author: BARRETT, Circuit Judge.

text:
    UNITED STATES of America, Plaintiff-Appellee, v. Paul E. REIMANN, and Maybeth Farr Reimann, his wife, Defendants-Appellants.
    No. 73-1905.
    United States Court of Appeals, Tenth Circuit.
    Argued July 10, 1974.
    Decided Sept. 9, 1974.
    As Amended on Denial of Rehearing Oct. 9, 1974.

      George R. Hyde, Dept, of Justice, Washington, D. C. (C. Nelson Day, U. S. Atty., Salt Lake City, Utah, and Wallace H. Johnson, Asst. Atty. Gen., Dept, of Justice, Washington, D. C., on the brief), for appellee.
    Paul E. Reimann, Salt Lake City, Utah (Reed H. Richards, Salt Lake City, Utah, on the brief), for appellants.
    Before BREITENSTEIN, Mc-WILLIAMS and BARRETT, Circuit J udges.
   BARRETT, Circuit Judge.

Paul E. Reimann, defendant below, appeals from a declaratory judgment rendered pursuant to 28 U.S.C.A. § 2201 in favor of the United States establishing boundaries between his property and that of surrounding national forest lands. .

Reimann is the successor in title to three tracts of land originally patented in 1907 and 1908 pursuant to homestead entries by Parker B. Pratt, Alvaro A. Pratt and Olive A. Pratt. The description of the lands patented to Parker B. Pratt is as follows:

Northeast quarter of the Southeast quarter, the South half of the Northeast quarter, and Lot One, of Section twenty-two, Township one South of Range two East of the Salt Lake Meridian, Utah, containing one hundred seventy-three and ninety-three hundredths acres.

The description of the lands patented to Alvaro R. Pratt is as follows:

Lots Two, Three, and Four of Section twenty-two in Township One South of Range two East of the Salt Lake Meridian, Utah, containing one hundred sixty-three and five-hundredths acres.

The description of the lands patented to Olive A. Pratt is as follows:

Southwest quarter of the Northwest quarter of section twenty-two and the Southeast quarter of the Northeast quarter and the East half of the Southeast quarter of section twenty-one, in Township One South of Range two East of the Salt Lake Meridian, Utah, containing one hundred sixty acres.

Each of these descriptions is followed in the patents by the phrase “according to the Official Plat of the Survey of the said Land, returned to the General Land Office by the surveyor general tt

The above properties are referred to in the record below as tracts 37, 38 and 42, located within sections 21 and 22 of Township One South, Range two East, Salt Lake Base and Meridian, Utah. Reimann acquired his interest in these tracts in 1948. The Government holds nearly all the land surrounding these tracts as part of a national forest established in 1904.

The present controversy concerns the proper location of the northern boundary line of these tracts, separating them from the national forest lands. The amount of land in dispute here involves some 56 acres.

Three official United States Government surveys form the basis of the present dispute. In 1891, A. D. Ferron contracted to survey the arable portions of this township. This resulted in a survey of most of the northern three “tiers” of sections in the Township and included a survey of the southern boundaries of sections 13 through 18 (accomplished via “offset lines”), i. e., Ferron surveyed the “top half” of the township including the “centerline” of the township. This survey was accepted as an official survey in March, 1894.

In 1902, A. P. Hanson was directed to complete the survey of the township, coordinating it with the earlier Ferron survey. Hanson, claiming he was unable to locate Ferron’s corner for sections 15, 16, 21 and 22, stated in his survey notes that he set a new corner for these sections. This new boundary between the sections in the northern and southern “halves” of the township was purportedly located some distance north of the line set by Ferron in 1891. Hanson’s survey was accepted by the General Land Office in June, 1903.

Hanson’s survey was “investigated” in 1924 by H. W. Miller and was determined by Miller and Land Office officials to be “fatally defective” due to the fact that Miller had found only a few of Hanson’s monuments, and also because Miller considered it infeasible for Hanson to have surveyed the area he claimed to have surveyed within the time frame available to him. In 1926 Miller was instructed to “re-establish” the southern boundaries of sections 13 to 18 as surveyed by Ferron in 1891 and to accomplish an “independent resurvey” of those areas surveyed by Hanson “with the usual tract segregations for valid or patented entries in this area, which cannot be conformed to the lines of resurvey.” Miller thereupon reestablished the southern boundaries of sections 13 to 18 on the line of the 1891 Ferron survey, thereby moving the northern boundary of Hanson’s survey of Section 22 to a position some distance south of where this line had been placed by Hanson. Miller made no attempt to make “the usual tract segregations” for any patented land which, under the Hanson survey, would have been partially located north of the Ferron “centerline”, rather he “terminated” the northern boundaries of such tracts on the 1891 Ferron “centerline.”

According to appellant Reimann the end result of this “re-establishment” of the Ferron “centerline” of the township was an unlawful condensing of the tracts patented to his predecessors since their lands, as originally patented, were bounded on the north with reference to the Hanson survey of the centerline, such survey being the only official survey of Sections 21' and 22 in effect at the time of patent. It is contended by Reimann that Miller in his resurvey was under a duty to “follow the footsteps” of the Hanson survey in determining the correct boundaries of the tracts here in question (i. e., to accomplish the “tract segregations” as ordered in his resurvey instructions), in order to protect the vested rights of the patentees. Instead, Miller refused to follow Hanson’s “footsteps” north of the 1891 Ferron “center-line” resulting in an illegal infringement of the vested rights of the patentees.

The Government contends, however, that the Ferron survey of the “center-line” of this township, being senior in time, has always stood as the correct northern boundary of the lands patented in sections 21 and 22 overriding, in effect, the mistaken junior line established by Hanson. Under this theory, the Miller resurvey resulted in no interference with vested rights of patentees since the descriptions in their patents were controlled by the official survey in effect at that time, which, due to its priority in time, was the Ferron survey (at least as to the northern boundaries of these tracts) and the Miller resurvey merely re-established these boundaries.

The primary issue on this appeal centers upon which of these two surveys, the 1891 Ferron or the 1902 Hanson, controls as to the description of the boundaries in the patents to these tracts.

At the outset, we note that counsel have cited but one ease directly in point with the problem we are faced with here, nor have we uncovered other' controlling authority through our own research.

We are faced preliminarily with two seemingly inconsistent general rules: (1) “where the lines of senior and junior surveys conflict the lines of the senior survey control . . . .”11 C.J.S. Boundaries § 61, p. 633; (2) “the survey last accepted by the government before parting with title is the controlling survey.” 73 C.J.S. Public Lands § 35, p. 684.

The Government, relying upon the first rule quoted above, contends that the first survey of the common boundary between sections 13 to 18 and 19 to 24 — including the corner point where sections 15, 16, 21 and 22 meet — was the Perron survey, and under this rule the Ferron survey controls the location of this boundary notwithstanding the conflicting (junior) Hanson survey. In support of this contention the Government cites to Cragin v. Powell, 128 U.S. 691, 9 S.Ct. 203, 32 L.Ed. 566 (1888); United States v. Weyerhaeuser Company, 392 F.2d 448 (9th Cir. 1967), cert. denied 393 U.S. 836, 89 S.Ct. 112, 21 L. Ed.2d 107 (1968)’; Van Amburgh v. Randall, 115 Mo. 607, 22 S.W. 636 (1893); and United States v. Macmillan, 331 F.Supp. 435 (D.C.Nev.1971).

