author: SEITZ, Chief Judge.

text:
    LINDY BROS. BUILDERS, INC. OF PHILA. et al. v. AMERICAN RADIATOR & STANDARD SANITARY CORP. et al. Friendswood Development Company and Humble Oil & Refining Company, claimants, Appellants in No. 72-1647, The Weitz Company, Inc., et al., Appellants in No. 72-1648.
    Nos. 72-1647, 72-1648.
    United States Court of Appeals, Third Circuit.
    Argued May 4, 1973.
    Decided Oct. 31, 1973.

      Harold E. Kohn, Aaron M. Fine, Harold E. Kohn, P. A., David Berger, H. Laddie Montague, Jr., David Berger, P. A., Philadelphia, Pa., for appellees.
    William Simon, G. Joseph King, How-rey, Simon, Baker & Murchison, Washington, D. C., for appellants in No. 72-1647.
    Donald A. Wine, C. Carleton Frederi-ci, Alan H. Kirshen, Des Moines, Iowa, for appellants in No. 72-1648; Thoma, Schoenthal, Davis, Hockenberg & Wine, Des Moines, Iowa, of counsel.
    Before SEITZ, Chief Judge, WEIS, Circuit Judge and SCALERA, District Judge.
   OPINION OF THE COURT

SEITZ, Chief Judge.

These appeals concern the award of attorneys’ fees following the settlement of a class action. Two members of the class here involved, Friendswood Development Company and Humble Oil and Refining Company; appeal from the award of fees to attorneys Kohn and Berger and members of their law firms. Also before us is an appeal by attorneys of the firm of Thoma, Schoenthal, Davis, Hockenberg and Wine, who were denied fees. Kohn and Berger are attorneys for Lindy Bros. Builders and the Philadelphia Housing Authority, appel-lees in both appeals.. We will deal first with the appeal of Friendswood and Humble.

Following the indictment of plumbing fixture manufacturers and their trade association for price-fixing violations of the antitrust laws, numerous civil suits were filed on behalf of several classes of plaintiffs seeking treble damages. One such class action was filed by appellees on behalf of builders and owners shortly after the indictments were returned. The various class actions were consolidated for pretrial proceedings and transferred to the Eastern District of Pennsylvania. Several years of procedural maneuvering followed between plaintiffs and defendants, who wanted the civil suits stayed or enjoined pending resolution of the criminal actions. During the stay proceedings, in which the plaintiffs eventually prevailed, the criminal action proceeded, and on May 2, 1969, a jury verdict was returned against those defendants who had pleaded not guilty. The schedule of depositions in the civil suit was filed in June 1969, and the taking of depositions was to have begun in the fall of 1969.

In October 1969, settlement negotiations were undertaken, primarily by attorneys Kohn and Berger and their firms. The first settlement agreement involving the builder-owner class was reached early in 1970. As a result of the settlement agreement a single fund was created to satisfy the claims of all builder-owners, those who had'not filed suit (“unrepresented” claimants) as well as those who had. The district court gave preliminary approval to the settlement plan in May 1971, after the Supreme Court denied defendants’ petition for certiorari to review this Court's af-firmance of the criminal convictions. In its order preliminarily approving the settlement the district court appointed appellees as Class Representatives. The settlement was given final approval by the district court in April 1972.

