author: JOHN W. PECK, Circuit Judge.

text:
    Charles RAY et al., Plaintiffs-Appellees. v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant-Appellant.
    No. 73-2133.
    United States Court of Appeals, Sixth Circuit.
    Argued April 12, 1974.
    Decided June 14, 1974.

      Thomas J. Manahan, Finn, Manahan & Pietrykowski, Toledo, Ohio, for defendant-appellant.
    Wilbur C. Jacobs, Mittendorf, Jacobs, Reiser & Zraik, Toledo, Ohio, for plaintiffs-appellees.
    Before PECK and McCREE, Circuit Judges, and CECIL, Senior Circuit Judge.
   JOHN W. PECK, Circuit Judge.

We are asked to decide, in this diversity case, whether Ohio law permits the “stacking” of uninsured motorist coverages from separate motor vehicle liability insurance policies issued to a single insured on different automobiles. The matter is before us on an interlocutory appeal from the partial granting of summary judgment in favor of the plaintiffs, the district court having certified that its order involved a controlling question of law as to which a substantial ground for difference of opinion exists and that an immediate appeal would advance this litigation.

The facts are not in dispute. The plaintiffs-appellees, Charles Ray, his wife, and his daughter, received serious injuries in a head-on collision with an uninsured motorist. At the time of the accident, State Farm Mutual Automobile Insurance Company (hereinafter “State Farm”), the defendant-appellant herein, had in force a separate automobile liability insurance policy on each of three automobiles owned by Mr. Ray, one of which applied to the car in which they were riding. Appellees were “insureds” under each of the policies. With State Farm’s consent, appellees obtained default judgments against the uninsured motorist totalling $167,000.

The provisions of the three policies of insurance issued to Mr. Ray were identical. The limits afforded under the uninsured motorist clause in each policy was $15,000 per person and $30,000 per accident. Aggregated, the three policies provided uninsured motorist coverage of $45,000 per person and $90,000 per accident. Below, appellees sought, inter alia, a declaratory judgment that they were entitled to aggregate the uninsured motorist coverages from the three separate policies; that is, they asked the district court to declare that they were entitled to “stack” the three coverages for the single accident involving an automobile insured under one policy.

The district court, in response to a motion for partial summary judgment filed by appellees, entered an order granting the motion for summary judgment to allow “stacking” of the uninsured motorist coverages. State Farm petitioned this Court for leave to appeal from that order, and on the certification of the district court, as hereinabove indicated this Court granted that petition.

Appellees have attempted to raise the issue of the district court’s refusal to allow “stacking” of medical payment coverages, but this issue was not properly raised and is not before us here.

State Farm takes the position that under the terms of the policies, “stacking” of uninsured motorist coverages is not permitted, and further, that Ohio law recognizes the validity of such a limitation. Appellees urge contrary conclusions. The resolution of this dispute turns, in the first instance, on the language in the contracts of insurance between the parties.

The uninsured motorist section of the policies provides that State Farm agrees with the insured:

“To pay all sums which the insured or his legal representative shall be legally entitled to recover as damages from the owner or operator of an uninsured motor vehicle because of bodily injury sustained by the insured, caused by accident and arising out of the ownership, maintenance or use of such uninsured motor vehicle . . . .”
(Emphasis the policies’.)

Immediately following this section appear a number of exclusions, one of which reads:

“THIS INSURANCE DOES NOT APPLY:
* * * -X- -X- *
“(b) to bodily injury to an insured while occupying or through being struck by a land motor vehicle owned by the named insured or any resident of the same household, if such vehicle is not an owned motor vehicle .” (Emphasis the policies’.)

The term “owned motor vehicle” is defined elsewhere as “the motor vehicle or trailer described in the declarations »

The above language clearly and unambiguously states that uninsured motorist coverage does not extend to the insureds when they are occupying a motor vehicle owned by one of the insureds that is not described in the declaration section of the policy- In the instant case, Mr. Ray purchased three separate liability policies, each describing in its declaration clause one of the three automobiles he owned. The insureds were riding in one of these vehicles when the accident occurred, and the policy in which that vehicle was described definitely provided uninsured motorist coverage. However, because the involved vehicle was not an “owned motor vehicle” under either of the policies on the other two automobiles, the uninsured motorist insurance provided therein was not applicable to this accident.

At this point we must delimit the problem before us. The uninsured motorist coverage in the State Farm policies extended protection to the insureds not only when they were riding in the “owned motor vehicle,” but also when they were occupants of motor vehicles owned by third persons, or when they were pedestrians, on horseback, or whatever. The exclusionary language relied upon by State Farm does not apply unless the insureds were occupying a vehicle owned by one of them, making available the argument that they would be entitled to “stack” the coverages if any of the above mentioned situations arose. We are not, however, faced with those questions in this case, and we do not express an opinion as to the result that might be reached under those circumstances.

Having resolved the threshold question concerning the contractual language in the uninsured motorist provisions in favor of State Farm, we meet the further issue of whether such an exclusion is effective under Ohio law. Ohio Revised Code Section 3937.18, which became effective in 1965, requires insurance carriers to offer uninsured motorist coverage in every motor vehicle liability policy issued. Although there is a wealth of eases from other jurisdictions dealing with issues similar to that here presented, at the time the district court had this case under advisement it did not have the benefit of an Ohio case on point. Since that time, however, three cases have been handed down by Ohio appellate courts directly bearing on the question of “stacking,” but because the Supreme Court of Ohio has not addressed itself to this issue to date, Ohio law “is not finally and conclusively declared.” Michie v. Great Lakes Steel, 495 F.2d 213 (6th Cir. 1974). Following the dictates of Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), we hereinafter seek to determine what the Supreme Court of Ohio would do in this case by reference to these three court of appeals decisions.

On June 30, 1973, the Court of Appeals of Montgomery County, Ohio, held that uninsured motorist coverage cannot be aggregated. Hurles v. Republic Franklin Ins. Co., Case No. 4209 (Ct. App. Montgomery Co., Ohio, filed June 30, 1973). In that case the insured had a single insurance policy which afforded uninsured motorist coverage for each of the two automobiles which he owned, but separate premiums were charged for each automobile. Injured by an uninsured motorist while operating one of the insured vehicles, insured claimed the right to “stack” the uninsured motorist coverage for the vehicle not involved in the accident on top of that provided for the automobile that was involved. In reaching its conclusion not to allow “stacking,” the court reasoned that uninsured motorist coverage for two automobiles was purchased by the payment of separate premiums, and the nonpayment of either one of the premiums would have resulted in a loss of coverage for one of the vehicles. Therefore, since “there is separate consideration for each premium,” the insured was only entitled to the coverage for the vehicle involved in the accident.

In Nichols v. Allstate Ins. Co., Case No. CA 73-04-0037 (Ct.App. Butler Co., Ohio, filed December 10, 1973), the insured owned two automobiles covered by a single insurance policy which contained separate premium payment provisions for uninsured motorist coverage. The policy provided that “[w]hen two or more automobiles are insured by this policy, the terms of this policy shall apply separately to each ,. . . . ” The court held that insured, who was injured by an uninsured motorist while occupying one of the covered automobiles, was not entitled to “stack” the coverages because, (1) the insured was informed “clearly and without ambiguity, that multiple coverage has not been purchased by him,” and (2) the public policy of Ohio (as manifest in O.R.C. § 3937.18) was satisfied when the minimum limits of uninsured motorist coverage was provided. The court specifically stated that language limiting uninsured motorist coverage to single recovery was valid if it was clear and unambiguous.

The Court of Appeals of Franklin County, Ohio, was confronted with a situation generally similar to that involved in the above cases in Weemhoff v. Cincinnati Ins. Co., Case No. 73AP-419 (Ct.App. Franklin Co., Ohio, filed March 26, 1974). After reviewing the Hurles and Nichols decisions, the court found that the involved “policy affords a single uninsured motorist coverage collectively for all motor vehicles insured thereunder,” and held “stacking” inappropriate. In reaching this result, however, the court stated, in obiter dictum, that “[i]f there had been two separate policies issued, one for each of the automobiles, regardless of the premium rate, plaintiffs would be entitled to stack coverages.”

The district judge and both parties, each urging the interpretation which suits its purposes, and the Weemhoff opinion relied heavily on the decision rendered by the Supreme Court of Ohio in Curran v. State Automobile Mutual Ins. Co., 25 Ohio St.2d 33, 266 N.E.2d 566 (1971). The Syllabus of Curran reads as follows:

“1. Where an insurer provides uninsured motorist protection, as required by R.C. 3937.18, it may not avoid indemnification of its insured under that coverage by including in the insurance contract an ‘other insurance’ clause, which, if applied, would relieve the insurer from liability in circumstances where the insured has other similar insurance available to him from which he could be indemnified. Such an uninsured motorist coverage limitation is repugnant to the statute.
“2. Where an insured has uninsured motorist coverage available to him under two policies of insurance and has collected a portion of his damages from the primary insurer, but has not been indemnified to the full extent of his injury, he may collect for the balance of his damages, to the extent of its policy limits, from the secondary insurer.”

The Weemhoff court found in the above statement of law the implication that where there are two separate insurance policies issued to a single insured on two or more automobiles, the insurance carrier (or carriers) is liable for the full damages sustained by the insured up to the total coverage of all the policies combined. We do not feel Curran dictates that conclusion.

Curran states that an insured could collect from two policies where the coverages were “available to him.” We take this to mean that absent an effective exclusion of some sort, “stacking” is permitted. That is not the case here, however, as the policies clearly defined the limits of coverage not to include “stacking” when the insured was occupying an owned, but not described, vehicle.

