text:
    Kate MAHONEY, Administrator of the Estate of Lawrence Alfred Mahoney, Deceased, Plaintiff-Appellant, v. ROPER-WRIGHT MANUFACTURING COMPANY, INC., Defendant-Appellee.
    No. 72-1338.
    United States Court of Appeals, Seventh Circuit.
    Argued April 12, 1973.
    Decided Dec. 12, 1973.

      Edwin W. Sale, Kankakee, Ill., for plaintiff-appellant.
    Joseph P. Skowronski, Jr., Danville, Ill., for defendant-appellee.
    Before HASTINGS, Senior Circuit Judge, CUMMINGS, Circuit Judge, and CAMPBELL, Senior District Judge.

       Senior District Judge William J. Campbell of the Northern District of Illinois is sitting by designation.

   WILLIAM J. .CAMPBELL, Senior District Judge.

This diversity action was commenced by the plaintiff, the Administrator of the Estate of Lawrence Mahoney, deceased, for the alleged wrongful death of the decedent. Recovery was sought on the basis of strict liability in tort. The judgment was entered for the defendant following the return of a jury verdict in its favor. The plaintiff has appealed and contends that the district court erred in excluding certain testimony offered by two of the plaintiff’s witnesses and in preventing the plaintiff from calling as a rebuttal witness an expert not identified on the plaintiff’s list of witnesses filed prior to trial.

As they relate to the issues raised on appeal, the facts show that in 1966 Lawrence Mahoney purchased a John Deere Model 55 EB self-dash propelled combine equipped with an automatic header control unit manufactured and sold by the defendant. The defendant’s control device is designed to automatically regulate the height of the combine’s cutting bar during harvesting operations. The defendant’s system had been installed on the combine prior to its delivery by the local John Deere dealer.

The header control system consists essentially of three components, a feeler bar, a selector control valve, and the operator control. The purpose of the system is to keep the head of the combine as near to the ground as possible when harvesting over uneven ground. The feeler bar, which appears somewhat like the head of a rake, is attached under and parallel to the cutting bar of the combine head. It consists of twenty-four fingers, each about eight inches in length, which function as guides to the control system, by mechanically communicating any changes in ground contour to the selector control valve. This communication is accomplished through a cable connected to both the feeler bar and the selector control valve.

The selector control valve is a hydraulic valve which directs the flow of hydraulic oil alternatively to two separate hydraulic lines. This is done by means of a spool valve which moves within the selector control valve, covering and uncovering inlet and outlet ports depending on the signals it receives from either the feeler bar or the operator control.

The selector control valve assembly is mounted on the combine with the spool valve in a vertical position. In such a position, the control system is in the manual mode and the height of the combine head is then controlled manually by the operator with the regular John Deere hydraulic control. When the spool valve is in the lowered position, the control system becomes automatic and the movement of the fingers and feeler bar thereby control the height of the combine head independently of the operator.

If the control system is in the automatic mode and the combine passes over a depression in ground contour, the fingers of the feeler bar drop lower, causing the cable between the feeler bar and the selector control valve to be pulled downward. This in turn causes the spool valve to drop and divert the flow of hydraulic oil so that the hydraulic rams under the combine head retract, lowering the head. The reverse will occur when the combine passes over an elevated section of ground.

In addition to the cable between the feeler bar and the selector control valve, there is a second cable which runs from the selector control valve to the operator’s platform on the combine. This cable permits the operator to place the header control system in either automatic or manual mode by means of a push-pull knob. When the knob is pulled the spool valve is raised and the system is in the manual mode. When the knob is pushed, the spool valve is lowered and the system is then in the automatic mode.

From the time of its purchase in 1966 until October 25, 1969, the combine equipped with the defendant’s system had been used without incident. On the latter date, the decedent had been harvesting soybeans with the combine, and after he had eaten lunch in the field with two of his sons, the sons departed on errands. When the oldest son returned, he discovered his father crushed under the head of the combine. The decedent was found lying on his back with his feet and torso below his chest extending out at a right angle to the side of the combine head. The combine engine was running. The precise circumstances which led to the death are unknown since no one witnessed what occurred that day.

Plaintiff’s case was premised on the theory that the automatic header control system as manufactured and sold by the defendant was unreasonably dangerous and that this caused Lawrence Maho-ney’s death. Specifically, plaintiff’s complaint charged that the header control device contained no positive safety devices to prevent the combine header from moving independently of operator control. The record discloses that as the combine was manufactured by John Deere, it was equipped with an angle iron brace for the purpose of providing a positive lock on the hydraulic rams used to raise the combine header. The installation of the defendant’s header control system necessitated the removal of the John Deere safety device. In order for the header on a machine equipped with the defendant’s system to remain in an elevated position regardless of the position of the selector valve, a hydraulic arrangement was employed. This arrangement was effective as long as the combine engine did not exceed a certain RPM, approximately 1400. If this RPM rate was exceeded when the engine was at a fast idle, the selector control valve could drop from the manual to the automatic mode and the combine head would immediately drop to the ground.

Plaintiff’s expert testified that the change from manual to automatic was effectuated by the selector control valve which operated by means of a spool valve which directed the flow of hydraulic fluid. The expert further related that the spool valve was secured in place only by the friction of two rubber “0” rings and that a force of as little as two to five pounds would be sufficient to move it. Engine vibration could provide enough force in the expert’s opinion to cause the' spool valve to drop from the manual to the automatic mode. It was the expert’s view that the easy movement of the spool valve constituted an improper design since, with the combine motor operating at a fast idle and the combine header elevated, the header could unexpectedly fall when the spool valve dropped.

Through a formal offer of proof, the plaintiff attempted to show through the expert’s testimony that there were three relatively simple designed alternatives which could have remedied the claimed defect. The proposed evidence was objected to on the ground that evidence that it was possible to build a safer product is inadmissible. The district judge excluded the evidence, stating that “what might or could have been done was not in issue.”

This is a diversity case in which Illinois law controls. The proof here was offered for the purpose of showing that it would have been feasible for defendant to have corrected the claimed defect in his product. The offer of proof indicates that a mechanical lock device on the operator control could have been installed and would have prevented the spool valve from dropping, that the hydraulic hoses could have been reversed with the result that if the spool valve dropped, the machine would have gone into the manual rather than the automatic mode of operation, and that the spool control valve could have been mounted so that it would not be affected by gravity. The offer also showed that a mechanical lock device has been installed on a subsequent model of defendant’s control system.

In products liability cases, the law in Illinois for some time now has permitted the introduction of evidence which consists of alternate design feasibility or post-accident design changes. The evidence is admissible if the design alternative or design alteration was available at the time the defendant’s product was manufactured and sold. See Moren v. Samuel M. Langston Company, 96 Ill.App.2d 133, 237 N.E.2d 759 (1968); Rivera v. Rockford Machine and Tool Company, 1 Ill.App.3d 641, 274 N.E.2d 828 (1971); Sutkowski v. Universal Marion Corp., 5 Ill.App.3d 313, 281 N.E.2d 749 (1972); Wallner v. Kitchens of Sara Lee, Inc., 419 F.2d 1028 (7th Cir. 1969). Although the defendant here protests to the contrary in its brief, the offer of proof clearly reveals that the design alternatives suggested by the witness were available at the time the defendant’s header control device was manufactured and sold to the plaintiff’s decedent.

Relying principally on Day v. Barber-Colman Co., 10 Ill.App.2d 494, 135 N.E. 2d 231 (1956), the defendant contends that evidence as to ways of designing a safer product is not admissible. In Day, the evidence showed that the design alternative there mentioned was not available at the time the defendant placed its product in the stream of commerce. Moreover, Day was tried on a negligence theory rather than on the theory of strict liability in tort. The products liability cases cited above and pursued on a theory of strict liability all held that evidence of design alternatives and post-accident design changes is admissible to show what was feasible and what the defendant knew or should have known.

As one Illinois court has put it, although a manufacturer need not adopt every new safety device which may be developed, “a manufacturer is required to adopt any and all devices the absence of which render his product unreasonably dangerous.” Rivera v. Rockford Machine and Tool Co., 1 Ill.App.3d 641, 274 N.E.2d 828, 833 (1971). Whether a defendant’s product is unreasonably dangerous for failure to incorporate certain available safety devices is a question to be decided by the jury in these kinds of cases. See Rivera v. Rockford Machine and Tool Co., 1 Ill. App.3d 641, 274 N.E.2d 828, 832 (1971). Because the plaintiff here was prevented from introducing evidence of design alternatives and post-accident design changes, she was denied the opportunity to properly submit her case to the jury. The judgment for the defendant must therefore be reversed and the cause remanded for a new trial.

Since a new trial has been ordered, we should briefly comment on the plaintiff’s other evidentiary point. The plaintiff offered to prove that on two occasions subsequent to the accident in issue, the combine header malfunctioned in a manner similar to that claimed to have occurred on the day of the accident. The offer of proof, however, failed to adequately demonstrate that the combine header was in substantially the same condition at the time of the alleged subsequent malfunction as it had been on the day of the accident. Under those circumstances, we agree with the district court that the evidence was not admissible. See City of Bloomington v. Legg, 151 Ill. 9, 37 N.E. 696 (1894).

