text:
    INDEPENDENCE INDEMNITY CO. v. CENTRAL FARMERS’ TRUST CO. (two cases).
    Nos. 4574, 4575.
    Circuit Court of Appeals, Third Circuit.
    Aug. 21, 1931.
    J. W. McWilliams, C. B. Wagoner, and C. S. Wesley, all of Philadelphia, Pa. (Tus-tin & Wesley, of Philadelphia, Pa., of counsel), for appellant.
    W. W. Montgomery, Jr., and C. Russell Phillips, both of Philadelphia, Pa., for appellee.
    Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.
   DAVIS, Circuit Judge.

These are two eases between the same parties, involving the same question of law with slightly different facts.

Case No. 4574.

This is an appeal from a judgment entered for want of a sufficient affidavit of defense.

The N. E. Second Avenue Company of Miami, Fla., issued its bonds seemed by a first mortgage on certain lands which it owned, to the Biscayne Trust Company, as trustee for the bondholders. The defendant Independence Indemnity Company guaranteed the payment, principal and interest, of the bonds. The guaranty, among other things, provided that:

“First. The payment to said Trustee of the Interest of the said ‘Bond’ at the rate therein specified and within sixty (60) days after the same shall have become due and shall have been demanded by the Trustee with interest thereon at the rate specified in said ‘Bond.’
“Second. The payment to said Trustee of the principal of the ‘Bond’ within twelve (12) months after the same shall have become due and shall have been demanded by the Trustee, with regular payment in the meantime of interest thereon at the rate specified in the ‘Bond’, subject, however, to the following conditions.”

One of the conditions was that: “D. No suit, action or proceeding shall be instituted or maintained against the ‘Guarantor’ under this instrument unless brought within eighteen (18) months after default in the payment of the principal or interest bn the bond, whether such maturity resulted by the bond becoming due on its face or whether it resulted by reason of one of the acceleration clauses in the deed of trust provided.”

The Biscayne Trust Company failed, and the plaintiff, Central Farmers’ Trust Company, was substituted as trustee.

The mortgage or deed of trust provided that if default be made by the mortgagor in the payment of the principal of the bonds or of the interest coupons thereon, and if that default should continue for thirty days, the principal amount of all outstanding bonds, whether or not due and payable on their face, at the option of the trustee, became due and payable forthwith, and the trustee, if requested by the holders of 25 per cent, or more of the amount of the bonds then outstanding, should declare the principal amount due and cause suit to be brought for the sale of the mortgaged premises.

Interest on the bonds was payable on June 15th and December 15th. On December 15, 1928, interest in the amount of $8,-043.75 on bonds totaling $247,500 became due and payable, but was not paid or tendered within thirty days; and so on January 23,1929, after having been requested by the required number of bondholders, plaintiff notified defendant that it declared the principal of the bonds then outstanding, amounting to $233,750, due and owing because of the failure to pay the interest within thirty days after it became due.

On February 2,1929, defendant tendered to the plaintiff the interest which by agreement of the parties was accepted without prejudice to the rights, as they then stood, of either party.

This suit was brought to recover the principal amount of $233,750 which the plaintiff claims was then due on the bonds outstanding.

The defendant contends that under paragraph “First” of the guaranty, it had sixty days after the interest became due and was demanded by the trustee before it could be called upon to pay, and if the interest was paid within that time the trustee could not accelerate the due date of the bonds.

But this paragraph does not so provide. In fact, neither this nor the following paragraph determines the date when either interest or principal of the bonds became due. The payment of interest is guaranteed in the “First” paragraph and principal in the “Second” paragraph within specified times “after the same shall have become due.” The dates when they became due are stated in the bonds. If interest was not paid within thirty days after it became due, then the mortgage gave the trustee the right to accelerate the due date of the principal of all the bonds.

The time when the bonds “become due” is the issue in this ease. If the trustee had the right to accelerate the due date of the bonds as against the guarantor because the interest had remained unpaid for more than thirty days, then there is no defense to this action and the judgment should be affirmed, for all the formal prerequisites, imposed by the mortgage, bonds, and guaranty, to the institution of the suit were complied with.

Was the guarantor bound by the provision in the mortgage for accelerating the date on which the bonds became due on default in the payment of interest? The geneneral rule of law, based upon sound reason and authority, is that in express agreements in writing, a reference by the contracting parties to an extraneous writing for a particular purpose makes it a part of their agreement only for the purpose specified. Martin v. Oberle, 85 Misc. Rep. 35, 147 N. Y. S. 60; Miller v. Hamilton (C.C.A.) 216 F. 131; Guerini Stone Co. v. Carlin Construction Company, 240 U. S. 264, 36 S. Ct. 300, 60 L. Ed. 636. But the reference in the guaranty to the deed of trust was not for a particular purpose, as in the case of Cummings Construction Company v. Marbleloid Co. (C. C. A.) 51 F.(2d) 906. The intention was to incorporate in the guaranty the provisions of the mortgage or deed of trust. In the fourth and final paragraph of the guaranty the defendant said: “The undersigned ‘Guarantor’ is familiar with all the terms and conditions in a certain deed of trust referred to in this ‘Bond’ and is hereby bound thereby.” The guaranty, including the fourth paragraph, was written on the back of every bond. The defendant thus expressly bound itself by all the terms of the deed of trust. One of these terms was, as above stated, that if default was made in the payment of any of the bonds or interest coupons attached thereto 'and this continued for thirty days, then the principal amount of all outstanding bonds became due and payable. The guarantor was, therefore, bound by this term of the deed of trust and the trustee was within its legal rights when it declared all the outstanding bonds due and payable. The guarantor had sixty days, however, within which to pay the interest, and twelve months within which to pay the principal after they had become due and payment had been demanded. It did not pay; within these times. The affidavit of defense does not show any legal justification for not doing so, and the judgment of the district court so holding is affirmed.

Case No. 4575.

This case involves the same question of law as No. 4574 with slight, but immaterial, difference in facts. It is, therefore, affirmed on the authority of No. 4574.

Affirmed.


source: Caselaw Access Project

author: DAVIS, Circuit Judge.

license: Public Domain

text:
    POMERANTZ v. UNITED STATES.

    No. 4549.
    Circuit Court of Appeals, Third Circuit.
    Aug. 21, 1931.
    B. D. Oliensis, of Philadelphia, Pa., for appellant.
    Paul Freeman, Asst. U. S. Atty., of Philadelphia, Pa., and Raymond S. Norris, Sp. Asst, to Atty. Gen.
    Before WOOLLEY, DAVIS, and THOMPSON, Circuit Judges.

       Rehearing denied November 5, 193L

   DAVIS, Circuit Judge.

Pomerantz and others were convicted in the District Court for the Eastern District of Pennsylvania of conspiracy to violate the National Prohibition Act. The case is brought to this court on appeal by Pome-rantz alone.

He and his codefendants were indicted on December 14, 1927, in the District of Delaware on the charge of conspiracy to violate the National Prohibition Act. On September 5, 1929, while the indictment was pending in Delaware, they were indicted for the same offense in the Eastern District of Pennsylvania. The defendants moved the court to quash the indictment then pending in the Pennsylvania district. The motion was denied. Thereupon the Attorney General elected to proceed in Pennsylvania and the defendants were accordingly brought to trial in that District. The indictment in Delaware was nolle prossed six days after the return of the indictment in Pennsylvania.

The appellant insists that the lower court was without power to entertain the indictment on which he was convicted, for the reason that at the time of the return of the indictment in Pennsylvania there was an indictment pending in the district of Delaware charging the same offense; that the “prior jurisdiction of the District Court for the District of Delaware was exclusive, and that as long as the indictment was pending there, no other federal court might take cognizance of the matter.”

These contentions are answered by the Supreme Court in the case of Haas v. Henkel, 216 U. S. 462, 30 S. Ct. 249, 251, 54 L. Ed. 569, 17 Ann. Cas. 1112, wherein it was said:

“But, if indicted in two or more districts, there must be an election as to where the defendant shall be tried. Primarily, this is the right and duty of the Attorney General, or those acting by his authority. * * *
“But if the fact be that the offense charged in both sets of indictments is identical, and that the locus of the conspiracy is laid in one set as in one district and in tbe other as in a different district, it is still for the government to determine in which of the two districts it will bring the accused to trial, and of the commissioner to determine whether a prima facie ease has been shown that the accused had,probably committed an offense in the District of Columbia, which was indictable and triable there.”

The appellant’s second objection is that the evidence is legally insufficient to warrant a conviction.

The government contends that the appellant was a party to a conspiracy to manufacture potable alcohol at the plant of the Rayon Silk Company of America, at Chester, Pa.; that the government thwarted the conspirators’ original plan to use specially denatured alcohol, which is comparatively easy to redistill, and forced them to use completely denatured alcohol; that they devised a system to cover up their operations and the use of such large quantities of alcohol by organizing in Wilmington, Del., an alleged distributing company, called the “Delaware Distributing Company,” to which they consigned truckloads of completely denatured alcohol; that, if a truck en route from Philadelphia, where the alcohol was obtained, to Chester, was seized and detained, it could easily be shown that the load was being carried to Wilmington, and the appellant was in charge of these “cover up” operations.