In Curran the plaintiff was a passenger in an automobile struck by an uninsured motorist. Both the plaintiff and the owner of the car in which she was riding had in force a liability insurance policy, and these policies were written by different companies. Plaintiff was, by definition, an insured under both of the policies, and as such, entitled to indemnification from either one standing alone. However, plaintiff’s insurance carrier asserted that an “other insurance” clause in the contract enabled it to escape liability altogether. In the language of Curran:

“[1] in the event injury is sustained while the insured is occupying an automobile not owned by him, the coverage under their uninsured motorist clauses ‘shall apply only as excess insurance over any other similar insurance available to such insured and applicable to such automobile as primary insurance, and this insurance shall then apply only in the amount by which the limit of liability for this coverage exceeds the applicable limit of liability of such other insurance.’ ” Curran, supra, 25 Ohio St.2d at 36-37, 266 N.E.2d at 568.

Because both policies involved had identical limits, the clause effectively prevented plaintiff’s recovery under her own policy.

After examining a number of cases from other states, the Ohio Supreme Court decided that the “other insurance” clause was repugnant to O.R.C. § 3937.-18 because it would result in no coverage at all under insured’s own policy. “To permit an insurer, who provides uninsured motorist coverage, to avoid liability by an ‘other insurance’ clause in cases where other insurance is available to his insured would thwart that legislative intent [the compensation of persons injured by uninsured motorists].” Curran, supra, 25 Ohio St.2d at 38, 266 N.E.2d at 569. The court held that the owner’s insurance carrier was the primary insurer and as such was to bear the liability for plaintiff’s damages (as well as those suffered by the owner and other passengers) to its policy’s limit, and that the remainder of her damages were to be borne, to policy limits, by her own insurer.

In the case at bar, State Farm issued three separate policies to Mr. Ray to cover his three automobiles. Each vehicle involved a separate and distinct risk, and in recognition of that fact, the uninsured motorist coverage in each policy protected the insureds in every circumstance except when they were in an owned car not described in the policy. Appellees’ reasoning, if carried to its logical conclusion, would require an insurance carrier (or carriers) which insured one of a fleet of automobiles owned by a single insured (or family) to bear the increased risks that multiple vehicle ownership creates without increased premium. Such a result was neither contemplated by the parties nor compelled by the law in this case.

We find no merit in appellees’ argument, based in part on dicta in Weemhoff, that there is a critical difference between separate policies issued to one insured on a number of owned automobiles and a single policy with separate premium payment provisions issued to a single insured on a fleet of automobiles. The important question is not the form that insurance companies use to extend coverage to multi-vehicle insureds, but whether the policy or policies clearly inform insureds that they are not purchasing “stacked” uninsured motorist coverage.

We conclude, therefore, that the clear language of the policies excluded the possibility of “stacking” the uninsured motorist coverages, and that those exclusions are effective under Ohio law. Accordingly, the judgment of the district court is reversed, and the cause is remanded for further proceedings consistent herewith.

      . O.R.C. § 3937.18 reads in pertinent part:
      “ (A) No automobile liability . . . policy of insurance insuring against loss resulting from liability imposed by law for bodily injury or death suffered by any person arising out of the ownership, maintenance, or use of a motor vehicle shall be issued . . . unless coverage is provided therein . . . for the protection of persons . . . legally entitled to recover damages from owners or operators of uninsured motor vehicles . . . . ”
      Tlie minimum limits to be offered are $12,500 per person, $25,000 per accident. O.R.C. § 4509.20.

      . See generally, Annot., 37 A.L.R.3d 1263 (1971).


source: Caselaw Access Project

author: LAY, Circuit Judge. VAN OOSTERHOUT, Senior Circuit Judge

license: Public Domain

text:
    LIBERTY LOAN CORPORATION, Appellee, v. UNITED STATES of America, Appellant.
    No. 73-1389.
    United States Court of Appeals, Eighth Circuit.
    Submitted Nov. 14, 1973.
    Decided May 31, 1974.
    Rehearing En Banc Denied July 19, 1974.

      John A. Townsend, Atty., Tax Div., Dept, of Justice, Washington, D. C., for appellant.
    William D. Crampton, St. Louis, Mo., for appellee.
    Before VAN OOSTERHOUT, Senior Circuit Judge, and LAY and HEANEY, Circuit Judges.
   LAY, Circuit Judge.

The United States appeals from a judgment of the district court granting Liberty Loan Corporation (hereinafter taxpayer) a refund of $246,292.28 plus interest for 1961 income taxes alleged to have been wrongfully assessed and paid. The trial court’s opinion is reported at 359 F.Supp. 158 (E.D.Mo.1973). We reverse the judgment for the taxpayer and remand with directions to enter judgment in favor of the government.

The fundamental issue is whether the Commissioner of Internal Revenue properly exercised his discretion under 26 U.S.C. § 482 and the regulations promulgated thereunder in allocating to taxpayer the amount of $473,639 as interest income from certain of its wholly-owned subsidiaries.

Taxpayer is engaged in the consumer finance business, operating through 40 branch offices and 399 subsidiaries in several states. In 1961, taxpayer borrowed substantial sums which it then loaned to its 399 subsidiaries. The subsidiaries in turn loaned the monies to consumers. This procedure of borrowing by the parent was employed because of the parent’s higher credit rating, which enabled it to borrow at a lower rate of interest than would have been available to the subsidiaries acting independently. In 1961, taxpayer was able to borrow the amount involved, over $110,547,000, at an effective interest rate of 5.55%. The ultimate consumers were charged considerably higher interest rates by the subsidiaries.

Rather than charge each subsidiary 5.55% interest, taxpayer charged its solvent companies 5.75%, while its 55 insolvent enterprises were charged little or no interest. This system resulted in interest income to taxpayer just sufficient to cover its own interest expense on the total amount borrowed, i. e., 5.55%.

The Commissioner determined that taxpayer’s 1961 income had not been clearly reflected due to the no-interest loans. Acting pursuant to § 482 and the regulations thereunder, the Commissioner therefore increased taxpayer’s income to reflect interest payments of 5% from the insolvent subsidiaries. No adjustment was made to the 5.75% interest income received from the solvent subsidiaries.

Upon Liberty Loan’s suit for a refund, the district court found no distortion in taxpayer’s income, since taxpayer had received the actual costs of its borrowing from the overall group of subsidiaries. Hence, the court held that § 482 and its regulations had been improperly applied. The court recognized that the income of the subsidiaries had been distorted; however, it held the Commissioner erred in attempting to adjust the income of the taxpayer, rather than unscrambling the distortion among the subsidiaries.

The regulations under § 482 specifically require that the method of allocating and apportioning income “shall be determined with reference to the substance of the particular transactions . . . .” Regs. § 1.482-1 (d)(1) (emphasis added). We find the “group loan” theory of the trial court ignores the actual substance of the transactions under scrutiny here. It is clear that the loans by the taxpayer were not made to a single entity or group. The facts stipulated show that the loans were made individually to each subsidiary; the interest rates charged the individual subsidiaries ranged from 0 to 5.75%, depending on the capital status of each company; each subsidiary carried on its balance sheets a note payable to its parent; and each subsidiary filed a separate income tax return, reflecting the individual loan from the parent. Although the parent, for admittedly sound business reasons, may have borrowed a lump sum, nevertheless when it came to relending the monies to the subsidiaries, it is evident that each loan was a separate transaction requiring independent scrutiny by the Commissioner.

The individual nature of taxpayer’s loans to its controlled interests is not altered in any way by the references to “group borrowing” contained in Paragraph 3 of the stipulation. As the government notes in its brief:

This label is in itself meaningless; here it can signify no more than that the assets of the entire group of corporations were made subject to the lender’s debt claim in order to achieve more favorable interest rates. But this is a, fortiori true of any loan to a parent corporation since the assets of its subsidiaries can be reached by its creditors. Hence, the parent is likely to be in a better credit position than the individual subsidiaries.

Equally unsupported by the facts is taxpayer’s argument that the solvent subsidiaries, rather than the parent, were actually the creditors of the insolvent concerns to the extent the insolvent companies failed to pay their full share of the interest costs. There is no evidence that the insolvent subsidiaries had any obligation to pay the “gain” subsidiaries any amounts whatsoever. The balance sheets of the gain subsidiaries do not reflect any amounts due from the “loss” subsidiaries. Particularly noteworthy in this regard is the fact that some of the insolvent subsidiaries paid the parent 5.75% interest for six months of the year. See note 4, supra. If the taxpayer’s theory were true, these amounts would have been paid to the gain subsidiaries, not to the parent.

Moreover, the stipulated fact that the gain subsidiaries paid 5.75% interest, while the loss subsidiaries paid little or no interest, is totally inconsistent with taxpayer’s assertion that all of the subsidiaries actually paid 5.55%, with the gain subsidiaries loaning the necessary interest amounts to the loss subsidiaries.

Viewed as a number of independent transactions, it is readily apparent that the no-interest loans to the insolvent subsidiaries distorted taxpayer’s 1961 taxable income. As the Second Circuit has observed, in construing § 482:

The instant loans without interest are obviously not at arm’s length, since no unrelated parties would loan such large sums without interest. The allocation of the interest income to taxpayers was necessary in order to properly reflect their taxable incomes.

B. Forman Co. v. Commissioner, 453 F.2d 1144, 1156 (2d Cir.), cert. denied, 407 U.S. 934, 92 S.Ct. 2458, 32 L.Ed.2d 817, rehearing denied, 409 U.S. 899, 93 S.Ct. 102, 34 L.Ed.2d 158 (1972).