Cragin v. Powell, supra, is not supportive of the rule as interpreted by the Government since there the Court merely invalidated a conflicting junior survey which was conducted after a patent based upon the original survey had been issued. In the present case both conflicting surveys were conducted prior to the issuance of any patent and at a time when all the land was still in the Government’s hands. United States v. Weyerhaeuser, supra, did not involve conflicting overlapping survey lines and is not applicable. Van Amburgh v. Randall, supra, is likewise distinguishable on its facts from the present case.

United States v. Macmillan, supra, is the strongest case in support of the Government’s contention that where two officially accepted surveys conflict and result in an overlap, the survey which is senior in time controls. However, as authority for that rule the opinion cites four cases [Commissioner of Highways v. Beebe, 61 Mich. 1, 27 N.W. 713 (1886); Snodgrass v. Snodgrass, 212 Ala. 74, 101 So. 837 (1924); State v. Talkington, 274 S.W. 314 (Tex.Civ.App.1925); and Houston Oil Co. v. Brown, 202 S.W. 102 (Tex.Civ.App.1917)], none of which involved a conflict between two officially approved government surveys, both of which were conducted prior to title passing from the government. We have found no other authority supportive of the rule as interpreted by the Government applicable to a factual situation such as the one in the case at bar.

Prior to title passing from the United States, it is undisputed that the Government has the power to survey and resurvey, establish and re-establish boundaries on its own lands. Lane v. Darlington, 249 U.S. 331, 39 S.Ct. 299, 63 L.Ed. 629 (1919); 43 U.S.C.A. § 772. But once patent has issued, the rights of patentees are fixed and the government has no power to interfere with these rights, as by a corrective resurvey. Cragin v. Powell, supra; United States v. State Investment Company et al., 264 U.S. 206, 44 S.Ct. 289, 68 L.Ed. 639 (1924); Ashley v. Hill, 150 Colo. 563, 375 P.2d 337 (1962) ; 43 U.S.C.A. § 772. The government has no power to control “previously disposed of lands.” Moore v. Robbins, 96 U.S. 530, 24 L.Ed. 848 (1877); Hardin v. Jordan, 140 U.S. 371, 11 S.Ct. 808, 35 L.Ed. 428 (1891); Marr v. Shrader, 142 Colo. 106, 349 P.2d 706 (1960). These authorities support the rule that the government is bound by the last official survey accepted prior to its divestment of title. Since no patents had been issued between the time of the Ferron and Hanson surveys, the government was empowered in 1902 to re-establish the boundaries on its own land, including the “centerline” of this township which is the boundary of the tracts in question. It exercised this power when it accepted the Hanson survey with its new location of the corner monument for sections 15, 16, 21 and 22. Since the government possessed this power to change its boundaries, it cannot now be heard to complain that the Hanson survey was void on the ground that it “overlapped” and, in fact, caused a change in these boundaries.

The Trial Court mistakenly relied upon the declaration by Miller and the Land Office officials to the effect that the Hanson survey was “fatally defective.” This determination by the Land Office was immaterial. The government retains no power to nullify a patent, nor the survey upon which it is based, once patent has issued. As stated in Moore v. Robbins, supra:

. in all this there is no place for the further control of the Executive Department over the title. The-functions of that department necessarily cease when the title has passed from the government. And the title does so pass in every instance where, under the decisions of the officers having authority in the matter, a conveyance, generally called a patent, has been signed by the President, and sealed, and delivered to and accepted by the grantee. It is a matter of course that, after this is done, neither the secretary nor any other executive officer can entertain an appeal. He is absolutely without authority. If this were not so, the titles derived from the United States, instead of being the safe and assured evidence of ownership which they are generally supposed to be, would be always subject to the fluctuating, and in many cases unreliable, action of the land-office. No man could buy of the grantee with safety, because he could only convey subject to the right of the officers of the government to annul his title.
If such a power exists, when does it cease? There is no statute of limitations against the government; and if this right to reconsider and annul a patent after it has once become perfect exists in the Executive Department, it can be exercised at any time, however remote. It is needless to pursue the subject further. The existence of any such power in the Land Department is utterly inconsistent with the universal principle on which the right of private property is founded.
96 U.S. 530 at 533-534.

While the finding that the Hanson survey was “fatally defective” provided sufficient grounds for the government to order a resurvey for its “own information”, it did not empower the government or its agent Miller with the authority to disregard or “nullify” — to the detriment of intervening patentees— that portion of the Hanson survey which conflicted with the Ferron survey.

The fact that Hanson was mistaken in his location of the boundary here in dispute is likewise immaterial in relation to the instant controversy. Being the controlling survey, its location of the boundary between the northern and southern “halves” of the Township takes precedence, even if erroneous, (or “largely fictitious” and “fatally defective” as found by the Trial Court), insofar as the rights of patentee whose patent was issued thereunder are concerned. United States v. State Investment Company, supra; United States v. Doyle, 468 F.2d 633 (10th Cir. 1972); See Ben Realty Co. v. Gothberg, 56 Wyo. 294, 109 P.2d 455 (1941). Furthermore, as concerns the Trial Court’s acceptance of the Miller resurvey, it would be inequitable to permit the government to direct the taking of, and to accept a survey (i. e., the Hanson survey), recording it with knowledge that it would be relied upon by patentees, and then grant the government the right to later correct its error, ex parte, to the detriment of those who did in fact, and in good faith, rely upon it.

It is noteworthy, in an equitable sense, that where the second survey has deviated from a line established by the first survey so as to create a “hiatus” of land between the common lines of the two surveys and where the patentee’s lands border on the line created by the second survey and would be enlarged if he were bound by the description in the first survey, that in such cases the government contends that the patentee is bound by the later survey under which his patent was issued, i. e., the same survey which the government here contends is “junior” and not controlling where the surveys overlap and reliance upon the second survey would work to the benefit of the patentee. United States v. Macmillan, supra; United States v. Weyerhaeuser Company, supra.

We hold that the Hanson survey, being the last accepted survey prior to the issuance of these patents in 1907 and 1908, is the controlling survey as to the location of the northern boundaries of these tracts. See Churchill Co. v. Beal, 99 Cal.App. 482, 278 P. 894 (1929); Phelps v. Pacific Gas & Electric Co., 84 Cal.App.2d 243, 190 P.2d 209 (1948); Larson v. Larson, 89 Cal.App.2d 846, 202 P.2d 121 (1949).

