author: CLARK, Circuit Judge:

text:
    J. Loyd PARKER, Jr., Petitioner-Appellant, v. W. J. ESTELLE, Director, Texas Department of Corrections, Respondent-Appellee.
    No. 73-3630.
    United States Court of Appeals, Fifth Circuit.
    Aug. 5, 1974.
    Rehearing and Rehearing En Banc Denied Oct. 24, 1974.

      Arthur Mitchell, Stephen M. Orr, Austin, Tex., for petitioner-appellant.
    Robert C. Flowers, Max P. Flusche, Jr., Asst. Attys. Gen., Austin, Tex., for respondent-appellee.
    Before WISDOM and CLARK, Circuit Judges, and GROOMS, District Judge.
   CLARK, Circuit Judge:

On May 3, 1963, the day after his father was found dead, petitioner J. Loyd Parker, Jr. confessed to the killing, and on May 17, 1963 he was indicted for murder. The principal issues from the inception of the proceedings were Parker’s sanity at the time of the act and his competency to stand trial. Pursuant to an agreement between counsel, a hearing was held at which Parker was found incompetent to be tried and was committed to Rusk State Hospital until he recovered his sanity. In February 1969, after spending six years in Rusk, he was released; and on May 19, 1969 a jury found that he was competent to be tried. In June 1969, represented by retained counsel, Parker was convicted by another jury of premeditated murder and sentenced to 10 years imprisonment. At the June trial the prosecution, somewhat surprisingly, put on a brief case of circumstantial evidence linking Parker to commission of the crime. Although Parker’s attorneys had been ready with witnesses, they elected not to present an insanity defense and thus avoid potentially damaging rebuttal evidence they knew to be in possession of the State. After an affirmance of his conviction by the Texas Court of Criminal Appeals, 457 S.W.2d 638 (1970), Parker filed his first federal habeas petition, which was dismissed for lack of exhaustion. He then filed a petition in the Texas court system, but relief was denied on the merits after a full evidentiary hearing by the state habeas judge; and his decision was affirmed by the Texas Court of Criminal Appeals, 485 S.W.2d 585 (1972). On the instant petition which followed, the district court found the facts fully developed in the State habeas hearing and denied relief on the merits of all of Parker’s contentions. We affirm.

Parker urges thirteen contentions before us. Three of them revolve around his bare factual allegation that he did not receive credit on his 1969 sentence for the six years spent at Rusk State Hospital after the 1963 jury found him incompetent to be tried. He alleges that this disallowance violated (1) his due process rights, and (2) his right not to be twice punished for the same offense, see Wright v. Maryland Penitentiary, 429 F.2d 1101, 1103 (4th Cir. 1970); and denied him equal protection.

Assuming arguendo, that detention and treatment at Rusk can be equated with punitive custody or punishment, this circuit distinguishes between credit for pre and post-sentence custody. Thus, in Robinson v. Beto, 426 F.2d 797 (5th Cir. 1970), and Hart v. Henderson, 449 F.2d 183 (5th Cir. 1971), we held that due process requires a state to give credit for time spent in custody after conviction since denied credit could operate to penalize the right of appeal, but in Gremillion v. Henderson, 425 F.2d 1293 (5th Cir. 1970), we held that “there is no federal constitutional right to credit for time spent prior to sentence.” However, the plenary scope of Gremillion has been qualified by Hart v. Henderson, supra, and Hill v. Wainwright, 465 F.2d 414 (5th Cir. 1972), which hold that, although there is no absolute right to pre-sentence detention credit, a denial of such credit due to a defendant’s poverty (e. g., the financial inability to make bail) or to some other constitutionally impermissible basis will not be allowed to extend a state prisoner’s sentence beyond the maximum prescribed for the crime. See also, Cobb v. Bailey, 469 F.2d 1068 (5th Cir. 1972) and Brown v. Beto, 359 F.Supp. 118 (S.D.Tex.1973). Although Parker alleges no such unconstitutional basis, we do not rest our decision on this lack.

In federal cases in which the sentence imposed plus time spent in pre-sentence custody totals less than the maximum for the offense, there is a conclusive presumption that the sentencing judge gave credit for the pre-sentence custody. See, e. g., Bryans v. Blackwell, 387 F.2d 764 (5th Cir.), cert. denied, 391 U.S. 907, 88 S.Ct. 1658, 20 L.Ed.2d 421 (1967). Rodriguez v. Blackwell, 433 F.2d 993 (5th Cir. 1970); Hyler v. Alexander, 423 F.2d 1215 (5th Cir. 1970), and Landman v. Mitchell, 445 F.2d 274 (5th Cir.), cert. denied, 404 U.S. 1022, 92 S.Ct. 695, 30 L.Ed.2d 671 (1971). Application of a concomitant presumption is required here. Parker elected to have the jury determine his punishment. Prospective jurors were informed on voir dire that he had spent six years at Rusk undergoing treatment while incompetent to be tried. At the punishment hearing defense counsel specifically urged the jury to consider these six years in determining punishment, and the jury returned a sentence of only ten years for premeditated murder, an offense which carries a permissible punishment of imprisonment for any number of years or life. Moreover, the state habeas judge, who also conducted the trial and the punishment hearing, found “the jury was permitted to take into consideration the six years spent in Rusk by petitioner and the jury did take this into consideration and that was the reason for such minimum punishment of ten years in this case.” In these circumstances, we reject Parker’s bald assertion that he was denied credit for the time spent at Rusk and with it fall his related constitutional arguments.

