author: McCREE, Circuit Judge.

text:
    Coles W. RAYMOND, M.D. and Virginia Raymond, his wife, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
    No. 74-1575.
    United States Court of Appeals, Sixth Circuit.
    March 5, 1975.

      Michael Avedisian, Avedisian & Avedisian, Andrew H. Avedisian, Paducah, Ky., for plaintiffs-appellants.
    George J. Long, U. S. Atty., Louisville, Ky., Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, Gilbert E. Andrews, Bennet Hollander, Jeffrey Blum, Tax Div., Dept, of Justice, Washington, D. C., for defendant-appellee.
    Before EDWARDS, McCREE, and MILLER, Circuit Judges.
   McCREE, Circuit Judge.

This is an appeal from a directed verdict for the government in a suit brought under 28 U.S.C. § 1346(a)(1) for refund of federal income taxes. The issues require us to decide whether taxpayers were entitled to have the jury consider whether advances made by them to their wholly-owned corporation were loans and not contributions to capital, and, if the advances were loans, whether taxpayers’ dominant motivation in extending them was to protect their trade or business.

During the summer of 1965, Dr. Coles W. Raymond, a specialist in obstetrics and gynecology, developed a serious physical disability that forced him to curtail his practice and to seek an alternative source of income. He decided to enter into the automobile dealership business with his wife, Virginia Raymond, who had not been employed during their marriage.

In February 1966, taxpayers filed articles of incorporation for Checker Cars, Inc. of Paducah, Kentucky. At the time of incorporation, the total authorized capital stock was six hundred shares. Three hundred shares of common stock were issued to Virginia Raymond and the same number to her husband, for which each paid $3,000. Virginia Raymond was elected President and Treasurer of the corporation, and" her husband was elected Vice President and Secretary. The corporation entered into a franchise dealership with Checker Motors Corporation for the sale of new and used Checker cars.

In June 1966, taxpayers filed articles of amendment changing the name of their corporation to Ash Motors, Inc. Shortly thereafter, Virginia Raymond, as President of Ash Motors, entered into a dealership franchise and dealer sales agreement with Nissan Motor Corporation to engage in the sale of new and used Datsun automobiles and trucks, and into a Dodge dealer agreement with Chrysler Motors Corporation to engage in the sale of new and used Dodge automobiles and trucks. As a condition of granting the dealership, Chrysler required that Ash Motors’ capitalization be increased by approximately $20,000. The taxpayers made this additional investment.

From 1966 until 1969 when the corporation became insolvent, Virginia Raymond worked six days a week managing its two branches, and Coles Raymond worked about ten hours a week as an assistant manager. They received no salary or wages for their services. During the same period of time, taxpayers made advances to their corporation: $33,490.82 in 1966, $40,702 in 1967, $38,-082.62 in 1968, and $2,489.23 in 1969. In addition to these direct advances, taxpayers, as guarantors of certain Ash Motors’ debts, paid various amounts to creditors, and leased the facilities necessary for the corporation’s operation. In all, they advanced approximately $151,067 for which they were never repaid.

On September 30, 1969, the corporation failed because of Nissan’s failure to deliver a new model automobile on time, some labor problems, and the mismanagement of a supervisory employee. By December 31 of the same year, the corporation had a net operating loss of approximately $157,000.

During the next year, taxpayers claimed that the advances made to the corporation were worthless loans. Accordingly, on April 11, 1970, they filed a claim for a refund of $8,218.28. The Commissioner denied the claim on September 16, 1970. On June 7, 1971, taxpayers filed claims for refunds in the amount of $3,301.80 for 1967, $9,357.89 for 1968, $4,704.62 for 1969, and $40,-589.67 for 1970. These claims were denied on February 20, 1973.

Taxpayers then filed this action in federal district court for a refund. The complaint alleged that the advances made by them to Ash Motors were loans; that they were made in connection with taxpayers’ trade or business; that they were worthless; and that, accordingly, taxpayers were entitled to deduct them in full as bad business debts.

At trial, taxpayers adduced, in support of their contention that the advances were loans and not contributions to capital, only their own testimony that they considered the advances loans, a ledger from the corporation’s books that had the notation, “notes payable” to Dr. Raymond totaling approximately $151,000, and two checks totaling approximately $2,000 that stated that they were written as loans from taxpayers to their corporation. Taxpayers conceded, however, that no notes were ever given to evidence the obligations, and that the corporation gave them no unconditional promises to repay the obligations at fixed maturity dates or at fixed interest rates. The evidence also disclosed that no security was given for the advances, and that it was unlikely that an outsider would have made such speculative loans. Moreover, it appeared that the corporation was inadequately capitalized and that some of the advances were used to purchase capital assets. Finally, the proofs showed that taxpayers’ advances were subordinate to the claims of outside creditors and that repayment of the advanees was contingent on the success of the enterprise. The only other evidence adduced by taxpayers that arguably supports their claim is the following resolution from the minutes of a meeting of the corporation’s Board of Directors which provided:

Be it further resolved, that said Bank is hereby authorized and directed to honor and pay any checks, drafts, notes or orders so drawn, whether such checks, drafts, notes or orders be payable to the order of any such person signing and/or counter-signing said checks, drafts, notes or orders, or any of such persons in their individual capacities or not and whether such checks, drafts, notes or orders are deposited to the individual credit of the person so signing and/or countersigning . . . or to the individual credit of any of the other officers or not . . . . [Emphasis added.]

Taxpayers argue that this writing was intended to obviate the necessity of having to issue a promissory note each time a loan was made to the corporation or to someone else in payment of an obligation of the corporation. The government argues that this writing speaks for itself, and that it was intended only as a direction to any financial or banking institution to honor any signature or countersignature of any authorized individual or surety for Ash Motors, Inc.

After taxpayers had completed the presentation of their case, the district court, in considering the government’s motion for a directed verdict, stated that it was the court’s duty “to ascertain whether or not . . . reasonable minds could differ as to the factual determinations that should be made under the requirements of the law as they govern the standards against which those factual determinations must be measured. . . . ” It considered that no notes payable had been given by the corporation, that there was no expressed intention to repay the advances at a time certain and at a fixed rate of interest, and that no security had been given. Only two of the checks, amounting to approximately $2,000, were ever themselves denominated as loans. Moreover, taxpayers testified that they looked for repayment of their advances from corporate earnings in contrast to a creditor who looks for repayment from any source — earnings, capital or loans from other creditors. The ledger notation was not sufficient to fill the void of evidence.

In determining whether a reasonable person could conclude that the advances made to the corporation were loans, and not contributions to capital, the district court could properly consider all these factors in addition to the identity of interest between the creditors and the shareholders and the timing of the advances during the corporation’s organization. E. g. Smith v. Commissioner, 370 F.2d 178, 180 (6th Cir. 1966), Bordo Products Co. v. United States, 476 F.2d 1312, 201 Ct.Cl. 482 (1973), Austin Village, Inc. v. United States, 432 F.2d 741 (6th Cir. 1970), Curry v. United States, 396 F.2d 630 (5th Cir. 1968) cert. denied, 393 U.S. 967, 89 S.Ct. 401, 21 L.Ed.2d 375 (1968), Fin Hay Realty Co. v. United States, 398 F.2d 694 (3d Cir. 1968), Berkowitz v. United States, 411 F.2d 818 (5th Cir. 1969). The district court then concluded that taxpayers’ advances to their corporation were contributions to capital and not loans.

Appellants present four issues for our consideration. We believe, however, that the resolution of only one will dispose of this appeal: whether the district court erred in concluding that no reasonable person could find that the advances taxpayers made to their wholly-owned corporation were loans and not capital contributions. Because we hold that the district court did not err in concluding that, as a matter of law, the advances were contributions to capital, we need not consider whether the jury should have been permitted to determine whether the advances, if debts, were business debts or nonbusiness debts.