The Trial Court relied upon the fact that the descriptions in these patents were by “aliquot parts”, i. e., by fractional parts of the rectangular survey system, and that appellant Reimann could not rely upon the acreage described in the patents. We do not dispute this finding. Rather, we hold that these “aliquot parts” must be determined in accordance with the Hanson survey and not the Ferron survey.

Having determined the Hanson survey to be controlling, and that in making “tract segregations” to preserve prior patented land Miller should have retraced the Hanson lines even north of the Ferron “centerline”, we are next faced with the difficult problem that the Hanson monuments along the northern boundary of these tracts were not located by Miller in 1924 nor by Reimann’s own surveyor. It is well settled that the notes, lines and descriptions in an accepted survey are considered a part of the Patent. Cragin v. Powell, supra; Walton v. United States, 415 F.2d 121 (10th Cir. 1969). Further, it would appear to be the rule that where monuments cannot be located they may be reestablished from the survey field notes, and if they can be so re-established they will not be considered “lost” monuments. United States v. Doyle, supra; 6 Thompson on Real Property, §§ 3044, 3045 (1962); 43 U.S.C.A. § 752; Cornia v. Putnam, 26 Utah 2d 354, 489 P.2d 1001 (1971); Vaught v. McClymond, 116 Mont. 542, 155 P.2d 612 (1945); Henrie v. Hyer, 92 Utah 530, 70 P.2d 154 (1937).

Appellant Reimann contends that by using the few monuments from Hanson’s survey that were found, and applying the descriptions of course and distances in Hanson’s field notes, the northern boundary of these tracts established by Hanson can be definitely ascertained. We are unable to make that determination based upon this record.

Finally, the following undisputed facts are noted from the pretrial order: (1) the southern boundary line of tract 38 of the 1927 tract resurveys was and is the south line of lots 2, 3 and 4 of the 1902 Hanson survey; (2) that the north-south lines of the 1927 tract resurveys were correctly located in their position east-to-west to constitute substantial portions of north-south boundary lines of the patented tracts; and (3) that the dispute between the parties arose as to the proper lengths of those north-south lines, and that defendants claimed that in conducting tract resurveys in 1927 Miller shortened the north-south lines not only on the north but also on the south, thereby omitting patented acreage from tracts 37, 38 and 42. Miller was clearly under an obligation to make “tract segregations” for patented lands south of the disputed center line of this township. We hold that the Hanson survey, if it can be established, is also controlling in determining the southern boundaries of tracts 37 and 42.

We reverse the Trial Court’s determination that the Miller resurvey controls the northern and southern boundaries of these patented tracts, and remand for a determination of the boundaries of the controlling Hanson survey from the field notes of that survey, and such other evidence requisite to such determination, and for the further determination as to whether the Reimann properties acquired in 1948 and subsequently are within the boundaries of the Hanson survey.

T. 1 S., R. 2 E.

LEGEND:

H 'X.-x-jC-fl Ferron survey line; re-established by Miller.

----- Hanson survey line.

o Purported "new corner" established by Hanson.

      . See tlie attached explanatory diagram showing the approximate location of these surveys.

      . That the trial court did not appreciate this distinction is evident from the following passage in the record:

        The Court: I don’t think it makes any difference what plat the patent is based upon. The patent is a conveyance, and it has a description in it, and that description is the description of the only land you have a patent to.

        Mr. Richard: But it is based on this [the Hanson plat] your Honor.

        The Court: I don’t care what it is based on. I don’t think in this lawsuit it makes a whit of difference what it is based on. (Tr., Yol. 1, p. 157).

       This Diagram is for illustrative purposes only, and does not purport to be an accurate description of the actual boundaries disputed in this case.


source: Caselaw Access Project

author: WILLIAM E. DOYLE, Circuit Judge.

license: Public Domain

text:
    Steven C. DRAEGER, By and Through Norman A. Draeger, guardian ad litem, Plaintiff-Appellee, v. GRAND CENTRAL, INC., and David Park, Defendants-Appellants.
    No. 73-1819.
    United States Court of Appeals, Tenth Circuit.
    Sept. 12, 1974.
    Rehearing Denied Oct. 16, 1974.

      Paul L. Badger of McMillan & Browning, Salt Lake City, Utah, for plaintiff-appellee.
    H. Wayne Wadsworth of Hanson, Wadsworth & Russon, Salt Lake City, Utah, for defendants-appellants.
    Before HILL, MOORE and DOYLE, Circuit Judges.

       Honorable Leonard P. Moore, Senior Judge, United States Court of Appeals, Second Circuit, New York, New York, sitting by designation.

   WILLIAM E. DOYLE, Circuit Judge.

In this diversity and civil rights action in which the jury returned a verdict in favor of the plaintiff awarding $4,000 damages on each of two claims, one for false imprisonment and one for civil rights violation, the defendant department store and the off-duty police officer employed by it seek reversal.

Various points are relied on. Defendants contend:

First, that defendant Park is immune from false arrest liability by the relevant Utah statute allowing reasonable investigation by police officers and merchants in the course of prevention of shoplifting.

Second, that Park’s conduct was not so aggravated as to rise to the level of a violation of the constitutional rights of the plaintiff.

Third, that even assuming that the officer in fact and in law violated the plaintiff’s civil rights, nevertheless, the store is not to be held vicariously liable under 42 U.S.C. § 1983 for the actions of the officer.

The facts are not complicated: defendant-appellant David Park is regularly employed as a police officer in Orem, Utah. At the time of the incident he was engaged as a security guard for the department store. An off-duty policeman in Utah is authorized to prevent and detect crime and to make arrests of persons who commit crimes in the officer’s presence or view.

The incident in question occurred on October 25, 1971, at or about 6:00 p. m. Defendant Park was engaged in his off duty employment as security guard. From a catwalk near the sound room area of the store he was observing patrons by focusing binoculars on them. At the time, he was dressed in civilian clothes. Plaintiff Draeger and a companion had been in the sound room going through various tapes. Defendant Park observed them passing several tapes back and forth. He thought that he saw one of the tapes disappear into Drae-ger’s jacket pocket, so when the latter and his companion left the sound room Park climbed from the catwalk and at the front door identified himself to them and stated that they were under arrest. There is some dispute about the exact statement made. Defendant Park testified that his statement was “I would like to talk with you a minute. I am a security officer.” Simultaneously he displayed his badge. There is no dispute about Park’s action in placing the plaintiff under arrest. Plaintiff did not submit to the arrest and the evidence indicates that Park twisted his arm behind his back and forcibly took him outside the store to a side entrance and down a hallway to the security office, where the search was conducted. No tapes were found. When the investigation was completed the boys were allowed to leave. They went to the Orem City Police Department and tried to file a complaint. Following this, they proceeded to the Útah Valley Hospital in Provo, Utah in an effort to get treatment for plaintiff’s arm.

The evidence established that there was slight injury to the plaintiff’s arm and that this required physical therapy treatments and caused the plaintiff to wear a sling for approximately a week.

As a result of the incident, the action was filed by the plaintiff through his father as guardian. Jurisdiction was based on both diversity and 42 U.S.C. § 1983. Compensatory damages in the amount of $50,000 and punitive damages in the amount of $50,000 were sought on each of plaintiff’s three claims.

