw-sugar quantity at or above its LIFO base.
- Near year-end, the company arranged transactions with a sugar trader (Czarnikow-Rionda Co.) to “purchase” large quantities of raw sugar and, immediately after year-end, resell the same sugar back to the trader.
- Although legal title passed to the company briefly across the year-end, the company did not take physical possession; the sugar remained with or under the control of the trader.
- The transactions imposed only minimal costs and were not undertaken to earn operating profit or to supply production needs; the government characterized them as inventory “paper” transactions designed to obtain tax benefits.
- The government alleged the company’s tax returns overstated year-end inventory by including these quantities as LIFO inventory, thereby understating corporate income tax liability.
- A jury in the Southern District of New York convicted the corporation and its former president, Robert M. Rapaport, of conspiracy to evade corporate income taxes and of making and causing to be made false corporate income tax returns.

## Issues

1. Whether year-end title-passing sugar transactions, prearranged to be reversed and lacking real business purpose, could be treated as LIFO inventory such that reporting them was not criminally false.
2. Whether the governing tax rules were too unclear to support a finding of willfulness, thereby defeating criminal liability.
3. Whether the trial court erred by excluding defense expert testimony on tax law and by refusing defense-requested jury instructions centered on detailed LIFO regulations.

## Decision

- The Second Circuit affirmed the convictions.
- The court held the transactions lacked economic substance and did not represent a bona fide inventory increase; including them in LIFO inventory supported the false-return and conspiracy convictions.
- The court rejected the claim that tax law uncertainty defeated willfulness, finding established principles gave adequate notice that sham transactions solely for tax reduction were unlawful.
- The court upheld exclusion of expert testimony offered to interpret tax law and found no reversible error in refusing instructions that would have required the jury to construe tax regulations.

## Legal Principles

- Tax consequences turn on substance rather than formal title; transactions without economic substance or meaningful beneficial ownership may be disregarded for tax reporting purposes.
- A taxpayer may not use transactions designed solely to obtain tax benefits, without genuine business purpose or real economic effect, to reduce taxable income; doing so can support criminal tax charges when the returns are false.
- For criminal tax offenses requiring willfulness, the law need not address the defendant’s exact fact pattern if established doctrines clearly prohibit sham arrangements; concealment and misleading conduct may support an inference of knowledge of illegality.
- Expert testimony that effectively instructs the jury on the meaning of tax statutes or regulations may be excluded because interpretation of law is for the court; the jury’s role is to decide factual questions, including intent and good faith.

## Conclusion

The Second Circuit upheld criminal tax convictions where a corporation used year-end, prearranged title transfers in “paper” sugar to maintain LIFO levels without real economic ownership, concluding that substance-over-form and anti-sham doctrines provided sufficient legal clarity to prove willfulness and that the trial court properly limited expert and instruction requests that would have shifted legal interpretation to the jury.


United States v. Ingredient Tech. Corp., 698 F.2d 88 (2d Cir. 1983)