Another set of arguments concerns the fact that no jury has ever resolved the question of Parker’s sanity at the time of the offense. Relying on the testimony of the 1963 district attorney that he believed Parker insane at the time of offense and the fact that several psychiatrists were willing to testify to this, Parker asserts numerous constitutional errors. He alleges that his retained counsel’s failure to submit this issue either to the competency hearing jury or to the convicting jury, coupled with the fact that the prosecutors and the trial judge knew “of the defense and yet did nothing to see that it was submitted to either jury,” deprived him of his Sixth Amendment right to effective assistance of counsel both in 1963 and 1969. Additionally, he argues that the fact that the sanity issue was not submitted at the 1963 competency hearing of itself was a denial of due process. and that it denied him due process for the state to allow a conviction “knowing” of his insanity. As to the ineffective assistance claims, the state habeas judge’s findings that the decisions not to submit the sanity issue to either jury were legitimate tactical ones made by competent attorneys are fully supported by the record, see 28 U.S.C. § 2254(d), and are in full compliance with our “reasonably likely to render and rendering reasonably effective assistance” standards. See Herring v. Estelle, 491 F.2d 125 (5th Cir. 1974); citing MacKenna v. Ellis, 280 F.2d 592 (5th Cir.), cert. denied, 368 U.S. 877, 82 S.Ct. 121, 7 L.Ed.2d 78 (1960). Nor was Parker deprived of due process because the sanity question was not submitted to the jury in 1963. Parker argues that Article 932b of the Texas Code of Criminal Procedure in force in 1963, required that both issues be submitted to the jury at the competency hearing, and since he had been determined to be incompetent at the time of the hearing, he was of necessity incompetent to waive this statutory right. Even assuming we could find the state had an affirmative duty under its statute to submit the issue, the right remains purely one created by state statute and not a matter of constitutional mandate. Hence, this claim is not cognizable on federal habeas corpus. As for the argument that the state should not have tried to convict Parker, the fatal flaw is the assertion that the prosecutors “knew” Parker was insane. While the testimony at the state habeas hearing indicates that the district attorney at the time and some psychiatrists believed Parker insane, it also shows that the assistant district attorney who was primarily responsible for the case thought otherwise. Since the issue was doubtful and since it is a defendant’s burden to present a prima facie case to overcome the presumption of sanity, Parker can only succeed by establishing that his attorneys represented him ineffectively by not presenting such a claim. We have previously rejected this very contention.

Parker further asserts that the trial judge’s denial of bail coupled with the prosecutor’s pretrial assertion that the state would seek the death penalty if Parker challenged this denial by way of habeas corpus, operated to deprive him of his Eighth Amendment right to be free from excessive bail, and to deny him due process. The prosecutor’s conduct, which gave the judge’s ruling a macabre finality, might raise constitutional questions if presented to us in the proper context. However in the absence of • any allegation of prejudice other than increased pretrial custody, we hold that both issues are now moot. Parker is now confined by virtue of a conviction in no way tainted by these alleged illegalities. See, e. g., Smith v. Warden, 280 F.Supp. 827 (D.Md.1968), and Sheldon v. Nebraska, 401 F.2d 342 (8th Cir. 1968).

Parker next argues that the state obtained a crucial correction in the statement of Julian Morales by use of Parker’s admittedly invalid confession, and consequently truthful testimony from Morales was proscribed by the so-called “fruit of the poisoned tree” principle of Silverthorne Lumber Co. v. United States, 251 U.S. 385, 40 S.Ct. 182, 64 L.Ed. 319 (1919). The record indicates that Morales, who was the gardener on the elder Parker’s estate, initially told investigating officers that he had neither heard nor seen anything suspicious at the time of the father’s slaying. However, sometime after Parker gave his confession in which he stated that Morales had been present at his father’s house when the crime occurred, Morales changed his statement to what he eventually testified at trial, i. e., that he heard two shots and saw Parker fleeing the scene of the crime.

There can be no doubt that the Silverthorne principle, announced in a search and seizure context, is applicable to a suppressed confession case, Harrison v. United States, 392 U.S. 219, 88 S.Ct. 2008, 20 L.Ed.2d 1047 (1969); or that its exclusionary effect applies not only to tangible evidence but also to the testimony of witnesses. See, e. g., United States v. Marder, 474 F.2d 1192 (5th Cir. 1972), and Williams v. United States, 382 F.2d 48 (5th Cir. 1967); see generally, Ruffin, Out on a Limb of the Poisonous Tree: The Tainted Witness, 15 UCLA L.Rev. 32 (1967). However, the relevant issue in each case is broader than a sterile “but for” inquiry; rather “[t]he more apt question in such a ease is ‘whether, granting establishment of the primary illegality, the evidence to which instant objection is made has been come at by exploitation of that illegality or instead by means sufficiently distinguishable to be purged of the primary taint.’ ” Wong Sun v. United States, 371 U.S. 471, 488, 83 S.Ct. 407, 417, 9 L.Ed.2d 441, 455 (1963). This language incorporates two previously recognized exceptions to Silverthorne. First, evidence acquired through a source independent of the unlawful conduct is admissible notwithstanding its connection with such conduct. See Silverthorne, supra. Second, if the nexus between the unlawful conduct and the discovery of the evidence has “become so attenuated as to dissipate the taint” the evidence is admissible. Nardone v. United States, 308 U.S. 338, 60 S.Ct. 266, 84 L.Ed. 307 (1939). The facts of the instant case warrant application of the second exception. It is initially clear that this case does not involve police discovery of the name of a witness, as in Williams v. United States, supra, and United States v. Marder, supra, but rather a corrected statement by a witness previously interviewed by the police. The exact reason why Morales decided to tell the truth cannot be discerned from the record before us. It is clear that he came to the decision to change his story after being made aware of the contents of Parker’s confession.