We do not consider the issue concerning the plaintiff’s claim that he had a right to call as a rebuttal witness an expert not identified on the list of witnesses filed prior to trial. We assume that any difficulties of this nature will be resolved prior to the new trial.

For the reasons stated, the judgment of the district court is reversed and the cause is remanded for a new trial.

Reversed and remanded.


source: Caselaw Access Project

author: SWYGERT, Chief Judge.

license: Public Domain

text:
    UNITED STATES of America, Plaintiff-Appellee, v. Frank J. GILL and James Fahey, Defendants-Appellants.
    Nos. 72-1689, 72-1690.
    United States Court of Appeals, Seventh Circuit.
    Argued Feb. 14, 1973.
    Decided Dec. 28, 1973.

      Anna R. Lavin, John J. Muldoon, Julius Lucius Echeles, Chicago, Ill., for defendants-appellants.
    James R. Thompson, U. S. Atty., William T. Huyek, Asst. U. S. Atty., Chicago, Ill., Sidney M. Glazer, Robert J. Vedatsky, Attys., Dept, of Justice, Washington, D. C., for plaintiff-appellee.
    Before SWYGERT, Chief Judge, HASTINGS, Senior Circuit Judge, and KILEY, Circuit Judge.
   SWYGERT, Chief Judge.

Defendants Frank J. Gill and James Fahey appeal from their convictions of extortion and perjury, having been found guilty of these crimes by a jury. Gill was convicted of extortion in violation of the Hobbs Act, 18 U.S.C. § 1951, and of making a false material declaration before the grand jury in violation of 18 U.S.C. § 1623. Fahey was also convicted for the same violations. Gill received two four-year concurrent sentences and Fahey received two three-year concurrent sentences.

The evidence viewed most favorable to the Government establishes the following. Gill was a lieutenant and Fahey a sergeant with the Chicago Police Department. Stojan Kovacevic was the licensee of a combination tavern and liquor store called the Chicago-Oak Liquors. His brother, Boris, was a bartender there. Sometime in early July 1971, Chicago police officer Reddon entered the liquor store and told Kovacevic that he had sold beer to a minor. Kova-cevic could not recall the sale so Officer Reddon left the store and returned shortly with the minor to whom the beer had been sold. After a conversation between Kovacevic and Reddon, Reddon left with the minor.

A short time later Lieutenant Gill and Sergeant Fahey entered the liquor store. Gill told Kovacevic that he had sold liquor to a minor. Kovacevic said he could not recall this and suggested that the officers search the minor for another identification card. Gill and Fahey then left and returned shortly and told Kovacevic that they did not find any other identification on the minor. Ko-vacevic said that he still did not believe it. Gill asked him what he was going to do; Kovacevic replied that he did not know. Gill then said that he would have to appear before the Liquor Commissioner. Kovacevic asked if something could be done; Gill asked what he meant. Kovacevic then offered Gill $150,- but Gill countered with a demand for $500. They finally agreed on $300. Kovacevic told his brother, Boris, that he was giving the money because he feared the loss of his license as well as his business.

Constantine (Dino) Sanichas was in the tavern during the time in question and saw Fahey, with whom he was acquainted. Sanichas approached Fahey and asked what was happening. Fahey said that the owners were caught selling liquor to minors and asked Sanichas if he knew the owners. Sanichas said that he did. Fahey then asked Sanichas to talk to them and explain that “it would be $500 for the owners to be given a pass, excused.” After Fahey left, Sani-chas spoke with Boris and told him that the police officer wanted $500; Boris said that he couldn’t pay it. Sanichas then suggested $300, to which he agreed. After Fahey had returned to the tavern, Sanichas told him, “He’s willing to pay $300, to give $300 for the pass, so he won’t be arrested.” Fahey then told Sanichas to get the money and meet him on the corner. Fahey left. Sanichas told Boris that Fahey would accept $300, whereupon Boris produced the $300. Sanichas left the bar, met Fahey on the prearranged corner, and gave him the $300. About four to five weeks later Fahey met Sanichas and gave him $40.

Both Gill and Fahey were called before the grand jury. Gill denied asking the owner or anyone else for money when he was in the Chicago-Oak Liquors. Fahey denied receiving money from Sanichas.

Subsequently, they were jointly indicted in Count I for extortion. Gill was charged in Count II and Fahey in Count III for false declarations to'the grand jury.

I

The first contention made by the defendants is that the commerce affected by the extortion was not of an interstate nature. They argue that there was no evidence that the beverages sold to the tavern and liquor store came from a distributor or manufacturer from outside of Illinois, despite a stipulation that the beverages were manufactured in a state other than Illinois. It is maintained that the beverages, citing Brown v. Houston, 114 U.S. 622, 5 S.Ct. 1091, 29 L.Ed. 257 (1885), were no longer in interstate commerce, having come to rest at the distributor’s warehouse in Chicago before they were resold to Chicago-Oak Liquors.

The fallacy in the argument is that the Hobbs Act not only forbids extortion which interferes with interstate commerce but also extortion which affects interstate commerce. Congress’ power to regulate interstate commerce is very broad. Heart of Atlanta Motel, Inc. v. United States, 379 U.S. 241, 253-258, 85 S.Ct. 348, 13 L.Ed.2d 258 (1946); Wickard v. Filburn, 317 U.S. 111, 118-129, 63 S.Ct. 82, 87 L.Ed. 122 (1942).

The defendants make the alternative argument that the extortion of $300 from the tavern owner had, to say the least, a de minimis effect on commerce. Stated differently, they say it is unreasonable to infer that the owner’s depletion of funds to the extent of $300 could have affected his ability to transact business, including the purchase of liquor from out of the state. An identical argument was made in the recent case of United States v. DeMet, 486 F.2d 816 (7th Cir., 1973). There this court, speaking through Judge Fairchild, rejected the argument:

Although King’s business was primarily local, depletion of King’s assets by the goods and money extorted, or the cessation of his business if he did not yield and his fears were realized, would tend to reduce the demand for and amount of beer and liquor moving into Illinois. The effect on interstate commerce would exist, though small by most standards, and only indirectly caused by defendant’s acts.
* * *
Section 1951 clearly contemplates a full application of the commerce power. It proscribes extortion which “in any way or degree obstructs, delays, or affects commerce or the movement of any article or commodity in commerce. . . . ”
-X- -X- -X- -X- -X- -X-
Because Congress has seen fit to exercise its full power under the commerce clause, extortionate conduct having any arguably de minimis effect on commerce may nevertheless be punished. At pp. 821-822.

Fahey raises the additional issue that the Twenty-first Amendment has precluded the enforcement of the Hobbs Act in this case since the amendment gave to the states the power to regulate traffic in intoxicants. Section 2 of the Twenty-first Amendment prohibits any state-restricted transporting or importing of liquor for use or delivery therein which crosses state lines. This state preemption in regulating liquor does not preclude the federal government from prohibiting extortion which affects interstate commerce under authority of the Commerce Clause.

II

Defendants next contend that the Government proved bribery and not extortion. They rely heavily on Stojan’s testimony that he offered Gill $150 without any demand by the police officers. The offer of the $150 came after Gill had asked Stojan what he was going to do and told him that he would have to appear before the Liquor Commissioner. After Stojan offered $150, Gill said, “No, I will take $500.” Fahey approached Sanichas and asked him to tell the owners that “it would be $500 for the owners to be given a pass, excused.” The jurors could reasonably have inferred from the evidence that the money was obtained through fear of economic loss and that Stojan offered to pay the $300 because he reasonably feared that if he did not, he would be cited for liquor violations or lose his license. Extortion, not bribery, was proved. See United States v. DeMet, at p. 820.

Defendants argue that extortion and bribery are mutually exclusive crimes and rely primarily on United States v. Kubacki, 237 F.Supp. 638, 641-642 (E. D.Pa.1965), for this proposition. Since there is sufficient evidence for the jury to have found extortion, it is not necessary to deal with this argument.

Ill

Defendants allege that the trial judge failed to instruct on an essential element of the crime, namely, commerce. They say that the judge withdrew this element to be proved from the jury and made the determination himself. The defendants stipulated at trial that Sto-jan’s distributors would testify that the liquor and beer they sold to him came from outside Illinois. The judge told the jurors that the defendants had agreed that the stipulated testimony proved that the beer and liquor came from out of state. Defendants, who never objected to the judge’s statement and who never attempted to refute the stipulated testimony, argue on appeal that the judge improperly withdrew the question from the jury as to whether the liquor had been in interstate commerce. Counsel for Gill specifically approved and counsel for Fahey did not object to the following instruction:

In reference to the requirements of the statute that commerce or the movement of any article or commodity in commerce be obstructed, delayed or affected you are hereby instructed that alcoholic beverages were shipped to various liquor distributors in Chicago, Illinois, from locations outside of the State of Illinois, and the Chicago-Oak Liquor distributors sold these alcoholic beverages to the Chicago-Oak Liquor Store in Chicago, Illinois.