To support these charges, the government produced the following evidence: The appellant appeared at the office in Philadelphia of the manufacturer of stills and general equipment of denaturing plants on several occasions and 'participated in the negotiations for the installation of a denaturing plant for the Rayon Silk Company; that on August 2, 1926, he rented a portion of a building for the “Delaware Distributing Company” to store naval oils and alcohol, and used an alias in signing the lease,- refusing to affix his own name; that nothing was ever stored in the space rented by the .Delaware Distributing Company; that.-the appellant appeared at the place every few days to await telephone calls; that he told one Smalley, whose concern occupied the remaining portion of the building, that (in the words of Smalley) “the alcohol would be moving through, and if anytime it was stopped on the road, if they called up about that, to let it come on through and telephone him at Chester and he would come down and take care of it, but he said when he came he was not to be known as Pomerantz; that I was to call him Mr. Stern; that he would use.the name in calling up”; that the premises of the Rayon Silk Company were raided on September 10, 1926; that for several nights theretofore, when the plant was under observation, the government’s agents had noted men within the plant scraping labels from drums that afterward proved to be containers of completely denatured alcohol; that immediately after the last of these observations the plant was raided, and the agents found on the floor of the plant parts of several labels which were fitted to the parts remaining on drums in the immediate vicinity and appeared to belong thereto; that on the labels there was written the name and address of the consignee, namely^ “The Delaware Distributing Company, Wilmington, Delaware; that, after the raid, the lease of the Delaware Distributing Company was abandoned, but the appellant called at the building several times thereafter “to find out (from Smalley) if there were any inquiries for him, any officers there trying to find him”; that in October, 1926, a registered letter addressed to the Delaware Distributing Company was delivered, and, when Smalley advised the appellant on the telephone of its arrival, the appellant told him to give it back to the mail carrier and tell him that he had never heard of the Delaware Distributing Company.

This evidence, the appellant says, is equivocal, and equally as consistent with innocence as with guilt.

It is true that the evidence here is largely circumstantial, but the very nature of the offense of conspiracy usually requires that it be proved by such evidence. There is no inherent defect in circumstantial evidence which prevents it from producing persuasion. The evidence in this case forms an unmistakable chain of circumstances which compels the conclusion that the appellant entered into an agreement to do the things with which he was charged and which constitute conspiracy. The facts adduced do more than raise a suspicion of guilt. They exclude every other reasonable hypothesis. ■

The contention of the appellant that his acquittal of the charge of manufacturing intoxicating liquor exonerates him of the charge of conspiracy to commit the substantive crime is untenable. Rothman v. United States, 270 F. 31, 37 (C. C. A. 2), certiorari denied 254 U. S. 652, 41 S. Ct. 149, 65 L. Ed. 458; United States v. Anderson, 31 F.(2d) 436, 437 (C. C. A. 9). It is not necessary to show that he himself actually did anything to effect the object of the conspiracy. An overt act committed by any one of the conspirators makes all of them guilty.

The claim that the charge of conspiracy collapsed with the acquittal of the other defendants tried with the appellant is unsound, for the reason that the indictment alleges that he and his eodefendants conspired “with divers other persons unknown” to commit the crime charged. The testimony supports the charge in the indictment, and is sufficient to prove that unknown persons assisted the appellant in carrying out the conspiracy. Donegan v. United States, 287 F. 641 (C. C. A. 2); Grove v. United States, 3 F.(2d) 965 (G. C. A. 4).

Finally, it is urged that, even if the conviction was warranted by the evidence, a new trial should be awarded for errors committed at the trial.

One of these alleged errors is that the trial court admitted a statement on the ground that it was a narrative of past events made by one Higgins, a codefendant, on the charge of conspiracy. This statement was: “We have been raided in Chester and the Pomerantz lease is all off.” At the time this was admitted, Higgins was still on trial. If the testimony was admissible for any purpose, there is no error in refusing to strike it out while the case was still before the jury. The learned trial judge also warned the jury that the evidence could only be used if Higgins was linked with the conspiracy.

The appellant next complains of the instruction given by the trial court on the effect of the testimony of character witnesses. The instruction of the court was: “That’s substantive evidence which you can take into consideration with the rest of the defense, and it is entitled to some weight in determining the guilt or innocence of the defendants as to whom it was brought.”

The charge must be considered as a whole; and, if it is then not misleading, it is not erroneous. The above quotation should be considered in connection with the following: “Character testimony is substantive evidence; and is in itself sufficient to raise a reasonable doubt. That is correct if you feel that it is entitled to that much weight.”

This charge on reputation for good character was, in fact, more favorable to the appellant than he had the right to demand. Kaufmann v. United States (C. C. A.) 282 F. 776; Edgington v. United States, 164 U. S. 361, 366, 17 S. Ct. 72, 41 L. Ed. 467.

We have carefully considered the other assignments of error, which have less merit than those discussed above, and find that the trial was without error.

The judgment is affirmed.


author: DAYIS, Circuit Judge.

text:
    UNITED STATES v. 94 DOZEN, MORE OR LESS, HALF-GALLON BOTTLES CAPON SPRINGS WATER (CAPON WATER CO., Claimant).
    No. 4541.
    Circuit Court of Appeals, Third Circuit.
    Aug. 19, 1931.

      H. B. Lewis, Asst. U. S. Atty., of Philadelphia, Pa. (Elton L. Marshall and John B. O’Donnell, both of Washington, D. C., of counsel), for the United States.
    B. M. Golder, of Philadelphia, Pa., for appellee.
    Before BUFFINGTON, DAYIS, and THOMPSON, Circuit Judges.
   DAYIS, Circuit Judge.

This is an appeal from a decree (D. C.) 48 F.(2d) 378, dismissing the libel in the above-stated cause.

On January 28, 1928, the United States filed a libel under section 10 of the Food and Drugs Act (21 USCA § 14), and prayed for seizure and condemnation of 94 dozen half-gallon bottles of Capon Springs water, which had been shipped on January 20, 1928, from Capon Springs, W. Ya., to Philadelphia, Pa., on the grounds that the water was adulterated and the bottles in which it was contained were misbranded.

An article is adulterated within the meaning of the act (section 7, cl. 6 (21 USCA § 8, cl. 6), “if it consists in whole or in part of a filthy, decomposed, or putrid animal or vegetable substance.”

An article is misbranded within the meaning of the act (section 8 (21 USCA § 10), “if the package containing it or its label shall bear any statement, design, or device regarding the ingredients or the substances con-' tained therein, which statement, design, or device shall be false or misleading in any particular.”

The learned trial judge in his second conclusion of law dismissed the count in the libel based upon clause 6, § 7, “because of the fáilure to grant the claimants the preliminary hearing allowed by the regulations.” The regulation to which the court referred was regulation 5 (a), which provides as follows: “(a) Whenever it appears that an article is adulterated or misbranded within the meaning of the aet, and proceedings are contemplated under section 1 and 2, notice shall be given to the party or parties against whom prosecution is under consideration and to other interested parties, and a date shall be fixed at which such party or parties may be heard. The hearing shall be held at the office of the Food, Drug and Insecticide Administration most convenient to the parties cited, and shall be private and confined to questions of fact. The parties notified may present evidence, either oral or written, in person or by attorney, to show cause why the matter should not be referred for prosecution as a violation of the Federal food and drugs aet.”

This regulation refers to sections 1 and 2 of the aet (21 USCA §§ 1, 2), which provide the penalty for conviction in criminal proceedings under section 4 (21 USCA § 11). It does not refer to proceedings in rem as provided in section 10 of the aet (21 USCA § 14). This section does not require that a preliminary hearing be given to claimants of the articles alleged to be adulterated or misbranded. United States v. Fifty Barrels of Whiskey (D. C.) 165 F. 966; United States v. Sixty-Five Casks of Liquid Extract (D. C.) 170 F. 449; United States v. Nine Barrels of Olives (D. C.) 179 F. 983; United States v. 100 Barrels of Vinegar (D. C.) 188 F. 471; United States v. Seventy-Five Barrels of Vinegar (D. C.) 192 F. 350. But section 4 does require that, when on examination the Board of Chemistry finds an article to be adulterated or misbranded, notice be given the party from whom the sample was obtained and an opportunity to be heard. But under section 5 of the aet (21 USCA § 12), which also relates to criminal proceedings, it is the duty of the district attorney, to whom satisfactory evidence of any violation of the aet is reported by the Secretary of Agriculture or by any health officer of any state, to begin proceedings against the offender without notice or an opportunity to be heard. So even in criminal proceedings notice is not always necessary. United States v. Seventy-Five Boxes of Alleged Pepper (D. C.) 198 F. 934; United States v. Morgan et al., 222 U. S. 274, 32 S. Ct. 81, 56 L. Ed. 198.

The government charged in its libel that the water was misbranded, in that the labels on the bottles and circulars contain statements, designs, and devices regarding the ingredients and substances in the water to the effect that it is a “healing water,” and possesses curative and therapeutic properties, which, it alleges, is false and fraudulent. It further charged that the water was adulterated, in that it “consists in part of a filthy, decomposed and putrid animal and vegetable substance.” These allegations were earnestly denied by the appellee. It appears that several hundred pages of testimony were taken to establish and rebut these allegations. The court made the following general finding: “We make the finding that this water at the time of the trial was free from the criticisms made of it and will continue to be free.” The “criticisms made” were that the water was adulterated and misbranded. But the government has not brought any of the testimony here to establish these allegations. The record before us consists of the pleadings, the opinion, decree, exception, assignment of errors, petition for appeal, order allowing appeal and citation. These alone are open for consideration. Reilly v. Beekman (C. C. A.) 24 F.(2d) 791, 795.