It is also clear that he decided to purge himself after he had consulted a lawyer for advice, the lawyer had told him to tell the truth, and had brought Morales to the courthouse for that purpose. Morales’ reaction to the initial police inquiry may have been that he should avoid all involvement with his employer’s death, even at the cost of perjury. Obviously, he had second thoughts. Can we say that the pressure of the confession must have dominated Morales’ conscience to cause him to change his story? In this outer reach of the exclusionary rule, we decline Parker’s invitation to speculate on the imponderables of human will and motivation, see Smith and Bowden v. United States, 117 U.S.App.D.C. 1, 324 F.2d 879 (1963). Since the facts will not permit us to tie the acquisition of the evidence clearly and directly to the confession as the court was able to do in Harrison v. United States, supra, we hold that whatever connection there may be between Parker’s confession and Morales’ testimony is “so attenuated as to dissipate the taint.” Additionally we do not think it would serve the deterrent purpose of the exclusionary rule to deny to Parker’s trial not merely the unlawful confession but also, truthful testimony from Morales. The purpose of the police practices which have been found to be illegal, was to extract a confession from Parker. If the police so believed Morales’ first statement that they intended to accept it without further question, as Parker’s exclusionary argument presupposes, then it would have been beyond the scope of their unlawful purpose in obtaining the confession to secure information about • Morales, and they would have come by this information quite unexpectedly. Thus, any deterrent to future illegal police practices from the exclusion of Morales’ testimony would be slight. The exclusion of the confession, which was the intended objective of the illegal police practices, is an ample deterrent. See Harrison v. United States, supra (White, J., dissenting) and Note, 115 .Pa.L.Rev. 1136 (1967).

Finally, Parker contends that “the unlawful confession irreversibly tainted the entire trial.” Since we have rejected his argument that the illegality of the confession requires the suppression of Morales’ testimony, and since the confession was never introduced into evidence, we reject this argument also.

Affirmed.

      . Parker’s confession was later suppressed by the trial judge.

      . The major part of this evidence was provided by the testimony of Julian Morales, long time Parker family gardener. He testified that he heard two shots, saw petitioner Parker exit the house and drive away in Ms Cadillac, and that he then observed Mr. Parker, Sr. lying prone on the kitchen floor. The other evidence tended to link Parker, Jr. with the purchase of a gun similar to the one that was used to kill his father. The murder weapon was never found.

      . He grounds this argument on the rationale of North Carolina v. Pearce, 395 U.S. 711, 89 S.Ct. 2072, 23 L.Ed.2d 656 (1969), and argues that failure to credit the time he spent at Rusk penalized the assertion of his “defense” of incompetency to stand trial just as a denial of credit for time served pending appeal was held in Pearce to violate due process by penalizing assertion of the right to appeal.

      . The equal protection argument is that it is arbitrary and unreasonable for Texas to require credit for post-conviction time spent in a mental institution, Vernon’s Ann.Tex.Code Orim.Pro. 46.01 § 8, but deny credit for preconviction time spent in such an institution, Tex.Code Orim.Pro. 46.02 § 10.

      . His attorneys had first indicated by written notice an intention to present both the sanity at the time of the crime and competency to be tried issues, but later decided only to present the competency to stand trial issue.

      . He also argues that failure to present the issue of his sanity at the time of offense at the 1963 hearing denied him any chance of acquittal at that hearing and resulted in the 1969 trial violating his rights against double jeopardy. We reject this argument. It involves a fundamental misconception of the meaning of a competency determination and the function of a competency hearing. Since there is no possibility of conviction for the substantive offense, jeopardy does not attach at such a hearing.

      . We reject Parker’s contention that he was denied counsel of his choice at the 1969 trial because the state habeas judge’s finding that his request for different counsel was made purely to obtain a continuance is fully supported by the record, see 28 U.S.C. § 2254(d) ; United States v. Carter, 453 F.2d 402 (6th Cir. 1971); Bowman v. United States, 409 F.2d 225 (5th Cir. 1969), and United States v. Cozzi, 354 F.2d 637 (7th Cir.), cert. denied, 383 U.S. 911, 86 S.Ct. 896, 15 L.Ed.2d 666 (1965).

      . We avoid any determination of whether the prosecutor’s and trial judge’s knowledge of the possibility of an insanity defense was sufficient state action to bind the State of Texas to the actions of retained counsel.

      . Parker’s attorneys at his 1969 trial testified at the habeas hearing that they were in no way handicapped because Parker was not released on bail.

      . For the same reason, we reject Parker’s argument that the trial judge denied him due process by incorrectly stating that he would lose credit for the time spent at Rusk if he secured bail.

      . In Silverthorne, supra, the court stated the policy behind the rule as follows:
      The essence of a provision forbidding the acquisition of evidence in a certain way is that not merely evidence so acquired shall not be used before the Court but that it shall not be used at all.
      251 U.S. at 392, 40 S.Ct. at 183, 64 L.Ed. at 321.

      . The specific reasons for the trial judge’s denial of Parker’s motion to suppress Morales’ testimony are unclear in the record of the proceedings in the trial court. They are not clarified in the opinion of the state habeas hearing judge. However, the Texas Court of Criminal Appeals apparently adopted what has become known as the “inevitable discovery rule” in its opinion. Bee Annotation, 43 A.L.K.3d 385, 404 (1972). The Supreme Court has never approved this rule and application of the rule in this circuit was rejected in United States v. Castellana, 488 F.2d 65, 68 (5th Cir. 1974); but cf. Gissendanner v. Wainwright, 482 F.2d 1293, 1297 (5th Cir. 1973). This rule might minimize the number of times a guilty defendant could avoid conviction but is hard to square with the deterrent purposes of the various exclusionary rules.


source: Caselaw Access Project

author: PER CURIAM:

license: Public Domain

text:
    John Alton SMITH, Petitioner-Appellant, v. W. J. ESTELLE, Jr., Director, Texas Department of Corrections, Respondent-Appellee.
    No. 74-1601
    Summary Calendar.

    United States Court of Appeals, Fifth Circuit.
    Aug. 2, 1974.
    Rehearing and Rehearing En Banc Denied Oct. 16, 1974.
    Donald L. Kraemer, Staff Counsel, Huntsville, Tex.’, for petitioner-appellant.
    John L. Hill, Atty. Gen., Sarah Shirley, Asst. Atty. Gen., Austin, Tex., for respondent-appellee.
    Before BROWN, Chief Judge, and THORNBERRY and AINSWORTH, Circuit Judges.