I.

At the outset we consider appellants’ contention that the relevant Utah immunity statutes fully protected the defendant Park from liability. These provisions protect police officers, merchants or merchant’s employees from both criminal and civil liability if they have arrested or detained individuals on reasonable and probable grounds who are believed to have committed shoplifting violations.

Defendants contend that the actions were clearly within the protective scope of the quoted statutes and also maintain that the instructions dealing with the subject were inadequate.

A prime requisite to the operation of these statutes is the existence of reasonable and probable ground for the arrest. The evidence is not so clear as to require that this question be treated as one of law. Whether reasonable cause and probable cause were established was obviously an issue of fact. These elements have to be determined by the trier of the facts from a full and thorough consideration of all of the evidence bearing on the question.

As to the alleged inadequacy of the instructions, it is important to note that the particulars of the .instruction are largely within the discretion of the trial judge. Thus, no form of words is essential if the charge as a whole conveys a correct statement of the applicable law. 9 Wright and Miller, Federal Practice and Procedure § 2556; Tyler v. Dowell, 274 F.2d 890, 897 (10th Cir. 1960), cert. denied, 363 U.S. 812, 80 S.Ct. 1248, 4 L.Ed.2d 1153. Where, as here, specific statutory law is involved the trial judge is allowed to paraphrase the language and it is not required that he quote it directly so long as the meaning is communicated accurately. McDonnell v. Timmerman, 269 F.2d 54, 62 (8th Cir. 1959); La Barge Water Well Supply Co. v. United States, 325 F.2d 798, 803 (8th Cir. 1963). The defendants’ principal complaint is that the judge failed to read the statute; the reading is not, however, the best approach. Indeed, it has been considered in some instances to be erroneous. 9 Wright and Miller, Federal Practice and Procedure § 2556, footnote 1.

It is to be concluded then that the problem incident to the immunity statute is not an issue of substantive law but, rather, is predominantly a question of fact.

Since the dispute as to whether defendant Park had reasonable and probable ground to arrest the plaintiff was a question of fact, the jury’s verdict constituted a determination that reasonable and probable ground for the plaintiff’s arrest was nonexistent and so the immunity statutes do not furnish an effective basis for reversal. The instruction dealing with probable cause was adequate.

II.

The contention of defendants that the defendant Park’s conduct was not sufficiently aggravated or outrageous to constitute an invasion of the plaintiff’s civil rights is also lacking in merit. The main argument here is that the jury found for the defendants on the claim of assault and battery, including the use of excessive force in making the arrest. It is said that the only thing remaining is the fact that the plaintiff was arrested in front of the store and subjected to embarrassment and humiliation incident to this act and that he was detained against his will for a very short period of time. This, they say, is inadequate.

Our decision in Wells v. Ward, 470 F.2d 1185 (10th Cir. 1972) is cited in support of the contention that the action is frivolous. But there, the plaintiff, a law student, who had parked his car in a prohibited place in front of the Utah University Law School had refused to cooperate in any degree with the officer, and we there said that there are differences between common law torts and violations of the rights guaranteed by the Fourteenth Amendment to the Constitution of the United States. We noted that often the same set of facts give rise to remedies under both the federal and the state common law, and we added:

* * * The differences are though in terms of not only the requisite elements under § 1983, but also in the gravity of the right which has been invaded. For example, under state common law, the mere placing of another in apprehension of bodily harm is an assault and the mere unprivileged touching of another is a battery. Also, the slightest interference with personal liberty is a false imprisonment. It does not follow that all such invasions however trivial or frivolous serve to activate remedies under the due process clause of the Fourteenth Amendment as well as those parts of the Bill of Rights which are incorporated in and made a part of due process.

470 F.2d at 1187.

Here, the factual structure is more substantial than in Wells v. Ward. The facts establish a false arrest, search and confinement in which no justification is apparent. The plaintiff was roughed up some and was detained in the security room for at least a short period of time. It is sufficiently serious to constitute a violation of rights guaranteed by the Fourteenth Amendment.

III.

Generally speaking, the doctrine of vicarious liability or respondeat superior has been ruled out in cases arising under the Federal Civil Rights statutes. Jennings v. Davis, 476 F.2d 1271 (8th Cir. 1973); Adams v. Pate, 445 F.2d 105 (7th Cir. 1971); Ashenhurst v. Carey, 355 F.Supp. 1101 (N.D.Ill.1973); Barnes v. Dorsey, 354 F.Supp. 179 (E.D.Mo.1973); Boyden v. Troken, 352 F.Supp. 722 (N.D.Ill.1973).

In Jennings v. Davis, supra, an effort had been made to subject the police chief to liability because the act in question had occurred in close proximity to him. The court conceded that § 1983, being a remedial statute, was entitled to a liberal construction, but also ruled vicarious liability to be inappropriate. The Court of Appeals for the Eighth Circuit added: “We . . . expressly reject the application of the doctrine [of respondeat superior] on this set of facts, as have the vast majority of federal courts in cases such as this.” [Citations omitted.] 476 F.2d at 1274.

Ever since the Supreme Court’s decision in Monroe v. Pape, 365 U.S. 167, 81 S.Ct. 473, 5 L.Ed.2d 492 (1961), the law has been clear that municipalities are not included within the ambit of § 1983. A more recent decision along the same line is City of Kenosha v. Bruno, 412 U. S. 507, 93 S.Ct. 2222, 37 L.Ed.2d 109 (1973).

In subsequent decisions courts have extended the reasoning of Monroe v. Pape to other state and municipal agencies. See Lehman v. City of Pittsburgh, 474 F.2d 21 (3d Cir. 1973) (Civil Service Commission held not a “person” under the Act); Fischer v. Cahill, 474 F.2d 991 (3d Cir. 1973) (New Jersey prison medical department held not a “person” under § 1983); Anthony v. Cleveland, 355 F.Supp. 789 (D.Hawaii 1973) (state university held not a “person” under the Act).

In instances in which a superior official has been held liable, he has had some actual participation in the incident so that it is not vicarious liability. There is very little law on our question as to whether a private entity having a police officer in its employ is liable on a vicarious liability basis. In our view, there is less reason for imposing vicarious liability here since the entire thrust of § 1983 requires, consistent with the Fourteenth Amendment, official state action. The civil rights protected are guaranteed by the Fourteenth Amendment to the Constitution of the United States and a private entity does not have the requisite official character and thus cannot be reasonably concluded to be representing the state. The Fourteenth Amendment does not, of course, protect against private action.

In one case cited by plaintiff-appellee, DeCarlo v. Joseph Horne & Co., 251 F. Supp. 935 (W.D.Pa.1966), the court did not grapple with the issue of vicarious liability in relationship to a private person. Because of this the case cannot be considered an authority in the present context.

We are of the opinion then that the appellant department store cannot be held liable solely as a master or principal. If the store were an active participant it could still not be state action. Therefore, the aggrieved person must look to common law actions for relief.