We note also that even if one were to accept the “group loan” premise of the trial court, there is nevertheless a distortion in taxpayer’s income. As the trial court recognized:

Low or no income subsidiaries would have significantly less use for an interest expense deduction, whereas a subsidiary corporation in a surtax bracket would be able to utilize the deduction against higher tax rates. The internal apportionment undoubtedly led to substantial overall savings in taxes to the group, taken as a whole. (emphasis added).

359 F.Supp. at 162-163.

We think it obvious that any savings in taxes realized by the subsidiaries has the effect of increasing the parent’s net worth and hence distorting its true income. And, as one commentator has observed, “[t]he purpose of the section is to prevent corporations within the same corporate family from utilizing their separate corporate structures to diminish the overall tax liability of the corporate family.” Note, 6 N.Y.U.J.Int.L. & Politics 169, 171 (1973). Thus, any distortion in the income of the subsidiaries is necessarily a distortion of the parent’s income as well.

Contrary to the district court’s holding, it makes no difference whether the Commissioner first adjusts the income of the subsidiaries or that of the parent. Regs. § 1.482-l(d)(2) requires the Commissioner to make appropriate correlative adjustments to the income of any other member of the group involved in the allocation. In other words, when the Commissioner increased taxpayer’s income, he was also required to give the insolvent subsidiaries correspondingly increased interest deductions. Whether the Commissioner starts by increasing the income of the parent or, instead, by increasing the deductions of the insolvent subsidiaries should have no effect on the ultimate tax consequences.

Having determined that there exists a § 482 distortion in taxpayer’s income, it remains to be seen whether the Commissioner’s adjustment was a proper application of the regulations. We note at the outset that the Commissioner has broad discretion under § 482 and his determination will not be upset unless proven by the taxpayer to be arbitrary and capricious. See, e. g., Ballentine Motor Co. v. Commissioner, 321 F.2d 796, 800 (4th Cir. 1963); Grenada Industries, Inc. v. Commissioner, 17 T.C. 231, 255 (1951), aff’d, 202 F.2d 873 (5th Cir.), cert. denied, 346 U.S. 819, 74 S.Ct. 32, 98 L.Ed. 345 (1953). As the Tax Court has recognized :

The legislative history of section 482 indicates that it was designed to prevent evasion of taxes by the arbitrary shifting of profits, the making of fictitious sales, and other such methods used to “milk” a taxable entity. * * * The Commissioner has considerable discretion in applying this section and his determinations must be sustained unless he has abused his discretion. We may reverse his determinations only where the taxpayer proves them to be unreasonable, arbitrary, or capricious.

Pauline W. Ach, 42 T.C. 114, 125-126 (1964), aff’d, 358 F.2d 342 (6th Cir.), cert. denied, 385 U.S. 899, 87 S.Ct. 205, 17 L.Ed.2d 131 (1966).

Regs. § 1.482-l(b)(1) provides that the “purpose of section 482 is to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer . ” In the case of loans or advances from one controlled entity to another, the regulations provide that tax parity with uncontrolled taxpayers is to be achieved through application of an arm’s length standard. Regs. § 1.482-2(a)(1).

Regs. § 1.482-2(a) (2) sets up standards for determination of the appropriate arm’s length interest rate. The regulation first requires that the arm’s length rate shall be the rate which would have prevailed between unrelated parties under similar circumstances. However, the regulation then creates certain “safe haven” rates which, even though not the prevailing arm’s length rate, will be allowed to stand unadjusted. The government calls these rates “deemed arm’s length rates,” since they may be substituted for the prevailing arm’s length rate. One commentator explains the operation of the deemed rate provisions as follows:

Thus, if a taxpayer (not in the business of making loans) lends money to an affiliate at an interest rate between 4 and 6 per cent no allocation will be made; if the arm’s length rate is greater than 6 per cent or less than 4 per cent, and the actual rate charged falls between the arm’s length rate and the safe haven rate, the actual rate charged similarly will be allowed to stand; if the actual rate falls outside of this zone, however, a rate of 5 per cent simple interest will be imputed to the loan for allocation purposes.

Eustice, Affiliated Corporations Revisited: Recent Developments Under Sections 482 and 367, 24 Tax L.Rev. 101, 105 (1968).

In the present case, the Commissioner adjusted taxpayer’s income upward to reflect interest income of 5% from the insolvent subsidiaries. This adjustment was made pursuant to Regs. § 1.482-2(a)(2) (ii), applicable in the case of no-interest loans.

The Commissioner made no adjustment to the 5.75% interest rates charged the solvent subsidiaries because, in his view, 5.75% was within the safe haven provision of Regs. § 1.482-2(a) (2)(i).

Because the district court viewed the subsidiaries as a single entity, it in effect required the Commissioner to offset the 5.75% interest paid by the solvent subsidiaries against the no-interest loans to the insolvent subsidiaries. It is clear, however, that the regulations do not permit an offset under the factual circumstances of this case. Regs. 1.-482-1 (d)(3) limits offsets to transactions between the same two members of the controlled group. Thus, if the parent loaned one of its subsidiaries monies at no interest, but'received in exchange services equivalent to an arm’s length interest charge, an offset would be permitted. But the regulations do not contemplate offsets involving benefits flowing to other members of the group. As one commentator has observed:

In a sense, the allowance of any offset to a section 482 adjustment represents a retreat from the Service’s historical position that section 482 is a “one-way street” which may not be invoked by the taxpayer. On the other hand, multinational corporations with many foreign subsidiaries probably would have preferred an approach which permitted netting not only “vertically” (that is, between two members of a controlled group) but also “horizontally” (that is, among all members of the group) .... The Treasury, however, rejected the “horizontal netting” principle, presumably because of administrative difficulties and the possibilities of manipulation.
It must be recognized, however, that there would be an obvious temptation under horizontal netting to overcharge profitable subsidiaries in high-tax countries and to undercharge those operating at a loss or in low-tax countries. The reservation of authority to deny offset and to make individual allocations, where United States tax liabilities are thus distorted might be sufficient to control such tax-motivated operations. However, there is a marked reluctance in this, as in other areas of the section 482 regulations, to depart from the concept of allocation in individual transactions or to judge compliance on the basis of overall results. Taxpayers had to settle for the proverbial half a loaf.

Jenks, Treasury Regulations Under Section 482, 23 Tax Lawyer 279, 285-286 (1970).

In addition to the above limitation on the offset regulation, Regs. § 1.482-1(d)(3) requires a taxpayer desiring to utilize the offset provision to notify the IRS of that fact within 30 days of the date of the examination report advising taxpayer of the proposed § 482 adjustment. Taxpayer made no attempt here to so notify the Commissioner.

Finally, the taxpayer may not assert an offset in which a deemed arm’s length rate (here 5%), as opposed to the actual arm’s length rate (stipulated to be in excess of 5.75%), is used as the balance point. Regs. § 1.482-l(d)(3) provides that for purposes of an offset:

[T]he term arm’s length refers to the amount which was charged or would have been charged in independent transactions with unrelated parties under the same or similar circumstances considering all the relevant facts and without regard to the rules found in § 1.482-2 by which certain charges are deemed to be equal to arm’s length, (emphasis added.)

Thus, it would have been contrary to the regulations for the Commissioner to balance out the transactions at 5% (or 5-55%) when the stipulated arm’s length rate was in excess of 5.75%. This limitation on the offset provision logically follows when one remembers that the purpose of a § 482 adjustment is to more clearly reflect income. The upward adjustments to the no-interest loans do just that. Downward adjustments to the 5.75% loans, however, would have the effect of moving those loans even further away from the actual arm’s length rate. In adjusting the no-interest loans upwards to 5%, the Commissioner therefore made the only adjustment he could.

In sum, we conclude that the Commissioner acted within his discretion in allocating to the taxpayer interest income of 5% to bring the no-interest loans more closely into conformity with the arm’s length standard of § 482.

Judgment reversed and remanded with directions to the district court to enter judgment for the United States.

VAN OOSTERHOUT, Senior Circuit Judge

(dissenting).

I would affirm the trial court’s decision, principally upon the basis of Judge Webster’s well-reasoned opinion, reported at 359 F.Supp. 158 (E.D.Mo.1973). Judge Webster makes the following critical findings:

It is undisputed * * * that all of the members of the controlled group were acting as a group for purposes of borrowing working capital, and that the interest burden was shared according to a pre-established formula. 359 F.Supp. at 164.
* * * * * 48-
Plaintiff charged the group and recovered from the group as a whole all of the interest charges it paid on behalf of the group. Plaintiff’s income and expenses, for tax purposes, were thus no different in amount than they would have been had an exact proration been made according to amounts separately loaned to the members of the group. Id. at 163.
44 * 44 44 44 44
Plaintiff was fully reimbursed for all but its own share of the borrowing costs it incurred on behalf of the group. Id. at 162.
44 44 -X 44 44 44
The federal income tax return of plaintiff for 1961 clearly reflects its income and there has been no tax evasion on its part. Id. at 162.

Upon the basis of such findings, Judge Webster determined:

The court finds and concludes that allocating part of the interest income of the impaired subsidiaries to plaintiff as imputed interest was unreasonable, arbitrary and capricious. Id. at 165.