The third conclusion of law is: “3. The libel should be dismissed.” The decree is: “And now, to wit, this tenth day of December, 1930, it is ordered that the libel in the above entitled ease be dismissed.”

The general finding, the specific conclusion of law, and decree are based upon the evidence which is presumed to support them, and there is nothing in the record before us to rebut this presumption. Southern R. Co. v. Lester (C. C. A.) 151 F. 573, 575; Bankers’ Trust Co. v. Missouri, K. & T. R. Co. (C. C. A.) 251 F. 789, 798; Arena v. Delaware, Lackawanna & Western R. Co. (C. C. A.) 292 F. 1, 4; Coldwell v. United States (C. C. A.) 256 F. 805; Clarke v. United States (C. C. A.) 255 F. 546. Samuel Olson & Co. v. Voorhees (C. C. A.) 292 F. 113, 115.

It is true that .in the second conclusion of law, which the government says is predicated upon the third finding of fact, the dismissal of the count based upon clause 6, § 7, of the act, may have been put upon the wrong ground. This clause and section refer to paragraph 6 only of the libel which charges adulteration. With this paragraph eliminated, the rest of the libel is left standing. The third conclusion of law, that “the libel should be dismissed,” is based upon the evidence as a whole, and dismisses not only the sixth paragraph but the entire libel. While the record does not disclose any exceptions taken at the trial, embodied in a formal bill, presented tc> and signed by the trial judge within the term as required by the decisions generally, it is true, as the government here contends, that in trials by the court without a jury the sufficiency of facts specially found to support the judgment or decree may be reviewed without a bill of exceptions. Sloss-Sheffield Steel & Iron Co. v. Stover Mfg. & Engine Co. (C. C. A.) 37 F.(2d) 876; General Motors Co. v. Swan Carburetor Co. (C. C. A.) 44 F.(2d) 24; Seeberger v. Schlessinger, 152 U. S. 581, 14 S. Ct. 729, 38 L. Ed. 560; Lewellyn v. Electric Reduction Co., 275 U. S. 243, 248, 48 S. Ct. 63, 72 L. Ed. 262. But this does not materially help, for, as above stated, there is nothing in the record open to us that justifies a reversal. There are twenty-three assignments of error, but they are not contained in any special finding, and there is no bill of exceptions bringing up those portions of the record upon which they are predicated. If we are free to consider them, they show findings against the government presumptively on sufficient evidence or a refusal to find for the government on insufficient evidence.

It follows that the decree dismissing the libel must be affirmed.


text:
    TAYLOR v. COMMISSIONER OF INTERNAL REVENUE.
    No. 4524.
    Circuit Court of Appeals, Third Circuit.
    Aug. 19, 1931.
    Rehearing Denied Sept. 29, 1931.

      Albert Smith Faught, of Philadelphia, Pa., for petitioner.
    G. A. Youngquist, Asst. Atty. Gen., and Sewall Key, Andrew D. Sharpe, and Norman D. Keller, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Nathan Gammon, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for respondent.
    Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.
   DAVIS, Circuit Judge.

.This.ease is here on petition to review an order of re determination made by the United States Board of Tax Appeals. 17 B. T. A. 1107. The case involves income taxes for the years 1921, 1922, 1923, and 1924, in the aggregate amount of $14,370.17, being the amount of the deficiency found by the Commissioner and approved by the Board.

The petitioner, Taylor, devised a plan designed to enable a newspaper purchasing it to acquire, supremacy in the field of classified advertising in its territory. The plan was copyrighted in 1899, and renewed in 1926, as the “Taylor Plan.” The details of the plan remain a mystery. The petitioner has continually refused to divulge the details, and each purchaser of the plan must, as a condition of its contract, keep the plan a secret.

Prior to March 1, 1913, the petitioner made four sales of his plan, from which he realized a total compensation of $10,000. After 1919 he sold his plan to a number of newspapers. In particular, this controversy arises out of the sale of the Taylor Plan to the Minneapolis Journal on January 19, 1921.

Section 214(a) (8) of the Revenue Act of 1921 (42 Stat. 239), and section 214(a) (8) of the Revenue Act of 1924, 26 USCA § 955(a) (8) and note, provides: “That in computing net income there shall be allowed as deductions: * * * A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. In ease of such property acquired before March 1,1913, this deduction shall be* •computed upon the basis of its fair market price or value as of March 1,1913. * * * ”

The petitioner claims (a) that his plan for effecting supremacy of classified advertising is an exhaustible asset within the meaning of the Revenue Act, and (b) that its value is to be based on its fair market value of March 1, 1913.

The Board disposed of these contentions as follows: “It is doubtful, to say the least, whether the petitioner has or had on March 1,1913, an exhaustible asset in the copyrighted plan in question. We know nothing about it and the petitioner refused to divulge its detail. Whether the petitioner was protected by the copyright in the use of the plan or only in the name ‘Taylor Plan,’ we know not. However, passing that question and assuming for the moment that the Taylor Plan was an exhaustible asset, we are unable to find any basis for holding that it had any value •on March 1,1913, except a speculative or potential value.”

The petitioner says the Board erred in thus disposing of the ease because he- produced a number of expert witnesses who testified that his plan was worth at least $500,-000, and their testimony should have been accepted as to its value. But no facts were disclosed to show on what grounds their conclusions were based. The whole structure, on which they are built, is carefully concealed. The government is not obliged to accept the' conclusion of these experts as to the value of the plan without being shown what it is and without being shown some sound basis on which their opinion rests. We are- inclined to feel that the intrinsic value of the plan lies in secrecy and in salesmanship.

The determination of this ease depends in the final analysis upon whether or not the “Taylor Plan” is “property” within the meaning of the act, because the deductions it allows are for the exhaustion, wear, and tear of “property.” It is the use in the trade or business of “property” that entitles the taxpayer to a deduction. Unless property is used, no deduction is allowable. In other words, before any plan, idea, theory, or system can be used as an exhaustible asset in an income tax computation, it must be determined that it is “property.”

It appears that the “Plan” is copyrighted, and the question at once arises as to whether or not the copyright is property. It is true that copyrights are subject to depreciation and may be charged off under the same procedure as patents, taking the term of the copyright into consideration. Klein, Federal Income Taxation, p. 628 et seq. Copyright laws afford protection for a limited time against the publication only and not against the use of a system or plan or idea of which the work is an exposition. Stone & McCarrick v. Dugan Piano Company (D. C.) 210 F. 399; Baker v. Selden, 101 U. S. 99, 25 L. Ed. 841. A copyright does not give its owner any property in the thing copyrighted. It simply gives him protection against anybody else copying it. Nor does it prevent any one from using the copyrighted matter, if it is not copied or published. The value of the “Taylor Plan” lies in its application and not publication. And so the copyright of the “Plan,” whether it discloses the seeret features or not, does not help the petitioner, for it is not “property,” on the exhaustion, wear, and tear of which a deduction may be based.

The scope of the meaning of the term “property,” as it is used in the revenue acts, includes both tangibles and intangibles. A taxpayer has the light to take a reasonable allowance for depreciation of an intangible just as in the ease of a tangible, if it is property used in the trade or business. But the plan of the petitioner cannot meet the real and definite characteristics that the law requires of “property.”

What was the “Taylor Plan?” Taylor had an idea, theory, or system in his head. It could not be subject to ownership in a legal sense any more than the multiplication table. Its value, if it has other than the benefit of Taylor’s salesmanship, lies, not simply in the plan itself, but in the retention of its details in seeret, in being withheld from the public. This in itself is a demonstration that it is not property which is subject to possession and control and may be used as an exhaustible asset in computing deductions in income taxes.

The petitioner and his witnesses did not regard the plan as property, but simply as an idea which, conceivably, might have a potential value of some $500,000. Thus, if it can be thought of as analogous to some inventive idea in any art, it would not become property until.it was reduced to practice and patented, or, being a seeret idea, like a seeret process, it might be sold, and, by virtue of the executory or executed contract, be reduced to a chose in action which is “property.”

Again, if it is remotely possible that the secret feature of the petitioner’s plan might be property, the petitioner was obliged to prove, inter alia, its duration of usefulness. Klein, Federal Income Taxation, p. 630. This he did not do, and we can only speculate that the petitioner would possess the éx-clusive right to enjoy and use the plan in his business so long as he retained the secret features.

Whatever the “Taylor Plan” may be, the petitioner has failed to show that it is “property” within the meaning of section 314(a) (8) of the Revenue Acts of 1921 and 1924. He must therefore fail, as he has not fulfilled the requirements cf the statute.

Another question remains for our disposal: The proper treatment of the $80,-000 that the petitioner received in 1924 in settlement of his contract with the Journal Printing Company of Minneapolis.