When a taxpayer makes advances to a corporation which subsequently becomes insolvent, the transactions may be treated in three different ways by the Internal Revenue Code of 1954, depending upon the character of the advances and the dominant motive of the taxpayer in making them. If an advance is a contribution to capital, the amount of the contribution is added to the basis of the stock, Int.Rev.Code of 1954, § 1011, and if it becomes worthless, the shareholder is entitled to a capital loss equal to the basis in the stock. Int. Rev.Code of 1954, § 165(a). If the advance is a genuine debt, the treatment of it when it becomes worthless is governed by section 166 of the Int.Rev.Code of 1954. A loss arising from a nonbusiness bad debt, one not created or acquired in connection with the taxpayer’s trade or business, is treated as a short-term capital loss. A business bad debt, one created or acquired in the taxpayer’s trade or business, is treated as an ordinary loss and may, accordingly, be deducted in full against ordinary income. In order to show that a loss was created or acquired in connection with his trade or business, a taxpayer must show that he made the loan either to protect his employment or as part of an established business of financing corporations. E. g. United States v. Generes, 405 U.S. 93, 92 S.Ct. 827, 31 L.Ed.2d 62 (1972), Whipple v. Commissioner, 373 U.S. 193, 83 S.Ct. 1168, 10 L.Ed.2d 288 (1963), Townshend v. United States, 384 F.2d 1008, 181 Ct.Cl. 635 (1967), Holtz v. Commissioner, 256 F.2d 865 (9th Cir. 1958).

In order to be deductible as a bad business debt, taxpayers needed first to demonstrate that the advances made to

Ash Motors were loans and not contributions to capital. “Only a bona fide debt which arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money” qualifies, as a bad debt for the purposes of section 166. Treas.Reg. § 1.166 — 1(c).

In determining whether a jury could reasonably have considered that taxpayers’ advances to their corporation were loans and not contributions to capital, we hold that taxpayers’ statement characterizing the transactions as loans, standing alone, is insufficient, as a matter of law. Cf. United States v. Generes, supra. In that case, the Supreme Court considered whether the dominant motivation of a taxpayer, the president of a closely-held corporation, for undertaking an indemnity obligation to creditors of the corporation, was to protect his $12,000 salary. At trial, taxpayer had testified that his sole motive for agreeing to be an indemnitor was to protect his employment as president. The Supreme Court, in directing a judgment n. o. v. for the Government, considered, inter alia, that taxpayer worked less than ten hours each week as president, that he also held a full-time position as president of a savings and loan association at an annual salary of $19,000, and that his annual gross income for the taxable years in question was approximately $40,000. It explained that it had examined the record carefully and that it could find “nothing” that would support a jury determination that taxpayer’s dominant motivation was to protect his $12,000 salary. The Court added that the taxpayer’s

statements obviously are self-serving. In addition, standing alone, they do not bear the light of analysis. What the taxpayer was purporting to say was that his $12,000 annual salary was his sole motivation, and that his $38,-900 original investment, plus his loans to the corporation, plus his personal interest in the integrity of the corporation as a source of living for his son-in-law and as an investment for his son and his other son-in-law were of no consequence .
We conclude on these facts that the taxpayer’s explanation falls of its own weight, and that reasonable minds could not ascribe, on this record, a dominant motivation directed to the preservation of the taxpayer’s salary as president of . [the corporation].

405 U.S. at 106-07, 92 S.Ct. at 834.

In determining whether advances made to one’s wholly-owned corporation are loans or contributions to capital, we, too, believe that public policy and the prevention of fraud require that an “[i]ntention to create a debt not be so readily proved”, and that “[generally it depends upon whether contemporaneous facts, not testimony given years later, establish an unconditional obligation to repay the advances.” Road Materials, Inc. v. Commissioner, 407 F.2d 1121, 1124 (4th Cir. 1969). In that case, the court affirmed a determination of the Tax Court that advances made to taxpayer’s wholly-owned corporation were contributions to capital even though the advances were shown as loans on the taxpayer’s books and entered in the books of the receiving corporation as items payable in accordance with the bookeeping procedures for entry of debt approved in the state of incorporation.

This court, in Smith v. Commissioner, supra, has also held that in determining whether an advance to a closely-held corporation by the principal shareholders and officers is debt or equity, objective, contemporaneous criteria must be considered and accorded great weight. In that case, we affirmed a determination of the Tax Court that advances made by the' taxpayer to his corporation were contributions to capital and that the unpaid balance of these advances could not be deducted as bad debts when the corporation became insolvent. In making this disposition, Judge Peck, writing for the court observed:

Inherent within the philosophy and structure of the income tax law is the proposition that all income is to be taxed unless it falls within a specific exemption, and if a taxpayer makes a deduction from income he must indicate the specific statutory authority for that deduction. [Citations omitted.]
It is equally well established that when such a deduction is claimed, the substance of the transaction, rather than its form, is controlling. [Citations omitted.]
In addition to indicating the specific law under which he claims a deduction, where as here a taxpayer is attempting to establish that an advance is a true loan and not a contribution to capital the burden of doing so is upon him. [Citations omitted.]
In determining whether the taxpayer has sustained the burden of establishing that a true loan and not a contribution to capital was intended when an advance has been made, a number of factors or tests must be taken into consideration. These include the presence or absence of a maturity date of the obligation, the name given to the writing (if any) evidencing the claimed obligation, the source of payments and repayments, the adequacy or inadequacy of capitalization, identity (or lack of identity) of interest between creditor and stockholder, the corporation’s ability to obtain financing from independent lending institutions, and the timing of the advance with reference to the organization of the corporation. [Citations omitted.]

370 F.2d at 180.

We applied these criteria in Austin Village, Inc. v. United States, supra, where we reversed a judgment for taxpayers entered by the district court which had held that advances made by shareholders to their closely-held corporation were loans, not contributions to capital. Although taxpayers testified that the advances were loans and although the transactions were evidenced by demand notes, this court held that any determination that the advances were genuine debts would be clearly erroneous. In explaining why this conclusion was required, the court stated:

The maturity dates and interest rates assigned to the alleged loans were, at best, illusory, and in fact no interest payments or payments of principal had been made at the time this litigation commenced. Moreover, there was no unconditional promise to repay the loans, no fixed schedule of payments, no security and no sinking fund to provide funds for repayment. Also, it is significant that the putative loans were subordinated to the claims of all other creditors and were the result of the shareholders’ inability to obtain sufficient conventional financing for the project.
By way of contrast, the bank loans that eventually were obtained had the conventional indicia of debt and were repaid in due course.

432 F.2d at 745.

In applying the law to the facts of this case, we observe, as we did in the Austin Village case, that it is “clear that the objective factors . . . are decisive in cases of this type.” 432 F.2d at 745. Only by requiring evidence contemporaneous with the advances that indicates that they were loans and not contributions to capital can courts minimize the danger that taxpayers will defer characterizing advances as loans or as contributions to capital until the tax consequences of such characterizations are certain.

In this case, the corporation did not unconditionally promise to repay the advances as required by Treas.Reg. 1.166-l(c). Instead, repayment appears, to have been contingent upon the success of Ash Motors, Inc. Thus, Virginia Raymond testified that the advances “would be repaid at the time the Company could afford to do so out of the Company’s earned surplus . . . .” (Emphasis added.) Under traditional accounting principles, interest expense is a factor in computing earned surplus and is not paid out of it. On the other hand, dividends, remuneration for capital investment, are paid from earned surplus. Moreover, the corporation did not issue notes payable to taxpayers, did not promise to repay the advances at a fixed interest rate or at a time certain, did not pay any principal or interest, gave no security for the advances, did not cause any interest to be accrued on its books, and did not establish a sinking fund for repayment. In addition, taxpayers, by acting as personal guarantors for secured loans made to the corporation by outsiders, subordinated their advances to the claims of their creditors. We consider also that taxpayers were the sole shareholders of the corporation and that the advances were made in starting the corporation which, it appears, was inadequately capitalized. The mere entry of the advances on the corporation’s balance sheet as notes payable, taxpayers’ self-serving testimony that the advances were loans, and the comment on two of the taxpayers’ checks to the corporation that these checks were loans, are not sufficient to create a jury question whether the advances were loans. Moreover, we believe that the Resolution of the Board of Directors speaks for itself and cannot be interpreted as the taxpayers would have us do.