In my view, such findings are supported by substantial evidence, are not induced by any erroneous view of the law, and are not clearly erroneous, and afford a sound basis for the judgment entered by Judge Webster. This case differs factually from B. Forman Co. v. Commissioner, 453 F.2d 1144 (2d Cir. 1972), and Kahler Corp. v. Commissioner, 486 F.2d 1 (8th Cir. 1973), in a number of significant respects. In those cases no subsidiaries paid any interest; no showing of subsidiary participation in the loans obtained from the financial institutions was made, and no business purpose in making the interest-free loans was established. In our present case, the court found upon the basis of the parties’ stipulation, particularly paragraph 3 thereof, that the subsidiaries participated in making the loans and that the subsidiaries as a group agreed to reimburse the parent corporation for all interest and other expense arising out of the borrowing. It is undisputed that the group as a whole reimbursed the parent for all interest and incidental expense incurred as a result of the loans, and that the interest paid by the group as a whole fell weli within the safe harbor provisions. Such interest was reported as income by taxpayer.

The court on the present record was also warranted in finding that a legitimate business purpose existed for shifting the interest burden from the loss subsidiaries to the gain subsidiaries, and that no tax evasion was established.

The parent company is the only entity whose tax liability is directly involved in this case. The Government has instituted no timely proceedings under § 482 or otherwise to increase the tax liability of any subsidiary.

I recognize that § 482 confers considerable discretion upon the Commissioner to allocate income. Under the peculiar facts of this case, I agree with the trial court that the Commissioner has abused his discretion in making the allocation that he made.

I would affirm the judgment entered by the trial court.

      . Section 482 of the Internal Revenue Code provides:
      In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary or his delegate may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses.

      . The facts were stipulated in the district court. Paragraph 3 of the stipulation reads in part:
      It is the practice of finance companies to borrow funds to lend to customers and for other corporate purposes. Where there is an affiliated group of finance companies, and large sums of borrowed funds are so required, in lending such funds at thé most favorable rates, lending institutions (e. g., banks, insurance companies) require that such borrowings be made by the parent corporation for the group and not by the subsidiaries on an individual basis because the subsidiaries are not acceptable credit risks at these rates on an individual basis, but are so on a collective, or group, basis. The affiliated group determined to liave the borrowings made by the plaintiff on the group’s behalf because, in addition to the lower rates of interest thus available, this permitted greater flexibility in the use of funds within the group so as to minimize the total borrowings of the group. The lending institutions, accordingly, required financial information to be submitted solely on a consolidated (or group) basis.

      . Thus, this case does not involve the “creation of income” problem presented in Kahler Corp. v. Commissioner, 486 F.2d 1 (8th Cir. 1973), and B. Forman Co. v. Commissioner, 453 F.2d 1144 (2d Cir.), cert. denied, 407 U.S. 934, 92 S.Ct. 2458, 32 L.Ed.2d 817, rehearing denied, 409 U.S. 899, 93 S.Ct. 102, 34 L.Ed.2d 158 (1972). Those two cases reversed prior Tax Court decisions which had held that a § 482 adjustment could not be made to a transaction from which income had not been realized.

      . Taxpayer made an evaluation of each of its subsidiary’s surjdus condition every six months. As a result, 28 subsidiaries whose surplus condition changed during the year were charged no interest for one six-month period and were charged the regular 5.75% rate for the other six months of the year. Twenty-seven companies were charged no interest for the entire year. The actual interest rate paid by these 55 subsidiaries averaged out at a rate of 1.48%.

      . The existence of two or more organizations, trades, or businesses, owned or controlled directly or indirectly by the same interests, is not contested in this case. Thus, the only issues are whether a § 482 allocation was necessary and, if so, whether the Commissioner made the proper allocation.

      . Taxpayer was given credit for the 1.48% interest income already received from the insolvent companies. See note 4, supra.

      . Regs. § 1.482-2(a) (1) reads:
      Where one member of a group of controlled entities makes a loan or advance directly or indirectly to, or otherwise becomes a creditor of, another member of such group, and charges no interest, or charges interest at a rate which is not equal to an arm’s length rate as defined in subparagraph (2) of this paragraph, the district director may make appropriate allocations to reflect an arm’s length interest rate for the use of sucli loan or advance.

      . Regs. § 1.482-2(a) (2) reads:
      For the purposes of this paragraph, the arm’s length interest rate shall be the rate of interest which was charged, or would have been charged at the time the indebtedness arose, in independent transactions with or between unrelated parties under similar circumstances. All relevant factors will be considered, including the amount and duration of the loan, the security involved, the credit standing of the borrower, and the interest rate prevailing at the situs of the lender or creditor for comparable loans. If the creditor was not regularly engaged in the business of malting loans or advances of the same general type as the loan or advance in question to unrelated parties, the arm’s length rate for purposes of this paragraph shall be—
      (i) The rate of interest actually charged if at least 4 but not in excess of 6 percent per annum simple interest,
      (ii) 5 percent per annum simple interest if no interest was charged or if the rate of interest charged was less than 4, or in excess of 6 percent per annum simple interest,
      unless the taxpayer establishes a more appropriate rate under the standards set forth in the first sentence of this subparagraph. For purposes of the preceding sentence if the rate actually charged is greater than 6 percent per annum simple interest and less than the rate determined under the standards set forth in the first sentence of this subparagraph, or if the rate actually charged is less than 4 percent per annum simple interest and greater than the rate determined under the standards set forth in the first sentence of this subparagraph, then the rate actually charged shall be deemed to be a more appropriate rate under the standards set forth in the first sentence of this subparagraph. Notwithstanding the other provisions of this subparagraph if the loan or advance represents the proceeds of a loan obtained by the lender at the situs of the borrower the arm’s length rate shall be equal to the rate actually paid by the lender increased by an amount which reflects the costs or deductions incurred by the lender in borrowing such amounts and making such loans, unless the taxpayer establishes a more appropriate rate under the standards set forth in the first sentence of this subparagraph.

      . The trial court’s opinion indicates that had it felt an adjustment was called for, it would have relied on the last sentence of Regs. § 1.482-2(a) (2) to apply an interest rate of 5.55%- — the cost the parent incurred when it borrowed the money to relend to the subsidiaries. The Commissioner persuasively argues, however, that the “situs of the borrower” test in that sentence has not been met in this case. Thus, the Commissioner has used the appropriate deemed arm’s length rate of 5%, as provided in Regs. § 1.-482-2(a) (2) (ii).

      . Regs. § 1.482-1 (d) (3) provides in part: The district director shall also consider the effect of any other nonarm’s length transaction between them in the taxable year which, if taken into account, would result in a set off against any allocation which would otherwise be made, provided the taxpayer is able to establish with reasonable specificity that the transaction was not at arm’s length and the amount of the appropriate arm’s length charge. For purposes of- the preceding sentence, the term arm’s length refers to the amount which was charged or would have been charged in independent transactions with unrelated parties under the same or similar circumstances considering all the relevant facts and without regard to the rules found in § 1.482-2 by which certain charges are deemed to be equal to arm’s length. ... In order to ' establish that a set-off to the adjustments proposed by the district director is appropriate, the taxpayer must notify the district director of the basis of any claimed set-off at any time before the expiration of the period ending 30 days after the date of a letter by which the district director transmits an examination report notifying the taxpayer of proposed adjustments or before July 16, 1968, whichever is later.

      . Mr. Jenks’ remarks concern multinational corporations with numerous foreign subsidiaries ; however, they are equally applicable to corporations such as taxpayer with many domestic subsidiaries.

      . The government explains the restricted basis of the offset regulation as follows:
      The reason is that offsetting transactions between the same two entities do not alter their combined taxable income and there is thus no need to adjust either or both in order to clearly reflect income. On the other hand, where, as here, an unduly high rate is charged to one member and a purportedly offsetting low rate is charged to a different member, the aggregate taxable income of the three participating entities may be altered materially because of the differing impact which the thus shifted income or deductions will have in the hands of the two members affected by the shift. Untangling the resulting complications and distortions deliberately created by the taxpayers could prove to be an administrative task of considerable proportions and place an undue strain upon the administrative resources of the Internal Revenue Service.

      . Even with the adjustment made by the Commissioner, taxpayer is still receiving the benefit of the safe haven rates. As the government states:
      By providing the safe harbors, the Commissioner has allowed taxpayer to save substantially on its taxes, in that the 5.75 percent loans stood unadjusted and the no-interest loans were adjusted only up to 5 percent.

      . The Government in its brief states :
      Here, taxpayer, a parent corporation, lent substantial sums of money to its numerous subsidiaries, having itself borrowed the sums in question at an interest rate of 5.55 percent. Under one of the safe harbor rates spelled out in the Regulations the rate paid by the taxpayer is deemed the arm’s length rate for purposes of the reloans to the subsidiaries. Thus, had the taxpayer charged each subsidiary interest at 5.55 percent, there would have been no basis for adjustment by the Commissioner. However, the taxpayer charged no interest to some of the subsidiaries which were in poor financial condition and charged the balance the rate of 5.75 percent — the latter rate being at the level which would provide the taxpayer with interest income in the same aggregate amount which it had to pay on its own borrowing and which would net out at an average rate of 5.55 percent to all subsidiaries.


author: CUMMINGS, Circuit Judge.

text:
    MADIGAN, INCORPORATED, et al., Plaintiffs-Appellants, v. Gilbert GOODMAN et al., Defendants-Appellees.
    No. 73-1628.
    United States Court of Appeals, Seventh Circuit.
    Heard Feb. 28, 1974.
    Decided June 6, 1974.

      Fred H. Bartlit, Jr. and Frank Cicero, Jr., Kirkland & Ellis, Chicago, Ill., for plaintiffs-appellants.
    Joseph P. Della Maria, Jr., Michael J. Guinan, Sheldon Karon, Russell J. Topper, Chicago, Ill., for defendants-appellees.
    Before SWYGERT, Chief Judge, CUMMINGS and PELL, Circuit Judges.
   CUMMINGS, Circuit Judge.