It was not error for the judge to fail to define “commerce” since the defendant had agreed that the liquor sold to Stojan had come from out of state. To define “commerce” under 18 U.S.C. § 1951(b)(3) as defendants now argue would be a meaningless instruction since the jury was not called upon to make any factual determination about whether the shipment of liquor was interstate commerce. The only factual question in this regard was whether the commerce to which they had stipulated was affected by the extortion. The instructions fully covered this element of the crime.

IV

Count I of the indictment charged Gill and Fahey jointly with a violation of the Hobbs Act; Count II charged Gill with making a false material declaration to the grand jury which investigated the extortion charge; Count III charged Fahey with a similar offense. Gill made a pretrial motion for severance under Rule 8(b) of the Federal Rules of Criminal Procedure. The motion also mentioned Rule 14, Fed.R.Crim.P. The motion read in part, “The defendant Gill consents to a trial of the charges contained in Counts I and II, but objects to a joint trial with Fahey which includes the charges contained in Count III.” After Fahey joined in the motion, the district court denied it. Later, at the start of the trial, Gill filed a second motion for severance, claiming that the evidence to be produced at trial would place him in a position antagonistic to Fahey. He requested a separate trial. During the trial Fahey made a similar motion. Both motions were denied.

Although their briefs are far from clear, the defendants appear to argue that there was a misjoinder of counts under Rule 8(b) and that, in any event, severance should have been granted under Rule 14.

The defendants contend that the joinder of Counts I, II and III violated Rule 8(b). It is their position that the three counts do not constitute the “same series of acts or transactions” as required by the rule. Counts II and III do relate, however, to the occurrence which is the basis of the Hobbs Act violation alleged in Count I. The same evidence adduced to prove the Government’s charge under Count I was used to prove Counts II and III. See McElroy v. United States, 164 U.S. 76, 17 S.Ct. 31, 41 L.Ed. 355 (1896). Moreover, the alleged extortion and the denials of complicity herb were as closely related as the misprison and the bank robbery charges in United States v. Daddano, 432 F.2d 1119 (7th Cir. 1970). There we held that the relationship of the two separate charges was “close enough that they may be deemed a ‘series’ under Rule 8(b).” 432 F.2d at 1125. Without the nexus between the alleged extortion and the separate false declarations there would have been an impermissible joinder under Rule 8(b); but Count I provided the nexus which permitted the joinder of the three counts.

This ruling, however, does not answer the question whether the joinder was so prejudicial that there should have been a severance under Rule 14. Gill contends that his trial on Count I should be severed from Count II; Fahey makes the same contention regarding Count I and Count III. They argue that it was prejudicial for the jurors to be aware of the fact that the grand jurors disbelieved each one’s grand jury testimony denying involvement in the activity for which he was charged on the extortion count. They maintain that each defendant’s credibility was impeached before he took the witness stand. We do not decide this important question, however, since in the motion for severance, filed by Gill and joined in by Fahey, Gill consented to being tried on Counts I and II and Fahey, by joining in the motion, consented to being tried on Counts I and III. Thus, they waived the very issue they now seek to present on appeal.

Another question which was asserted in the district court remains: whether the joinder was so prejudicial that the defendants should have been afforded separate trials under Rule 14. The main contention is that neither should have been compelled to be tried jointly since only Gill was charged in Count II and only Fahey in Count III. It is settled that severance under Rule 14 rests in the discretion of the trial judge, subject to correction only if there has been an abuse of discretion. United States v. Echeles, 352 F.2d 892 (7th Cir. 1965). In that case we said: “ . [A] single joint trial, however desirable from the point of view of efficient and expeditious criminal adjudication, may not be had at the expense of a defendant’s right to a fundamentally fair trial.” 352 F.2d at 896. Both defendants, while claiming prejudice by being tried together, provide little if any support in their briefs for their claim. The prejudice, if any, amounted to the fact that the jurors were aware that the co-defendant was charged individually with an additional crime which was separate from the charges against the other defendant. The jurors were instructed by the judge that the evidence relating to the perjury charge against one defendant could not be used as evidence to prove any other count. Under these circumstances, we are not prepared to hold that there was an abuse of discretion in granting a severance of defendants. United States v. Kahn, 381 F.2d 824 (7th Cir. 1967).

V

Both defendants contend that the supplementary instruction given the jury after it had deliberated for some ten hours, violated this court’s decision in United States v. Brown, 411 F.2d 930 (7th Cir. 1969). The instruction was substantially similar to the instruction given in United States v. Silvern, 484 F.2d 879 (7th Cir., 1973), at 882, n. 5. In Silvern, Judge Sprecher, speaking for the majority of the en banc court, held that under the circumstances of that case there was no prejudice in giving the supplemental instruction — the Allen charge intermeshed with the instruction suggested by the American Bar Associa-tion and recommended in Brown. The majority also held that any conviction thereafter would be reversed if any supplementary instruction other than the exact instruction recommended in Brown were given to a deadlocked jury. The instant case was. tried prior to the en banc decision in Silvern; accordingly, we are bound by the decision in Silvern in holding that no prejudice resulted from the supplemental instruction which was substantially the same as that given in Silvern.

Before giving the supplementary in- - struction with which we were concerned in Silvern, the trial judge, as a preamble, stated:

In your job of determining the facts, you are reminded before each of you was accepted and sworn to act as a juror, you were asked questions regarding your competency, qualifications, fairness and freedom from prejudice or sympathy. Neither prejudice nor sympathy should play any part in your deliberations. On the faith of those answers you were accepted as jurors by the parties. Therefore, those answers are as binding on each of you now as they were then, and should remain so until you are discharged from consideration of the case.

Then, after giving the supplementary instruction, the trial judge concluded:

In determining the guilt or innocence of a defendant, you should not give any consideration to the matter of punishment. This question is exclusively my responsibility.

We agree with the defendants that there was no particular reason why the jurors should have been reminded of their oath at the time the supplementary instruction was given or for the judge to repeat what he had told them prior to, the time the jury started their deliberations: that it was his exclusive responsibility to decide punishment. The defendants argue that it is possible for a juror to have gained the impression that if he voted not guilty, or if he did not change his vote, he would not be true to his oath. It is also argued that by singling out and repeating the instruction on punishment the judge meant for the jurors to convict and that he would take care of the punishment and possibly give favorable consideration to the defendants regarding their sentences. Such arguments, however, are speculative.

The question of coerciveness is close, but on balance we are constrained to hold that these statements do not require reversal, particularly in light of the decision in Silvern.

VI

Gill contends that he was prejudiced by the Government’s failure to turn over all of Stojan’s pretrial statements as required by 18 U.S.C. § 3500. The assistant United States Attorney informed the court before the third day of trial that he had inadvertently left out one page of the section 3500 material when he had tendered the statement to defense counsel. The trial judge admonished the Government not to comment on defense counsel’s inability to impeach and denied Gill’s motion for a mistrial. Stojan was recalled as a witness and cross-examined. At that time the missing page was available to the defendant. We have examined the page and reviewed the cross-examination and find no prejudice to Gill’s defense under the circumstances. The delay in producing the one page of the statement was harmless error. Rosenberg v. United States, 360 U.S. 367, 371, 79 S.Ct. 1231, 3 L. Ed.2d 1304 (1959).

It is also contended that it was error for the trial judge to refuse to allow Gill to testify about whether he had made similar decisions in the past not to arrest minors who had purchased beverages. It is argued that this proffered testimony was affirmative evidence to prove that Gill properly exercised his discretion in not arresting the minor and not charging Stojan with a liquor violation. Whether he had made prior decisions not to arrest in similar situations was irrelevant to the question whether he extorted money on this occasion. Cf. United States v. Isa, 452 F.2d 723 (7th Cir. 1971).

Fahey argues that the Government failed to show that he had been advised by the prosecutor at the time of his grand jury testimony that he could purge himself of the allegedly false declaration by subsequently recanting. There is no duty on the Government prosecutor to attempt to get the witness to recant. Perforce, failure to show that an attempt was made is not an element of the offense. 18 U.S.C. § 1623(a), (c), and (e).

The last contention raised on appeal is that the standard used by the district judge in sentencing the defendants was improper. The maximum penalty for extortion is twenty years and the maximum penalty for false declaration is five years. Gill received two four-year concurrent sentences and Fahey received two three-year concurrent sentences. The asserted improper standard was that the trial judge imposed punishment on police officers in accordance with their rank. Gill, a lieutenant, received the four-year sentence, Fahey, a sergeant, received the three-year sentence, and a patrolman sentenced about a week prior received a two-year sentence for a similar crime. The trial judge said that he felt that “only this type of deterrent” could have an effect on future crime. Courts of appeals have no reviewing power over sentencing except perhaps in the most extraordinary circumstances; this is not such a case.

The convictions are affirmed.

