Dutch Schultz - Tax Troubles

Tax Troubles

At the time of the Martin killing, Schultz was busy fighting a federal tax evasion case; U.S. Attorney Thomas Dewey had set his sights on convicting Schultz. Schultz was convicted of the charges, but they were soon overturned. Schultz's lawyers convinced the judge that their client could not get a fair retrial in New York City, so the judge moved it to the small town of Malone in rural upstate New York.

Looking to influence potential jurors, Schultz presented himself to the town as a country squire and good citizen. He donated cash to local businesses, gave toys to sick children, and performed other charitable deeds, a strategy that proved successful. In the late summer of 1935, to everyone's surprise, Schultz was acquitted of tax evasion.

Following his acquittal in the second trial, the outraged mayor of New York, Fiorello La Guardia, issued an order that Schultz be arrested on sight should he return to New York. As a result, Schultz was forced to relocate his base of operations across the Hudson River to Newark.

As the legal and related costs of fighting his tax indictment continued to mount, Schultz found it necessary to cut the commissions of his runners and controllers in order to bolster the "Arthur Flegenheimer Defense Fund." He reduced pay from around 50 percent down to 10 percent for the runners and to 5 percent for the controllers. However, Schultz's poverty plea fell on universally deaf ears, even after his associates began making threats of violence if any serious resistance developed. The runners and controllers hired a hall, held a mass protest meeting, and declared a strike of sorts. Suddenly, fewer and fewer bets were being delivered to the banks, reducing the vast policy inflow to a mere trickle as Schultz's street soldiers lost their zeal. Schultz was forced to back down and restore the status quo, but he had already permanently damaged his relationships with his underlings.

Bo Weinberg, concerned that the drain of money from Schultz’s rackets into his legal defense fund was going to ruin the business for everyone else, sought advice from New Jersey mobster Longy Zwillman, who in turn put him in contact with Charlie "Lucky" Luciano. Weinberg was hoping to make a deal whereby he would retain overall control and a percentage, but Luciano instead planned to divide the Schultz empire among his associates, which was to take place in the event of Schultz's being convicted.

Believing that Schultz would be convicted in the second trial, Luciano and his allies implemented their plan to move in on his empire. Given the circumstances of his takeover of the policy racket, the bad feeling created by his attempted pay cuts, and the complicity of Weinberg, his number one enforcer, the takeover would have met with little resistance. Schultz quickly sought a meeting with Charlie Luciano, his erstwhile colleague on the Commission, in order to "clarify" the situation. Schultz even converted to Roman Catholicism to cozy up to Luciano. Luciano placated Schultz with the explanation that they were just "looking after the shop" while he was away, only to ensure that everything ran smoothly, and promised that control of his rackets would be returned.

In a weakened position and still under constant harassment from the authorities, Schultz was forced to accept Luciano's version of events. However, Luciano was well aware of Schultz's prior history and would have had no illusions about what the outcome would be in the long term—that as soon as he felt able, Schultz would launch an all-out war to recover what he had lost and get revenge. As for Weinberg, he disappeared without a trace, and it was believed that Schultz had arranged the disappearance.