Four corporate plaintiffs and five of their directors, collectively known as the Madigan Group, sued seven former shareholders of Fidelity General Insurance Company and the receiver of Dealers National Insurance Company and Liberty Universal Insurance Company, who held title to 1,071,650 shares of Fidelity’s common stock. The complaint asserted that defendants made false representations concerning Fidelity’s financial situation to the detriment of the Madigan Group. The amended complaint makes clear that the defendant receiver is not charged with fraud and is joined only to insure the enforceability of any relief affecting title to the Fidelity shares. Count I of the complaint was based on the Securities Exchange Act of 1934 (15 U.S.C. § 78a, et seq.) and SEC Rule 10b-5 (17 C.F.R. § 240.10b-5). Count II was based on Illinois common law fraud. After considering plaintiffs’ answers to defendants’ interrogatories, the district court rendered an opinion dismissing the complaint. 357 F.Supp. 1331 (N.D.Ill.1973). Because of the court’s reliance on those answers, its ruling was actually a summary judgment for defendants. Rule 12(b) of the Federal Rules of Civil Procedure. Plaintiffs’ subsequent motion for leave to file an appended amended complaint was denied. We will consider the allegations of the amended complaint, since its filing should have been permitted. See Austin v. House of Vision, Inc., 385 F.2d 171, 172 (7th Cir. 1967).

According to the complaint, the Madigan Group purchased 51% of the common stock of Fidelity from defendants for $1,750,895.50 in December 1968. At the same time, the Madigan Group contracted to make a tender offer for the remaining Fidelity shares before June 30, 1969. In September 1969, the Madigan Group sold its Fidelity stock to Texas Consumer Finance Corporation for $1,750,895. Texas Consumer Finance Corporation was an affiliate of the Madigan Group. It and two other affiliates assumed the obligation to make the tender offer and purchased 506,845 shares of Fidelity from various sellers for $1,571,219.50 in the summer of 1969. None of these three companies are parties to this lawsuit.

The complaint asserted that as a result of defendants’ understatement of the reserves for losses and loss adjustment expenses of Fidelity, plaintiffs expended $3,322,115 to buy Fidelity stock; expended additional sums in an effort to prevent the insolvency of Fidelity; lost $1,-000,000 in expected profits; incurred substantial expenses in defending lawsuits resulting from their purchase of Fidelity stock; might incur substantial losses (possibly exceeding $48,000,000 according to the opinion below) in connection with Fidelity-related litigation; and were unable to plan and conduct their financial affairs in an orderly manner due to the same litigation.

In its opinion, as noted, the district court relied on the Madigan Group’s answers to defendants’ interrogatories. These answers claimed that Fidelity was insolvent in 1968 and that in November and December of that year defendants orally and in writing falsely represented its financial condition, “including its reserve for losses and loss expenses.” The answers also asserted that subsequent to December 31, 1968, defendants submitted under oath a 1968 Fidelity annual statement to the Illinois Director of Insurance that falsely represented it's financial condition. Assertedly thereafter, defendants “caused revisions to be made to the 1968 Fidelity general annual statement and offered false explanations for the revisions while concealing the true reasons for the revisions.” Defendants supposedly continued to conceal Fidelity’s true financial condition by “concealing from the plaintiffs actions that had been taken by several state insurance regulatory bodies because of the financial condition of Fidelity * * The answers also state that the Illinois Department of Insurance concluded subsequent to Fidelity’s liquidation that it “would have been insolvent as of December, 1968 had its financial condition been accurately reported then.” September 1969 was stated to be the first time that plaintiffs became aware that defendants had misrepresented Fidelity’s financial condition. To prevent Fidelity’s insolvency, plaintiffs allegedly contributed $500,000 to Fidelity’s capital on April 30, 1970, but nevertheless on December 4, 1970, the Circuit Court for Sangamon County, Illinois, found Fidelity to be insolvent and ordered that it be placed in liquidation.

According to the supplemental interrogatory answers filed by plaintiffs,

“The information concerning the true financial condition of Fidelity General concealed by defendants could have been ascertained only by an exhaustive study of Fidelity’s books and records including all of its claims files and its records relating to loss reserves which was unnecessary in view of the legal duty of defendants not to conceal such information and not to misrepresent the true condition of Fidelity General.”

The supplemental answers also state that a partial audit of Fidelity’s reserves for losses conducted in September 1969 by the accounting firm of Lybrand, Ross Bros. & Montgomery “indicated deficiencies.” In the supplemental answers, plaintiffs also stated that among the losses incurred in attempting to prevent the insolvency of Fidelity was $2,053,-629 “ceded by Fidelity General to Dealers National Insurance Company during 1969, while Dealers National was virtually a wholly owned subsidiary of Madigan.”

The district court held that since the plaintiffs resold the Fidelity securities purchased from the defendants for the same price at which those securities were acquired, they suffered no loss. In their supplemental answer to defendants’ interrogatory 31(a) and in their proposed amended complaint, plaintiffs no longer claim damages based on loss of purchase price. The court reasoned that in such circumstances plaintiffs had no cause of action based on any violation of the Securities Exchange Act of 1934 or SEC Rule 10b-5.

The court held that the Madigan Group could not recover the $18,384 commission that it had paid to a broker in connection with its December 1968 purchase of Fidelity securities, stating:

“In fact, under the ‘out of pocket rule’ the plaintiff Madigan [Group] sold the [Fidelity] stock for what it purchased it for and thus was not damaged. Chasins v. Smith Barney & Co., 438 F.2d 1167 (2nd Cir. 1970).”

It may be noted that Chasins does not discuss recoverability of commissions as an element of damages in a securities fraud case.

The district court also held that defendants’ liability “does not include the speculative fruits of unrealized profit,” so that plaintiffs were not permitted to recover the million dollars they claimed in expected profits and benefits.

As to expenses undertaken by plaintiffs to prevent Fidelity’s insolvency, citing Mott v. Tri-Continental Financial Corp., 330 F.2d 468 (2d Cir. 1964), the court held that since such “indirect injuries” related to matters after they sold their stock, there could be no recovery under the Securities Exchange Act. Mott is no bar to relief here, for Mott sought only recission, despite the fact that he no longer owned the securities. He alleged no substantial damages apart from the securities purchase price that he had recouped nor did he invoke Rule 10b-5.

The court applied the same reasoning to expenses incurred by plaintiffs in defending lawsuits resulting from their purchase of securities from the defendants, and to plaintiffs’ claim for damages due to their inability to plan and conduct financial affairs as a result of said lawsuits. The court also held that these damages were not attributable to defendants.

The court also indicated its view that the five individual plaintiffs and two of the four corporate plaintiffs (Ward Cut-Rate Drug Company and Mading-Dugan Drugstores, Inc.) had neither purchased nor sold Fidelity stock and therefore had no standing to assert a claim under Rule 10b-5, citing Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir. 1952), and Herpich v. Wallace, 430 F.2d 792 (5th Cir. 1970). As a result of this finding, in the proposed amended complaint “only those plaintiffs who purchased Fidelity General stock seek recovery of damages [apparently as opposed to indemnification or contribution] caused by defendants’ security fraud” (plaintiffs’ reply brief 6, n. 3). In view of this construction of the amended complaint, we will not consider the effect of Eason v. General Motors Acceptance Corp., 490 F.2d 654 (7th Cir. 1973), on the standing question. The district court did not consider the Illinois common law fraud count, nor have the parties briefed that question in this Court. Therefore, we will not consider it either.

On appeal, the Madigan Group first argues that its members are entitled to indemnification or contribution from defendants for any liability to which plaintiffs may be exposed in the pending action filed against them by the Illinois Director of Insurance as liquidator of Fidelity. That suit, Mauck v. Mading-Dugan Drug Co. et al., No. 70 C 2151, is still pending before the same district judge. The defendants include the five individual plaintiffs herein. $16,500, 000 in damages are sought in addition to equitable relief.

The liquidator’s complaint states a quite different version of the facts. He alleges that Fidelity was solvent when purchased by the Madigan Group, and that the Madigan Group promptly diverted all the assets of Fidelity into other Madigan Group companies, leaving Fidelity a “corporate shell.” Fidelity, Texas Consumer Finance Corporation, and other companies rendered insolvent by the scheme were then abandoned by the Madigan Group, according to the liquidator. The Madigan Group complaint describes a number of transactions which it says were designed to save Fidelity by transferring more liquid or more valuable resources to it than it paid in exchange; the liquidator’s complaint describes those same transactions as part of the scheme to loot Fidelity, giving it worthless assets in return. Before dismissing the present case the district judge consolidated the two suits, stating:

“The main issue to be resolved in both cases is what caused the liquidation of Fidelity General, i. e., was it the bootstrap acquisition by Mading-Dugan or the already existing insolvency of Fidelity General compounded by false and misleading financial statements.”