      . The author of this opinion stated a view in a prior case, United States v. Amabile, 395 F.2d 47, 54 (7th Cir. 1968), that is in opposition to those expressed by Judge Fairchild in DeMet. With reluctance, the author accepts Judge Fairchild’s opinion in DeMet as the law of the circuit. See concurring opinion, Swygert, C. J., United States v. DeMet, at pp. 822 and 823.

      . Rule 8(b) provides:
      Joinder of Defendants. Two or more defendants may be charged in the same indictment or information if they are alleged to have participated in the same act or transaction or in the same series of acts or transactions constituting an offense or offenses. Such defendants may be charged in one or more counts together or separately and all of the defendants need not be charged in each count.

      . Rule 14 provides :
      Relief from Prejudicial Joinder. If it appears that a defendant or the government is prejudiced by a joinder of offenses or of defendants in an indictment or information or by such joinder for trial together, the court may order an election or separate trials of counts, grant a severance of defendants or provide whatever other relief justice requires. In ruling on a motion by a defendant for severance the court may order the attorney for the government to deliver to the court for inspection in camera any statements or confessions made by the defendants which the government intends to introduce in evidence at the trial.

      . The Allen charge, also known as the dynamite charge, takes its name from the case of Allen v. United States, 164 U.S. 492, 501-502, 17 S.Ct. 154, 41 L.Ed. 528 (1896). The Supreme Court approved the giving of the instruction in Allen, but this circuit under its supervisory power held in United States v. Brown, 411 F.2d 930 (1969), that the American Bar Association standards on supplementary instructions were to be followed instead of the Allen charge.


author: KAUFMAN, Chief Judge: OAKES, Circuit Judge

text:
    Philip GROVE and Harriet Grove, Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Appellant.
    No. 847, Docket 73-1037.
    United States Court of Appeals, Second Circuit.
    Argued May 24, 1973.
    Decided July 27, 1973.

      Wesley J. Filer, Atty., Tax Div., Dept, of Justice, Washington, D.C. (Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, Elmer J. Kelsey, Attys., Tax Div., Dept, of Justice, Washington, D.C., on the brief), for appellant.
    Mason G. Kassel, New York City (R. Palmer Baker, Jr., and Lord, Day & Lord, New York City, on the brief), fbr appellees.
    Before KAUFMAN, Chief Judge, and KILKENNY  and OAKES, Circuit Judges.

       Of the United States Court of Appeals for the Ninth Circuit, sitting by designation.

   KAUFMAN, Chief Judge:

We are called upon, once again, to wrestle with the tangled web that is the Internal Revenue Code and decipher the often intricate and ingenious strategies devised by taxpayers to minimize their tax burdens. We undertake this effort mindful that taxpayer ingenuity, although channelled into an effort to reduce or eliminate the incidence of taxation, is ground for neither legal nor moral opprobrium. As Learned Hand so eloquently stated, “any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; - there is not even a patriotic duty to increase one’s taxes . ” Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934), aff’d, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935).

The case before us involves charitable contributions to an educational institution. It is becoming increasingly apparent that colleges and universities must engage in extensive fund-raising if they are to continue to exist and provide quality education. In their efforts to induce alumni to make substantial contributions, these institutions have devised interesting gift plans which offer attractive, and legal, tax advantages to the donor. Philip Grove, a successful engineer, was one who responded to the needs of his alma mater, Rensselaer Polytechnic Institute (“RPI”). Thus, in 1954, he began making annual donations to RPI of 165 to 250 shares of Grove Shepherd Wilson & Kruge, Inc. (“the Corporation”), a closely held corporation of which he is majority shareholder, vice-president, and a director. In each instance, Grove retained a life interest in any income earned from his gift and limited his charitable contribution deduction to the value of the remainder interest received by RPI. Despite the absence of any prearranged agreement between Grove and RPI, each year between 1954 and 1964 RPI successfully offered individual groups of shares to the Corporation for redemption. RPI then invested the redemption proceeds in income-producing securities and made quarterly disbursements to Grove of any income received. Grove reported any federally-taxed items on his personal income tax returns for the year of receipt.

The Commissioner of Internal Revenue refused to approve these arrangements. Instead, he assessed deficiencies in Grove’s income taxes for the years 1963 and 1964, contending that Grove had employed RPI as a tax-free conduit for withdrawing funds from the Corporation and that redemption payments by the Corporation to RPI were in reality constructive dividend payments to Grove. Grove successfully challenged the deficiency determinations in the Tax Court, and the Commissioner appealed. We affirm.

I.

A full recitation of the undisputed facts underlying this controversy will aid in placing the legal issues raised on appeal in their proper context.

Philip Grove received an engineering degree in 1924 from Rensselaer Polytechnic Institute, a private, tax-exempt educational institution. During the Depression, he founded what is now Grove Shepherd Wilson & Kruge, Inc. and at all times since has controlled a majority of its shares. The balance of the Corporation’s shares, with the exception of those held by RPI, are owned by officers and employees of the Corporation or their relatives.

The Corporation’s business is building airfields, highways, tunnels, canals, and other similar heavy construction projects in both the United States and foreign countries. These projects usually involve the investment of large sums of money over an extended period of time and involve a high degree of risk. Since, in this industry, contract payments normally are made only after specified levels of progress are achieved, a firm must always commit substantial amounts of its own funds, whether borrowed or internally generated, to a project. Moreover, a company can determine an acceptable contract price based only on its best estimate of the cost to complete the project. A bad “guess” or unforeseen contingency may require a firm to complete a project while incurring a loss. Not surprisingly, the mortality rate in this industry is high. To protect against such adverse developments, successful firms seek to maintain liquidity by holding ample cash or other assets easily converted to cash. One method of conserving cash, adopted by the Corporation, is to retain all earnings and refrain from paying dividends.

As we have noted, RPI, like all universities and colleges, pursued its alumni with a wide variety of contribution plans. One plan employed “life income funds,” and its terms were simple. An alumnus would make a gift of securities to RPI and retain a life interest in the income from the donated securities. Whatever dividends and interest were paid during the donor’s life would belong to the donor, while any capital appreciation would inure to RPI. Upon the death of the donor, RPI would obtain full title to the securities.

In 1954, Dr. Livingston Houston, RPI’s president, suggested to Grove that he make a gift under the “life income funds” plan. Grove explained that his only significant holdings were shares of his own corporation, but expressed a willingness to donate some of these shares under the plan, with certain qualifications. The Corporation, he stated, could not agree to any obligation or understanding to redeem shares held by RPI. This condition, of course, stemmed from a fear that RPI might seek redemption at a time when the Corporation was hard pressed for cash, which, as we have noted, was an asset crucial to a company in the heavy construction business. Moreover, since Grove at that time was unsure of RPI’s money-management qualifications, he further conditioned his gift on a requirement that if RPI disposed of the shares, any proceeds would be invested and managed by an established professional firm.

RPI found these terms acceptable and on December 30, 1954, Grove made an initial gift of 200 shares, valued at $25,560. A letter accompanying the donation set forth the conditions we have recited. Moreover, in addition to retaining an interest in the income from the gift for his life, Grove specified that in the event he should predecease his wife Harriet, she would receive the income until her death.

On the same day, the Corporation and RPI signed a minority shareholder agreement. RPI agreed not to “sell, transfer, give, pledge or hypothecate, or in any way dispose of the whole or any part of the common stock of the Corporation now or hereafter owned . until [RPI] shall have first offered the Corporation the opportunity to purchase said shares upon the terms and conditions hereinafter provided.” The redemtion price was established at book value of the shares as noted on the Corporation’s most recent certified financial statement prior to the offer. Pursuant to the contract, the Corporation was “entitled (but not obligated) to purchase all or any part of the shares of stock so offered.” If the Corporation did not exercise its option to purchase within sixty days, RPI could transfer the shares to any other party and the Corporation’s right of first refusal would not subsequently attach to such transferred shares.

The 1954 gift was the first in a series of annual contributions to RPI by Grove. From 1954 to 1968, Grove donated to RPI between 165 and 250 shares of the Corporation each year, reaching a cumulative total of 2,652 shares, subject to terms substantially similar to those noted earlier.

Generally, RPI offered donated shares to the Corporation for redemption, between one and two years after they were donated by Grove. The transactions followed a similar pattern. On each occasion, the Finance Committee of RPI’s Board of Trustees first authorized the sale of specific shares of the Corporation. RPI’s treasurer or controller would then write to Sidney Houck, the Corporation’s treasurer, informing him of RPI’s desire to dispose of the shares. Upon receipt of this letter, Houck would call a special meeting of the Corporation’s board of directors to consider whether or not to exercise the Corporation’s right of first refusal. The Board would adopt a resolution authorizing redemption and Houck would so inform RPI’s financial officer, enclosing a company check for the amount due. By return mail, RPI would forward the appropriate stock certificate to the Corporation for cancellation.