The petitioner sold the use of his plan to the Journal Printing Company at $300 a week for ten consecutive years beginning May 28, 1921, or within three years from that date the Journal Printing Company was to pay the petitioner $100,000 in full settlement of the contract. All weekly payments theretofore made were to be credited as a part of the $100,000. However, during the years 1921, 1922, and 1923, the weekly payments were not made, and the petitioner, who kept his accounts on the accrual basis, charged off at the end of each year all but $1 of the accounts, leaving them open with that balance. In 1924 the petitioner and the Journal Printing Company effected a settlement of the obligations arising under the contract of 1921, whereby the Journal Printing Company paid to the petitioner a total of $80,000 in full settlement. The petitiqner then without objection re-entered on his books the amounts that had been accrued under the contract during the years 1921, 1922, and 1923] but also accrued for 1924, 1925, and 1926, maintaining his tax return so as to pay the taxes on the moneys received. The Commissioner of Internal Revenue allowed the petitioner to accrue the sum of $300 a week from May 28, 1921, through 1924, but treated the balance of the settlement as income for 1924, for the reason that even under the accrual system periodical payments cannot be spread into the future.

Before the settlement in 1924, the' petitioner had a right to receive $300 a week during the coming years in which the contract was in force. He could have continued using the accrual basis to reflect his income until the term of the contract was ended. But a settlement was reached. No further payments were to be made, and the moneys accepted by the petitioner were in lieu of prior and future payments due under the contract. With the settlement the contract was completed, and nothing further could be accrued under the closed transaction. It is clear that no accrual entries can be made in the future and advantage be taken of them when in fact no payments are to be made or accrued in the future. The law requires a taxpayer’s return to reflect his true income.

Relying on the recent ease of Burnet v. Sanford & Brooks, 282 U. S. 359, 51 S. Ct. 150, 75 L. Ed. 383, and related cases, the petitioner says: “The clear inference (from these eases) is that if the taxpayer had kept its books on the accrual basis (and the present petitioner does so keep his books), payments under a contract, even when the contract is enforced by suit by the taxpayer, are income not when the money is received, but as it accrues under the contract.” That is a correct statement of the law, and we are of the opinion that, if it is applied in this ease, the amount of the settlement (except that part allocated to the years 1921, 1922 and 1923) is income for the year 1924 for the reason that it accrued in that year; the contract being at an end and superseded by the settlement.

The redetermination of the Board of Tax Appeals is affirmed.


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    SEABOARD REFRACTORIES CO. v. LEHIGH VALLEY R. CO.
    No. 4483.
    Circuit Court of Appeals, Third Circuit.
    Aug. 19, 1931.

      Fred B. Scott, of New York City, for appellant.
    John E. Selser, of Hackensack, N. J., and George S. Hobart, of Newark, N. J., for ap-pellee.
    Before WOOLLEY, DAVIS, and THOMPSON, Circuit Judges.
   DAVIS, Circuit Judge.

This is an appeal from a judgment of the District Court entered for the defendant upon the verdict of a jury.

The plaintiff below, Seaboard Refractories Company, alleged in its complaint that the defendant “set out a fire” upon its buildings at Valentines in Middlesex county, N. J., at or about 8 o’clock in the forenoon of August 16, 1923, because of the negligent and careless construction, equipment, and operation of one of its steam locomotive engines on its railroad track which runs by the plaintiff’s property. This is a suit to recover dan ages caused by the fire.

The alleged negligent construction and equipment of the engine referred to the spark arrester which did not prevent the escape of sparks and live coals. That the engine threw sparks when it passed the plaintiff’s property at the time in question was denied by the defendant. Whether or not it threw sparks at this time was therefore the vital question.

The defendant relied almost entirely upon the testimony of its engineer, John S. Fahey, to rebut the charge that the engine threw sparks while passing the plaintiff’s property. He testified that when he passed the property his engine was “drifting,” going 15 to 20 miles an hour, that his throttle lever was “shut off tight” and the engine was not using steam and not throwing sparks. He further testified on this trial that the engine would throw sparks when doing heavy work and the throttle was open, but was sure that it was not open at the time he passed plaintiff’s factory.

If this was a fact and the jury believed it, the conclusion was inevitable that the fire was not caused by the escape of sparks through the screen or spark arrester of the engines in question.

It appears that this same witness testified in a former trial of this case. He was asked in this trial the following question as to his testimony in the former trial: “Now, will you listen to this question? Do you remember on the trial of this case before testifying, ‘And when you use steam your engine throws sparks?’ And do you remember answering, ‘Oh, yes, when you use steam, yes, sure.’ Do you remember being asked that particular question and answering it in that particular way?”

The court refused to admit that question, and this refusal is one of the two assignments of error on which the appellant relies.

If that question and answer on the former trial referred to the time when the engine was passing the property of the plaintiff, they would be contrary to his testimony on this trial, would tend to impeach him, and was admissible. If, however, they referred to the time when the engine was doing heavy work with the throttle open elsewhere and at other times, he had already answered the question on both trials.

Counsel for appellee*objected to the question “unless it be limited to credibility,” that is, to the impeachment of the credibility of the witness. The court asked if there was testimony by others that the engine was using steam when passing the plaintiff’s property, and counsel for plaintiff said, “No.” The question, therefore, could not have impeached the testimony of the witness with respect to his using steam when he was passing the property, and whether or not the court would permit the witness to repeat what he had already said on both the first and second trial (that the engine was not using steam and was not throwing sparks when he passed the plaintiff’s property, but that it would throw sparks when doing heavy work with the throttle open) was a matter of discretion with the learned district judge and is not ground for reversal.

The appellant says that the learned trial judge further erred in permitting the jury to determine that the spark arrester which “they saw was in the passenger engine at all” and “was one in common use and approved by experience.”

The statute of New Jersey provides with reference to spark arresters as follows: “Every company or person operating or using any railroad shall take and use all practicable means to prevent the communication of fire from any engine used by them in passing along or being upon such railroad to the property, of whatever description, of any owner or occupant of any land adjacent or near to said railroad, and shall provide such engine with a screen or cover in the smokestack so as to arrest and prevent, as much as practicable, the escape of fire.” Vol. 3, Compiled Statutes of New Jersey 1910, page 4245, § 56.

The learned trial judge charged on this subject that: “Now, furthermore particularly defining this 'all practicable means’, if the defendant used upon its engine a spark ar-rester of any approved pattern in general use, and which, upon a careful inspection by a skilled mechanic, appeared to be in good condition, the defendant is not responsible for the damage done by a fire occasioned by sparks escaping from said spark arrester”.

This is in accord with the law of New Jersey. An arrester of a kind in common use and approved by experience complies with the statutory requirement, although as a matter of fact it may not be the best type. Vallaster v. Atlantic City Railroad Company, 72 N. J. Law, 334, 62 A. 993.

The plaintiff contends that the learned trial judge erred in permitting the jury to determine that the spark arrester used on the locomotive engines in question was one of “approved pattern in general use,” because there was no evidence of common or general use to support such a finding.

Stanley West, general foreman of the Perth Amboy Locomotive Shops, Edwin A. Adams, boiler maker foreman, and W. I. Cantley, mechanical engineer of the defendant company, all testified that the screen used by the locomotives in question is known as the “basket” type and was made by the Baldwin Locomotive Works. Among his duties as mechanical engineer of the Lehigh Valley Railroad, Mr. Cantley has been engaged, among other things, in designing locomotives and other equipment for railroads. He testified that in August, 1923, when the fire in question occurred, there weire two kinds of spark arresters in use, the “basket” type and the “master mechanics’ front end arrangement” or type.

While these witnesses, or at least some of them, have not made tours of inspection to other railroads to ascertain the kind of ar-resters they used, there are other ways than that of tours of inspection by which the kind of arresters used by other railroads may be ascertained. That the “basket” type of spark arrester is in common or general use stands uneontradicted as a fact. The learned trial judge submitted to the jury the question of whether or not the spark arresters used in ¿he two locomotives, Nos. 2331 and 3427, which drew the passenger and freight trains by the plaintiff’s factory, were in general use. Its verdict shows that it found that they were, and, while the testimony on this point may not be so full and satisfactory as might be desired, yet we think it was sufficient to sustain a finding to that effect. .

The court likewise submitted to the jury the question of the identity of the spark arresters used in the two locomotives, which passed the plaintiff’s property near the time when the fire was discovered, and its verdict on evidence, which we think was sufficient, settles this fact.

We do not find that error was committed, and the judgment is affirmed.


text:
    UNITED STATES v. AUER.
    No. 4606.
    Circuit Court of Appeals, Third Circuit.
    Aug. 18, 1931.
    See, also, 51 F.(2d) 922.
    Louis E. Graham, U. S. Atty., and Wm. J. Aiken, Asst. U. S. Atty., both of Pittsburgh, Pa. (William Wolff Smith, and Bayless L. Guffy, both of Washington, D. C., and Vincent Baldouf, of Pittsburgh, Pa., of counsel), for the United States.
    Wm. Kaufman, of Pittsburgh, Pa., for appellee.
    Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.
   DAVIS, Circuit Judge.

This action was begun in the District Court for the Western district of Pennsylvania to recover on a contract of war risk term insurance granted to William Flood, now deceased, while in the military service of the United States during the late war. The ease was tried to the court and jury, and the verdict was for the plaintiff. Judgment was accordingly entered, and thereupon the United States appealed to this court.

The question involved is whether or not the appellee was permanently and totally disabled prior to January 21, 1919, the date of his discharge, or within thirty days thereafter, when the policy was effective, and before its date of expiration. The jury found that he was, and the appellant contends that the evidence was not sufficient to justify such finding.