Accordingly, the district court did not err in directing a verdict for the government at the close of taxpayers’ case — no reasonable person could have concluded on the basis of the record before us that the advances made by taxpayers to their corporation were loans and not contributions to capital.

Affirmed.

      . Section 1346(a)(1) of Title 28 provides, in relevant part,
      The district courts shall have original jurisdiction, concurrent with the Court of Claims, of:
      (1) Any civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws

      . The district court held, as a matter of law, that taxpayers were not engaged in the trade or business of Ash Motors:
      Nowhere was the definite expression of the actual employment of Dr. and Mrs. Raymond as employees as opposed to their status as investors. There was no accrual of any salary upon the books; no expression anywhere as to any amount of salaries at some point in time to be paid up to them; no entries of accounts; no issuance of notes of the Corporation in support of the claimed amount of salary, whatever they may have been.
      After examining these facts, it concluded “that reasonable minds could not ascribe on this record of evidence a dominant motivation described to the preservation of the trade or business rather than to the protection of a further profit anticipated from the successful conduct of his automobile business.”
      Although United States v. Generes, 405 U.S. 93, 92 S.Ct. 827, 31 L.Ed.2d 62 (1972) and Whipple v. Commissioner, 373 U.S. 193, 83 S.Ct. 1168, 10 L.Ed.2d 288 (1963) support the district court’s determination that taxpayers’ evidence did not create a jury question whether the advances made by them arose out of their trade or business, we do not reach this question because we hold that the district court properly concluded that the advances were contributions to capital.


source: Caselaw Access Project

author: HAMLEY, Circuit Judge:

license: Public Domain

text:
    Henry W. KERR et al., Petitioners, v. UNITED STATES DISTRICT COURT FOR the NORTHERN DISTRICT OF CALIFORNIA, Respondent; John VAN GELDERN et al., Real Parties in Interest.
    No. 74-2206.
    United States Court of Appeals, Ninth Circuit.
    Jan. 17, 1975.
    Certiorari Granted May 27, 1975.
    See 95 S.Ct. 1988.

      Karl S. Mayer, Deputy Atty. Gen. (argued), San Francisco, Cal., for petitioners.

      B. E. Bergesen, III (argued), Youth Law Center, San Francisco, Cal., for real parties in interest.
    James L. Browning, Jr., U. S. Atty., San Francisco, Cal., for respondent.
    Before HAMLEY, MERRILL and DUNIWAY, Circuit Judges.
   OPINION

HAMLEY, Circuit Judge:

Petitioners seek from this court a writ of mandamus or prohibition under 28 U.S.C. § 1651, vacating an order of respondent district court which granted a motion of the real parties in interest requiring petitioners to produce various documents by way of discovery under Rules 34 and 37 of the Federal Rules of Civil Procedure. We deny the petition.

The real parties in interest, who seek the documents, are seven California state prisoners who have joined as plaintiffs in a civil rights action against petitioners in the respondent district court. Plaintiffs in that suit assert district court jurisdiction under 28 U.S.C. § 1343, 42 U.S.C. §§ 1983 and 1988, and 28 U.S.C. §§ 2201 and 2202. Plaintiffs brought the action on behalf of themselves and of a class, divided into several subclasses, consisting of all others similarly situated.

Petitioners in this mandamus proceeding are the defendants in the civil rights action described above. They constitute the members of the California Adult Authority, two state administrative officers, their agents, employees and successors in interest, as described in the caption of the complaint.

Plaintiffs in the civil rights action seek both declaratory and injunctive relief. They request a declaratory judgment that the acts of the defendants pertaining to the revocation, rescission or suspension of parole, the fixing or refixing of sentences, and the imposition of sanctions for alleged infractions of rules, as described in numerous paragraphs of the complaint, contravene the rights of the plaintiffs and their class under the Fifth, Sixth and Eighth Amendments and the Due Process and Equal Protection Clauses of the Fourteenth Amendment of the United States Constitution.

The injunctive relief plaintiffs seek is an order requiring defendants and their agents to accord plaintiffs and their class certain specified procedural rights with regard to all proceedings for the revocation, suspension or rescinding of parole, the fixing or refusing to fix the terms of sentences, and the imposing of serious disciplinary sanctions. The rights sought pertain to giving notice of such proceedings, providing an opportunity to be heard, to present witnesses, and to cross-examine witnesses; according the right to be represented by counsel; providing the right to be heard by an unbiased panel or official and the right to challenge any panel or official for cause; and providing a verbatim transcript of any such hearing and a written statement of the reason for the action taken and the evidence relied on.

During the course of discovery in the civil rights action, plaintiffs served upon petitioners a set of interrogatories under Fed.R.Civ.P. 33 and a request for production of documents under Fed.R.Civ.P. 34. Petitioners made objections to the requests for documents and to certain interrogatories. As to the requested documents, petitioners also argued that an in camera inspection was necessary in order to determine relevancy and evaluate their claimed privileges. Plaintiffs thereupon moved under Fed.R.Civ.P. 37 to compel discovery. The district court referred the motion to a United States magistrate for findings and recommendations.

Following a hearing, the magistrate recommended that all requests for production of documents be granted, that some but not all of the interrogatories be answered, and that costs in the amount of $500 be levied against petitioners under Fed.R.Civ.P. 37(a)(4). Protective orders concerning certain of the document requests were also suggested.

Petitioners sought a review by the district court of the magistrate’s findings and recommendations, complaining primarily about the granting of the requests for the production of documents. After such a review, the district court, with reference to the documents here in issue, followed the magistrate’s recommendations, including denial of the request for in camera inspection. However, the district court modified the recommended protective order by being more restrictive of the persons to whom the documents in request number seven could be revealed. Subsequently, the district court refused to stay the discovery order pending the disposition of this petition.

“[Tjhat no . file of any plaintiffs, or any copy of any of its contents, and no personnel file of any member of the Adult Authority, hearing representative or executive officer, nor any copy of any of its contents, shall be shown to any person except counsel of record for the plaintiffs and no more than a total of two investigators designated by such counsel, and then only to the extent necessary to the conduct of this action.”

Being dissatisfied with the district court’s order under Fed.R.Civ.P. 37, petitioners instituted this mandamus or prohibition proceeding and requested a stay-pending its disposition. The petitioners contend that it was improper for the district court to allow discovery of the documents requested under Fed.R.Civ.P. 34, specifically those sought in requests numbers 7, 14, 15, 18, 20, 21 and 22 of the plaintiffs’ request for production of documents. This court stayed the district court’s order on September 20, 1974, at which time it also designated this petition for oral argument.

Preliminarily, it is necessary to examine the nature of the vehicle which brings the district court’s order before this court for review. This is a petition for mandamus or prohibition pursuant to the All Writs Act, 28 U.S.C. § 1651.

Mandamus is an extraordinary remedy. It is appropriately exercised where the district court has exceeded its jurisdiction, or has improperly failed to exercise jurisdiction, or has taken action amounting to an “usurpation of power.” Will v. United States, 389 U.S. 90, 95-96, 88 S.Ct. 269, 19 L.Ed.2d 305 (1967); Roche v. Evaporated Milk Ass’n, 319 U.S. 21, 26, 63 S.Ct. 938, 87 L.Ed. 1185 (1943). This court set out its standard for granting mandamus in Hartley Pen Co. v. United States District Court, etc., 287 F.2d 324, 328 (9th Cir. 1961):

“In our view the remedy is available in an ordinary case within our jurisdiction if ordinary remedies are inadequate and there are present exceptional and extraordinary circumstances which require the issuance of an extraordinary writ to prevent a grave miscarriage of justice. . . . ”

From an examination of Hartley, three factors are evident which determine the appropriateness of granting mandamus: the degree to which the district court’s actions can be legally questioned, the damage to petitioner (not correctable on appeal), and the ability to correct the district court’s actions by appeal. See Heathman v. United States District Court, 503 F.2d 1032 (9th Cir. 1974); Belfer v. Pence, 435 F.2d 121 (9th Cir. 1970).