At the time of the first redemption, in December, 1955, RPI opened an investment account at the Albany, New York, office of Merrill Lynch, Pierce, Fenner & Beane (“Merrill Lynch”). The account was captioned “Rensselaer Polytechnic Institute (Philip H. Grove Fund) Account.” In accordance with Grove’s wishes concerning the management of disposition proceeds, RPI authorized Merrill Lynch to act directly upon investment recommendations made by Scudder, Stevens, & Clark, Grove’s personal investment adviser. RPI deposited the proceeds of each redemption transaction into this account which, pursuant to Scudder, Stevens & Clark’s instructions, were generally invested in securities of large corporations whose shares traded on organized stock exchanges. Merrill Lynch paid the income from these investments to RPI on a monthly basis. RPI, in turn, made quarterly remittances to Grove, accompanied by an analysis of all account transactions.

On his personal income tax return for 1963, Grove reported as taxable income dividends of $4,939.28 and interest of $2,535.73 paid to him by RPI from the Merrill Lynch account. For 1964, Grove reported $6,096.05 in dividends and $3,540.81 in interest. The Commissioner, however, assessed deficiencies in Grove’s taxable income for these years, asserting that Grove “realized additional dividends in the amounts of $29,000 and $25,800 in 1963 and 1964, respectively, as the result of the redemption of stock by Grove Shepherd Wilson & Kruge, Inc.” Accordingly, the Commissioner increased Grove’s taxable income by these amounts and demanded payment of additional taxes — in excess of $13,000— for each year. Grove refused to pay and petitioned the Tax Court for a redeter-mination of his tax liability. The Court, concluding that Grove had made a bona fide gift to RPI, ruled in favor of the taxpayer and the Commissioner appealed.

II.

The Commissioner’s view of this case is relatively simple. In essence, we are urged to disregard the actual form of the Grove-RPI-Corporation donations and redemptions and to rewrite the actual events 'so that Grove’s tax liability is seen in a wholly different light. Support for this position, it is argued, flows from the Supreme Court’s decision in Commissioner of Internal Revenue v. Court Holding Co., 324 U.S. 331, 65 S. Ct. 707, 89 L.Ed. 981 (1945), which, in language familiar to law students, cautions that “[t]he incidence of taxation depends upon the substance of a transaction. ... To permit the true nature of a transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.” Id. at 334, 65 S.Ct. at 708. In an effort to bring the instant case within this language, the Commissioner insists that whatever the appearance of the transactions here under consideration, their “true nature” is quite different. He maintains that Grove, with the cooperation of RPI, withdrew substantial funds from the Corporation and manipulated them in a manner designed to produce income for his benefit. In the Commissioner’s view, the transaction is properly characterized as a redemption by the Corporation of Grove’s, not RIP’s shares, followed by a cash gift to RPI by Grove. This result, it is said, more accurately reflects “economic reality.”

The Commissioner’s motives for insisting upon this formulation are easily understood once its tax consequences are examined. Although Grove reported taxable dividends and interest received from the Merrill Lynch account on his 1963 and 1964 tax returns, amounts paid by the Corporation to redeem the donated shares from RPI were not taxed upon distribution. If, however, the transactions are viewed in the manner suggested by the Commissioner, the redemption proceeds would be taxable as income to Grove. Moreover, because the redemp-tions did not in substance alter Grove’s relationship to the Corporation — he continued throughout to control a majority of the outstanding shares — the entire proceeds would be taxed as a dividend payment at high, progressive ordinary-income rates, rather than as a sale of shares, at the fixed, and relatively low, capital gains rate. See, 26 U.S.C. § 302; United States v. Davis, 397 U.S. 301, 90 S.Ct. 1041, 25 L.Ed.2d 323 (1970).

Clearly, then, the stakes involved are high. We do not quarrel with the maxim that substance must prevail over form, but this proposition marks the beginning, not the end, of our inquiry. The court in Sheppard v. United States, 361 F.2d 972, 176 Ct.Cl. 244 (1966) perceptively remarked that “all such ‘maxims’ should rather be called “minims’ since they convey a minimum of information with a maximum of pretense.” Id. at 977 n.9. Each case requires detailed consideration of its unique facts. Here, our aim is to determine whether Grove’s gifts of the Corporation’s shares to RPI prior to redemption should be given independent significance or whether they should be regarded as meaningless intervening steps in a single, integrated transaction designed to avoid tax liability by the use of mere formalisms.

The guideposts for our analysis are well marked by earlier judicial encounters with this problem. “The law with respect to gifts of appreciated property is well established. A gift of appreciated property does not result in income to the donor so long as he gives the property away absolutely and parts with title thereto before the property gives rise to income by way of sale.” Carrington v. Commissioner of Internal Revenue, 476 F.2d 704, 708 (5th Cir. 1973), quoting Humacid Co., 42 T.C. 894, 913 (1964). As noted below by the Tax Court, the Commissioner here “does not contend that the gifts of stock by [Grove] to RPI in 1961 and 1962 were sham transactions, or that they were not completed gifts when made.” If Grove made a valid, binding, and irrevocable gift of the Corporation’s shares to RPI, it would be the purest fiction to treat the redemption proceeds as having actually been received by Grove. The Tax Court concluded that the gift was complete and irrevocable when made. The Commissioner conceded as much and we so find.

It is argued, however, that notwithstanding the conceded validity of the gifts, other circumstances establish that Grove employed RPI merely as a convenient conduit for withdrawing funds from the Corporation for his personal use without incurring tax liability. The Commissioner would have us infer from the systematic nature of the gift-redemption cycle that Grove and RPI reached a mutually beneficial understanding: RPI would permit Grove to use its tax-exempt status to drain funds from the Corporation in return for a donation of a future interest in such funds.

We are not persuaded by this argument and the totality of the facts and circumstances lead us to a contrary conclusion. Grove testified before the Tax Court concerning the circumstances of these gifts. The court, based on the evidence and the witnesses’ credibility, specifically found that “[t]here was no informal agreement between [Grove] and RPI that RPI would offer the stock in question to the corporation for redemption or that, if offered, the corporation would redeem it.” Findings of fact by the Tax Court, like those of the district court, are binding upon us unless they are clearly erroneous, 26 U.S.C. § 7482(a); Rule 52, F.R.Civ.P., and “the rule . . . applies also to factual inferences [drawn] from undisputed basic facts.” Commissioner of Internal Revenue v. Duberstein, 363 U.S. 278, 291, 80 S.Ct. 1190, 1200, 4 L.Ed.2d 1218 (1960). It cannot seriously be contended that the Tax Court’s findings here are “clearly erroneous” and no tax liability can be predicated upon a nonexistent agreement between Grove and RPI or by a fictional one created by the Commissioner.

Grove, of course, owned a substantial majority of the Corporation’s shares. His vote alone was sufficient to insure redemption of any shares offered by RPI. But such considerations, without more, are insufficient to permit the Commissioner to ride roughshod over the actual understanding found by the Tax Court to exist between the donor and the donee. Behrend v. United States (4th Cir. 1972), 73-1 USTC ¶ 9123, is particularly instructive. There, two brothers donated preferred shares of a corporation jointly controlled by them to a charitable foundation over which they also exercised control. The preferred shares were subsequently redeemed from the foundation by the corporation and the Commissioner sought to tax the redemption as a corporate dividend payment to the brothers. The court, in denying liability, concluded that although “it vas understood that the corporation would at intervals take up the preferred according to its financial ability : . . , this factor did not convert into a constructive dividend the proceeds of the redemption . [because] the gifts were absolutely perfected before the corporation redeemed the stock.” Id.

Nothing in the December, 1954, minority shareholder agreement between the Corporation and RPI serves as a basis for disturbing the conclusion of the Tax Court. Although the Corporation desired a right of first refusal on minority shares — understandably so, in order to reduce the possibility of unrelated, outside ownership interests — it assumed no obligation to redeem any shares so offered. In the absence of such an obligation, the Commissioner’s contention that Grove’s initial donation was only the first step in a prearranged series of transactions is little more than wishful thinking grounded in a shaky foundation. See Carrington v. Commissioner of Internal Revenue, supra, 476 F.2d at 709; Behrend, supra, 73-1 USTC ¶ 9123 at 80,067; Sheppard v. United States, supra at 978; Robert L. Fox, 27 TCM 1001, 1013 (1968).

We are not so naive as to believe that tax considerations played no role in Grove’s planning. But foresight and planning do not transform a non-taxable event into one that is taxable. Were we to adopt the Commissioner’s view, we would be required to recast two actual transactions — a gift by Grove to RPI and a redemption from RPI by the Corporation — into two completely fictional transactions — a redemption from Grove by the Corporation and a gift by Grove to RPI. Based upon the facts as found by the Tax Court, we can discover no basis for elevating the Commissioner’s “form” over that employed by the taxpayer in good faith. “Useful as the step transaction doctrine may be in the interpretation of equivocal contracts and ambiguous events, it cannot generate events which never took place just so an additional tax liability might be asserted.” Sheppard v. United States, supra, at 978. In the absence of any supporting facts in the record we are unable to adopt the Commissioner’s view; to do so would be to engage in a process of decision that is arbitrary, capricious and ultimately destructive of traditional notions of judicial review. We decline to embark on such a course.