In conclusion we are unable to agree with the arguments of the appellant Park that he is entitled to relief from the jury verdict, nor can we see any basis for relief of Grand Central, Inc. from liability on the false arrest or false imprisonment claim. As we have noted, however, we consider the judgment against Grand Central on the civil rights claim to be out of harmony with the applicable constitutional provision and the federal statute enacted pursuant thereto.

Accordingly, the judgment of the district court is affirmed in part and reversed in part; the cause is remanded with instructions to dismiss the claim growing out of Title 42 U.S.C. § 1983 as against Grand Central, Inc. (the third claim for relief).

      . The terms of these provisions are as follows :
      A peace officer, or a merchant, or a merchant’s employee, servant or agent, who has reasonable and probable ground for believing that goods held or displayed for sale by the merchant have been taken by a person with intent to steal may, for the purpose of investigating such unlawful act and attempting to effect a recovery of said goods, detain such person in a reasonable manner for a reasonable length of time. (Sec. 77-13-30, U.C.A., 1953, as amended).
      A peace officer or a merchant, or a merchant’s employee, servant or agent, who causes such detention of a person as provided in section 77-13-30, or who causes the arrest of a person for larceny of goods held or displayed for sale shall not be criminally or civilly liable where the peace officer, or merchant, merchant’s employee, servant or agent has reasonable and probable ground for believing that the person detained or arrested committed larceny of goods held or displayed for sale. (Sec. 77-13-32, U.C.A., 1953, as amended) .

      . There is a substantial body of law which establishes that warrantless arrest without probable cause, or warrantless search without probable cause, will support an action for damages under 42 U.S.C. § 1983. Pierson v. Ray, 386 U.S. 547, 87 S.Ct. 1213, 18 L.Ed.2d 288 (1967) ; Giordano v. Lee, 434 F.2d 1227 (8th Cir. 1970), cert. denied, 403 U.S. 931, 91 S.Ct. 2250, 29 L.Ed.2d 709 (1971) ; Sexton v. Gibbs, 327 F.Supp. 134 (N.D.Tex.1970), aff’d, 446 F.2d 904 (5th Cir. 1971), cert. denied, 404 U.S. 1062, 92 S.Ct. 733, 30 L.Ed.2d 751 (1972).


author: GARTH, Circuit Judge.

text:
    HMW INDUSTRIES, INC., Petitioner-Appellee, v. Rueben B. WHEATLEY, Commissioner of Finance, Government of the Virgin Islands, Respondent-Appellant.
    No. 74-1092.
    United States Court of Appeals, Third Circuit.
    Argued April 22, 1974.
    Decided Sept. 25, 1974.

      Joseph L. Costello, Bryant, Costello & Burke, Christiansted, St. Croix, V. I., James R. Wiener, David H. Brockway, Donovan, Leisure, Newton & Irvine, New York City, for petitioner-appellee.
    Verne A. Hodge, Atty. Gen., Gordon S. Gilman, Asst. Atty. Gen., Charlotte Amalie, St. Thomas, V. I., for respondent-appellant.
    Before ALDISERT, ADAMS and GARTH, Circuit Judges.
   OPINION OF THE COURT

GARTH, Circuit Judge.

This appeal involves the proper income tax treatment of non-taxable subsidies granted under Act 224 of the Virgin Islands Sessions Laws (1957). The question presented is whether such subsidies (non-taxable when paid) reduce the basis of property acquired with the subsidy payment, so that upon liquidation and distribution of that property (from subsidiary to parent), the reduced property basis results in increased income and hence additional taxes to the parent. The answer to this question depends upon whether the non-taxable subsidies are to be considered as “non-shareholder contributions to capital” subject to the provisions of § 362(c)(2) of the Internal Revenue Code, or whether they retain their non-taxable character despite liquidation and distribution. The district court held that the subsidy payments made to Standard Time Corporation (“STC”) did not constitute non-shareholder contributions to capital such as to require a reduction in asset basis. We agree.

The facts are undisputed. HMW, the taxpayer-petitioner, is a Pennsylvania corporation, formerly known as Hamilton Watch Co. Prior to August 4, 1969, all of the outstanding stock of STC, a Virgin Islands corporation engaged in the watch manufacturing business in St. Croix, was owned by petitioner. On August 4, 1969, STC was liquidated and its assets distributed to petitioner in a transaction qualifying under § 332 of the Internal Revenue Code for non-recognition of gain or loss. Under § 334(b)(1) of the Code, petitioner’s tax basis in the assets received from STC was the same as STC’s tax basis in those assets prior to the liquidation. HMW filed a Virgin Islands income tax return for the period August 5, 1969 through January 31, 1970, using STC’s ending (or liquidation) inventory tax basis as its beginning inventory tax basis. Thereafter, respondent asserted a deficiency of $181,548.80 in petitioner’s income taxes for fiscal 1970. The theory upon which the deficiency was assessed appears in the “Explanation of Items” section of the assessment as follows:

Included in the cost of goods sold section was beginning inventory of $346,778.11. This was the same amount as the ending inventory on the subsidiary’s [STC] return before liquidation. The question was raised as to whether the amount was correctly includable in cost of goods sold.
* * * •» * -X-
Subsidy received or accrued during the period ending 8/4/69 was deemed to be in excess of $395,600.00. This is broken down into the following categories :
* * •X- * -X-Income Tax ■X- -X-243,335.34 * -X-X-
Examination revealed that during a time period before liquidation, the only property acquired by Standard Time was inventory. Since the subsidy exceeded the inventory at the time of liquidation, the basis of the inventory in the hands of the subsidiary was zero. When the inventory was transferred to the division [HMW], the same basis should have been used, which had a zero basis. This adjustment resulted in a substantial increase in income.

The asserted deficiency is the result of the Commissioner’s contention that the subsidies received by STC reduced STC’s basis in its inventory, and consequently reduced HMW’s carry-over inventory basis. This reduction in the basis of HMW’s opening inventory had the effect of decreasing HMW’s cost of goods sold, thereby increasing its taxable income for the fiscal year ended January 31, 1970. Thus, HMW is liable for the deficiency assessed only if the subsidies paid to STC are found to be non-shareholder contributions to capital.

I.

Whether the subsidies paid here are non-shareholder contributions to capital as the Commissioner contends or a reduction in taxes without more, as is contended by the taxpayer, requires an examination of the history and purpose of the relevant tax laws. By the Naval Appropriation Act of July 12,1921,

The income-tax laws in force in the United States of America and those which may hereafter be enacted shall be held to be likewise in force in the Virgin Islands of the United States, except that the proceeds of such taxes shall be paid into the treasuries of said islands

This provision was incorporated into the Virgin Islands Code and is the basis of the Virgin Islands income tax law. Thus, 33 V.I.C. § 1931(15) provides:

“Virgin Islands income tax law” means so much of the United States Internal Revenue Code as was made applicable in the Virgin Islands by the Act of Congress entitled “An Act making appropriations for the naval service for the fiscal year ending June 30, 1922, and for other purposes,” approved July 12, 1921 (48 U.S.C. § 1397).