       Rule 18, 5 Cir.; see Isbell Enterprises, Inc. v. Citizens Casualty Company of New York et al., 5 Cir., 1970, 431 F.2d 409, Part I.

   PER CURIAM:

Appellant was tried and convicted in Texas state court for assault with intent to murder. He seeks federal habeas corpus relief on the grounds he was tried in prison garb, rather than in civilian clothing, which we have granted on a number of occasions. Hernandez v. Beto, 5 Cir., 1971, 443 F.2d 634, Brooks v. State of Texas, 5 Cir., 1967, 381 F.2d 619, accord, Gaito v. Brierley, 3 Cir., 1973, 485 F.2d 86.

However, an examination of the evidentiary record in this case reflects beyond a reasonable doubt appellant’s guilt. We therefore hold the infraction to be harmless error. Thomas v. Beto, 5 Cir., 1973, 474 F.2d 981.

Affirmed.


author: TUTTLE, Circuit Judge:

text:
    JIM WALTER CORPORATION, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
    No. 73-3656.
    United States Court of Appeals, Fifth Circuit.
    July 31, 1974.

      Harry H. Root, III, Norman Stallings, Thomas C. MacDonald, Jr., Tampa, Fla., for plaintiff-appellant.
    Scott P. Crampton, Asst. Atty. Gen., Tax Div., Rodger M. Moore, Atty., Meyer Rothwacks, Chief, App. Sec., Dept, of Justice, Washington, D. C., John L. Briggs, U. S. Atty., Jacksonville, Fla., Bennet N. Hollander, Atty., Tax Div., Arthur L. Bailey, Atty., Justice Dept., Washington, D. C., Ronald H. Watson, Asst. Atty., Tampa, Fla., for defendantappellee.
    Before TUTTLE, COLEMAN and AINSWORTH, Circuit Judges:
   TUTTLE, Circuit Judge:

The sole issue in this refund suit is whether the district court correctly held that taxpayer Jim Walter Corporation could not deduct as an ordinary and necessary business expense under section 162 of the Internal Revenue Code the net amount of $750,120 paid to purchase 188,000 outstanding FR B Warrants in June, 1959. The disallowance of this deduction required the taxpayer to pay an extra $390,065.21 in federal taxes for its taxable year ending August 31, 1959, plus payment of interest in the amount of $115,133.36, the total refund claim of the taxpayer being $505,198.59.

I. FACTS

The facts of this case are not in dispute. Jim Walter Corporation (hereinafter Walter) was organized in 1955 to carry on the business of building shell homes formerly conducted by Walter Construction Company, a partnership. Over 90% of the shell homes sales were financed by the taxpayer for the purchasers. As a result the taxpayer corporation experienced a continuing need for capital. The rather unorthodox capitalization plan of Walter included, inter alia, 9% bonds and 370,000 B Warrants (250,000 to the former partners and 120,000 to purchasers of the portfolios) for consideration of $.01 per warrant. One B Warrant entitled, inter alia, the owner at any time prior to December 31, 2000, upon payment of $80 to the corporation to receive one share of the common stock of Walter and two $25 9% subordinated and unsecured bonds, due December 31, 2000; after December 31, 2000, the owner was entitled upon tender of $30 to the corporation to receive three shares of common stock. It was conceived that as financing was needed by Walter, the warrants would be exercised.

In 1957, the 250,000 B Warrants held by the former partners were modified and changed to FR (First Refusal) B Warrants at the suggestion of the underwriters in connection with a public offering of corporate securities in that year. The 1957 underwriters and the taxpayer were concerned that the B Warrants, if exercised, would cause the corporation to issue a large number of shares of common stock and bonds, and would subject the corporation to potential interest payments of $840,000 annually or a total of $34,000,000 until December 31, 2000, the maturity date of the 9% bonds. Under the FR B Warrants the taxpayer corporation at its option had the following conversion choices: (1) upon receipt of $80 and the warrant, to issue three shares of common stock of Walter (after the 3-for-l stock split in 1958) and two $25 9% subordinated bonds — same as the “original” option under the B Warrants; or (2) upon payment of $30 and the warrant, to issue three shares of common stock (after the 3-for-l stock split in 1958) — the “stock only” option; or (3) to repurchase the warrant for $4 or $6 depending on corporate net earnings — the “repurchase” option.

In 1959, there was a 3-for-l split of the stock of Walter and thereafter, in 1959, there was another separate public offering of securities of Walter. The 1959 underwriters, too, were concerned about the possibility that the FR B Warrants might be exercised, causing the issuance of substantial debt obligations^ — 9 million dollars of 9% bonds, carrying a potential 34 million dollars in bond interest over the years until 2000. Apparently the underwriters’ concern was also directed at the prospect of issuing additional shares of common stock, resulting in a serious dilution of shareholder equity and the effect on earnings per share (which also might have a bearing on future stock issuances). Therefore, in June, 1959, the taxpayer corporation repurchased 188,000 FR B Warrants held by the former partners for $4 per warrant or a total of $752,000.

On its federal income tax return for the taxable year ended August 31, 1959, the corporation claimed a deduction in the amount of $750,120, the net amount between the $752,000 repurchase payment and the $1,800 consideration it had received in 1955 upon issuance of the underlying B Warrants.

The stock under the June, 1959, underwriting was issued to the public at $34 per share, and the 9% bonds at 105% of their face amount. Walter asserted that it legally and morally could not permit the exercise of these FR B Warrants under the “original” stock/bond option or the “stock only” option, because that would have caused Walter to issue stocks to four primary stockholders at $10 per share when the stock had a market value of $34, which would have resulted in a breach of fiduciary duty by the insiders.