Accordingly, the judgment of the Tax Court is affirmed.

OAKES, Circuit Judge

(dissenting):

Review of the tax consequences of a business transaction requires consideration of the economic realities of the entire transaction. See Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935); South Bay Corp. v. Commissioner of Internal Revenue, 345 F.2d 698, 703, 705 (2d Cir. 1965). Whether a transaction should be viewed as two or more steps or as one integrated transaction may result in entirely different tax consequences. See generally B. Bittker & J. Eustice, Federal Taxation of Corporations and Shareholders ¶ 1.05 at 1-19 through 1-21 (3rd ed. 1971); Mintz & Plumb, Step Transactions in Corporate Reorganizations, N.Y.U. 12th Inst, on Fed.Tax. 247 (1954); cf. Treas.Reg. § 1.351-1 (c)(2) & (5) (1967) (“existing plan” and subsequent steps “however delayed”).

Here, as I see it, the form of the transaction was two-step: a gift of stock followed by a redemption of the stock by the donor controlled corporation. The substance of the transaction, however, was a payment out of corporate earnings and profits to a charity designated by the donor who retained a life interest in the gift.

The factors which distinguish the RPI-Grove transactions from other charitable donations of securities and which persuade me to treat this as an integrated transaction are two: first, the gifts made by the Groves were of stock in a closed corporation that was inevitably redeemed annually; second, by virtue of retaining a life income from the reinvested proceeds and by retaining a measure of control over how those proceeds should be reinvested (by designating the investment adviser who was also the Groves’ personal adviser), the Groves were able to achieve a bail-out from their non-dividend-paying closed corporation.

Viewing the economic realities of the situation, the pattern of redemption always following upon the gifts makes it clear that by the tax years here in issue Grove could confidently expect that RPI would quickly redeem and reinvest the Grove stock in safe income bearing securities. From the time Grove first began giving RPI shares in 1955, until 1964 when Grove was assessed with the taxes here in dispute, RPI consistently and without exception offered for redemption the Grove shares approximately one year after they were received. Not only was the practice consistent, thus indicating that at least as of 1963 the Groves could count on annual redemption offers, but it was the only practice which a university treasurer could correctly take and still meet his own statutory obligations as a fiduciary to RPI. See N.Y. Estates, Powers and Trust Law § 11-2.1 & .2 (McKinney 1967 & Supp. 1972). As pointed out in the majority opinion, construction company stock may be quite risky. Given the relatively conservative nature of university investments, it would have been obvious to Grove from the beginning that RPI’s treasurer (pursuant to direction from the finance committee of the RPI board of trustees) would redeem the Grove shares quite soon after their receipt. RPI was required as a condition to the gifts to offer any Grove shares to the Grove corporation for redemption prior to resale elsewhere. Grove as majority shareholder had control over whether the shares would be redeemed by the corporation. Thus it is entirely unimportant that there was no written agreement requiring that RPI offer its Grove stock for redemption. Judge Learned Hand observed in Commissioner of Internal Revenue v. Transport Trading & Terminal Corp., 176 F.2d 570, 572 (2d Cir. 1949) (dictum), cert, denied, 338 U.S. 955, 70 S.Ct. 493, 94 L.Ed. 589 (1950), that the “sure expectation” of a later transaction might be sufficient to bring a transaction within the principle enunciated in Gregory v. Helvering, swpra. There surely was a “sure expectation” of redemption here. It did not become any the less sure when Grove became a term trustee of RPI in 1957, and subsequently a life, and then an honorary trustee.

Moreover, the reinvestment which took place gave the Groves a life interest in an entirely different sort of security than they had had as owners of the shares of Grove Shepherd Wilson & Kruge, Inc. — thus accomplishing a financially desirable diversification and creating a dependable interest and dividend flow. Their closed corporation paid no dividends during the period here in question, although it could have done so. See Edgar v. Commissioner of Internal Revenue, 56 T.C. 717, 758-759 (1971); Security First National Bank v. Commissioner of Internal Revenue, 28 B. T.A. 289, 310-11 (1933); Rev.Rul. 68-658, 1968-2 Cum.Bull. 119. The fact that Grove could depend on RPI’s investment of the Grove shares in stocks and bonds paying substantial dividends and interest is clear. Indeed, he selected the investment firm advising RPI on such reinvestment. This firm also personally advised him, and RPI acknowledged in writing as early as 1955 that it was pleased to conform to Grove’s wishes, to have the investment of the redemption proceeds coordinated with Grove’s personal investment program. The investment firm could be expected to act, and did in fact act as far as the record indicates, to make investments which provided good yearly income to Grove as well as a safe capital base for RPI.

If Grove had given RPI listed “safe” securities equivalent to those invested in by Scudder, Stevens & Clark to RPI rather than the risky construction company stock he would have received no benefit from these transactions (other than the gift tax deduction). But in this case his gifts acted as a sort of low risk pension fund for himself and his wife in case of failure of the construction business, without his having to pay a tax on any dividends that might be declared by his corporation. The Groves were in the very same financial position after the gift-redemption-reinvestment transaction as if the corporation had paid them a cash dividend in the amount of the gift, a dividend which they had then given to RPI to be reinvested safely. The Groves maintained their position as controlling shareholders. Cf. United States v. Davis, 397 U.S. 301, 313, 90 S.Ct. 1041, 25 L.Ed.2d 323 (1970). Finally, the corporation was also in the same financial position as if it had declared and paid a cash dividend since it redeemed the shares of stock for cash (except that on redemption it was better off in that it rather than the Groves owned its shares redeemed). But a tax on the amount of the dividend, had one been declared, had' — hopefully for corporation and shareholder alike— been avoided and under the majority decision was in fact avoided.

The majority opinion relies heavily on two cases which I believe are readily distinguishable from the situation here. One is Carrington v. Commissioner of Internal Revenue, 476 F.2d 704 (5th Cir. 1973), relied on for the proposition that “(a] gift of appreciated property does not result in income to the donor so long as he gives the property away absolutely and parts with title before the property gives rise to income by way of sale.” Here the Groves did not part with all interest in the construction company stock. The reservation of a life interest in the stock (or its reinvested proceeds), when coupled with taxpayer’s right, however indirect, to direct the manner in which proceeds would be invested, gave the Groves a very great continuing interest and control, a fact of not inconsiderable tax significance. Cf. Corliss v. Bowers, 281 U.S. 376, 378, 50 S.Ct. 336, 74 L.Ed. 916 (1930) (Holmes, J.) (“taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed. . ”). More importantly, Carring-ton involved only one contribution of stock and one redemption; there was no pattern of redemption of stock as was clearly established here at least by the time of the tax years in question.

In Behrend v. United States, CCH 1973 Stand.Fed.Tax Rep. ¶ 9123 (4th Cir. 1972), also relied upon by the majority, the proceeds of the redemption were used wholly for the benefit of the charitable foundation which was the recipient of the stock; there was no life estate reserved for the personal benefit of the donors. See 1973 Stand.Fed.Tax Rep. ¶ 9123 at 80,067 (“[P]redominant force” in Behrend decision is “indisputable fact” that the taxpayers therein “did not participate whatsoever in the beneficence of the foundation”).

Thus, I believe that when, as here, the nature and conditions of the charitable gift and the pattern of donor-charity behavior are such as to make it for all practical purposes inevitable that the stock given will be offered for redemption and accepted by the closely held corporation, resulting in providing the equivalent of a safe pension fund for the donor stockholders, then the transaction must be treated as a distribution of dividends under §§ 301(a), 301(c) and 316(a) of the Internal Revenue Code of 1954. The majority opinion refers to an “absence of any supporting facts in the record” for the Commissioner’s position, but omits to rely upon the one most important fact on which the case should turn: the pattern of redemption over years of giving. I accordingly dissent.

      . Harriet Grove, Philip’s wife, is a party to these proceedings solely by virtue of having signed their joint federal income tax return for years in which the Commissioner of Internal Revenue assessed deficiencies. Our subsequent references to “Grove” refer to Philip.

      . On December 31, 1964, a date after which the record is bare, Grove directly held 14,931 of 22,484 shares outstanding. In addition, 3,076 shares were owned by a voting trust holding shares for Grove’s children which Grove controlled.
      As noted, Grove also is a vice-president and a member of the board of directors of the Corporation. The other directors —each of whom owns shares of the Corporation — are E. W. Shepherd, who serves as president of the Corporation, Sidney A. Houck, the Corporation’s treasurer, and George Kruge. Due to the close knit nature of the Corporation’s ownership, its officer-owners manage company affairs through informal decision-making processes and rarely hold formal board of directors or shareholders meetings.

      . Other minority shareholders of the Corporation signed similar agreements, which, in effect put in writing the Corporation’s practice of redeeming, when financial conditions permitted, any minority-owner shares offered to it, for example, by a departing employee or a deceased employee’s widow.

      . On August 20, 1963, Grove donated to RPI 70 shares of Thompson Construction Corporation, a gift unrelated to the present controversy. Grove made no gift of his corporation’s stock to RPI in 1963.