Petitioners first direct their attention to the documents described in request number seven. See note 5, supra. These documents consist of the personnel files maintained by petitioners pertaining to each member of the Adult Authority, each hearing representative, and the Executive Officer of the Adult Authority. On the merits of the district court order, petitioners argue that the contents of these personnel files have no relevance to the subject matter of the civil rights action, and for this reason alone, the district court discovery order should be vacated with regard to request number seven.

One of the plaintiffs’ allegations in their civil rights complaint is that members and executive personnel of the Adult Authority have “no expertise in arriving at fair decisions” because of their narrow partisan backgrounds, their bias against prisoners, their inexperience, and their failure to reflect a representative cross section of the population of California. As indicated by the earlier review of the relief sought in the civil rights suit, plaintiffs do not attack the qualifications of petitioners with an expectation of obtaining a judicial determination that an Adult Authority so constituted cannot accord due process to prisoners who come before them. Instead, they expect that, by proving such an allegation, they will demonstrate the need of imposing stringent procedural requirements governing the functioning of the Adult Authority.

Since this would appear to be a proper line of attack for plaintiffs, the district court’s holding of the personnel files relevant for discovery purposes is not so questionable as to invoke mandamus. For the question of relevancy “is to be more loosely construed at the discovery stage than at the trial.” 8 Wright & Miller, Federal Practice and Procedure, § 2008 at 41 (1970). Thus under Fed.R.Civ.P. 26(b)(1), it is no ground for objection that information sought in pretrial discovery would not be admissible at trial, “ ‘if the testimony sought appears reasonably calculated to lead to the discovery of admissible evidence.’ . . . ” Olympic Refining Company v. Carter, 332 F.2d 260, 266 (9th Cir. 1964). In addition to discovering information pertaining to a party’s case in chief, it is entirely proper to obtain information for other purposes such as cross-examination of adverse witnesses. See United States v. Meyer, 398 F.2d 66, 12 (9th Cir. 1968).

Because the issue of relevancy in discovery matters is subject to such a broad standard, a district court’s decision will rarely be overturned by a petition for mandamus. Heathman v. United States District Court, 503 F.2d at 1035. Cf. Hartley Pen Co. v. United States District Court, 287 F.2d at 328 — 332.

Petitioners further argue, however, that established principles of California law and federal law create an absolute or qualified privilege for the personnel files covered by request number seven and all documents sought under requests numbers fourteen, fifteen, eighteen, twenty, twenty-one and twenty-two, and for this reason discovery should not have been ordered. In the alternative, petitioners argue that, at the very least, the district court should have required in camera inspection to ascertain relevancy and judge the need to maintain the confidentiality of the Authority’s files.

The claim of privilege under California law is based upon California Evidence Code § 1040, and California Government Code §§ 6250 — 6260 and 6254(f) (Supp. 1974). However, the civil rights action was instituted in federal court under a federal statute, 42 U.S.C. § 1983, which was enacted particularly to vindicate federal rights against deprivation by state action. See Monroe v. Pape, 365 U.S. 167, 180, 81 S.Ct. 473, 5 L.Ed.2d 492 (1961). As this court recently pointed out in Heathman v. United States District Court, 503 F.2d at 1034: “[I]n federal question cases the clear weight of authority and logic supports reference to federal law on the issue of the existence and scope of an asserted privilege. 2B Barron & Holtzoff, Federal Practice and Procedure (Wright ed. 1961), § 967 at 243; 4 Moore’s Federal Practice, § 26.60 [7] at 26-255; 8 Wright & Miller, Federal Practice & Procedure, Civil § 2016 at 123; Proposed Federal Rules of Evidence, Rules 501-02.”

The state’s interest is that of a litigant, and not, as in diversity cases, that of a sovereign whose law is being applied in a foreign forum. Reference to federal law in this case is necessary on the issue of the existence and scope of the claimed privilege. Heathman v. United States District Court, 503 F.2d at 1034; Fears v. Burris Manufacturing Co., 436 F.2d 1357, 1360-1361 (5th Cir. 1971); Carr v. Monroe Manufacturing Co., 431 F.2d 384, 387-389 (5th Cir. 1970); Colton v. United States, 306 F.2d 633, 636 (2d Cir. 1962).

Federal statutory law, the Freedom of Information Act, 5 U.S.C. § 552(b)(6) and (7), is relied upon by petitioners to sustain their asserted privilege. The purpose of this Act was to expand the access of the public to official records of federal agencies, subject to stated exceptions. Among the exceptions to disclosure are those set out in § 552(b)(6) — personnel and medical files, and section 552(b)(7) — “investigatory files compiled for law enforcement purposes.”

This Act would not create a privilege for the requested documents for two reasons. First, its language is limited to authorities “of the Government of the United States.” 5 U.S.C. § 551(1). The civil rights suit involves California agencies. Secondly, the exceptions to the disclosure in the Act were not intended to create evidentiary privileges for civil discovery. See Verrazzano Trading Corp. v. United States, 349 F.Supp. 1401, 1403 (Cust.Ct.1972);

Pleasant Hill Bank v. United States, 58 F.R.D. 97, 99 (W.D.Mo.1973); Hodgson v. GMAC. 54 F.R.D. 445. 446 (S.D.Fla.19.72); 4 Moore’s Federal Practice ¶ 26.61 [4.—3] at 26-276, 26—278 (2d ed.). They were intended only to permit the withholding of certain types of information from the public generally.

Petitioners also contend that the common law governmental privilege (encompassing and referred to sometimes as the official or state secret privilege) covers the requested documents. Committee for Nuclear Responsibility, Inc. v. Seaborg, 149 U.S.App.D.C. 385, 463 F.2d 788, 792 — 795 (1971); Carr v. Monroe Manufacturing Co., 431 F.2d at 388 — 390.

These cases, however, indicate that this is only a qualified privilege, contingent upon the competing interests of the requesting litigant and subject to disclosure especially where protective measures are taken, as in this case. But we do not have to reach the question of whether this privilege extends to these documents or if a further protective order in the nature of in camera inspection was necessary before allowing disclosure. The governmental privilege must be formally asserted and delineated in order to be raised properly. United States v. Reynolds, 345 U.S. 1, 7-8, 10-11, 73 S.Ct. 528, 97 L.Ed. 727 (1953); Carr v. Monroe Manufacturing Co., 431 F.2d at 387. See General Services Administration v. Benson, 415 F.2d 878, 879 (9th Cir. 1969). Cf. United States v. Nixon, 418 U.S. 683, 688, 94 S.Ct. 3090, 3097, 41 L.Ed.2d 1039 (1974) (“by a formal claim of privilege”); Committee for Nuclear Responsibility, Inc. v. Seaborg, 463 F.2d at 792-793 (by implication).

In United States v. Reynolds, supra, the Supreme Court in discussing a claimed state secret privilege stated:

“The privilege belongs to the Government and must be asserted by it; it can neither be claimed nor waived by a private party. It is not to be lightly invoked. There must be a formal claim of privilege, lodged by the head of the department which has control over the matter, after actual personal consideration by that officer. . . ”

345 U.S. at 7-8, 73 S.Ct. at 532. Neither the Chairman of the Authority nor the Director of Corrections nor any official of these agencies asserted, in person or writing, any privilege in the district court.