The 62,000 FR B Warrants which remained outstanding after June, 1959, were either transferred to Walter employees under a stock option or were called in by Walter for $4 or $6 each according to their terms.

At the district court, the taxpayer corporation claimed it was entitled to an ordinary and necessary business expense deduction in the amount of $750,120, the net payment for the 188,000 FR B Warrants, because the 1959 repurchase originated with the 1957 conversion of B to FR B Warrants which clearly was implemented for the deductible business purpose of saving interest, or, because the payment was analogous to a deductible premium paid to repurchase a corporation’s bonds. The government contended, and the district court agreed, that the origin of the warrant repurchase was the 1959 reformation of the corporation’s capital structure and thus was capital in character, and that eliminating liability for long term high interest was simply the potential consequence upon the taxpayer’s capital structure created in earlier years, and therefore, under United States v. Gilmore, 372 U.S. 39, 83 S.Ct. 623, 9 L.Ed.2d 570 (1963), the payment for the FR B Warrants was a nondeductible capital expenditure. Furthermore, the repurchase could not be construed as a redemption of indebtedness, and thus the bond premium deduction analogy was not controlling.

II. ORIGIN AND CHARACTER OF THE DEDUCTION

The principle that deductibility depends on the origin and character of the claim was first set forth in United States v. Gilmore, supra, where the Supreme Court stated:

“[T]he origin and character of the claim with respect to which an expense was incurred, rather than its potential consequences upon the fortunes of the taxpayer, is the controlling basic test of whether the expense was ‘business’ or ‘personal’ and hence whether it is deductible or not ”

In Gilmore, the payment of legal fees in a divorce proceeding was held to have originated with the divorce, and thus deemed personal in nature and nondeductible. Even though the fees arguably were incurred to protect the taxpayer’s income producing assets, this was a potential consequence and was not controlling.

Proper application of the origin test asserts appellant taxpayer, would have been to find that the 1959 repurchase stemmed from the creation of the first refusal provisions of the FR B Warrants, which clearly were instituted for the deductible business purpose of saving interest, and that the collateral consequence of altering Walter’s capital structure should not be controlling. It is urged that the legal barrier to issuing $34 stock at $10 per share to insiders precluded exercise of the “stock only” option thus requiring the taxpayer corporation to exercise the “repurchase” option to avoid the bond interest under the “original” stock/bond option. Walter does not contend that the 1957 modification and the 1959 repurchase of warrants should be treated as a single transaction, or that the 1959 payment related back to the 1957 modification, but only that since Walter had no real choice in 1959 because of the 1957 modification, the reasons for the earlier modification should control.

The appellant taxpayer argues that this analysis of the origin and character of the 1959 repurchase is correct for two reasons. First, the 1959 repurchase was not part and parcel of, but independent of, the 1959 offering. The FR B Warrants were not part of the securities being offered, nor was Walter itself issuing securities to the public. Even if the repurchase is considered a condition imposed by the underwriters, a condition of underwriting is not necessarily an underwriting expense or an expense of issuing stock. For example, if underwriters required the issuing corporation to lease buildings from stockholders to assure continuity of business, the lease payments, if reasonable would be deductible and would not be treated as expenses of the offering. Walter, of course, benefitted from the public offering to the extent that it received proceeds from the conversion of the A Warrants, but Walter did not participate in the proceeds of the public offering. Repurchasing at this particular time of the offering, asserts the taxpayer, was only a matter of convenience to Walter as it was receiving proceeds from the exercise of the A Warrants with which to pay the $4 per warrant. The independence of the FR B Warrant repurchase is further evidenced by the fact that to the extent that the balance of the FR B Warrants were not converted under an employees’ benefit plan, they were eventually called in and repurchased by Walter in 1961.

Secondly, and more persuasively, the appellant taxpayer urges that this analysis is consistent with this Court’s application of the origin test in Five Star Manufacturing Corp. v. Commissioner, 355 F.2d 724 (5th Cir. 1966), and United States v. Smith, 418 F.2d 589 (5th Cir. 1969). These decisions, assert the taxpayer, set forth the principle that although expenses of recapitalizations or other capital structure changes are generally nondeductible capital expenses, such expenses which arise for a valid business purpose other than altering the capital structure are deductible under the origin test. In Five Star, this Court, in reversing the Tax Court, permitted the taxpayer corporation to deduct as an ordinary and necessary business expense the cost of acquiring the interest of a 50% stockholder. Two individuals each owned 50% of the stock of the company, which was in serious straits and near receivership. The presence of one of the individuals as a shareholder was preventing the company from entering into an agreement with an outsider which was necessary for the survival of the company. The company purchased all of that shareholder’s stock at judicial sale, and claimed a section 162 deduction for the entire purchase price. This Court concluded, supra 355 F.2d at 727:

“To be deductible as a business expense, the payment must be both ordinary and necessary. It seems unquestionable that the payment to Smith to terminate his interest in Five Star was a necessary expense. ... It can scarcely be held that the payment to Smith was for the acquisition of a capital asset, but rather one which would permit Five Star again to use assets for income production by freeing its management from unwarranted fetters.”

Appellant taxpayer also relied heavily on United States v. Smith, supra, where this Court remanded the case to the district court to determine whether the taxpayer corporation assumed a certain liability of the partnership in the acquisition of its operating assets, and if so, whether the later satisfaction of that liability was a deductible expense of a part of the cost of acquiring the operating assets. The district court had found that the taxpayer had paid the liability in order to save its business, and therefore the payment was a noncapital expenditure. The Smith court instructed -the district court to focus not on the purpose and effect of the payment of the debt, but on the reasons for the initial assumption of the liability, and, to allow a deduction if the primary purpose for the assumption was other than the acquisition of assets.