As we recognized in Dudley v. Commissioner of Internal Revenue, 258 F.2d 182 (3d Cir. 1958), the purpose behind the enactment pf the Naval Appropriation Act was to impose “upon the inhabitants of the Virgin Islands . a territorial income tax, payable directly into the Virgin Islands treasury, to assist the Islands in becoming self-supporting.” 258 F.2d at 185. Thus, the effect of the above quoted provisions was to create a separate taxing structure for the Virgin Islands “mirroring” the provisions of the federal tax code except as to those provisions which are incompatible with such a separate tax structure. Dudley, supra; cf. Chicago Bridge and Iron Co. v. Wheatley, 430 F.2d 973 (3d Cir. 1970), cert. denied, 401 U.S. 910, 91 S.Ct. 873, 27 L.Ed.2d 809 (1971).

In 1957, Act No. 224, Virgin Islands Sessions Laws was enacted to encourage new business enterprises in the Virgin Islands. Its preamble stated:

Whereas it is deemed of great benefit to the people of the Virgin Islands, as well as to the economy of the Virgin Islands, to establish as many self-sustaining enterprises in the Virgin Islands as is practical — to attract additional investment capital — to promote tourism — to promote the building of hotels, guest houses, and housing projects — to the end that the economic life of the Virgin Islands may be as diverse and stable as possible, and the people of the Virgin Islands trained and employed in investments, in finance, in .modern techniques of production, mechanical skills, services and trades; and
Whereas it is deemed to be in the public interest to extend such inducements and render such aid as will encourage persons, firms and corporations to establish and develop new business enterprises; to make additional investment capital available to new and existing business; to promote tourism and the building of hotels, guests houses and housing projects.

Act No. 224’s “Declaration of Policy” provided among other things:

(d) To achieve this objective, exemptions from payment of certain taxes or fees and the granting of special subsidies shall be allowed to new business enterprises and to such other persons and corporations as hereinafter provided, and
(e) In order that the encouragement tendered by this Act in the form of subsidies for the promotion of the business and industrial development of the Islands may be an incentive, having a real and unmistakably sure basis, the Government of the Virgin Islands hereby declares that it considers all orders granting subsidies and tax exemptions made available under the provisions of this Act as being in the nature of a contract or agreement between the Government of the Virgin Islands and the persons or corporations receiving the benefit of the subsidies or tax exemptions, and that it will not adopt any legislation which may impair or limit such subsidies or tax exemptions granted hereunder or which may defeat the purpose of this Act.

To achieve the stated objectives and policy aims, the Act § 6(b) among other things provided that each qualifying corporation “shall also be entitled to receive a nontaxable subsidy in an amount equal to Seventy Five (75%) Per Cent of the Income Tax paid into the Treasury of the Virgin Islands. it

In 1960, Congress amended Title 26 to include Section 934. It is apparent that Congress was concerned with the attempt by the Virgin Islands legislature to reduce the income tax liability of certain taxpayers “with respect to the tax attributable both to income from sources within the Virgin Islands and from sources within the United States.” (emphasis added). Both the Senate and House Reports indicate that Congress felt that Act No. 224 had achieved “substantially the same effect” as a “rebate” of income taxes but that the Act failed to limit the “rebate” or reduction in tax to just Virgin Islands income. It, thus, enacted section 934(a) which provides that:

Tax liability incurred to the Virgin Islands pursuant to this subtitle shall not be reduced or remitted in any way, directly or indirectly, whether by grant, subsidy, or other similar payment. .

However, recognizing that the purpose of Act No. 224 was the economic development of the Virgin Islands, it did not find objectionable a properly limited reduction in income tax liability as an incentive for new businesses to locate there. Therefore, a number of exceptions to the general rule stated in section 934(a) were provided.

One of these exceptions is section 934(b) which provides:

(b) Exception for certain domestic and Virgin Islands corporations. — In the case of a domestic corporation or a Virgin Islands corporation, subsection (a) shall not apply (if the information required by subsection (d) is supplied) to the extent such corporation derived its income from sources without the United States if the conditions of both paragraph (1) and paragraph (2) are satisfied:
(1) Three-year period. — If 80 percent or more of the gross income of such corporation for the 3-year period immediately preceding the close of the taxable year (or for such part of such period immediately preceding the close of such taxable year as may be applicable) was derived from sources within the Virgin Islands; and
(2) Trade or business. — If 50 percent or more of the gross income of such corporation for such period or such part thereof was derived from the active conduct of a trade or business within the Virgin Islands.
For purposes of the preceding sentence, the gross income of a Virgin Islands corporation, and the sources from which the income of such corporation is derived, shall be determined as if such corporation were a domestic corporation. For the purposes of this subsection, all amounts received by such corporation within the United States, whether derived from sources within or without the United States, shall be considered as being derived from sources within the United States.

A corporation satisfying these conditions would be eligible for subsidies limited to Virgin Islands income, if appropriate subsidy legislation was enacted.

Accepting the “invitation” extended by Section 934, the Virgin Islands legislature enacted the Industrial Incentive Program which was substantially the same as Act No. 224, except that it contained the limitations required by Section 934(b). See 33 V.I.C. § 4071(a) (2).

With this brief legislative history as a backdrop, we turn to the immediate issues before us.

II.

STC, as a qualified corporation, had been granted Section 6(b) subsidies under Act No. 224 since the time such subsidies were authorized in 1959. The instant deficiency concerns only the last subsidy paid to STC prior to its liquidation.

Initially, the Commissioner argues that the Virgin Islands legislature did not have the authority to enact a tax law (Act No. 224) which conflicted with or modified any provision of the Internal Revenue Code and that Act No. 224 was just such a law because it purported to reduce the income tax liability of certain taxpayers.

In our disposition of this case we need not reach the issues of whether the Virgin Islands legislature had the authority to adopt Act No. 224 and whether Act No. 224 conflicted with other provisions of Title 26 at the time it was enacted. It is clear that Congress has the power to ratify territorial legislation, even if that legislation was unauthorized when enacted. See Swayne & Hoyt Ltd. v. United States, 300 U.S. 297, 57 S.Ct. 478, 81 L.Ed. 659 (1937) ; Rafferty v. Smith, Bell & Co., 257 U.S. 226, 42 S.Ct. 71, 66 L.Ed. 208 (1921); see also Ex Parte Endo, 323 U.S. 283, 303 n. 24, 65 S.Ct. 208, 89 L.Ed. 243 (1944).

Rationally encompassed within this broad power is the authority to ratify questionably valid enactments. In our view such ratification occurred when Congress enacted Section 934 of the Internal Revenue Code. The subsequent passage of the Industrial Incentive Program conforming with the mandate of Section 934, removed any question of the validity of the Virgin Islands tax subsidy program.

III.