We hold that if the suits proceed on the theories of the present complaints, the Madigan Group is entitled to neither indemnity nor contribution. If the Madigan Group is correct that the damage alleged in these cases flows from Fidelity’s pre-existing insolvency and the concealment thereof, then the liquidator will be unable to prove his complaint, and there will be no judgment against the Madigan Group to contribute to or indemnify. Conversely, if the liquidator does prove his complaint and wins a judgment against the Madigan Group, then the Madigan Group’s view of the facts will necessarily have been disproven. What the Madigan Group really seeks is a second chance to litigate the issues in the event they are unsuccessful in the liquidator’s suit. This is not the purpose of indemnification or contribution, as an examination of the cases relied on by the Madigan Group makes clear. In both of those eases, a defendant sought indemnity from a third party defendant, relying on the same facts alleged by plaintiff plus an allegation that the third party defendant had caused defendant to commit an unwitting violation of the securities laws. See deHaas v. Empire Petroleum Co., 286 F.Supp. 809, 815-816 (D.Col.1968), decision on plaintiffs’ complaint affirmed, 435 F.2d 1223 (10th Cir. 1970); Handel-Maatschappij H. Albert De Bary & Co. N. V. v. Faradyne Electronics Corp., 37 F.R.D. 357 (S.D.N.Y.1961).

However, since the plaintiffs in the liquidator’s suit may conceivably amend their complaint at a time when a new complaint for indemnity and contribution might pose unresolved statute of limitations issues, it seems inappropriate to dismiss this aspect of the complaint entirely. The facts shown at trial might not be consistent with any of the complaints, and an indemnity or contribution situation could emerge. If, for example, the Madigan Group is held liable for selling Fidelity General stock, and in connection with that sale, repeating the false representations which it alleges were made to it, then it might be entitled to indemnity or contribution from the source of the misrepresentations. There is no need to decide such hypotheticals until they arise. The controlling principle is that the Madigan Group cannot seek indemnity or contribution on a theory inconsistent with the theory on which it is held liable. If the Madigan Group plaintiffs are too culpable to be entitled to indemnification, they may nonetheless be entitled to contribution. See deHaas, supra; Globus, Inc. v. Law Research Service, Inc., 318 F.Supp. 955, 958 (S.D.N.Y.1970), affirmed per curiam, 442 F.2d 1346 (2d Cir. 1971), certiorari denied sub nom. Law Research Service, Inc. v. Blair & Co., 404 U.S. 941, 92 S.Ct. 286, 30 L.Ed.2d 254.

Plaintiffs next contend that they are entitled to recover the following consequential damages:

1. Contributing addditional capital to Fidelity and incurring other expenses in an attempt to avoid its insolvency.

2. Loss of $18,384 broker’s commission or finder’s fee in connection with acquisition of Fidelity stock.

3. Causing a significant amount of Fidelity’s losses to be reinsured by Dealers National Insurance Company, resulting in" the Madigan Group’s absorption of losses from reinsurance amounting to $2,-053,629.

4. Divestment of ownership in Fidelity and other insurance operations at a loss of $7,000,000.

5. Litigation expenses for defending related lawsuits.

6. Damages for inability adequately to plan and orderly to conduct their financial affairs as a result of these other lawsuits.

7. A one million dollar loss of profits and other benefits reasonably expected.

Zeller v. Bogue Electric Manufacturing Corp., 476 F.2d 795 (2d Cir. 1973), certiorari denied, 414 U.S. 908, 94 S.Ct. 217, 38 L.Ed.2d 146, holds that buyers defrauded under the Securities Exchange Act are entitled to consequential damages. See also deHaas v. Empire Petroleum Co., 435 F.2d 1223, 1228-1229 (10th Cir. 1970). We agree that if plaintiffs can establish the requisite causal nexus at trial, they are entitled to recover out-of-pocket consequential damages suffered as a result of holding Fidelity stock. We reject the contention that consequential damages are recoverable only if incurred while the stock was held. When a securities transaction causes plaintiffs to wind up with less money than they' began with, there is no reason in the policy of the securities laws why their right to recovery should depend on exactly when the loss was realized or on whether the loss was fully reflected in a change in the securities’ price.

Accordingly, capital contributions and other expenses of attempting to save Fidelity may be recoverable. Plaintiffs must show that each expenditure for which recovery is sought was a reasonable effort to, e. g., minimize plaintiffs’ losses, or fulfill a fiduciary obligation to Fidelity policyholders, or comply with the requirements of regulatory agencies. They must also show that the danger from which Fidelity was being saved was the pre-existing insolvency concealed by defendants, and that but for defendants’ misrepresentations, plaintiffs would not have made these expenditures. We also think that the $18,384 broker’s commission or finder’s fee is recoverable, if but for the misrepresentation it would not have been spent.

Losses on claims reinsured by Dealers National Insurance Company would be recoverable if the test we have set forth for contributions to capital was met, and if these losses were attributable to a plaintiff. However, Dealers is not a plaintiff, and it appears from the interrogatory answers that the plaintiffs’ only claim to these losses is that Dealers was a subsidiary of one of the plaintiffs. This is not sufficient. We have referred to plaintiffs as the Madigan Group primarily for convenience. The term does not imply that the group collectively is entitled to damages. Each plaintiff is entitled only to its own losses in its individual capacity. Under the circumstances, one corporation may be able to show that it was reasonable for it to spend money to help another, and if the expenditure is otherwise compensable, the corporation which actually spent the money may recover. But no plaintiff may recover simply because it was a shareholder of a corporation which suffered damages, even if the damage was reflected in the value of the stock. It follows that the claim of losses from divestment of other insurance operations cannot be recovered either. Shareholders may enforce corporate rights only if all the conditions for a derivative suit are met; no derivative claims are alleged here.

We also hold that expenses from related litigation and damages from inability to plan as a result of that litigation are not recoverable. These damages are not a direct consequence of defendants’ alleged fraud. Taking the complaint as true, these damages are a result of the liquidator’s gross misperception of what actually happened. Defendants could not have foreseen that a third party would blame their fraud on the plaintiffs. See Smith v. Bolles, 132 U.S. 125, 130, 10 S.Ct. 39, 33 L.Ed. 279. Put another way, the chain of causation has been broken by the independent act of the liquidator.

We come finally to the matter of profits and other benefits expected but not earned. There is no allegation that defendants made windfall profits which must be disgorged; in that situation, plaintiffs’ disappointed expectations might be relevant as one possible formula for allocating the disgorged profits among the various plaintiffs. The question presented is simply whether a defrauded buyer is entitled to the benefit of his bargain.

The federal rule has traditionally been that only “out of pocket” losses are recoverable in a fraud action. Estate Counseling Service, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 303 F.2d 527, 533 (10th Cir. 1962). A defendant “was bound to make good the loss sustained, such as the moneys the plaintiff had paid out and interest, and any other outlay legitimately attributable to defendant’s fraudulent conduct; but this liability did not include the expected fruits of an unrealized speculation.” Smith v. Bolles, 132 U.S. 125, 129-130; see also Levine v. Seilon, Inc., 439 F.2d 328, 334 (2d Cir. 1971).

We adhere to this rule. Plaintiffs have not alleged a breach of contract; they complain of a misrepresentation. If defendants had told the truth, plaintiffs would have no complaint. Neither would they have had a million dollars in expected profits on a 1% million dollar investment. The consequence of defendants’ acting legally would have been that plaintiffs would not have purchased, or would have purchased at a lower price. Plaintiffs are entitled to compensation for lost • alternative uses of their money, but defendants’ fraud did not obligate them to create profits that never existed and, under the alleged circumstances, never could have existed.

Even lost alternative investments are not literally “out of pocket” expenses, but that shorthand phrase should not obscure proper analysis. Smith v. Bolles, supra, apparently the first case to announce the federal rule, allowed interest on the purchase price. Had plaintiffs not purchased the Fidelity stock, or purchased at a lower price, they would have put the unused money somewhere, even if only in a savings account. Unlike the non-existent profits envisioned as a result of defendants’ misrepresentations, the chance to use their money elsewhere was actually lost to plaintiffs. But we agree with Zeller, supra, that if plaintiffs seek more than the market rate of interest, they must prove with a “good deal of certainty” that they would have made a particular alternative investment that would have produced a higher return than market interest. 476 F.2d at 803.

Neither the complaint nor the amended complaint Sought interest on the purchase price for the time the money was tied up, but plaintiffs did request $100,000 for this item at oral argument. It follows from what we have said that plaintiffs are entitled to amend their complaint to claim interest on the remand.

The defendant receiver’s motion to affirm without oral argument was denied on January 22, 1974. He should remain a party to this action until the district court decides upon the exact type of relief, if any, to be awarded.

We affirm the order of the district court insofar as it holds that plaintiffs are not entitled to damages based on: loss of purchase price, expenses of other litigation, inability to plan and conduct their financial affairs and loss óf profits and other expected benefits (at least in the absence of a trial showing of defendants’ windfall profit). They are also not entitled to divestment damages as prayed in the amended complaint. We reverse the order insofar as it denies plaintiffs the opportunity to prove their right to indemnity or contribution, or direct consequential damages, including the broker’s commission or finder’s fee and costs of attempting to save Fidelity, and we remand the cause for further proceedings consistent with this opinion, with directions to grant plaintiffs leave to file their proposed amended complaint.


author: BARRETT, Circuit Judge.

text:
    The TEWA TESUQUE, an unincorporated association, et al., Plaintiffs-Appellants, v. Rogers C. B. MORTON, Individually and as Secretary of the Interior of the United States, et al., Defendants-Appellees.
    No. 73-1817.
    United States Court of Appeals, Tenth Circuit.
    June 12, 1974.
    Rehearing Denied Aug. 5, 1974.