The claiming official must “ ‘have seen and considered the contents of the documents and himself have formed the view that on grounds of public interest they ought not to be produced’ ” and state with specificity the rationale of the claimed privilege. Reynolds is illustrative. The Court there continued, explaining:

“Of course, even with this information before him, the trial judge was in no position to decide that the report was privileged until there had been a formal claim of privilege. Thus it was entirely proper to rule initially that petitioner had shown probable cause for discovery of the documents. Thereafter, when the formal claim of privilege was filed by the Secretary of the Air Force, under circumstances indicating a reasonable possibility that military secrets were involved, there was certainly a sufficient showing of privilege to cut off further demand for the document on the showing of necessity for its compulsion that had then been made.” (Emphasis added.) 345 U.S. at 10-11, 73 S.Ct. at 533.

In the civil rights suit, petitioners’ counsel merely raised a blanket objection covering any and all documents in request numbers 7, 14, 15, 18, 20, 21 and 22. Formally claiming a privilege should involve specifying which documents or class of documents are privileged and for what reasons, especially where the nature of the requested documents does not reveal an obviously privileged matter. See Pleasant Hill Bank v. United States, 58 F.R.D. at 101. Since there may be information in the requested documents which should be protected, the petitioners may assert a privilege to a particular document or class of documents, and perhaps seek in camera inspection, at the time the documents are discovered in the district court. See United States v. Reynolds, 345 U.S. at 10-11, 73 S.Ct. 528.

In sum, the petition fails to show such an usurpation by the district court that warrants the extraordinary remedy of writ of mandamus. In promulgating the discovery order the district court did enter some protective measures. The granting of mandamus as to discovery orders is limited, and this case does not appear to present exceptional circumstances.

The stay of this court is vacated, and the petition for mandamus or prohibition is denied.

      . In the district court the civil rights action carries docket number C-72-2088 SAW.

      . After the petition was filed in this court, the district court entered an order providing that the suit could be maintained as a class action.

      . Several document requests were subject to a limited time period. And with reference to request number seven, the magistrate advised limiting the revelation of the documents to plaintiffs’ attorneys and the personnel in their offices.

      . The protective order with reference to request number seven, as entered by the district court, reads:

      . The requests for documents at issue are: “7. All files, including all personnel files, which are maintained by the Adult Authority or by the Department of Corrections, or by any officer or employee thereof, with respect to each member, each hearing representative, and the Executive Officer of the Adult Authority.”
      “14. Each report submitted by any member, hearing representative, Executive Officer, or any other employee or official of the Adult Authority, including without limitation all reports of the type indicated at lines 9-11 of page 21 of the aforementioned deposition.”
      “15. All written statements written or delivered by any member or hearing representative or the Executive Officer of the Adult Authority during the past 5 years favoring, opposing, or in any way commenting upon bills or other legislation or legislative proposal pending in the U.S. House of Representatives, the Senate of the United States, or the California Legislature.”
      “18. All written proposals for any change whatsoever in the organization or operation of, qualifications for, or substantive criteria and procedures to be employed by the Adult Authority, including without limitation any of the individuals or groups listed in the foregoing item.”
      “20. All memoranda written by the Chairman of the Adult Authority during the past 5 years, no matter to whom sent, including without limitation memoranda sent to other government organizations, agencies or officials, or to other members, hearing representatives, officials or employees of the Adult Authority.”
      “21. All documents in effect on November 15, 1972 which pertain to any Policy Statement or Resolution issued by the Adult Authority, including without limitation any file maintained on any Resolution or Policy Statement and all such documents executed or issued subsequent to that date.”
      “22. All documents, however formal or informal, issued during the past calendar year, which concern the Adult Authority’s adoption of new policies, procedures, criteria, and the like, to be followed by members, hearing representatives, officials and employees, including without limitation ail documents relating to a) Policy Statement No. 24, adopted March 27, 1973, and b) Resolution No. 129, revised and reissued May 21, 1973.”

      . The standard, for when mandamus should be granted to review interlocutory discovery orders, is in flux between circuits. 4 Moore’s Federal Practice ¶ 26.83 [9. — 3] (2d ed., Supp. 1973). There is some authority for lessening the extraordinary showing necessary to invoke mandamus. Harper & Row Publishers, Inc. v. Decker, 423 F.2d 487 (7th Cir. 1970), aff’d, 400 U.S. 348, 91 S.Ct. 479, 27 L.Ed.2d 433 (1971) (by an equally divided court); Pfizer, Inc. v. Lord, 456 F.2d 545 (8th Cir. 1972).

      . For an example of where the determination on relevancy was found extraordinary and mandamus invoked, see Sanderson v. Winner, 507 F.2d 477 (10th Cir. 1974).
      We make no inference as to whether the information contained in the personnel files would be admissible at trial, as against a claim that it is irrelevant.

      . The section 552(b)(7) exception has no relationship with the kinds of documents plaintiffs seek to discover. See Bristol-Myers Co. v. F.T.C., 138 U.S.App.D.C. 22, 424 F.2d 935, 939-940 (1970).

      . United States v. Reynolds, 345 U.S. at 8 n. 20, & Co. [1942] A.C. 624, 638. 73 S.Ct. at 532, quoting Duncan v. Cammell, Laird


author: STALEY, Circuit Judge.

text:
    Sandra WETZEL, and Mari Ross, on behalf of themselves and all others similarly situated. Equal Opportunity Commission as amicus curiae v. LIBERTY MUTUAL INSURANCE COMPANY, a corporation, Appellant.
    No. 74-1233.
    United States Court of Appeals, Third Circuit.
    Argued Oct. 30, 1974.
    Decided Feb. 11, 1975.
    Certiorari Granted May 27, 1975.
    See 95 S.Ct. 1989.

      Kalvin M. Grove, Steven R. Semler, Lederer, Fox & Grove, Chicago, 111., Robert A. Penney, Boston, Mass., Clem R. Kyle, Pittsburgh, Pa., for appellant.
    Howard A. Specter, Harry J. Gruener, Edward C. Smith, Litman Litman Harris and Specter, P.A., Pittsburgh, Pa., Robert F. Stone, Fine, Perlow & Stone, Pittsburgh, Pa., for appellees.
    John G. Wayman, Scott F. Zimmerman, Walter P. DeForest III, Martha Hartle Munsch, Reed, Smith, Shaw &
    McClay, Pittsburgh, Pa., for amicus curiae Westinghouse Electric Corp.
    William A. Carey, Gen. Counsel, Joseph T. Eddins, Associate Gen. Counsel, Beatrice L. Reischel, Beth L. Don, Washington, D.C., for amicus curiae E.E.O.C.
    Before STALEY, HASTIE and ALDI-SERT, Circuit Judges.
   OPINION OF THE COURT

STALEY, Circuit Judge.

This appeal presents this court with significant questions of first impression. We are asked to determine whether Title YII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e et seq., is violated by a private employer who maintains employment policies that exclude pregnancy benefits from the company’s income protection plan and that require female employees to return to work within three months after childbirth or face termination.

Appellant, Liberty Mutual Insurance Company (“Liberty Mutual”) is a national insurance underwriting business. Two of its employees, Wetzel and Ross, filed charges of sex discrimination with the Pennsylvania Human Relations Commission (“PHRG”). Filing of these charges led the company to review and change certain employment policies. The PHRC, however, failed to conciliate the parties, and Wetzel and Ross then filed charges with the United States Equal Employment Opportunity Commission (“EEOC”). After the statutory period within which charging parties are precluded from commencing litigation, Wetzel and Ross requested and received right-to-sue letters. On February 28, 1972, appellees commenced a class action on behalf of female employees of Liberty Mutual, alleging that appellant’s hiring and promotion policies and its pregnancy related policies violated Title VII. The court granted the plaintiffs’ motion for class action and ordered that the suit could be maintained as a class action under Rule 23(b)(2) of the Fed.R.Civ.P. On March 26, 1973, after extensive discovery, Wetzel and Ross moved for partial summary judgment only as to the issue of liability. The district court, on January 9, 1974, finding no issues of material fact, entered an interlocutory order finding that Liberty Mutual’s pregnancy-related policies violated Title VII of the Civil Rights Act of 1964. Liberty Mutual subsequently filed a motion for reconsideration which was denied by the court. On February 20, 1974, the district court, pursuant to Rule 54(b), directed the entry of final judgment as to the pregnancy-related issues, thus giving this court jurisdiction under 28 U.S.C. § 1291. It is from this order that Liberty Mutual appeals. The district court, in its order of January 9, 1974, also ruled that Liberty Mutual’s hiring and promotion policies violated Title VII. On March 19, 1974, that court made its judgment final, and the company appealed at No. 74-1515. That appeal has been disposed of by another panel of this court, and we need not discuss the issues presented there.