What then is the effect of subsidy payments made under an appropriately authorized subsidy statute? The issue is whether the particular subsidies granted STC were non-taxable for all purposes, and did not reduce the basis of HMW’s opening inventory.

The Commissioner argues that Act No. 224 exempted only those taxes which local (Virgin Islands) legislation had authority to impose, such as gross receipts and excise taxes. The Commissioner claims that the subsidy in question cannot be termed “non-taxable” because under Section 6(b) of the Act, the subsidy is equal in amount to only 75% of the income 7 taxes paid, and is further restricted to income taxes generated from activities for which the Certificate of Tax Exemption was granted. In addition, the Commissioner argues that the subsidies are paid as long as 18 months after the payment of the income tax on which they are based and no interest is paid on a subsidy. The Commissioner contrasts this with a refund of income tax which requires the payment of interest. In effect, the Commissioner takes the position that the statutes, relied on by the taxpayer as providing outright exemptions or reductions of tax liability, provide only for deferral or postponement of tax payment.

The taxpayer argues that the thrust of the legislation is to make the subsidies tax exempt for all purposes and at all times. The taxpayer claims that a permanent tax reduction was contemplated by Act No. 224 and the Industrial Incentive Legislation. In support of its argument, HMW refers to the intent and content of the legislation; the internal consistency of the statutes; the legislative history underlying the enactment of § 934 of the Internal Revenue Code; and, a Revenue Ruling involving a similar subsidy.

As previously noted 33 V.I.C. § 4071 provides that a Certificate Holder (such as STC) under the Industrial Incentive Progi’am is entitled to certain “subsidy” payments. One such subsidy is equal to 75% of the amount of Virgin Islands income taxes paid. 33 U.S.C. § 4071(a) (2). 75% of the income taxes paid by such a taxpayer are placed in a separate fund known as the “Industrial Incentive Fund” and it is out of this fund that “subsidy payments” are made. 33 V.I.C. § 4108(a) and (b). Significantly, § 4108(b) refers to the subsidy payments as tax refunds, e.g., . . . “The proper officers are authorized, with further legislation, to make refunds of such taxes authorized under the provisions of this subtitle from money in such special account.” (emphasis supplied).

Section 4071(a)(2) of Title 33, among other things, provides that in the case of a subchapter S corporation (the income of which is taxed directly to its stockholders rather than at the corporate level), the stockholders rather than the corporation are entitled to receive the subsidy. HMW argues persuasively that a subsidy paid to stockholders can hardly be characterized as a contribution to corporate capital but rather must be regarded as a tax refund. Hence, HMW contends, the entire pattern of the Industrial Incentive Program requires that subsidies be treated as tax refunds and not as contributions to capital.

In our view, the legislative history underlying the enactment of § 934 of the Internal Revenue Code demonstrates the intent of Congress to provide for income tax exemptions as distinct from income tax deferral or postponement. Reference is made to the Senate Finance Committee Report which recognized that subsidies, such as STC’s, were “substantially the same” as a rebate of income taxes. The Report states:

Although the Revised Organic Act provided the Virgin Islands no authority to rebate income taxes paid to it . nevertheless the [Virgin Islands] legislature achieved substantially the same effect in Act No. 224 by providing subsidies ranging from 50 to 75 percent of the income taxes paid by corporations and residents with respect to certain specified types of new investment. .
* - * * * # *
For these reasons both the House and your committee in the first section of this bill, with two specified exceptions noted below, deny the right to the Virgin Islands to make any grant, subsidy, or other payment which has the effect either directly or indirectly of reducing tax liability incurred to the Virgin Islands.

S.Rep.No.1767, 86th Cong., 2d Sess. 3-4 (1960), 1960-2 Cum.Bull. 829, 830-31. See also H.R.Rep.No.1131, 86th Cong., 1st Sess. 4-5 (1959), 1960-2 Cum.Bull. 811, 813-14.

Similarly, the Conference Committee Report states:

The first exception [Section 934(b), the requirements of which were satisfied by STC] relates to United States and Virgin Islands corporations and, in general, provides that subsidies can be paid to these corporations under much the same conditions as those under which income tax exemptions are presently available in the case of U. S. corporations carrying on a trade or business in most other U. S. possessions (sec. 931 of the code).

H.R.Conf.Rep.No.2214, 86th Cong., 2d Sess. 5 (1960), 1960-2 Cum.Bull. 859, 862, U.S.Code Cong. & Admin.News, p. 3766 (emphasis added).

Our attention has also been called to Revenue Ruling 69-433, 1969-2 Cum. Bull. 153 holding that subsidies received under the Virgin Islands Industrial Incentive Program are considered to be a reduction in the amount of taxes paid to the Virgin Islands for purposes of the indirect foreign tax credit provisions of Internal Revenue Code § 902. It is argued by HMW that inasmuch as the cited ruling is the official interpretation of the United States Internal Revenue Service, it should control the Commissioner’s construction of the Code as made applicable to the Virgin Islands under 48 U.S.C. §§ 1397 and 1642. The construction which taxpayer urges upon the Commissioner is that subsidies received under the Incentive Program constitute tax refunds and not contributions to capital.

Finally, HMW points to the closing agreement executed by STC and the Department of Finance of March 14, 1968. That agreement resolved the accumulated earnings tax liability of STC for its fiscal years ending 1964 through 1966. In paragraph 6(d) of that agreement, it is provided: “Surplus resulting from subsidy payments . . . will not be considered in determining whether or not its [STC’s] earnings have been permitted to accumulate beyond the reasonable needs of its business.” It is argued that this resolution implicitly recognizes that if subsidy payments could be considered for accumulation purposes, the effect would be to render the subsidies taxable, in contrast to the intent and terms of the closing agreement.

iv.

We agree with the district court that the subsidy legislation enacted by the Virgin Islands was designed to reduce the income tax liability of Certificate holders and reduce income taxes by refunding a portion of tax paid. See 33 V.I.C. §§ 4108(b), 4071(a)(2). Nothing appears in any of the legislative enactments to indicate that a deferment of tax liability was intended rather than an exemption from tax liability. We do not believe that Congress has provided otherwise. If a subsidy is treated as the Commissioner contends, (that is, as a non-shareholder contribution to capital which must be applied in reduction of basis) the subsidy would in effect be rendered taxable, albeit at a later date. Yet, 33 V.I.C. § 4071 specifically states that all of the subsidies are to be nontaxable.

The district court pointed out:
The promise of tax reductions has been an important incentive for new businesses to locate in the Virgin Islands. In order to assure companies that this favorable treatment would not be subject to withdrawal at the whim of the legislature, it was provided that the arrangement was ‘in the nature of a contract’ between the government and the company. Act No. 224 § 1(e); 33 V.I.C. § 4001(b). Congress understood that the Virgin Islands had made these firm commitments (and would make others in the future) when it enacted Section 934 (b). To deny taxpayers who were induced to establish new businesses in the Virgin Islands the benefits they reasonably anticipated receiving would do immeasurable harm to the economy of the territory and render uncertain indeed its prospects of attracting any additional investment. I feel that a holding that subsidies designed to refund income taxes are non-shareholder contributions to capital, often causing an immediate increase in taxable income in the amount of the subsidy, would constitute such a denial of promised benefits.