Total and permanent disability within the meaning of the war risk insurance policies is defined by the Bureau of War Risk Insurance in regulation 11, which, was promulgated under the authority of section 13 of the War Risk Insurance Act of 1917, as amended, as follows:

“Any impairment of mind or body which renders it impossible for the disabled person to follow continuously any substantially gainful occupation shall be deemed, in Articles III and IV, to be total disability.
“ ‘Total disability’ shall be deemed to be ‘permanent’ whenever it is founded upon conditions which render it reasonably certain that it will continue throughout the life of the person suffering from it.” 40 Stat. 555; section 5 of the World War Veterans’ Act of 1924, 43 Stat. 608 (38 USCA § 426); Carter v. United States, 49 F.(2d) 221, 222 (C. C. A. 4); White v. United States, 270 U. S. 175, 46 S. Ct. 274, 70 L. Ed. 530.

Both parties have agreed that this definition is correct. Was the evidence under it sufficient to take the case to the jury? In other words, is it sufficient to support the judgment entered upon the jury’s verdict?

The evidence tends to show that the insured was well and strong when he entered the army. He returned from the army broken in health, bent in form, and lost ground steadily. He was wounded while in active service in France, and the evidence does not show that he ever rendered active service thereafter, but was brought home in a casualty company on board a casualty ship.

There is also substantial evidence that the insured was unable to work with any degree of regularity after his discharge from the army. The most convincing evidence of this fact is the time record of his work for his employer. It shows that he began work on or about the beginning of the second week of February, 1919, two weeks after his discharge, and continued throughout 1919 and 1920. During this period of some eighty-six weeks he received his full pay only thirteen times, which is 15 per centum of the time. We think it cannot, in the light of this evidence, be said that he followed his occupation “continuously,” or, as this word has been defined, “with reasonable regularity.” United States v. Sligh, 31 F.(2d) 735, 736 (C. C. A. 9); Ford v. United States, 44 F.(2d) 754, 755 (C. C. A. 1); United States v. Godfrey, 47 F.(2d) 126, 127 (C. C. A. 1); Carter v. United States, 49 F.(2d) 221, 223 (C. C. A. 4). This evidence tends to show that he “was able to follow gainful occupations only spasmodically, with frequent interruptions due to disability.”

He was forced to leave his job permanently in January, 1921, and to go to a government hospital for tubercular patients. From that time until his death his life was spent in a succession of hospitals, where he steadily lost ground until he died'in a government hospital on May 9,1928, of active pulmonary tuberculosis.

There can be no question as to the permanence of the disability in this ease. We think that the evidence was sufficient to take the case to the jury on the question of total disability, and its verdict establishes the fact.

But there is a further matter in this case which should be noticed. The eourt below charged the jury that section 200 of the World War Veterans’ Act 1924, as amended by section 7 of the Act of July 2, 1926, and July 3, 1930, § 11 (38 USCA § 471), must be applied if the proper facts existed in this case. That statute provides that, where any ex-service man is shown to have developed an active tubercular disease prior to January 1,1925, and that this disease created a 10 per centum disability, there is a conclusive presumption that he acquired the disease during his military service.

The Circuit Court of Appeals for the Fourth Circuit has held in the following cases that the presumption in that statute applies to sections 200 and 304 only of the World War Veterans’ Act of 1924, as amended by the Act of July 3, 1930, §§ 11, 23 (38 USCA §§ 471, 515), and that these sections do not enable a veteran in a suit on government insurance to establish for the purpose of the suit that total disability on which the suit is based, was of service origin: United States v. Rhodes, 49 F.(2d) 228; United States v. Harrison, 49 F.(2d) 227; United States v. Searls, 49 F.(2d) 224. But courts in other circuits have taken the opposite view. United States v. Eliasson, 20 F.(2d) 821 (C. C. A. 9); Mulivrana v. United States, 41 F.(2d) 734 (C. C. A. 9); Runkle v. United States; 42 F.(2d) 804 (C. C. A. 10); Caprio v. United States, 45 F.(2d) 520 (C. C. A. 1). But these eases were decided before the amendment of 1930.

In the case at bar, however, it is unnecessary to decide whether or not the presumption is applicable, for the evidence, regardless of the presumption, is sufficient to support the verdict of the jury as to total disability. United States v. Rhodes (C. C. A.) 49 F.(2d) 228.

The judgment of the District Court is affirmed.


text:
    UNITED STATES v. PATTERSON.
    No. 4604.
    Circuit Court of Appeals, Third Circuit.
    Aug. 18, 1931.
    Louis E. Graham, U. S. Atty., and Wm. J. Aikan, Asst. U. S. Atty., both of Pittsburgh, Pa. (William Wolff Smith and C. L. Dawson, both of Washington, D. C., of counsel), for the United States.
    Wm. Kaufman, of Pittsburgh, Pa., for appellee.
    Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.
   DAVIS, Circuit Judge.

This is an appeal from a judgment for the plaintiff who was insured under a policy of war risk term insurance. He was discharged from the military service July 16, 1919, and paid no premiums on his insurance after that date. The policy was effective for '30 days thereafter, and the question in this ease is whether the insured was permanently and totally disabled within the time that his policy was in effect.

This case is controlled by the decision in United States v. Auer (C. C. A.) 51 F.(2d) 921, this day decided, for the evidence here is stronger than in the Auer Case. As we said in that case, we will not consider the alleged error, raised for the first time before this court, that the trial court instructed the jury that it must presume the insured’s tuberculosis to have been acquired while in the service if it developed before January 1, 1925, and created a 10 per centum disability. Act of June 7, 1924, e. 320, § 200, 43 Stat. 615, as amended by Act July 3, 1930, c. 849, § 11, 46 Stat. 995 (38 TJSCA § 471). As we pointed out in that case, the evidence was sufficient to support the verdict, regardless of the presumption that the insured acquired tuberculosis during his military service.

On November 2, 1918, while in active service in Prance, the insured was gassed, and injured in his back by a falling steel rail. Later, he was sent to a base hospital, suffering from severe pains in his chest, shortness of breath, and spitting blood. In addition, the injury to his back was causing him trouble. He saw no more active service.

After his discharge, though severely hampered by chest pains, he sought and obtained work from a construction company, but was discharged for irregularity due entirely to his physical condition. He was again employed, after an interval of several months, as a porter. After a week or so his employer sent him to the Red Cross to get assistance. He then spent some time in two hospitals, and, after his discharge, depended entirely on charity for his sustenance.

In 1921 he began vocational training under the Veterans’ Bureau. He was often forced to suspend his training because of illness, but managed to finish it in 1925.

He next obtained employment from a railroad company, but, after working intermittently for a few weeks, he fainted, and was sent to a hospital, where his condition was diagnosed as tuberculosis moderately advanced. After two years he was discharged from the hospital with a temporary, total disability rating.

Two private physicians who examined him as early as 1923 testified that he had active pulmonary tuberculosis. And several physicians testifying for the government said that the insured would be able, to do only “light work” because of the injury to his back.

With these facts in mind, we are of the opinion that there was sufficient evidence for a jury to find that the insured at the time of his discharge was unable to follow continuously any substantial gainful occupation, and that his disability is permanent.

The judgment is therefore affirmed.


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    FRANK v. COMMISSIONER OF INTERNAL REVENUE.
    No. 4569.
    Circuit Court of Appeals, Third Circuit.
    Aug. 18, 1931.
    Edward P. Hitchcock and David J. Myers, both of Philadelphia, Pa., for petitioner.
    G. A. Youngquist, Asst. Atty. Gen., and S.ewall Key and Morton K. Rothschild, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Prew Savoy, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for respondent.
    Before BUPPINGTON and DAVIS, Circuit Judges, and S CHO ONMAKER, District Judge.
   DAVIS, Circuit Judge.

*This case is here on petition of Jacob W. Frank to review the determination of the United States Board of Tax Appeals of his income tax return for the year 1923.

There is no dispute as to the facts. The dispute arises over the interpretation of undisputed facts contained in an agreement between the taxpayer and his estranged wife. The taxpayer owned a piece of real estate, known as No. 2025 Chestnut street, Philadelphia, Pa., which he desired to sell; but his wife would not sign the deed of conveyance unless she was paid $40,000, which was about one-half of the net amount which he received out of the purchase price. The $40,000 was paid to' her in 1923.

In reporting his income for the year 1923, the taxpayer did not include the $40,-000, but the Commissioner of Internal Revenue refused to allow the deduction on the ground that the payment was in the nature of alimony, and on appeal, the Board of Tax Appeals sustained the determination of the Commissioner and the case was brought here on appeal.

After having been married 26 years, domestic difficulties arose between Dr. Frank and his wife in the year 1917, and he instituted a suit against her for divorce in March, 1919. She thereupon filed application for counsel fees and alimony pendente lite. She was allowed $100 per month alimony. Nothing further appears to have been done in this suit, and on May 9, 1922, Mrs. Frank prepared and executed a libel for divorce from her husband but it was not filed until October 14th of that year.