      See also D.C., 360 F.Supp. 452.
    Thomas E. Luebben, Jr., Native American Legal Defense & Education Fund, Inc., Albuquerque, N. M. (Richard L. Young, Native American Legal Defense & Education Fund, Inc., Albuquerque, N. M. on the brief), for appellants.
    Edward J. Shawaker, Dept, of Justice, Washington, D. C. (Wallace H. Johnson, Asst. Atty. Gen., Victor R. Ortega, U. S. Atty., Albuquerque, N. M., Jacques B. Gelin, Dept, of Justice, Washington, D. C., on the brief), for Federal appellee.
    Dick A. Blenden, Carlsbad, N. M., for Sangre de Cristo Development Co., Inc., appellee.
    Before LEWIS, McWILLIAMS and BARRETT, Circuit Judges.
   BARRETT, Circuit Judge.

This is an appeal from dismissal of a class action brought by members of the Tewa Tesuque (Tewa) of the Pueblo of Tesuque (Pueblo), an Indian tribe, seeking damages and equitable relief against federal officials and for cancellation of a 99-year lease between the Pueblo and Sangre de Cristo Development Company (Sangre).

The Tewas’ complaint alleged seven causes of action: (1) breach of trust by federal officials in negotiating and approving the lease; (2) violation of NEPA by failure to prepare an Environmental Impact Statement; (8) violation of 25 U.S.C.A. § 415 by federal officials; (4) illegality of the lease under other federal statutes and regulations; (5) violation of Tewas' civil rights under 42 U.S.C.A. §§ 1985 and 1988 and under the First and Fifth Amendments to the Constitution of the United States; (6) fraud by appellees in the negotiations for the lease; and (7) creation and maintenance of a public nuisance. The District Court dismissed the complaint for failure to join the Pueblo as an indispensable party and because of the sovereign immunity of the United States.

The appellants include 50 members of the Pueblo, each of whom are members of the Tewa, an unincorporated association of members of the Pueblo who are opposed to the 99-year lease granted to Sangre. Sangre, as lessee, entered into the 99-year lease with the Pueblo, as. lessor, on April 17, 1970. By its terms Sangre obtained a lease on a 1,300 acre tract, Tract I, together with lease options on four other tracts consisting of 5,400 acres. Sangre intends to develop the land for residential, recreational and commercial purposes, resulting in a city of non-Indians with the projected population of about 17,000. The subdivision is laid out and designed around an 18-hole golf course. The lease was approved by the Secretary of the Interior on May 24, 1970, pursuant to 25 U.S.C. A. § 415a which grants wide discretion. The Pueblo is to receive a maximum rental of $20 per acre per year for the leased lands, effective in 1994. For the first twelve years of the lease, the Pueblo will receive $2.50 per acre.

The Tewa contend that the Pueblo is not an indispensable party to the action and that the doctrine of sovereign immunity does not bar this action against federal officials.

I.

The Tewas’ contention that the Pueblo is not an indispensable party is erroneous. An indispensable party is one whose interest will be affected by the judgment. As lessor of the lease agreement entered into with Sangre, the Pueblo will certainly be affected if the lease is cancelled. Therefore, it is an indispensable party. Further, the Pueblo may not be joined without its consent or the consent of Congress in light of its quasi-sovereign status.

Rule 19(b), Federal Rules of Civil Procedure, 28 U.S.C.A., prescribes four factors which must be considered in determining whether the trial court should dismiss for non-joinder of an indispensable party:

first, to what extent a judgment rendered in the person’s absence might be prejudicial to him or those already parties; second, the extent to which, by protective provisions in the judgment, by the shaping of relief, or other measures, the prejudice can be lessened or avoided; third, whether a judgment rendered in the person’s absence will be adequate; fourth, whether the plaintiff will have an adequate remedy if the action is dismissed for nonjoinder.

In considering the first factor, we conclude that the Pueblo would be prejudiced by a judgment in its absence. If the lease is cancelled it would lose its rental income to be derived therefrom, together with employment opportunities for its members. With reference to the second factor, we hold that the above recited prejudice cannot be lessened if the lease is cancelled. Relating to the third factor, we hold that the judgment sought herein would not be adequate in the Pueblo’s absence because it may very likely invite additional lawsuits. Under the last factor, we hold that the Tewa has an adequate remedy available, i. e., bringing the dispute before the tribal council of the Pueblo for determination. This, we believe, is very critical in light of our well-established policy-rule that courts will not interfere with the internal workings of Indian tribes. Motah v. United States, 402 F.2d 1 (10th Cir. 1968); Prairie Band of Pottawatomie Tribe of Indians v. Puckkee, 321 F.2d 767 (10th Cir. 1963). An internal dispute such as this should be decided by the tribal council of the Pueblo and not by the courts.

The Tewa contend that the issue of indispensability of the Pueblo has been decided in Norvell v. Sangre de Cristo Development Company, Inc., 372 F.Supp. 348 (D.N.M.1974), and Davis v. Morton, 469 F.2d 593 (10th Cir. 1972). No final decision has been rendered in Norvell and, in any event, the case does not have the immediate effect of depriving the Pueblo of valuable rights under a contract. The Davis case held, under the same 99-year lease, that approvals of the lease would be enjoined until an environmental impact statement had been filed. The Court also held that approval of leases on federal lands constitutes major federal action. The suit did not, however, result in cancellation of the lease. Davis did not involve the issue of indispensability of the Pueblo. Any prayer for relief insofar as it relates to the allegations set forth in the second and third causes of action in the complaint, i. e., violation of NEPA by failure to prepare an Environmental Impact Statement and violation of 25 U.S.C.A. § 415 by federal officials, has been rendered moot by our decision in Davis. The Court did not err in dismissing the action for failure to join the Pueblo as an indispensable party.

II.

In seeking injunctive relief and damages the Tewa contend that the doctrine of sovereign immunity does not bar this action against the designated federal officals because they acted beyond the scope of their authority in approving the lease.

We hold that this suit against the named federal officials is in reality an unconsented suit against the United States barred by the doctrine of sovereign immunity. National Indian Youth Council, Intermountain Indian School Chapter v. Bruce, 485 F.2d 97 (10th Cir. 1973), appeal pending; McQueary v. Laird, 449 F.2d 608 (10th Cir. 1971). While it is well-settled that government officials may not rely on the defense of sovereign immunity when they act either beyond the scope of their statutory authority or unconstitutionally, we hold that the District Court did not err in holding that the discretionary acts of the appellees exercised in the case at bar are within the outer perimeter of their authority and that they are, accordingly, immune from suit. The Tewas’ claim for injunctive and damage relief was properly denied.

The Tewa contend that the Administrative Procedure Act applies and that sovereign immunity is not available as a defense where relief is sought thereunder. 5 U.S.C.A. §§ 701-706. It is fundamental that a party suing under the APA must have suffered a legal wrong because of agency action or inaction. The Tewa have not demonstrated that they are suffering a legal wrong in view of the fact that the Pueblo through its tribal council could have voluntarily filed suit had it determined that the lease should be cancelled. The APA does not provide a basis for review of governmental decisions where the doctrine of sovereign immunity bars suit. Rockbridge v. Lincoln, 449 F.2d 567 (9th Cir. 1971).

Affirmed.


author: PER CURIAM;

text:
    Jimmy F. BEARE et al., Plaintiff-Appellee, v. Dolph BRISCOE, Governor of Texas, et al., Defendants-Appellants.
    No. 71-1924.
    United States Court of Appeals, Fifth Circuit.
    July 31, 1974.
    W. O. Shultz, II, Asst. Atty. Gen. of Tex., Crawford C. Martin, Atty. Gen. of Tex., Austin, Tex., Franklin Smith, Nueces County Atty., Nueces County, Edwin Prichard, Asst. County Atty., Corpus Christi, Tex., James C. McCoy, Asst. Atty. Gen. of Tex., Austin, Tex., for defendant-appellant.
    David Yancey White, Edwards & De Anda, William Edwards, Corpus Christi, Tex., for plaintiff-appellee.
    Before BROWN, Chief Judge, and AINSWORTH and RONEY, Circuit Judges.
   PER CURIAM;

This appeal is one of the relatively rare situations in which the Court of Appeals is required to review the decision of a three-judge District Court. The District Court held that the Texas constitutional and statutory provisions which established a system of annual voter registration during a specified time imposed an impermissible burden on the right to vote in violation of the Fourteenth Amendment’s guaranty of equal protection of the laws. The Court’s opinion was a very comprehensive one which gave a complete picture of the problem therefore eliminating the necessity of much detail here. Concluding that the statutory provisions requiring annual voter registration during a restricted four-month period served no justifiable state interest, we affirm the decision of the District Court.

The three-judge District Court after declaring unconstitutional the challenged laws insofar as they provided for annual voter registration, withheld issuance of an injunction and retained jurisdiction of the cause in order to “afford the Texas Legislature the full opportunity to correct what we have found and held to be constitutional deficiencies in the present system.” 321 F.Supp. at 1109. In an effort to correct the objectionable features of the law, the Legislature thereafter enacted a temporary statute inaugurating permanent voter registration, with provisions for the automatic re-registration of those voting within a succeeding three-year period, and extended the time period for registration beyond the former cutoff date of January 31.

Since the District Court’s decision, the Supreme Court has considered several cases involving state deadlines for enrollment to vote. In Dunn v. Blumstein, 1972, 405 U.S. 330, 92 S.Ct. 995, 31 L.Ed.2d 274, the Court struck down Tennessee’s durational voter residency requirement of one year in the state and three months in the county on the grounds that the time period was excessive and did not promote any compelling governmental interest. In analyzing the statute, the Court emphasized that “a heavy burden of justification is on the State, and that the statute will be closely scrutinized in light of its asserted purposes.” 405 U.S. at 343, 92 S.Ct. at 1003, 31 L.Ed.2d at 284. Tennessee failed to define any state interest which would justify the total disenfranchisement of those persons who have been residents in the state less than a year or residents of the county less than three months before the election. The Court pointed out that a year or even three months was too long since the state did not close its registration books until 30 days before an election. Therefore, the state was admitting that the 30-day period between registration and the election was sufficient for officials to prepare for the election.