368 F.Supp. at 919-920. To hold the subsidies which were paid to STC taxable under 26 U.S.C. § 362(c)(2) would be contrary to both the letter and spirit of the Industrial Incentive Program Legislation and would frustrate the legislative intent so clearly expressed by the Virgin Islands Legislature commencing with Act No. 224. Such a holding would also deny taxpayers the benefits they reasonably anticipated receiving. It is our view that § 934(b) was intended to ratify the subsidy payments made to qualified Virgin Islands taxpayers, and that these subsidies were of a nontaxable character rather than a non-shareholder contribution to capital.

V.

Having concluded that we should not treat these subsidies as a postponement or a deferment of tax but rather as non-taxable, and recognizing that § 934(b) was in effect at the time the subsidy in question was paid, we hold that the subsidy received by STC in the year prior to its liquidation was nontaxable, rather than a non-shareholder contribution to capital. Accordingly, the basis of STC’s assets was not reduced in the amount of the subsidy and the district court did not err in concluding that HMW could include as beginning inventory for the period in question STC’s closing inventory without reducing that inventory by the amount of the subsidy. See Joseph Lupowitz Sons, Inc., et al. v. Commissioner of Internal Revenue, 497 F.2d 862 (3d Cir. 1974).

The judgment of the district court will be affirmed.

      . The respondent, Oommissioner of Finance, Government of the Virgin Islands (“Commissioner”) appeals from a judgment entered December 13, 1973 which granted the motion for judgment on the pleadings brought by H.M.W. Industries, Inc. (“HMW”) the taxpayer-petitioner. Our jurisdiction is invoked by 28 U.S.C. §§ 1291 and 1294(3).

      . 26 U.S.C. § 362(c)(2) provides:
      (c) Special rule for certain contributions to capital.
      * * * *
      (2) Money. — Notwithstanding subsection (a)(2), if money—
      (A) is received by a corporation, on or after June 22, 1954, as a contribution to capital, and (B) is not contributed by a shareholder as such, then the basis of any property acquired with such money during the 12-month period beginning on the day the contribution is received shall be reduced by the amount of such contribution. The excess (if any) of the amount of such contribution over the amount of the reduction under the preceding sentence shall be applied to the reduction (as of the last day of the period specified in the preceding sentence) of the basis of any other property held by the taxpayer. The particular properties to which the reductions required by this paragraph shall be allocated shall be determined under regulations prescribed by the Secretary or his delegate.

      . 368 F.Supp. 915 (D.V.I.1973).

      . After the liquidation of STC, taxpayer HMW conducted the same business of manufacturing watches formerly carried on by STC at tlie same address formerly occupied by STC.

      . It is asserted by IIMW that the Commissioner has conceded that assuming (as the Commissioner does) that the subsidy payment constituted a non-shareholder contribution to STC’s capital, it could only be applied in reduction of STC’s August 4, 1969 tax basis in its raw materials and supplies of $270,093.27, rather than to the total of $346,798.17, which latter figure includes $76,704.90 representing work in process and finished products which involve labor and other expenses. Based on such a concession the tax liability for the fiscal year would approximate $140,000 rather than the deficiency assessment of $181,548.80. In light of our disposition, we need not and do not reach this issue.

      . 48 U.S.C. § 1397.

      . S.Rep.No.1767, 86th Cong., 2d Sess. (I960), included in 1960-2 Cum.Bull. 829; H.R.Rep. No.1131, 86th Cong., 1st Sess. (1959) included in 1960-2 Cum.Bull. 811.

      . 33 V.I.C. §§ 4001-4116 (effective May 1, 1962), since repealed (July 17, 1972).

      . We agree with the district court that even though STC was originally granted its subsidy in 1959 prior to the passage of § 934 (effective on and after January 1, 1960), the relevant date is not the date of qualification but rather the date of payment. The subsidy in question here was paid to STC ill October 1968 after the enactment of § 934 and the Industrial Incentive Program.

      . In support of this contention the Commissioner asserts that in computing the subsidy, dividends on stock owned by the company, interest from loans not directly related to the business, certain capital gains and the like, are excluded.

      . The Commissioner’s brief (pages 15-16), in discussing the validity of Act No. 224 (see our discussion under II supra), admits that: The clear intention of the legislation (and understanding by corporations induced to establish businesses in the Virgin Islands) was that this ‘subsidy’ was to be a reduction of income taxes. Although this intention would be frustrated by a ruling that the payments constituted non-shareholder contributions to capital, reducing the basis of the grantees’ assets and in many cases causing an immediate increase in taxable income in the amount of the subsidy, it is irrelevant since the Virgin Islands Legislature cannot pass laws which will be in conflict with the intent of the Internal Revenue Code.

      . S.Rep. to P.L. 86-779, 86th Cong., 2d Sess. (1960), 1960-2 Cum.Bull. 829. H.R. Conf.Rep. No. 2214, 86th Cong., 2d Sess. (1960), 1960-2 Cum.Bull. 859.

      . Noil-taxable subsidies are not unknown. In Edwards v. Cuba Railroad, 268 U.S. 628, 45 S.Ct. 614, 69 L.Ed. 1124 (1924), the Supreme Court held that the subsidies paid by the Cuban Government to the Cuba Railroad, a New Jersey corporation, were nontaxable and were not income.

      . Rev.Rul. 69 — 433 provides :
      A United States corporation has a Virgin Islands subsidiary that satisfies the requirements of Virgin Islands law and the conditions set forth in section 934 of the Internal Revenue Code of 1954. Therefore, the Virgin Islands subsidiary has received, under the Virgin Islands Industrial Incentive Program, a nontaxable subsidy equal to 75 percent of the income tax liability paid to the Virgin Islands during the taxable year.

        Held, in computing the accumulated profits of the Virgin Islands subsidiary for purposes of section 902 (a) (2) of the Code, the amount of the subsidy is not an item of gains, profits, or income but is considered merely a reduction in the amount of the taxes paid to the Virgin Islands. Held further, for purposes of section 902(a) (2) of the Code, the income tax paid by such subsidiary to the Virgin Islands is the amount of income tax paid to the Virgin Islands less the subsidy granted.

      . Without regard to whether the cited Revenue Ruling should control the Commissioner’s position here, logic would dictate that at the very least STC’s subsidy payments should be treated in a manner analogous to the treatment of the foreign tax credit provisions of Rev.Rul. 69 — 433.

      . See Holmes v. Government of the Virgin Islands, 370 F.Supp. 715 (D.V.I.1974), for implicit support of HMW’s contention that a taxpayer is properly entitled to rely on a statutory tax exemption grant.

      . Section 4(e)(1) of P.L. 86-779 Act of September 14, 1960 which contained § 934(b) provided that it would “apply to tax liability incurred with respect to taxable years beginning on or after January 1, 1960.”