The suit of Dr. Frank had not been brought to trial in August, 1922, when on the 22nd of that month he and his wife entered into an agreement with respect to the sale of the real estate and the payment of the $40,000. It is reeited in the agreement that Mrs. Frank was unwilling to execute a deed to the purchaser and divest herself of her inchoate rights in the premises under the intestate laws of Pennsylvania unless her husband paid her $40,000 for so doing. The agreement provided that the deed was to be executed, placed in escrow with the Republic Trust Company of Philadelphia until the termination of the divorce proceedings which Dr. Frank had instituted against his wife or which she had instituted against him. The agreement further provided: “And in the event that a final decree be entered in favor of the party of the second part in the proceeding instituted by her against the party of the first part, or in favor of the party of the second part, then the said sum of $40,000 shall be paid over by the said Republic Trust Company to John R. K. Scott, Esquire, attorney for the party of the second part; or in the event of the discontinuance of said proceedings, and in the event that a final decree divorcing the parties hereto be not entered by the Court within one year from the date hereof, then the said sum of $40,-000 together with deed mentioned hereinafter in paragraph two shall be returned to the party of the first part.”

The deed was executed, placed in escrow, the divorce granted to Mrs. Frank within the year, and the $40,000 'was paid in accordance with the agreement.

Section 213 (a) of the Revenue Act of 1921 (42 Stat. 237), which controls this case, provides that “gross income” includes gains, profits, and income derived from sales, or dealings in real and personal property, growing out of the ownership or use of or interest in such property.

Section 215 (a) of the act (42 Stat. 242) provides that in computing net income, no deduction shall in any case be allowed in respect of living or family expenses, and Article 291 in Treasury Regulations No. 62 provides that “alimony and an allowance paid under a separation agreement are not deductible from gross income.”

The taxpayer contends that the $40,000 was paid Mrs. Frank for her interest in the land in question and not as alimony. This is the real question and must be decided by the interpretation of the agreement in the light of the surrounding circumstances.

The parties understood that Mrs. Frank had an “interest in” the real estate and was unwilling to “divest herself of her inchoate rights in said premises under the intestate laws of Pennsylvania” unless she received $40,000 as a consideration for so doing. It appears that Mrs. Frank was not mistaken as to her “inchoate rights” in the property.

The Wills Act of 1917, P. L. 403, of Pennsylvania (20 PS § 261), provides that: Section 23 (a). “When any person shall die testate, leaving a surviving spouse who shall elect to take against the will, such surviving spouse shall be entitled to such interests in the real and personal estate of the deceased spouse as he or she would have been entitled to had the testator died intestate.”

The Intestate Act of the same year, 1917, P. L. 429 (’20 PS § 1), provides: Section 1(a). “Where such intestate shall leave a spouse surviving and one child only, or shall leave a spouse surviving and no children * * * the spouse shall be entitled to one-half part of the real and personal estate.”

Mrs. Frank, therefore, had “an interest” in the real estate, and there was no way by which she could be divested of this interest by her husband, and the only way by which he could sell the property and give a clear title to it was by paying her the $40,000. This was not a gift to her by the husband, but was the price of her interest in her inchoate rights in the property. Burk’s Appeal, 75 Pa. 141, 15 Am. Rep. 587; Hannan v. Carroll, 283 Pa. 61, 128 A. 657; Heckman’s Estate, 299 Pa. 369, 149 A. 646.

While the agreement reeites that “unhappy differences have arisen between the parties hereto,” it nowhere even hints that this payment of $40,000 was in the nature of or in lieu of alimony. The statement of domestic difficulties between them is simply explanatory of the agreement, for when husband and wife sell property under ordinary circumstances, they do not enter into such written stipulation.

The agreement further provided for the conveyance by Mrs. Frank of premises located at No. 2631 Myrtlewood street, Philadelphia, but nothing whatever is said about alimony.

Mrs. Frank had two rights, an inchoate right in the property, both real and personal, of Dr. Frank, and a present right to alimony. The agreement settled her rights in the properties mentioned therein, but it is silent as to whether or not Dr. Frank had other property and as to whether or not the divorce settled her rights as to alimony.

The Board says that in the light of the circumstances, the institution of divorce proceedings by Dr. Frank against his wife, and the execution of a libel for divorce by her to be thereafter filed against him, affecting their affairs at the time they entered into this agreement on August 22, 1922, it is obvious that the thought uppermost in their minds at this time was the solution of their domestic difficulties.

But this is only an inference contrary to the facts expressed in the agreement and is not justified, for they were not thinking of income taxes or deductions at that time. The agreement itself discloses its object which it sought to accomplish and the circumstances under which it was executed. We think that a fair interpretation of its provisions shows that the object of Dr. Frank was to take advantage of an opportunity to sell the property, and the intention of Mrs. Frank was to prevent that sale unless she secured an equivalent of her inchoate rights in the two properties. She was represented by very capable counsel and certainly was informed as to her rights. We, therefore, think that the inference that this $40,000 was a payment in lieu of alimony is an assumption which is contrary to a fair interpretation of the facts.

The determination of the Commissioner and redetermination of the Board are set aside, and the return of the taxpayer is approved.


author: PHILLIPS, Circuit Judge.

text:
    PURE OIL PIPE LINE CO. v. ROSS.
    No. 385.
    Circuit Court of Appeals, Tenth Circuit.
    July 25, 1931.

      Thos. H. Owen and M. A. Looney, both of Oklahoma City, Okl. (Paul N. Lindsey and J. Fred Swanson, both of Oklahoma City, Okl., on the brief), for appellant.
    A. B. Carpenter, of Shawnee, Okl., for appellee.
    Before COTTERAL, PHILLIPS, and McDERMOTT, Circuit Judges.
   PHILLIPS, Circuit Judge.

Ross brought this action against the Pure Oil Pipe Line Company to recover damages for personal injuries. Prom a judgment for plaintiff defendant has appealed.

At the trial plaintiff testified as a witness in his own behalf. On cross-examination he was asked whether he had pleaded guilty in the county court of Payne County, at Still-water, to selling intoxicating liquor, and had been sentenced to pay a fine of $106 and to serve thirty days in jail. On the objection of counsel for plaintiff the court ruled that a conviction for a violation of a Prohibition Law cannot be shown to affect the credibility of a witness.

Section 725, Title 28, USCA, reads as follows:

“The laws of the several States, except where the Constitution, treaties, or statutes of the United States otherwise require or provide, shall be regarded as rules of decision in trials at common law, in the courts of the United States, in eases where they apply.”
Section 585, C. O. S. 1921, reads as follows:
“No person shall be disqualified as a witness in any civil action or proceeding, by reason of his interest in the event of the same, as a party or otherwise, or by reason of his conviction of a crime; hut such interest or conviction may be shown for the purpose of affecting his credibility.”

It is well settled that section 725, supra, requires the national courts in the trial of civil eases at common law to observe as rules of decision, when not within the exceptions named, the rules of evidence prescribed by the statutes of the states in which such national courts are held. Connecticut M. Life I. Co. v. Union Trust Co., 112. U. S. 250, 5 S. Ct. 119, 28 L. Ed. 708; Turner Simplicity Mfg. Co. v. Bremner (C. C. A. 8) 40 F.(2d) 368, 370; and eases cited in note 81, see. 725, Title 28, USCA.

Section 7002, C. O. S. 1921, declares that a violation of the Oklahoma Prohibition Law is a misdemeanor punishable by a fine of not less than $50 nor more than $500 and by imprisonment for not less than thirty days nor more than six months.

The word crime ordinarily includes a misdemeanor. Murray v. United States, 53 App. D. C. 119, 288 F. 1008, 1014; United States v. Zarafonitis (C. C. A. 5) 150 F. 97, 101, 10 Ann. Cas. 290; 16 C. J. p. 51.

The Oklahoma courts have construed the word crime as used in section 585, supra, to include a misdemeanor such as a violation of the State Prohibition Law. Relf v. State (Okl. Cr. App.) 280 P. 851; Hargis v. State, 33 Okl. Cr. 283, 243 P. 986; Queen v. State, 23 Okl. Cr. 146, 212 P. 1021; Hendricks v. State, 23 Okl. Cr. 18, 212 P. 330.

It follows that the trial court erred in sustaining the objection to the impeaching question.

The question remains: Was such error prejudicial?

The exclusion of competent impeaching evidence is not prejudicial error where the testimony of the witness sought to be impeached is in substantial harmony with that of unattaeked witnesses, and is not contradicted. Mo., K. & T. R. Co. v. Johnson, 34 Okl. 582, 126 P. 567, 571; Finlen v. Heinze, 32 Mont. 354, 80 P. 918, 926; Graham v. State, 28 Okl. Cr. 266, 230 P. 763, 766; 4 C. J. p. 961, § 2942. However, the exclusion of competent impeaching testimony is prejudicial error where the testimony on the issue, relating to which the witness is offered, is unsupported by other evidence. Calahan v. Dunker, 51 Ind. App. 436, 99 N. E. 1021, 1025; Texas & P. R. Co. v. Spann (Tex. Civ. App.) 173 S. W. 600; Smith v. State, 34 Okl. Cr. 396, 246 P. 1104; 4 C. J. p, 961, § 2942.

The facts with respect to the accident, and to a large extent with respect to the injuries and damages, rest wholly upon plaintiff’s testimony. This testimony was vital and it is impossible to say what effect the admission of the improperly excluded impeaching testimony would have had upoix the jury. It follows that the error injuriously affected a substantial right of defendant and was prejudicial.

The petition did not plead loss of eaxmings as special damages. Plaintiff testified that he was a rock mason; that before the accident he had been engaged in laying rock and had been earning five dollars per day; that due to injuries suffered at the time of the accident he had thereafter beeix unable to work. Counsel for defendant objected to this evidence on the gx’ound that the petition did not plead loss of earnings as special damages, and also reqxxested the court to instruct the jury that it should not take into consideration any loss of earning capacity sxiffered by plaintiff in arriving at his damages. The objection was overruled and the request refused.