      '. During this period, Grove became progressively more involved in RPI’s affairs. After 1954, he met RPI officials other than Dr. Houston. In 1957, Grove was elected a trustee of RPI for a four-year term ending in 1961. In 1965, he returned to the board of trustees as a life trustee and, when he resigned in 1969 at the age of sixty-five, he was elected an honorary trustee.

      . The following table discloses the number of shares, date donated, date of redemption (if made), and (if redeemed) amount paid by the Corporation to RPI:

        Date Shares Donated by Grove to RPI Number of Shares Donated Date Shares Redeemed from RPI by the Corporation Amount Paid to RPI

      12/30/54 200 12/29/55 $23,000
      12/21/55 220 12/28/56 25,300
      12/26/56 220 12/23/57 26,840
      12/11/57 205 12/27/58 26,035
      12/29/58 195 11/6/59 24,570
      12/28/59 200 12/27/60 23,500
      11/15/60 210 3/7/62 26,250
      10/31/61 200 1/4/63 29,000.
      11/30/62 172 4/24/64 25,800
      12/18/64 165 — —
      8/23/65 165 — —
      12/6/67 250 — —
      12/4/68 250' — —

      . In addition, Grove received each year small sums exempt from federal taxation.

      . Portions of each deficiency were based on items unrelated to the gift transactions. These matters were settled by the parties and were not presented to the Tax Court.

      . The Commissioner might have argued that at least that portion of the redemption proceeds allocable to Grove’s retained life income interest was taxable as a dividend. He chose not to do so and the Tax Court “express [ed] no opinion upon the question, if it were properly presented, whether petitioner derived taxable income upon the redemption of stock to the extent of the life estate which he retained . Since the Commissioner has bypassed this aspect, it would be inappropriate in our discussions of the gifts to attach any special significance to the retained life interest feature.

      . Courts have frequently dealt with the substance-form dilemma in a charitable gift context and found against the taxpayer, though not in situations specifically like this one. Cf. Parmer v. Commissioner of Internal Revenue, 468 F.2d 705 (10th Cir. 1972) ; Tatum v. Commissioner of Internal Revenue, 400 F.2d 242 (5th Cir. 1968) (donor-taxpayer held to have realized income upon the later collection by the donee charity of income due on assigned rights to shares of crops produced by the donor’s tenants). See also Friedman v. Commissioner of Internal Revenue, 346 F.2d 506 (6th Cir. 1965) (donor-taxpayer held to have realized income upon the collection by a charity of endowment policy interest payable shortly after the policy was transferred to the charity).

      . Clearly, the step transaction doctrine would be a dead letter if restricted to situations where the parties were hound to take certain steps.
      The doctrine derives vitality, rather, from its application where the form of a transaction does not reqxñre a particular further step be taken; but, once taken, the substance of the transaction reveals that the ultimate result was intended from the outset. King Enterprises, Inc. v. United States, 418 F.2d 511, 518, 189 Ct.Cl. 466 (1969).

      . The investment income was $9,636.86 of interest and dividends in 1964 and $7,475.01 in 1963.


author: ALBERT V. BRYAN, Senior Circuit Judge: WIDENER, Circuit Judge PER CURIAM:

text:
    SECURITIES AND EXCHANGE COMMISSION, Appellant, v. DATRONICS ENGINEERS, INC., et al., Appellees.
    No. 72-2240.
    United States Court of Appeals, Fourth Circuit.
    Argued March 7, 1973.
    Decided July 27, 1973.
    As Modified on Denial of Rehearing and Rehearing En Banc Sept. 28, 1973.
    Certiorari Denied April 15, 1974.
    See 94 S.Ct. 1936.

      Jacob H. Stillman, Asst. Gen. Counsel, Securities and Exchange Commission, (Walter P. North, Acting Gen. Counsel, Frederic T. Spindel, Atty., and Dennis R. Surprenant, Securities and Exchange Commission on brief), for appellant.
    Paul N. Sameth and Isadore B. Katz, Silver Spring, Md. (Jules Fink on brief), for appellee, Datronics Engineers, Inc. Sylman I. Euzent, pro se.
    John T. Gauthier, pro se.
    Harry Adelberg, Baltimore, Md., on brief for appellee, Irving Newirth.
    Before BRYAN, Senior Circuit Judge, and FIELD and WIDENER, Circuit Judges.
   ALBERT V. BRYAN, Senior Circuit Judge:

The Securities and Exchange Commission in enforcement of the Securities Act of 1933, § 20(b), 15 U.S.C. § 77t(b), and the Securities Exchange Act of 1934, § 21(e), 15 U.S.C. § 78u(e), sought a preliminary injunction to restrain Datronics Engineers, Inc., its of-' ficers and agents, as well as related corporations, from continuing in alleged violation of the registration and antifraud provisions of the Acts. The breaches are said to have been committed in the sale of unregistered securities, § 5 of the 1933 Act, 15 U.S.C. § 77e, and by the employment of false representations in their sale, § 10(b) of the 1934 Act, 15 U.S.C. § 78j, and Rule 10b-5 of the Commission, 17 CFR 240.10b-5.

Summary judgment went for the defendants, and the Commission appeals. We reverse.

Specifically, the complaint charged transgressions of the statutes by Da-tronics, assisted by the individual defendants, in declaring, and effectuating through the use of the mails, “spin-offs” to and among its stockholders of the unregistered shares of stock owned by Da-tronics in other corporations. With exceptions to be noted, and since the decision on appeal rests on a motion for summary judgment, there is no substantial dispute on the facts. Datronics was engaged in the construction of communications towers. Its capital stock was held by 1000 shareholders and was actively traded on the market. All of the spin-offs occurred within a period of 13 months — from November 1, 1968 to December 31, 1969 — and the spun-off stock was that of nine corporations, three of which were wholly owned subsidiaries of Datronics and six were independent corporations.

The pattern of the spin-offs in each instance was this: Without any business purpose of its own, Datronics would enter into an agreement with the principals of a private company. The agreement provided for the organization by Datronics of a new corporation, or the utilization of one of Datronics’ subsidiaries, and the merger of the private company into the new or subsidiary corporation. It stipulated that the principals of the private company would receive the majority interest in the merger-corporation. The remainder of the stock of the corporation would be delivered to, or retained by, Datronics for a nominal sum per share. Part of it would be applied to the payment of the services of Datronics in the organization and administration of the proposed spin-off, and to Datronics’ counsel for legal services in the transaction. Da-tronics was bound by each of the nine agreements to distribute among its shareholders the rest of the stock.

Before such distribution, however, Da-tronics reserved for itself approximately one-third of the shares. Admittedly, none of the newly acquired stock was ever registered; its distribution and the dissemination of the false representations were accomplished by use of the mails.

I. Primarily, in our judgment each of these spin-offs violated § 5 of the Securities Act, supra footnote 1, in that Datronics caused to be carried through the mails an unregistered security “for the purpose of sale or for delivery after sale”. Datronics was actually an issuer, or at least a co-issuer, and not exempted from § 5 by § 4(1) of the Act, 15 U.S.C. § 77d as “any person other than an issuer”.

Datronics and the other appellees contend, and the District Court concluded, that this type of transaction was not a sale. The argument is that it was no more than a dividend parceled out to stockholders from its portfolio of investments. A noteworthy difference here, however, is that each distribution was an obligation. Their contention also loses sight of the definition of “sale” contained in § 2 of the 1933 Act, 15 U.S.C. § 77b. As pertinent here that definition is as follows:

“When used in this subchapter, unless the context otherwise requires — • * * * * •* *
“(3) The term ‘sale’ or ‘sell’ shall include every contract of sale or disposition of a security or interest in a security, for value. The term ‘offer to sell’, ‘offer for sale’, or ‘offer’ shall include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value. . . . ” (Accent added.)

As the term “sale” includes a “disposition of a security”, the dissemination of the new stock among Datronics’ stockholders was a sale. However, the appellees urged, and the District Court held, that this disposition was not a statutory sale because it was not “for value”, as demanded by the definition. Here, again, we find error. Cf. Securities and Exchange Commission v. Harwyn Industries Corp., 326 F.Supp. 943, 954 (S.D.N.Y.1971). Value accrued to Datronics in several ways. First, a market for the stock was created by its transfer to so many new assignees — at least 1000, some of whom were stockbroker-dealers, residing in various States. Sales by them followed at once — the District Judge noting that “[i]n each instance dealing promptly began in the spun-off shares”. This result redounded to the benefit not only of Datronics but, as well, to its officers and agents who had received some of the spun-off stock as compensation for legal or other services to the spin-off corporations. Likewise, the stock retained by Datronics was thereby given an added increment of value. The record discloses that in fact the stock, both that disseminated and that kept by Datronics, did appreciate substantially after the distributions.

This spurious creation of a market whether intentional or incidental constituted a breach of the securities statutes. Each of the issuers by this wide spread of its stock became a publicly held corporation. In this process and in subsequent sales the investing public was not afforded the protection intended by the statutes. Further, the market and the public character of the spun-off stock were fired and fanned by the issuance of shareholder letters announcing future spin-offs, and by information statements sent out to the shareholders.