In conclusion, the appellant taxpayer asserts that Five Star and Smith stand for the broad principle that if an expense of recapitalization or other capital structure changes serves a business purpose other than the acquisition of property, it is deductible even though it may appear to be, or in fact is, a part of a capital transaction. A court should look not to simply the change in the capital structure, but instead to whether the payment was primarily for a business purpose other than the acquisition of a capital asset.

The government makes the following convincing and clarifying response to the appellant’s contentions that the district court erroneously applied the Gilmore origin test of deductibility. While not explicitly stated, the court’s discussion indicates that it found the origin of the $752,000 payment to have been in the retirement %f outstanding stock warrants. It found the character of the payment from its relationship to a change in the corporation’s capital structure. On the other hand, the court noted the potential consequences of the payment was to avoid possible interest expenses on bonds which may have been issued in the future under the warrants. As examined earlier, the origin and character of the payment, not its potential consequences on the fortunes of the taxpayer, is controlling under Gilmore. Therefore, the repurchase origin, being in the 1959 offering, and not with the 1957 conversion, cloaked the repurchase with a capital character.

This finding of a capital origin and character under ¡¡Gilmore is supportable on two grounds — either one of which alone is sufficient to sustain the judgment of the district court. First, the district court’s judgment is sustainable on the basis that, as the court found, the $752,000 payment to repurchase was required by the underwriters in connection with the 1959 public offering. Thus, the repurchase of the warrants was a recapitalization expense associated with the corporation’s issuance of stocks and bonds. It has been uniformly held that expenses incurred in connection with the acquisition or issuance of corporate stock and other reorganization or recapitalization expenses ordinarily are nondeductible capital expenditures. United States v. Hilton Hotels, 397 U.S. 580, 90 S.Ct. 1307, 25 L.Ed.2d 585 (1970); Woodward v. Commissioner, 397 U.S. 572, 90 S.Ct. 1302, 25 L.Ed.2d 577 (1970); Estate of Meade v. C. I. R., 5th Cir., 489 F.2d 161 (1974); General Bankshares Corp. v. Commissioner, 326 F.2d 712 (8th Cir. 1964); Johnson v. Commissioner, 56 F.2d 58 (5th Cir. 1932). Although the taxpayer asserts the repurchase of the warrants was not part and parcel of the 1959 offering and that the requirement of buying the warrants was not imposed on the corporation but only the warrant holders, these contentions are not supported by the record, which indicates that the corporation agreed to this requirement and determined prior to the public offering to repurchase the warrants at $4 each. Moreover, the prospectus for the 1959 offering indicates that the corporation’s repurchase was an integral part of the transaction.

Secondly, the capital nature of this transaction is supported by the fact that the repurchase payment could be construed to have extinguished only the corporation’s obligations to issue stock under the warrants. Under the FR B Warrants the corporation had three options: (1) “original” stock/bond option; (2) “stock-only” option; and (3) “repurchase” option. Thus, the corporation was not obligated to issue bonds, and, only if it refused to issue stock, was it required to repurchase the warrants. Thus as the district court observed, supra at n. 10, the cash payment could be interpreted to have merely extinguished the holder’s right to the corporation’s stock. On this basis the $752,000 expenditure only resulted in an alteration of the corporation’s capital structure by its extinguishment of stock rights. The previously cited decisions, which have held that expenses of recapitalizations or other changes in capital structures are nondeductible capital expenditures, again clearly apply.

The final fatal flaw in appellant’s arguments is that Five Star and Smith simply do not establish that any type of primary business purpose will suffice to convert an otherwise nondeductible expense of recapitalization or other changes in capital structures into a deductible item. The expenditures in those two cases were made to save the corporation from dire and threatening consequences. The court in Five Star stressed the extraordinary factual situation which showed a business emergency. Similarly the district court in Smith found that the corporation paid the liability in order to save its business and therefore the payment was a non-capital expenditure. In the instant case no similar emergency business purpose was -presented; in fact, the district court expressly pointed out that the corporation was prospering. We think the principle followed in the two cited cases should not be extended beyond the facts of the cases.

The recent decision of this Court in Estate of Meade v. C.I.R., 5th Cir., 489 F.2d 161 (1974), analyzed the origin test at length and reemphasized the import of the decisions by the Supreme Court in Woodward v. C.I.R., supra, and its companion case, United States v. Hilton Hotels Corporation, supra which held that legal expenses in appraisal proceedings in connection with a purchase of a dissenting shareholders’ stock that was required under local law were nondeductible capital expenditures arising out of the acquisition of a capital asset. Estate of Meade further analyzed the Woodward and Hilton Hotels holdings:

“The primary purpose of their expenditures in the appraisal proceedings, taxpayers argued, related not to the acquisition of title, but to the price to be paid for the stock, and, therefore, their expenditures should not be characterized as acquisition costs.
“In rejecting the taxpayers’ claims in Woodward and Hilton Hotels, the Supreme Court found the primary purpose test inapplicable to the situations before it: ‘A test based upon the taxpayer’s “purpose” in undertaking or defending a particular piece of litigation would encourage resort to formalisms and artificial distinctions.’ Woodward v. C.I.R., 397 U.S. at 577, 90 S.Ct. at 1306. Instead, the Court adopted the ‘origin’ test, choosing to consider the origin and character of the claim for which the expenditures were made. On the basis of that test, the Court held that the determination of a purchase price by litigation is clearly part of the process of acquisition and should be treated as part of the cost of the stock that the taxpayers acquired. In so holding, the Court noted that ‘ancillary expenses incurred in acquiring or disposing of an asset are as much part of the cost of that asset as is the price paid for it.’ Woodward v. C.I.R., 397 U.S. at 576, 90 S.Ct. at 1305.”