One year later the Court acknowledged that sufficient state interest could be shown to allow a 50-day residency and registration requirement without being violative of equal protection. Marston v. Lewis, 1973, 410 U.S. 679, 93 S.Ct. 1211, 35 L.Ed.2d 627; Burns v. Fortson, 1973, 410 U.S. 686, 93 S.Ct. 1209, 35 L.Ed.2d 633. Both Arizona and Georgia had statutes providing for a 50-day durational voter residency requirement and a 50-day voter registration requirement. In upholding the constitutionality of these statutes, the Court found no conflict with its decision in Dunn v. Blumstein, supra.

“States have valid and sufficient interests in providing for some period of time — prior to an election — in order to prepare adequate voter records and protect its electoral processes from possible frauds. A year, or even three months, was found too long, particularly in the context of ‘the judgment of the Tennessee lawmakers,’ who had set ‘the cut off point for registration [at] 30 days before an election . . . . ’ 405 U.S. at 349, 92 S.Ct. at 1006, 31 L.Ed.2d at 274. The Arizona scheme, however, stands in a different light. The durational residency requirement is only 50 days, and not a year, or even three months. Moreover, unlike Tennessee’s, the Arizona requirement is tied to the closing of the state’s registration process at 50 days prior to elections and reflects the state legislative judgment that the period is necessary to achieve the state’s legitimate goals.”

410 U.S. at 680, 93 S.Ct. at 1212, 35 L.Ed.2d at 629. Therefore, when compelling state interests are shown, a minimal cutoff date for registration will be allowed.

The Court’s most recent decision, Rosario v. Rockefeller, 1973, 410 U.S. 752, 93 S.Ct. 1245, 36 L.Ed.2d 1, dealt with the New York Election Law which required enrollment in a political party at least 30 days prior to the November general election in order to be eligible to vote in the party’s primary election the following year. Clearly there was an extensive period between the cutoff date for enrollment under the statute and the primary, eight months prior to the presidential primary, held in June, and 11 months prior to the non-presidential primary. The Court acknowledged the excessive length of the period but found that it was “not an arbitrary time limit unconnected to any important state goal.” 410 U.S. at 760, 93 S.Ct. at 1254, 36 L.Ed.2d at 8. The state’s interest in protected party primaries from “raiding” justified the time limitation on enrollment. Furthermore, the Court suggested that the disenfranchisement of the appellants resulted not from the state statute, but rather from the voluntary decision of the appellants not to register within the prescribed time. The Court’s opinion suggests that what might otherwise be invidious discrimination is excused by ascribing fault to the victims and an overriding justification by the state.

As the District Court found in our case, the State of Texas did not show a compelling state interest which would justify the disenfranchisement of such a large number of otherwise qualified voters. The evidentiary record below establishes that an entire class, otherwise willing to register, are unable to do so as the direct result of the challenged laws. It cannot be ascribed as a voluntary choice on their part since the statistical evidence clearly showed that the Texas laws rendered it impossible for a substantial percentage of otherwise qualified voters to register.

We acknowledge the state’s right to impose some reasonable cutoff point for registration, but the Texas Legislature itself has recognized that a 28-day period is sufficient for the certification of voter lists prior to the holding of an election.

In our decision we in no way diminish the right of the State of Texas to prescribe the qualifications for its voters, nor do we hold that all voter registration procedures are constitutionally infirm which disenfranchise a minority that fails to register. What we have held is that the tactic underlying the Texas annual voter registration system, which sought to win the war for representative government by inflicting devastating losses on its electoral army before it ever marched off to the polls, is inconsistent with the United States Constitution. The mass disenfranchisement may have been unintentional, but it was nevertheless the consequence of the law. The judgment of the District Court declaring unconstitutional the statutory provisions prescribing limited registration time periods and the requirement for annual voter registration was correct. The effect of this is to leave intact the 1971 amendments. See notes 6 and 7, supra.

Affirmed.

      . In the typical three-judge case the appeal is carried directly to the Supreme Court because the District Court has either granted or denied preliminary or permanent injunctive relief. Goldstein v. Cox, 1970, 396 U.S. 471, 90 S.Ct. 671, 24 L.Ed.2d 663. Here the District Court granted declaratory relief, but withheld the injunction in order that the Texas Legislature might have the opportunity to implement a substitute system of voter registration.
      Because the District Court expressly reserved the issuance of an injunction, there was no order appealable under 28 U.S.C.A. § 1291, and with the case thus only partially determined, the declaratory judgment did not dispose of the whole ease. Consequently, under Garza v. Smith, 5 Cir., 1971, 450 F.2d 790, there was no appealable order in the absence of a permissive interlocutory appeal under 28 U.S.C.A. § 1292(b). .To permit this to be done we remanded the case to the District Court which then, adhering to its opinion, certified the case to the Court of Appeals as an interlocutory appeal. By order of this Court the interlocutory appeal was allowed so the case is properly before this Court.
      Since the Texas Legislature lias subsequently accepted the judicial invitation to change the law, the issuance of a formal injunction has been rendered unnecessary and undesirable. The only viable issue which remains involves the correctness of the declaratory judgment.

      . Article VI, Section 2 of the Texas Constitution, Vernon’s Ann.St. in its relevant provisions provides:
      “Every person subject to none of the foregoing disqualifications who shall have attained the age of twenty-one (21) years and who shall be a citizen of the United States and who shall have resided in this State one (1) year next preceding an election and the last six (6) months within the district or county in which such person offers to vote, shall be deemed a qualified elector; provided, however, that before offering to vote at an election a voter shall have registered annually, but such requirement for registration shall not be considered a qualification of an elector within the meaning of the term ‘qualified elector’ as used in any other Article of this Constitution in respect to any matter except qualification and .eligibility to vote at an election. * * * ” (Emphasis added).

      . Article 5.11a, V.A.T.S. Election Code provided :
      “Voters shall register annually. * * * In each year * * * the period for registration shall be from the first day of October through the thirty-first day of January following. * * * Each annual registration * * * shall entitle the registrant, if otherwise qualified, to vote at elections held during the period of one year beginning on the first day of March following the registration period.”

      . Beare v. Smith, S.D.Tex., 1971, 321 F.Supp. 1100.
      The disposition of the District Court on equal protection grounds makes it unnecessary to consider the alternative argument that on the facts of this case, annual voter registration is a substantive equivalent of a poll tax and thus conflicts with the due process clause of the Fourteenth Amendment and the Twenty-Fourth Amendment as well. See United States v. Texas, W.D.Tex., 1966, 252 F.Supp. 234, aff’d 384 U.S. 155, 86 S.Ct. 1383, 16 L.Ed.2d 434.

      . Ordinarily amendatory legislative action of this sort would terminate the controversy and require that the case be dismissed as moot. Hall v. Beals, 1969, 396 U.S. 45, 90 S.Ct. 200, 24 L.Ed.2d 214. However, since the Texas Legislature has adopted the rather unusual procedural alternative of conditioning the permanency of the new law upon the finality of the judgment of this case (which it cited in the statute), we have con-eluded that the controversy is still very much alive. Laws, 62d Leg., Reg.Sess. ch. 827 § 23 (1971).

      . The following amendments changed the provisions for annual voter registration.
      Art. 5.11a Period for registration; period for which registration is effective
      *****
      Subdivision 2. The first voting year under this law begins on March 1, 1972. An initial registration period under this law begins on October 1, 1971, and continues through January 31, 1972. Notwithstanding the provisions of Section 42a of this code, a person may register at any time during this period if he has already attained the qualifications required by Section 42a or will attain them before April 1, 1972. A registration during this period becomes effective on March 1, 1972, and continues in effect for the 1972, 1973, and 1974 voting years, subject to extension or renewal as provided in Section 50b of this code. On applications mailed to the registrar on or before January 31 but not received by the registrar until after that date, the registrar shall treat each application as having been made in accordance with Subdivision 3 of this section, with registration to become effective on the 31st day following its receipt.
      Art. 5.18b. Extension or renewal of registration by voting or by request for renewal ; cancellation for failure to renew
      Subdivision 1. Beginning with the elections held during the 1972 voting year, whenever a registered voter votes in a primary or general election for nomination or election of State and county officers, his registration is automatically extended or renewed for the succeeding three voting years unless, prior to the beginning of the first succeeding year, the registration is cancelled under some provision of this code.

      . The period for registration was modified by the amendment to Art. 5.11a.
      Art. 5.11a Period for registration; period for which registration is effective.
      *******
      Subdivision 3. Beginning on February 1 after the close of the registration period provided for in Subdivision 2 - of this section, registration shall be conducted at all times that the registrar’s office is open for business. A registration on or after that date becomes effective on the 31st day following and is effective for the voting year in which that date falls and the succeeding two voting years, except that a registration on or after the first day of October and more than 30 days before the end of the voting year is effective for the remainder of that voting year and for the succeeding three voting years. Each registration is subject to extension or renewal as provided in Section 50b of this code. A person is deemed to have registered on the date that his application is received by the registrar.

      . Art. 5.19a List of registered voters
      (1) Before the first day of March each year, the registrar shall prepare for each election precinct of the county a certified list of registered voters who, as of the sist day before March 1 (as of January 31, 1972, for the list prepared in 1972), are entitled to registration for the voting year in which March 1 falls.