Moreover, we think that Datronics was an underwriter within the meaning of the 1933 Act. Hence its transactions were covered by the prohibitions, and were not within the exemptions, of the Act. §§ 3(a)(1) and 4(1) of the 1933 Act, 15 U.S.C. §§ 77c, 77d. By definition, the term underwriter “means any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking . . . . ” § 2(11) of the 1933 Act, 15 U.S.C. § 77b (11). Clearly, in these transactions the merger-corporation was an issuer; Datronics was a purchaser as well as a co-issuer; and the purchase was made with a view to the distribution of the stock, as commanded by Datronics’ preacquisition agreements. By this underwriter distribution Datronics violated § 5 of the 1933 Act — sale of unregistered securities.

II. The Commission charged a violation by Datronics and its officers of § 10(b) of the 1934 Act, 15 U.S.C. § 78j, and of Rule 10b-5. The breach occurred through untrue factual statements incident to the spin-offs. The District Court quite justifiably found that “in certain instances misleading statements were made by” Datronics and the individual defendants. This finding was reiterated by the District Court in discussing the announcements which were made to Datronics’ stockholders with each spin-off.

A common explanation of the distribution to its stockholders was that it was “impractical” for Datronics itself to run the merger-corporations. Of course, as the minority stockholder, Datronics could not do so. The District Court termed the explanation false and a “pure subterfuge”.

Since, however, the District Court was of the opinion that the distribution of the stock among Datronics’ shareholders was not a sale, it held that the “misleading statements” were not outlawed by § 10(b) or by Commission Rule 10b-5. These provisions condemn such misrepresentations only when they are used “in connection with the purchase or sale of any security”. Inasmuch as we believe there was a sale in each spin-off, we cannot agree with the District Court’s determination. See Securities and Exchange Comm’n v. Texas Gulf Sulphur Co., 401 F.2d 833, 860 (2 Cir. 1968 en banc), cert, denied, Coates v. Securities and Exchange Commission, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969).

This was one of the trial court’s reasons for not granting an injunction. Other grounds were that there was no indication that in the future the defendants might violate the statutes in suit; that the officers and agents who formulated and executed the spin-offs were no longer connected with Datronics; and that the present officers and agents assured the District Court that no more spin-offs of this kind would be indulged in. Moreover, the Court felt that by its interpretative releases the Commission had led Datronics and its codefendants to believe that spin-offs were not proscribed by these statutes. The Court was also persuaded by the failure of the Commission to act more vigilantly. While the issuance of an injunction is discretionary, it seems to us that overall, notwithstanding these considerations, the facts in this case warranted the grant of an injunction. See United States v. Parke, Davis & Co., 362 U.S. 29, 47, 80 S.Ct. 503, 4 L.Ed.2d 505 (1960).

Finally, a summary of the activities of Datronics is conclusively convincing that they violated the statutes in question, and' should now be restrained to prevent recurrences. To begin with, it is noteworthy that they were not isolated or minimal transgressions. There were, to repeat, nine sales and distributions of unregistered stocks in little more than a year. They were huge in volume, ranging from 75,000 to 900,000 shares. The distribution was not confined to a small number of recipients ; nor was it incidental to Datronics’ corporate functions. Concededly, none of the several distributions had a business purpose. In short, the spin-offs seemingly constituted the major operation of Datronics at the time.

We cannot read the releases or letters of the Commission or its abstention from earlier suits as evincing express or implied approval of the repeated and large-scale violations as are here. The releases do not approve or condone a campaign, such as Datronics engaged in, to develop means and opportunities to promote spin-offs. Indeed, one of Da-tronies’ agents was a “finder” of opportunities for spin-offs.

The dismissal order of the District Court will be vacated, and the cause remanded for the entry of a judgment sustaining the appellant’s motion for the preliminary injunction sought in its complaint.

Vacated with directions.

WIDENER, Circuit Judge

(concurring) :

I concur in the issuance of the temporary injunction because I believe the existence of the agreements between Da-tronics and the various companies whose stock found its way to the market through Datronics, on account of the agreements, with no apparent business purpose which has been expressed to us, other than the creation of a public market for the stock, points to the fact that Datronics may have been a willing cats-paw in a device or scheme to avoid the statute. For this reason, I believe there is a probable right and a probable danger, and that the right may be defeated unless the injunction is issued. The considerable weight which should be given to the need of protection to the plaintiff is satisfied by the need of protection by the public from possible injury resulting from the violation of the statute. Sinclair Refining Company v. Midland Oil Company, 55 F.2d 42 (4th Cir. 1932).

With so much of the opinion as holds that Datronics may be an underwriter within the meaning of the statute, 15 U.S.C. § 77b(11), I agree. The word “distribution” as used in the statute has not been defined to require value. XXIX Md.Law Rev., 320, 332.

I note that the opinion of the court may not be broadly enough read to cast doubt upon the legitimate business acquisition of one company by another, or the legitimate business merger of two companies, although a market for securities spun off as a consequence of the transfer may be thereby created; for, as the opinion of the court recites, the market created by Datronics’ spin-offs was spurious, doubtless meaning illegitimate, however actual it might have been, and Datronics caused the consummation of the transactions complained of without any business purpose of its own.

In my opinion, the root of this case is the pre-existing agreement between Da-tronics and the various companies whose stocks it spun off with no apparent purpose other than the incidental benefits of creation of a public market for the stock. If the transactions were with a view to creating a public market for the stock which the various companies could not otherwise do absent compliance with the statute, then I think Datronies may be held to be an underwriter. The value requirement of a sale, 15 U.S.C. § 77b(3), for the issuer (15 U.S.C. § 77b (4)) did receive value, I think, may be satisfied by the exchange of stock of the various companies with Datronies or by the exchange of stock of the various companies for services of Datronies. See also 58 Va.L.Rev. 1451.

OPINION ON MOTIONS TO RECONSIDER

PER CURIAM:

On review of the petition of Datronies Engineers, Inc., appellee herein, for reconsideration of the opinion filed on July 27, 1973 in this case, the Court denies a rehearing except as to that part of the opinion which remands the cause to the District Court for the entry of the preliminary injunction sought in the complaint of the Securities and Exchange Commission.

In regard to the injunction the Court notes the stressed reassurance, in the petition and the accompanying affidavit, of the owners of a majority of Datronies Engineers, Inc.’s stock that no more spinoffs would be undertaken, that the majority stockholders will not vote their stock in the future for any spin-off transactions or to elect as a director any person who would so vote, that the principals involved in the challenged spinoffs are no longer associated with Da-tronics, and that a merger of Datronies with another firm is in contemplation. In these circumstances the Court apprehends that its direction to the District Court to issue an injunction might have a punitive effect, which was not intended, and disturb the proposed merger.

Therefore, the Court rescinds so much of its initial opinion as requires the trial court to award a preliminary injunction, and in lieu thereof the cause is remanded for a determination by the District Court, consistently with the remainder of the opinion, of whether an injunction should or should not be issued restraining Datronies in respect to such transactions as the opinion of the Court declares to be impermissible. Nothing herein shall be construed as prohibiting or directing the issuance of an injunction, and the District Court is authorized to consider, if it sees fit, the bona fides of the merger asserted to be in prospect.

In view of the foregoing decision upon the petition of Datronies Engineers, the Court is satisfied that nothing would be gained by extending the time for the appellees, Sylman I. Euzent and John T. Gauthier to file requests for a rehearing, and their requests are denied.

No judge in regular active service or a member of the panel that rendered the instant decision on appeal having requested a vote on the appellees’ suggestion for a rehearing in banc, such a rehearing is denied. Although ordinarily a rehearing will not be granted in the absence of a request by the court for an answer to the petition for rehearing, instantly we deemed an answer unnecessary. See FRAP 40(a).

      . Section 5 of the Securities Act of 1933, 15 U.S.C.
      “ § 77e. Prohibitions relating to interstate commerce and the mails
      “(a) Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly—
      * * * :!: *
      “(2) to carry or cause to be carried through the mails . . . any such security for the purpose of sale or for delivery after sale”.
      Section 10 of the Securities Exchange Act, 15 U.S.C. § 78]:
      “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange—
      * * * :!: *
      “(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
      * :¡: * # *
      “Rule 10b-5 — Employment of Manipulative and Deceptive Devices
      “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
      “(a) To employ any device, scheme, or artifice to defraud,
      “(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
      “(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceipt upon any person,
      in connection with the purchase or sale of any security.”

      . The subsidiaries were Multi-Media Engineering, Inc.; Compu-Reader, Inc.; Data-Call Systems, Inc., and the remaining six independent corporations were Hosco, Inc.; Bun & Burger International, Inc.; Daypac Industries, Inc.; Associated Data & Management Corporation; Cyclo-Shine Corporation, and The Laand Corporation.

      . In one or two instances, there was some variation in these mechanics, but there was no deviation in principle from the plan.