Due to the recent rejection of a primary purpose test for determining deductibility of expenses incurred in acquisition of capital assets in Estate of Meade, we cannot accept appellant taxpayer’s argument that Five Star and Smith set forth any broad principle that if an expense of recapitalization or other capital structure reformation serves a business purpose other than the acquisition of property it is deductible, even though it may appear to be or in fact is, a part of a capital transaction. Rather, we read Smith and Five Star as being limited to situations where a payment to purchase a capital asset, though capital in nature, is necessary to the taxpayer’s survival. See H. and G. Industries, Inc. v. C.I.R., 3rd Cir., 495 F.2d 653 (1974).

III. BOND PREMIUMS: ANALOGOUS?

Appellant' taxpayer contends that the repurchase payment for the warrants should be treated as a premium paid to repurchase debt obligations. Under Treas.Reg. § 1.61-12(c) (1), which was in effect during the taxable year in issue, a premium paid by a corporation to purchase its bonds at a price in excess of the face value or issuing price is a deductible expense.

Walter concedes that no bonds or debt obligations were repurchased, but only urges that the underlying principle of bonds premium deduction, i. e. to avoid future interest costs, should extend to stock warrants convertible into debt securities where the payment has the same purpose. It is urged that the payment of the modification and the subsequent repurchase of the FR B Warrants — to save on future interest payments — is identical to the purpose supporting the deductibility of bond premiums. How-

ever, contrary to taxpayer’s position, the warrant repurchase payment cannot be treated analogously to a deductible premium paid to repurchase outstanding bonds, convertible or not, or any other type of debt obligations, because the underlying premise of the bond premium deduction, i. e. to save future interest, is inapplicable where the corporation’s payment did not cancel any bonds or any other type of debt obligation and where the district court found that the payment originated with the 1959 offering rather than the 1957 conversion. Under the first refusal provisions of the warrants the taxpayer corporation at its option could refuse to issue bonds. Therefore, it cannot be said that the 1959 warrant repurchase payment here can-celled any outstanding debt obligations.

The court cannot construe the regulation in such a fashion as suggested by taxpayer. The payment was not for a “purchase by a corporation of its bonds.”

This is decisive.

The judgment is affirmed.

      . Section 162, 26 TJ.S.C. § 162, provides in part:

        “Trade or business expenses

      (a) In General. — There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxaable year in carrying on any trade or business . . . ”

      . In exchange for the net assets of the partnership, Walter issued the following securities to the partners:
      25 — $1000 7% Convertible Subordinated Bonds
      50 — $1000 8% Subordinated Bonds
      12,500 — $25 9% Subordinated Bonds due December 31, 2000
      187,500 — Shares of Common Stock
      10,000 — A Warrants
      240.000— A Warrants Options
      250.000— B Warrants
      Investors, other than the partners, purchased portfolios of securities, each consisting of:
      1— $1000 7% Convertible Subordinated Bonds
      2— $1000 8% Subordinated Bonds
      1 — $500 9% Subordinated Bonds due December 31,2000
      100 — Shares of Common Stock
      400 — A Warrants
      400 — B Warrants.
      Each A Warrant entitled, inter alia, the owner at any time prior to December 31, 2000, upon payment of $40 to the corporation to receive one share of common stock and one $25 9% bond due December 31, 2000. Each A Warrant Option entitled, inter alia, the owner at any time prior to December 31, 2000, upon tender of $1.10 to the corporation to receive one A Warrant.

      . Following a 3-for-l stock split in 1958, the B Warrant holders were entitled to receive three shares of stock and two bonds under each warrant and the A Warrant holders were entitled to receive three shares of stock and one warrant bond under each warrant.

      . As part of the 1957 secondary distribution, the underwriters purchased 10,000 A Warrants and 40,000 A Warrant Options from the former partners at a gross profit to the former partners of $119,600. After having exercised the 40,000 A Warrant Options, the underwriters then exercised 50,000 A Warrants, paid $2,044,000 to the taxpayer corporation and received from the corporation $1,250,000 principal amount of 9% subordinated bonds and 150,000 shares of common stock. These securities were offered to the public by the underwriters.

      . Both the 120,000 B Warrants, which remained unmodified, and the 250,000 FR B Warrants could be recalled by Walter after December 31, 1960, but the warrant holders had 45 days after any call in which to exercise the warrant.

      . The 1959 offering was similar in many respects to the 1957 secondary distribution. The 1959 underwriters purchased from the former partners 50,000 A Warrant Options at a gross profit to the former partners of nearly $4,000,000. The underwriters then exercised the options and the resulting 50,000 A Warrants, paid $2,055,000 to the taxpayer corporation and received $1,250,000 principal amount of 9% subordinated bonds and 150,000 shares of common stock. These securities were then offered by the underwriters to the public.

      . According to the government, Walter’s position that the repurchase payment was incurred to avoid heavy fixed interest charges is inconsistent with its issuing a total of $2,500,000 in 9% bonds in the 1957 and 1959 offerings. The taxpayer counters that these bonds were issued pursuant to the exercise of A Warrants over which Walter had no right of first refusal as in the case of FR B Warrants. Also, the taxpayer argues that it is quite a different situation to issue $1,250,000 in 9% bonds in each to two years compared to issuing $9,400,000 in bonds at one time.

      . For a recent discussion of the origin test and its applicability to sections 162 and 212, see Estate of Meade v. C. I. R., 5th Cir., 489 F.2d 161 (1974).