Although appellant relegated the issue to a mere footnote, we believe the question of whether the district court had jurisdiction is worthy of discussion. One who alleges a violation of Title VII may not sue in federal district court until he has exhausted his administrative remedies. The filing of a charge with the EEOC is a statutory prerequisite to commencing an action in federal court. Richardson v. Miller, 446 F.2d 1247, 1248 (C.A.3, 1971).

Appellant contends that the portion of the complaint relating to the pregnancy policies should have been dismissed because those claims were not presented to the EEOC. The basis for this contention is that a box labeled “Benefits” on the Notice of Charge form was not checked. Instead, a box labeled “Terms and Conditions” was checked. We find no merit in appellant’s contention. The private litigant plays an important role in the enforcement of Title VII. The EEOC was created by Congress to effectuate the goals of the Civil Rights Act of 1964 (“Act”). In 1972 the Equal Employment Opportunity Act, 42 U.S.C. § 2000e-5, provided the Commission with further authority to bring its own actions. However, the Act did not provide the Commission with direct powers of enforcement. Since enforcement lies exclusively in the federal courts, Choate v. Caterpillar Tractor Co., 402 F.2d 357, 359 (C.A.7, 1968), the rights of a private party, therefore, must not be barred by procedural technicalities if Title VII is to operate effectively. Alexander v. Gardner-Denver Co., 415 U.S. 36, 44, 94 S.Ct. 1011, 39 L.Ed.2d 147 (1974). Courts have continuously construed Title VII so as not to allow procedural technicalities to bar a claim under the Act. Sanchez v. Standard Brands, Inc., 431 F.2d 455 (C.A.5, 1970). The only jurisdictional prerequisites that must be satisfied to commence a federal action are a timely filing of charges with the EEOC and the receiving and acting on the EEOC notice of the right to sue. 42 U.S.C. § 2000e-5(e).

Under the Act the charge of discrimination must be initiated by laymen — people who are apt to be of varying educational backgrounds and certainly few, if any, having knowledge of the subtleties of pleading and of statutory distinctions. Further, the complainants are probably, at this point, not represented by counsel and should not be held to as strict a standard as appellant has suggested. Since Wetzel and Ross have satisfied the jurisdictional prerequisites and are people without legal expertise, we believe that to deny them access to the federal courts because of a technical error would seriously undermine the policies of the Act and serve only to harm the interests of those whom the Act was designed to protect. “[Technicalities are particularly inappropriate in a statutory scheme in which laymen, unassisted by trained lawyers initiate the process.” Love v. Pullman Co., 404 U.S. 522, 527, 92 S.Ct. 616, 619, 30 L.Ed.2d 679 (1972).

Also persuasive is the Supreme Court’s decision in McDonnell Douglas Corp. v. Green, 411 U.S. 792, 798, 93 S.Ct. 1817, 1822, 36 L.Ed.2d 668 (1973). The Court held that since court actions under Title VII are de novo a complainant is not restricted to “those charges as to which the Commission has made findings of reasonable cause.” See also Fekete v. U. S. Steel Corp., 424 F.2d 331 (C.A.3, 1970); Robinson v. Lorillard Corp., 444 F.2d 791 (C.A.4, 1971).

We, therefore, believe that the district court properly had jurisdiction.

PREGNANCY BENEFITS

Liberty Mutual provides its employees with an income protection plan. The plan is a fringe benefit and provides employees with the payment of income during periods of disability. Funding of the plan is partially through employee contributions. After an employee is out of work eight days because of an illness requiring the care of a doctor, the employee receives a percentage of his salary for the duration of his leave. If the employee has been with the company five years or more, he receives benefits up to age 65. If the employee has been with the company less than five years, he receives the benefits for 103 weeks. Liberty Mutual, however, does not pay any benefits under the income protection plan for disability due to pregnancy or for any disability related to pregnancy. Leaves or temporary absences due to pregnancy-related disabilities are not covered by the plan.

Liberty Mutual maintains that Title VII does not require it to include pregnancy benefits in the income protection plan. In its reply brief and at oral argument, Liberty Mutual primarily relied on Geduldig v. Aiello, 417 U.S. 484, 94 S.Ct. 2485, 41 L.Ed.2d 256 (1974). Appellant feels that Aiello is dispositive of the case before us. We believe there are several distinctions between the cases and therefore disagree with the appellant.

Geduldig v. Aiello involved the question of whether there was sex discrimination in violation of the Equal Protection Clause of the Fourteenth Amendment. Here we are involved with the question of whether there was discrimination in violation of Title VII of the Civil Rights Act of 1964. In this posture our case is one of statutory interpretation rather than one of constitutional analysis. On this distinction alone we believe appellant’s reliance on Aiello is misplaced.

In Geduldig v. Aiello, the Supreme Court held that the State of California could choose not to include disabilities relating to normal pregnancy within its disability insurance program and not be violative of the Fourteenth Amendment’s prohibition against sex discrimination. The Court relied heavily on the fact that California’s program was totally self-supporting, “never drawing on general state revenues.” Geduldig v. Aiello, supra at 492, 94 S.Ct. at 2490. We are not faced with an insurance program similar to Aiello’s, and we need not attempt to balance public social welfare interests with the Constitution. An examination of California’s program showed that only normal pregnancy and delivery disabilities were excluded from the benefits, while Liberty Mutual excluded all pregnancy-related disabilities. It is worthy of note that at oral argument, appellant’s counsel declared that the company’s income protection plan would not cover a disability suffered by a pregnant woman but would have covered the disability had the woman not been pregnant. The California program as of January 1, 1974, covers certain pregnancy-related disabilities. See Geduldig v. Aiello, 417 U.S. 484, 490-91, note 15, 94 S.Ct. 2485, 41 L.Ed.2d 256.

For the above reasons we do not rely on Geduldig v. Aiello and find that it is not dispositive of the issues presently before us.

We then will proceed with our analysis, first examining the legislative history of the statute involved. The Civil Rights Act of 1964 was enacted to assure equality of employment opportunities. McDonnell Douglas Corp. v. Green, 411 U.S. 792, 93 S.Ct. 1817, 36 L.Ed.2d 668; Griggs v. Duke Power, 401 U.S. 424, 91 S.Ct. 849, 28 L.Ed.2d 158 (1971). Reading the statute and the legislative history of the Act indicates that one of the goals of Congress was to provide the opportunity for anyone to enter the job market without being subjected to disparate treatment because of race, color, religion, sex, or national origin. “The purpose of this title is to eliminate, through the utilization of formal and informal remedial procedures, discrimination in employment.” H.Rep. No. 914, 1964, U.S.Code Cong. & Admin.News 1964, p. 2401. Congress intended to eliminate any artificial or arbitrary impediments to employment. Until the 1964 Civil Rights Act, women had little or no legal weapons to attack their systematic exclusion from many employment opportunities. The legislative history pertaining to the addition of the word “sex” to the Act is indeed meager. It appears that the amendment to the Act was offered in a tongue-in-cheek manner with the intent to undermine the entire Act and assist in its defeat. See 110 Cong.Rec. 2484-85 (1964).