In the case of Kennedy v. Van Horn, 77 Okl. 100, 186 P. 483, the court said:

“The rale appears to be well settled that special damages must be pleaded, and it is error to admit proof of such damages in the absence of such allegation. * * *
“It is equally well settled that diminished earning capacity from a personal injury is special damages, and to be recoverable must be especially claimed in the petition. * * *
“An allegation of ‘permanent injury’ is not equivalent to an allegation of diminished earning capacity. “ * *
“There being no allegation as to plaintiff’s earning capacity, the extent to which such capacity had been impaired was not properly within the issues, and it was error to admit testimony, over the objections of the defendant, as to the difference betweexx his earnings prior and subsequent to the injury, and to submit that question to the jury as an element of damages.”

The admissibility of evidence under the pleadings is a matter respecting the remedy, and under the Conformity Act is governed by the law of the place where the suit is brought. Pacific Coin Lock Co. v. Coin Controlling Lock Co. (C. C. A. 9) 31 F.(2d) 38; Southern R. Co. v. King (C. C. A. 5) 160 F. 332, 339; Monarch Tobacco Works v. American Tobacco Co. (C. C. Ky.) 165 F. 774, 782, 783; Central Vt. R. Co. v. White, 238 U. S. 507, 511, 513, 35 S. Ct. 865, 59 L. Ed. 1433, Ann. Cas. 1916B, 252.

The general charge of the court did not mention loss of earnings as an element of damages and probably did not warrant the jury in taking into consideration such loss in estimating plaintiff’s damages. However, since evidexxee of loss of earnings was introduced, we think the requested charge should have been given to avoid possibility of the jury erring.

If the plaintiff desires to introduce evidence showing loss of earning capacity and to have that issue submitted to the jury, he should amend his complaint by setting up loss of earnings as special damages in conformity with the requirements of the Oklahoma practice.

The cause is reversed and remanded, with instructions to grant defendant a new trial.


author: McDERMOTT, Circuit Judge

text:
    GOLDEN CYCLE CORPORATION et al. v. COMMISSIONER OF INTERNAL REVENUE.
    No. 332.
    Circuit Court of Appeals, Tenth Circuit.
    July 30, 1931.

      Wm. V. Hodges, of Denver, Colo. (D. Edgar Wilson and Henry C. Vidal, both of Denver, Colo., were with him on the brief), for petitioners.
    John H. McEvers, Sp. Asst, to Atty. Gen. (G. A. Youngquist, Asst. Atty. Gen., Sewall Key, Sp. Asst, to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Percy S. Crewe, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., on the brief), for respondent.
    Before LEWIS, PHILLIPS, and McDERMOTT, Circuit Judges.
   McDERMOTT, Circuit Judge

(after stating the facts as above).

At the threshold of this ease stands the question of the interpretation of the transaction of January 15, 1917. The Pikes Peak Consolidated Fuel Company was organized that day; to it the Cycle Corporation transferred properties worth $1,350,000 and received therefor stock worth that amount. These properties had cost about $200,000. If the Consolidated Company was not affiliated within the meaning of the 1917 regulations —if it was a legal stranger as petitioners contend — then there was a realized profit in the transaction of more than a million dollars, a profit which increased the undivided profits or surplus account of the Cycle Corporation, and likewise its invested capital. If a corporation owns two hardware stores, and sells one of them to a stranger at a profit for cash, and leaves the cash in its business, its undivided profits and its invested capital is increased by the amount of the p"rofit. The relationship of the Cycle Corporation to the old Pikes Peak Fuel Company is of assistance in arriving at the actual relationship of the two corporations after January 15, 1917.

In determining the question, it should be remembered that in taxing matters in particular, we must have regard “to the very truth of the matter, to substance and not to form.” Eisner v. Macomber, 252 U. S. 189, 211, 40 S. Ct. 189,195, 64 L. Ed. 521, 9 A. L. R. 1570 Bowers v. Kerbaugh-Empire Co., 271 U. S. 170, 174, 46 S. Ct. 449, 70 L. Ed. 886.

Were these corporations affiliated after January 15, 1917? In the first place the Commissioner found an affiliation in 1917; otherwise his deficiency letter would not have included 1917 taxes. The Board of Tax Appeals held that the Commissioner so found, and approved. A heavy burden is on the petitioners to prove that such finding of the Commissioner was “plainly arbitrary.” Lucas v. Structural Steel Co., 281 U. S. 264, 50 S. Ct. 263, 74 L. Ed. 848; Reinecke v. Spalding, 280 U. S. 227, 50 S. Ct. 96, 74 L. Ed. 385. And by repeated decisions it has been held that findings of the Board of Tax Appeals will not be set aside if they are sustained by competent and substantial evidence. Prey Bros. Live Stock Comm. Co. v. Commissioner (C. C. A. 10) 36 F.(2d) 326. Furthermore,' we think the record discloses affiliation in 1917 and long prior thereto. The record discloses that coal is used in the reduction of gold ore. Now that in itself does not relate the coal business to the gold business. But one engaged in the business of gold reduction can, by going into the coal business, broaden the scope of its gold reduction business, just as many automobile manufacturers have broadened the former scope of automobile manufacturing to include all steps in manufacture from the mining of ore, through the refining of steel, to the assembly of parts. The gold reduction business can be conducted in a simple way; or it can be broadened to include all steps in it, from the mining of ore and coal to the time when the refined product is delivered. The record discloses that the Cycle Corporation long considered that the production of coal was a step in its process. Prior to 1913'it was buying coal lands and interests in a company engaged in the mining and sale of coal. Moreover, the record stipulates that the business of the Cycle Corporation is not simply gold-ore reduction ; it includes the “holding of the capital stock of all its subsidiaries.” The truth is that the Cycle Corporation considered the supply of fuel as an integral part of the business of gold reduction; it acquired coal lands;' and it acquired the original Pikes Peak Fuel Company, long before 1917. What it did in January, 1917, was to wipe out the old corporate structure and a bagatelle of outstanding common stock and bonds, and set up in its place a new and simpler corporate structure. As to the Cycle Corporation, the coal business was not only “closely related” within the meaning of the 1917 regulation — it was a department of “the same” business. The 1917 transaction set that department off into a new corporate structure. No profit was realized in bringing about this change in the corporate structure, unless perchance it be the negligible item of the elimination of 1 per cent, of the common stock, which rode behind $246,500 of bonds and 5,000 shares of preferred stock. By so doing, the investment in the properties was not increased by a million dollars, or by anything.

Insurance & Title Guarantee Co. v. Commissioner (C. C. A. 2) 36 F.(2d) 842, is cited as contra. The case is readily distinguishable. There the parent corporation transferred properties which had cost it $15,000 to a newly organized company in exchange for all of its shares, which were worth $35,-000. These shares were immediately distributed to the stockholders of the parent company. The court sustained the Commissioner in assessing an income tax against the parent corporation. It will be seen that the parent corporation completely severed itself from the ownership of the properties, and did not, after the transaction, own any of the shares of the subsidiary, while in the case at bar it owned them all. The corporations were not affiliated in the cited case, except momentarily; here they were affiliated throughout the taxable years. In the cited case, the substance of the transaction was an outright sale of the properties; the profit did not remain as a part of the surplus of the seller, but was distributed to the stockholders as a realized profit.

For these reasons we treat the case as one where the Cycle Corporation owned properties in whinh.it had invested approximately $200,009, and which had so appreciated iñ value that in 1917 they were worth $1,350,000; and we treat the 1917 transaction as one whereby this department of the business of the Cycle Corporation was changed over from the old to the new Fuel Company. So treating the situation, we approach the principal contention of the petitioners, to wit, that affiliation in 1917 or before is immaterial; that only the years 1918 and 1919 are here involved, affiliation under the 1918 statute being conceded; that the-proper method of computing the invested capital of affiliated corporations is to ascertain the invested capital of each, and, after eliminating duplications, add them; that there was an actual value of $1,350,000 in these fuel properties in 1918 and 1919; that there is no authority in law for ignoring this value; that it must be considered either, as invested capital of the Consolidated Fuel Company, embarked and risked in the business, eliminating from the invested capital of the Cycle Corporation its investment in that stock as a duplication; or, if the Consolidated Company’s invested capital is treated as $200,000, the original cost of the properties, then the Cycle Corporation’s invested capital must be increased by the profit passed to surplus.

The Revenue Acts for the years in question laid an additional tax on net income in excess of an amount which was supposed to represent a normal profit in normal times. This normal profit was calculated on “invested capital.” Section 326 of the Revenue Act of 1918 (40 Stat. 1092) defines invested capital as — ■

“(1) Actual ca'sh bona fide paid in for stock or shares;
“(2) Actual cash value of tangible property, other than eash, bona fide paid in for stock or shares, at the time of such payment, but in no ease to exceed the par value of the original stock or sharps specifically issued therefor, unless the actual cash value-of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus; * * *
“(3) Paid-in or earned surplus and undivided profits; not including surplus and undivided profits earned during the year.”