      . This Court stated in Smith v. United States, supra 418 F.2d at 596-597:
      “The trial court’s finding was in error because it focused on the payment rather than upon the obligation which gave rise to the payment. If, as found by the district court, the corporation assumed the contingent liability to Ritenour when it was incorporated, the district court will be required to determine wliy the obligation was assumed.
      “The importance of this determination is self-evident. If the corporation at its inception assumed a contingent obligation to pay Ritenour, it is that assumption of liability which obligated the corporation and not any subsequent legitimate business purpose. In other words, the corporation did not liave to pay because of the unfavorable judgment or because its directors deemed payment advisable but rather the corporation paid because it assumed the obligation when it became incorporated. Consequently we think the purposes behind the assumption should be determinative as to the question of the nature of the expenditure. As the district court correctly stated, it is the substance rather than the legal form of the transaction which governs. Commissioner of Internal Revenue v. Heininger, 320 U.S. 467, 64 S.Ct. 249, 88 L.Ed. 171 (1943). Here the substance of the transaction is based on the nature of the assumption of the liability which obligated the corporation to make the expenditure in question.
      “Since we are remanding the cause for a determination as to the existence of such an assumption, we deem it proper further to instruct the trial court' that should it determine that such liability was in fact assumed, the court must proceed to determine the reasons motivating the assumption. If this factual inquiry reveals a primary purpose other than acquisition of property, the court may properly allow a deduction to the corporation . . . ” (Emphasis supplied).

      . The district court’s opinion stated :
      “. . . in this case it seems to me that the purchase of these warrants was to avoid a hazardous potential consequence, i. e., the payment of millions of dollars in bond interest until the year 2000. To avoid the potential consequences, the FR B Warrants were retired. This resulted in a reformation of the corporation’s capital structure. Under the principles of Gilmore, the cost of retiring these FR B Warrants is not deductible. The evidence in this case is clear that at the time in question the corporation was prospering. There is no evidence that it was beset by undue competition or by internal struggles with reference to stock ownership or internal control. . . .
      “In the instant case there can be no doubt but that, as to 250,000 B Warrants, their modification to ‘FR’ B Warrants in 1957 removed any potential period of dilution of stock or of heavy fixed interest charges upon tender of such a warrant for exercise. This, after the 1957 modification, no bonds at all had to be issued, and only if the corporation also refused to issue stock was the corporation obliged to repurchase a tendered ‘FR’ B Warrant for cash. Manifestly, the payment of cash for such a warrant only extinguished a right to the corporation’s stock, and it could not be construed to constitute a redemption of indebtedness. Moreover, and apart from the foregoing, it is also crystal clear from the evidence that the actual repurchase of the 188,000 ‘FR’ B Warrants by the corporation was not in any wise part of the prior Í957 modifications whereby the ‘First Refusal’ options came into being. Rather, the evidence is wholly undisputed that the repurchase in question, in June of 1959, was part and parcel of a public offering of corporate stock and bonds in June, 1959, and in fact was required by the underwriters as a condition thereof.”

      . The initial page of the prospectus for the 1959 underwriting sets forth the securitiesfto be issued and then declares:
      “. . . (4) On the exercise by the Underwriters of the 50,000 ‘A’ Warrant Options and the underlying ‘A’ Warrants at $41.10 each, before deducting expenses payable by the Corporation, estimated at $209,700, and before the purchase by the Corporation from the Selling Security Holders of 188,000 ‘B’ Warrants at $4 each.”
      At page 10 the prospectus states :
      “The Selling Security Holders have agreed to Surrender 188,000 ‘B’ Warrants presently owned by them and the Corporation has determined to exercise its option of repurchasing such ‘B’ Warrants at $4 per Warrant; upon such repurchase the Corporation will pay an aggregate of $752,000 to the Selling Security Holders for an aggregate gross profit to them of $750,120.”
      At page 12, the prospectus provides:
      “The Selling Security Holders are hopeful that the public offering, combined with their agreement to surrender 188,000 ‘B’ Warrants to the Corporation for repurchase by the Corporation at $4 per Warrant, will assist in maintaining a market for the securities of the Corporation and that other security holders, may exercise their conversion privileges with respect to the 7% Convertible Subordinated Bonds or may exercise Warrants, with the result that the Corporation will secure additional working capital.”

      . See note 9, supra.

      . Estate of Meade held that attorney’s fees paid by stockholders of a liquidated corporation in connection with settlement of an antitrust treble damage claim of the corporation which had been distributed pro rata with its stock in liquidation were not deductible as ordinary and necessary business expenses or expenses for the production of income, but must be capitalized and offset against long-term capital gain realized by the stockholders from the settlement of the claim.

      . Section 61(a) (12), 26 U.S.C. § 61(a) (12), states:

        “Gross income defined

      (a) General definition. — Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items :
      ^
      (12) Income from discharge of indebtedness ; . . .”
      Treas.Reg. § 1.61-12 (c) (1), during the period in question provided :
      “(c) Sale and purchase by corporation of its bonds.
      (1) If bonds are issued by a corporation at their face value, the corporation realizes no gain no loss. If the corporation purchases any of such bonds at a price in excess of the issuing price of face value, the excess of the purchase price over the issuing price of face value is a deductible expense for the taxable year. If, however, the corporation purchases any of such bonds at a price less than the issuing price of face value, the excess of the issuing price or face value over the purchase price is income for the taxable year.” In 1968, Treas.Reg. § 1.61-12(c) (1) was amended by transferring all but the first sentence to regulations under section 163. As subsequently modified by the Tax Reform Act of 1969, provisions similar to the second sentence are now found in Treas.Reg. § 1.163-3 (c) and -4(c).
      Furthermore, Rev.Rul. 74-210, 1974 Int. Rev.Bull. No. 19, has announced that the Service has reconsidered its position with respect to the deductibility of premiums paid by a taxpayer on repurchase of its convertible notes, and will now allow such premiums to be deducted in pre-1969 cases, as long as taxpayers can show facts substantially similar to Roberts & Porter, Inc. v. Commissioner, 307 F.2d 745 (7th Cir. 1962); Southwest Grease & Oil Co. v. United States, 435 F.2d 675 (10th Cir. 1971), affirming 308 F.Supp. 107 (D.Kan. 1969) on the issue of deductibility; Head Ski Co. v. United States, 323 F.Supp. 1383 (D.Md.1971), which held that premiums paid in repurchasing convertible bonds were deductible even though they resulted in part in extinguishment of a right to an equity interest.