In 1972 Congress had the chance to make any changes to the Act that it felt was necessary. No substantive changes were made regarding sex discrimination, and we féel this indicates a congressional satisfaction with the operation and administration of the Act. We, therefore, believe that the broad purposes of the Act can be applied to sex discrimination cases. Congress intended to strike at all discriminatory treatment of men and women. Sprogis v. United Air Lines, Inc., 444 F.2d 1194, 1198 (C.A.7), cert. denied, 404 U.S. 991, 92 S.Ct. 536, 30 L.Ed.2d 543 (1971).

To effectuate the goals of Title VII, Congress created the EEOC. 42 U.S.C. § 2000e-4. As an agency, the EEOC was given the power by Congress to issue regulations or guidelines that would indicate what are or are not proscribed discriminatory practices. These guidelines are the agency’s interpretation of the statute. When faced with statutory construction problems, courts have generally held that the guidelines are entitled to great deference. McDonnell Douglas Corp. v. Green, supra; Griggs v. Duke Power Co., supra.

The guidelines we deal with here prohibit an employer from discriminating between men and women with regard to employment policies and fringe benefits.

Appellant urges us to reject these guidelines on the basis that the guidelines were contra to the EEOC’s earlier position and are now wholly inconsistent with the policy and understanding of the statute and therefore should be given no deference by this court. Appellant cites us Espinoza v. Farah Mfg. Co., 414 U.S. 86, 94 S.Ct. 334, 38 L.Ed.2d 287 (1973) in support of the argument. In that case the petitioner alleged that Farah had discriminated against her because of her “national origin” in violation of Title VII. The Supreme Court in Espinoza said of the EEOC guideline then in question,

“[T]he guideline relied on . . .is no doubt entitled to great deference [citing cases], but that deference must have limits where, as here, application of the guideline would be inconsistent with an obvious congressional intent not to reach the employment practice in question.” Espinoza, supra at 94, 94 S.Ct. at 339.

The Court was persuaded not to follow the EEOC interpretation of “national origin” because of legislative action by Congress. The “obvious congressional intent” was found in other statutes that required federal employees to be citizens of the United States. The Court concluded that Congress did not intend that citizenship be a requirement for federal employment and “at the same time, prevent private employers from doing likewise.” Espinoza, supra at 91, 94 S.Ct. at 338. The EEOC guideline was, therefore, rejected. Appellant suggests that because the EEOC had for several years indicated that the denial of pregnancy benefits did not violate the Act and now holds that this practice does violate the Act, the EEOC is inconsistent, making the guidelines not worthy of our consideration. The inconsistency to which the Supreme Court addressed itself in Espinoza was that the EEOC guideline was not reflective of the congressional intent. The Court did say it was significant that the EEOC had held two different views, but went on to say that the more recent guideline was entitled to great deference. Espinoza, supra at 94, 94 S.Ct. at 334. Unlike Espinoza, we have not found any congressional intent contrary to the EEOC guideline nor any “compelling indications” that it is wrong. Appellant has not shown any evidence in light of the legislative history that would indicate that the guidelines are inconsistent with any congressional intent. A study of the legislative history of the Act does not show any intent other than to strike at the broad spectrum of discrimination.

We are not persuaded by appellant’s argument that because the guidelines in question were issued in 1972, they should not be given our deference. The EEOC as the agency charged with the responsibility of administering the Act, has issued the guidelines to keep pace with changes in society’s attitudes. This evolutionary process is a necessary function of our legal system — a system that must remain flexible and adaptable to ever-changing concepts of our society. Congress has recognized this intrinsic proc-# ess. See S.Rep.No.92-415, 92d Cong., 1st Sess., p. 5, comments by Sen. Williams.

We feel that the legislative purpose of the Act is furthered by the EEOC guidelines and that the guidelines are consistent with the plain meaning of the statute. Mindful that the guidelines are interpretive rules, we will give them our deference as required by Griggs v. Duke Power Co., supra.

Under the pertinent guidelines, it is discriminatory to treat pregnancy differently from other temporary disabilities. 29 C.F.R. § 1604.10(b). Liberty Mutual expressly excludes all pregnancy disabilities from coverage under its plan while at the same time covers all other disabilities except those voluntarily inflicted.

Appellant, in justification of this policy, argues that because pregnancy is voluntary and illnesses are not, pregnancy can be excluded from its income protection plan. We disagree. Voluntariness is no basis to justify disparate treatment of pregnancy. There are a great many activities that people participate in that involve a recognized risk. Most people undertake these activities with full knowledge of the potential harm. Drinking intoxicating beverages, smoking, skiing, handball and tennis are all types of activities in which one could sustain harm.

According to the Liberty Mutual’s policy, all disabilities that could result from the above activities are covered under the income protection plan. Even if we were to accept appellant’s argument of voluntariness, we find that some voluntary disabilities are covered while one voluntary disability that is peculiar to women is not so covered. Either way we find no support for appellant’s argument. Moreover, pregnancy itself may not be voluntary. Religious convictions and methods of contraception may play a part in determining the voluntary nature of a pregnancy. There is no 100% sure method of contraception, short of surgery, and for health reasons many women cannot use the pill. This court will not accept “voluntariness” as a reasonable basis for excluding pregnancy from appellant’s income protection plan.

Appellant next contends that the plan covers only those disabilities arising from sickness, and since pregnancy is not a sickness it is properly excluded from coverage. Again we disagree. We believe that pregnancy should be treated as any other temporary disability. Employers offer disability insurance plans to their employees to alleviate the economic burdens caused by the loss of income and the incurrence of medical expenses that arise from the inability to work. A woman, disabled by pregnancy, has much in common with a person disabled by a temporary illness. They both suffer a loss of income because of absence from work; they both incur medical expenses; and the pregnant woman will probably have hospitalization expenses while the other person may have none, choosing to convalesce at home.

Thus, pregnancy is no different than any other temporary disability under an income protection plan offered to help employees through the financially difficult times caused by illness.

Under Liberty Mutual’s plan nearly all disabilities are covered. We believe that an income protection plan that covers so many temporary disabilities but excludes pregnancy because it is not a sickness discriminates against women and cannot stand.

Appellant also contends that the plan does not violate Title VII because of the company’s legitimate interest in maintaining the financial integrity of the plan.

Appellant has offered no statistical information from which we could conclude that the increased cost for pregnancy benefits would be “devastating.”- We do realize that there would be an increased premium. However, we are not convinced that integrity of the plan would be jeopardized.

Giving our deference to the EEOC guidelines, we agree that cost is no defense under Title VII to this particular issue. 29 C.F.R. § 1604.9(e).

Appellant advanced several other arguments to support its contentions, but we find them wholly without merit. The company’s policy is neutral on its face but treats a protected class of persons in a disparate manner. This is precisely what Title VII intends to strike down. Griggs v. Duke Power Co., 401 U.S. 424, 91 S.Ct. 849, 28 L.Ed.2d 158.

We conclude that Liberty Mutual’s income protection plan violates Title VII of the 1964 Civil Rights Act by excluding pregnancy benefits from coverage while including other kinds of temporary disabilities.

MATERNITY LEAVE

Prior to September 1970, appellant’s female employees who became pregnant were terminated after the eighth month with no right to re-employment. This policy was modified in September 1970 and again in November 1971 to allow a pregnant woman “to work for as long as her physician certifies her ability to work.” This is presently the company’s policy. It further allows a woman who has been employed by the company for one year to take a maternity leave of absence of six months from when the leave commences, or three months from the date of delivery, whichever comes first. The employee must return to work by or within the time limit or lose her job. This time limitation is applied only to maternity leaves and not to any other leave of absence for other temporary disabilities. In essence, this means a person who suffered from a temporary disability other than pregnancy would return to work after recovery; however, a woman with pregnancy-related disabilities must return to work within the specified time limit or be fired.

As we did in our analysis of pregnancy benefits and for the same reasons, we allow great deference to the EEOC guidelines. Also in keeping with our pri- or analysis, we will view the company’s leave policies, keeping in mind that pregnancy is to be treated as any other temporary disability.