The theory of the excess profits tax is to-recapture a part of the unusual profits attributable to the activities of the war. If that theory is of practical value, normal profits must be figured on investment, for, if a normal return is figured on abnormal and inflated .war-time values, then an abnormal and not a normal profit is taken as the starting point. The phrase “invested capital” means capital put in either by stockholders or by the- corporation reinvesting its earnings, and does not mean the increment to capital accming by appreciated values. The statutory de^itipn...excludfiS_theJLdea-o£.con-sidering"appreciated value as.a part'of the capitaljnvested; and this has been settled in La Belle Iron Works v. United States, 256 U. S. 377, 41 S. Ct. 528, 65 L. Ed. 998. In that ease a mining company bought lands in 1904 for $190,000. Exploration, disclosed large ore bodies, and in 1912 the lands were °worth $10,000,000. In 1912 this appreciated value was capitalized and a • stock dividend declared and paid out of the surplus so arising. The company claimed their invested capital in 1917 should include the $10,000,-000. The court held that the capital invested in such lands was the $190,000 paid for them in 1904, plus moneys expended in development, and stated that the statute, and the reasons for its enactment, “distinctly negatived any allowance for appreciation in value”; that the statute cannot be construed “as including within the definition of invested capital any marking up of the valuation of .assets upon the books to.correspond with increase in market value, or any paper transaction by which new shares are issued in exchange for old ones in the same corporation, but which is not in substance and effect a new acquisition of capital property by the company.”

The amount of tax assessable against a particular business depending so largely upon its invested capital, and the tax rates being graduated, the total tax payable could be lessened by distributing the ownership of the properties of the business, and by allocating its income. The corporation laws- afforded a simple and lawful method of distributing the legal ownership of properties and of allocating income, without disturbing the relative rights of the stockholders. To prevent this praeticeytbe Treasury Department, in 1917, promulgated Regulation 41, article 78 (confirmed by section 1331, Revenue Act 1921 [42 Stat. 319]). That regulation required affiliated corporations to file consolidated re-turhs 'of 'lE-eir" net income and invested eapi-tálpand provided that in such case' “the total tax will be computed in the first instance as a unit upon the basis of the consolidated return and will be assessed upon the respective affiliated corporations in such proportions as may be agreed 'among them. If no such agreement is made the tax will be assessed upon each such corporation in accordance with the net income and invested capital properly assignable to it.”

Regulation 41, article 77, provides that corporations will be deemed to be affiliated “(1) when one such corporation owns directly or controls through closely affiliated interests or by a nominee or nominees, all or substantially all of the stock of the other or others, or when substantially all of the stock of two or more.corporations is owned by the same individual or partnership, and both or all of such corporations are engaged in the same or a closely related business; or (2) when one such corporation (a) buys from or sells to another products or services at prices above or below the current market, thus effecting an artificial distribution of profits, or (b) in' any way so arranges its financial relationships with another corporation as to assign to it a disproportionate share of net income or invested capital.”

Section 240 of the Revenue Act of 1913 (40 Stat. 1082) required that affiliated corporations make “a consolidated return of net income and invested capital” for the purposes of both excess-profits and income taxes; and corporations were deemed to be affiliated if one corporation owned or controlled “substantially all the stock of the other.” ■

There is no obscurity as to the purpose of these statutes and regulations. Their purpose was to prevent corporations from avoiding the payment of their sharei of the war taxes by the device of affiliation. When the 1918 act was before Congress, the chairman of the Finance Committee recommended its passage “because the principle of taxing as a business unit what in reality is a business unit is sound and equitable.” The ranking minority memben of the Committee joined in the recommendation, saying, “It is impossible to determine the true profits of such a combined enterprise except by treating the enterprise as a unit and disregarding the incidental placing of different branches in legally separate corporations.” The statutes and the regulations have been many times construed. The Eighth Circuit held that their purpose “was to forestall such manipulation of profits * * * as would prevent the government from ascertaining correctly, and from collecting the sums just- , ly due it, from excess profit taxes, of the con-1, trolled and affiliated corporations.” Schlafly v. United States, 4 F.(2d) 195, 200. The Seventh Circuit has held their purpose was “to wipe out the artificial legal barriers of separate corporate entities * * and treat the affiliated corporations as a single unit.” W. S. Bogle & Co. v. Commissioner, 26 F.(2d) 771, 772. The Sixth Circuit has held that their purpose was to “tax as an economic unit any group of companies so operated as to make arbitrary apportionment of income possible.” United States v. Cleveland, P. & E. R. Co., 42 F.(2d) 413, 418. The Fourth Circuit has held “that what was iii fact one business should be taxed as one business, notwithstanding that it might be operated by two or more corporations * * “ and that * * * the tax on the business should not be * * * diminished 'because of division of income which, if allowed, might result in evasion of the higher rates of the graduated tax.” Lavenstein Corporation v. Commissioner, 25 F.(2d) 375, 376. The Second Circuit has held that the theory underlying them “is that the .income and invested capital are really the income and capital of a single enterprise, though carried on through the instrumentality of several corporations.” Ice Service Co. v. Commissioner, 30 F.(2d) 230, 231. See, also, opinion of Judge Booth, in Fidelity Nat. Bank & T. Co. v. Commissioner (C. C. A. 8) 39 F.(2d) 58.

These authorities amply sustain the proposition that appreciation in the value of property cannot be taken into account in computing invested capital, either directly, or indirectly through the device of transferring properties to an affiliated corporation. Yet this is exactly what the petitioners are attempting to do. The Cycle Corporation owned these coal properties for many years; its capital invested therein was about $200,000. It seeks to increase that invested capital to $1,-350,000, not by investing another million dollars in the enterprise, but by causing the properties to be transferred from one subsidiary corporation to another. This is what’ the statutes were designed to prevent; it is what the decisions cited say may not be done.

The petitioners urge, with vigor and earnestness, several reasons in opposition. It is argued that the transfer was made in 1917, before the regulation as to consolidated returns was adopted, and before the tax years in question. The 1918 law does not purport to except corporations affiliated in prior years, and it would be manifestly unfair to so discriminate. In La Belle Iron Works v. United States, supra, the new stock was issued in 1912; in Lavenstein Corporation v. Commissioner, supra, the tax was for 1919 and 1920, and the affiliation was in 1917. A ease, closely parallel in its facts, is Autosales Corporation v. Commissioner (C. C. A. 2) 43 F.(2d) 931. The tax years involved were 1917, 1918', and 1919. A predecessor of the petitioner acquired, in 1911, all of the capital stock of the Weighing & Sales Company. The petitioner claimed, as part of its ihvested capital, $1,350,000, the value of the stock of the Weighing & Sales Company. Instead, the court disregarded corporate entities, and undertook to ascertain the contribution made to the invested capital of the group when the stock of the Weighing & Sales Company was acquired in 1911.

Petitioners refer us to section 331 of the Revenue Act 1918 (40 Stat. 1095), which provides in substance that, in case of reorganization or consolidation after March 3, 1917, if control of 50 per cent, remains in the same-persons, in ascertaining invested capital no asset transferred or received from the prior business shall be appreciated in value unless paid for at the higher value. From this it is argued that, on transfers made to subsidiaries prior to March 3, 1917, appreciation in value may be computed in ascertaining invested capital. We are not impressed by the argument. When statutes are plain, they are not lightly to be set at naught by negative inferences drawn from other sections. This section is in the same act that requires consolidated returns from all corporations owning “substantially all” the stock of another. Congress apparently saw no conflict between this section -with its requirement of “substantially all” and without a date limit, and section 331 with its “50% or more” requirement and a date limit. .No court has declined to enforce the provisions as to affiliated corporations because the affiliation took place prior to March 3, 1917. In Autosales Corporation v. Commissioner, supra, the affiliation took place in 1911; in Lavenstein Corporation v. Commissioner, supra, the affiliation was in Mareh, 1917; that court thought the date in Mareh of no significance, for it is not given. We read the two sections as applicable to different conditions; but, whether there may be an overlapping or not, we agree with the statement of the Second Circuit, in treating of the “reorganization, merger, or _ consolidation” phrase in section 202(b) of the Revenue Act of 1918 (40 Stat. 1060) that “at any rate it is not enough to change the entire pattern of the exemption, so as to cover such a transaction as this.” Insurance & Title Guarantee Co. v. Commissioner, 36 F.(2d) 842, 844.

It is apparent that, if the formula proposed by petitioners of a separate computation of invested capitals be adopted, the whole statutory system to prevent the inclusion of appreciated values by affiliation is scrapped. Any corporation could do what La Belle Iron Works v. United States, supra, holds cannot be done, by the simple expedient attempted here, of transferring to one or more of its subsidiaries part or all of its appreciated assets. No authority is cited supporting this frontal attack on the statutory plan, except an isolated sentence from W. S. Bogle & Co. v. Commissioner, supra, and an inference drawn from the section (240) of the Revenue Act of 1918 dealing with consolidated returns, which provides that a corporation organized after August 1, 1914, having wartime contracts — a war baby— “shall be separately assessed on the basis of its own invested capital.” While we see no need of resorting to inferences to get at the intent of this legislation, such inference as may bé derived from this section bears directly against petitioners. If the plan of Congress was that the invested capital of all affiliated corporations was to be separately computed, as petitioners contend, it was futile to specifically provide for a separate computation of the invested capital of the so-called “war babies.”

We conclude that the Commissioner was right in declining to acknowledge that the invested capital of the group was actually increased by the manipulations of January 15, 1917, and in declining to reduce the taxes accordingly.

The order of the Board of Tax Appeals is affirmed.