The EEOC guidelines concerning the leave issue are in pertinent part as follows:

“ * * * [E]mployment policies and practices involving matters such as the commencement and duration of leave, the availability of extensions, the accrual of seniority and other benefits * * * shall be applied to disability due to pregnancy or childbirth on the same terms and conditions as they are applied to other temporary disabilities.” 29 C.F.R. § 1604.10(b).
“Where the termination of an employee who is temporarily disabled is caused by an employment policy under which insufficient or no leave is available, such a termination violates the Act if it has a disparate impact on employees of one sex and is not justified by business necessity.” 29 C.F.R. § 1604.10(c).

The guidelines also provide that it is a violation of Title VII for an employer to discriminate between men and women with regard to “fringe benefits,” of which leaves are one. 29 C.F.R. § 1604.-9(a) & (b). It would appear, under the EEOC’s interpretation, that Liberty Mutual’s maternity leave policy violates Title VII. Pregnancy, as a temporary disability, must be treated no differently than any other disability. We are not requiring appellant to give to women any more than it already gives to men. Since appellant provides leaves for all temporary disabilities, it must also provide leaves for pregnancy on the same basis. In cases that have dealt with Title VII, courts have held that any policy that operates to totally exclude women is violative of the Act. Willingham v. Macon Telegraph Pub. Co., 482 F.2d 535 (C.A.5, 1973); Sprogis v. United Air Lines, Inc., 444 F.2d 1194 (C.A.7, 1971); Weeks v. Southern Bell Tel. & Tel. Co., 408 F.2d 228 (C.A.5, 1969). In essence Liberty Mutual has two leave policies— one for pregnancy and one for other temporary disabilities. Since pregnancy is a disability common only to women, to treat it differently by applying a separate leave policy is sex discrimination. Liberty Mutual argues that since most women are recovered within six weeks and that most women do not return to work after childbirth, the company is justified in maintaining the present maternity leave policy. We disagree. This attitude is precisely what Congress intended to strike down. Discrimination based on stereotypes or overly categorized distinctions between men and women are forbidden by Title VII. Bowe v. Colgate-Palmolive Co., 416 F.2d 711 (C.A.7, 1969); Weeks v. Southern Bell Tel. & Tel. Co., supra. Justice Marshall, concurring in Phillips v. Martin Marietta Corp., 400 U.S. 542, 545, 91 S.Ct. 496, 27 L.Ed.2d 613 (1971), recognized that Congress intended to prevent employers from relying on stereotyped characterizations in the formulation of their employment policies. The legal standard articulated by the EEOC requires that women be considered on an individual basis on their own particular capabilities and not on “characteristics generally attributed to the group.” 29 C.F.R. § 1604.2(a)(l)(ii). A policy, therefore, that is founded on generalizations, such as most women after giving birth are fully recovered within six weeks, or that most women do not return to work after giving birth, is discriminatory because it makes no provision for considering individual capabilities. Appellant’s maternity leave policy, requiring all women to return to work within three months or be fired, penalizes women because of a physiological condition found only. in their sex. There is no leeway under this leave policy to ascertain individual capabilities or characteristics. As the district court properly found, Liberty Mutual’s policy bears “no relation to the fitness of any individual female to perform the functions of her job.” 372 F.Supp. at 1161. One woman may be physically and mentally prepared to return to her job within the arbitrary time limit, while another, although wishing to return, may be unable to do so because she has not fully recovered. We believe that a leave policy that in essence operates as two distinct policies, one affecting only women, cannot stand under Title VII. A maternity leave policy that is applied to one sex only, that is based on class generalizations of that sex, and that treats pregnancy different from other temporary disabilities, is not permitted under Title VII. The district court, therefore, properly concluded, as a matter of law, that Liberty Mutual’s maternity leave policy is violative of § 703 of Title VII.

Appellant, Liberty Mutual, did not assert at trial or on its motion for reconsideration any affirmative defense, nor did it allege any evidentiary facts that could arguably give rise to a defense. And even now, appellant’s briefs merely allude to the possibility of a defense, never presenting to this court any substantive arguments that have been developed from the cases that have discussed this issue. There are a number of cases that consider the business-necessity defense, but Liberty Mutual has not cited any of them in relation to its justification argument. The district court, however, did address itself to the possibility of a bona fide occupational qualification, 372 F.Supp. at 1161. The court, relying on Weeks v. Southern Bell Tel. & Tel. Co., supra, and Rosenfeld v. Southern Pacific Co., 444 F.2d 1219 (C.A.9, 1971), concluded that Liberty Mutual did not meet its burden of proof because it did not present any evidence that could raise that defense.

It is only now, on appeal, that appellant attempts to justify its discriminatory policies. It is clear that an issue not raised at the trial and then presented for the first time on the appeal will not be considered by this court. A party who fails to plead or fails to produce evidence that raises certain issues is “precluded from raising such issues on appeal.” Cady v. Twin Rivers Towing Co., 486 F.2d 1335, 1337 (C.A.3, 1973); Bogacki v. American Machine & Foundry Co., 417 F.2d 400, 407 (C.A.3, 1969); Crompton-Richmond Co.-Factors v. Smith, 392 F.2d 577 (C.A.3, 1967).

We conclude that Liberty Mutual’s income protection plan and maternity leave policy are violative of Title VII of the 1964 Civil Rights Act. The district court properly granted summary judgment.

For the foregoing reasons, the judgment of the district court will be affirmed.

      . Section 703(a)(1) of the Civil Rights Act of 1964, 42 U.S.C. § 2000e-2(a)(l), in pertinent part provides:
      “It shall be an unlawful employment practice for an employer ... to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s race, color, religion, sex, or national origin

      . The district court’s opinion is reported at 372 F.Supp. 1146 (W.D.Pa.1974).

      . Wetzel et al. v. Liberty Mutual Ins. Co., No. 74-1515, 508 F.2d 239 (C.A.3, 1975).

      . 42 U.S.C. § 2000e-5(e).

      . “§ 1604.9 Fringe benefits
      “(a) ‘Fringe benefits,’ as used herein, includes medical, hospital, accident, life insurance and retirement benefits; profit-sharing and bonus plans; leave; and other terms, conditions, and privileges of employment.
      “(b) It shall be an unlawful employment practice for an employer to discriminate between men and women with regard to fringe benefits.
      its * sf* * *
      “(d) It shall be an unlawful employment practice for an employer to make available benefits for the wives and families of male employees where the same benefits are not made available for the husbands and for the wives of male employees which are not made available for female employees; or to make available benefits to the husbands of female employees which are not made available for male employees. An example
      of such an unlawful employment practice is a situation in which wives of male employees receive maternity benefits while female employees receive no such benefits.
      * * * sfc *
      “1604.10 Employment policies relating to pregnancy and childbirth
      * * * * * sfc
      “(b) Disabilities caused or' contributed to by pregnancy, miscarriage, abortion, childbirth, and recovery therefrom are, for all job-related purposes, temporary disabilities and should be treated as such under any health or temporary disability insurance or sick leave plan available in connection with employment. Written and unwritten employment policies and practices involving matters such as the commencement and duration of leave, and availability of extensions, the accrual of seniority and other benefits and privileges, reinstatement, and payment under any health or temporary disability insurance or sick leave plan, formal or informal, shall be applied to disability due to pregnancy or childbirth on the same terms and conditions as they are applied to other temporary disabilities.
      “(c) Where the termination of an employee who is temporarily disabled is caused by an employment policy under which insufficient or no leave is available, such a termination violates the Act if it has a disparate impact on employees of one sex and is not justified by business necessity.”

      . See the proposal by the Citizens’ Advisory Council on the Status of Women, Love’s Labors Lost: New Conceptions of Maternity Leaves, 7 Harv.Civ. Rights — Civ.Lib.L.Rev. 260, 282 (1972).

      . On Liberty Mutual’s motion for reconsideration, the district court noted that the company did not set forth any evidence in support of its argument. 372 F.Supp. at 1164.