At the time the district court gave final approval to the settlement, numerous attorneys petitioned for award of fees. Among these was a petition by Kohn and Berger as attorneys for the Class Representatives. Kohn and Berger had private fee agreements with the appel-lees and also with many other builder-owners who made claims against the fund. In their fee petition, Kohn and Berger asked for an award to be given to them directly in addition to the amounts to be received pursuant to contracts with individual claimants. For purposes of their petition, Kohn and Berger divided the class into four categories. The first category was composed of claimants who had contractual fee arrangements with Kohn and Berger. Kohn and Berger were to receive over $800,000 from these claimants. The second category included claimants who had filed suit and whose attorneys Kohn and Berger felt had contributed to the creation of the settlement fund. Kohn and Berger were to receive no fees from these claimants and sought none. Other claimants who had joined in the suits but whose attorneys Kohn and Berger concluded had not contributed to the creation of the settlement fund comprised the third category. From these claimants, who had contracted to pay varying fees to other attorneys, Kohn and Berger sought a fee award equal to one-sixth of the claimants’ share of the settlement fund. The final category was made up of builder-owners who filed claims against the fund, but who had not joined in the suit and, therefore, had not contracted with any attorney participating in the settlement negotiations or other related proceedings. Kohn and Berger asked the court to award them one-third of the amounts to be recovered by these last claimants. The petition was opposed by unrepresented claimants Friendswood Development Company and Humble Oil and Refining Company.

The district court, 341 F.Supp. 1077, denied Kohn and Berger’s petition for fees from the third category of claimants and granted fees from the last category equal to 20% of the amount of the fund apportioned to the unrepresented claimants. Kohn and Berger have not appealed the denial of fees from claimants in category three nor the award of fees from unrepresented claimants in an amount less than requested.

Friendswood and Humble appeal from the award of fees out. of the settlement apportioned to them and other unrepresented claimants.

Basis for Fee Awards

The first contention advanced by Friendswood and Humble is that the court below lacked authority to award any fees to Kohn and Berger. We assume that appellants are correct in stating that Section 4 of the Clayton Act, 15 U.S.C. § 15 (1970), does not authorize award of attorneys’ fees to a plaintiff who has settled his antitrust action, rather than pursue it to successful judgment. Cf. Milgram v. Loew’s, Inc., 192 F.2d 579 (3d Cir. 1951), cert, denied, 343 U.S. 929, 72 S.Ct. 762, 96 L.Ed. 1339 (1952); Decorative Stone Co. v. Building Trades Council, 23 F.2d 426 (2d Cir.), cert, denied, 277 U.S. 594, 48 S.Ct. 530, 72 L.Ed. 1005 (1928). There is, however, authority for the award of fees under the general equitable powers of the court. E. g., Trustees v. Greenough, 105 U.S. 527, 26 L.Ed. 1157 (1882). These equitable powers may, under the equitable fund doctrine, be used to compensate individuals whose actions in commencing, pursuing or settling litigation, even if taken solely in their own name and for their own interest, benefit a class of persons not participating in the litigation. See Sprague v. Ticonic National Bank, 307 U.S. 161, 59 S.Ct. 777, 83 L.Ed. 1184 (1939).

Appellants Friendswood and Humble concede that the equitable fund doctrine may provide a basis for award of attorneys’ fees in the instant case. They contend, however, that the application for fees should be made by the client or clients who were parties to the action and not the attorneys who prosecuted the action or negotiated the settlement. Clearly, fees may be awarded on the attorney’s petition. Central Railroad & Banking Co. v. Pettus, 113 U.S. 116, 5 S.Ct. 387, 28 L.Ed. 915 (1885). The thrust of appellants’ contention here is more .that, regardless of which person files the petition, the right to compensation is in the client rather than the attorney. We think that appellants misconceive the basis for award of attorney fees.

The award of fees under the equitable fund doctrine is analogous to an action in quantum meruit: the individual seeking compensation has, by his actions, benefited another and seeks payment for the value of the service performed. Understood in this way, there are two possible “causes of action” that may be urged as the basis for award of attorneys’ fees. One of these “causes” belongs to the plaintiff who brought the underlying suit. His claim is that by instituting the suit he has performed a service benefiting other class members. The reasonable value of that service is measured by the expenses incurred by the plaintiff on behalf of the class. Trustees v. Greenough, supra, the seminal case in establishing the equitable fund doctrine, involved this type of claim for attorneys’ fees. There a bondholder brought suit on behalf of himself and other bondholders to prevent the trustees of a fund that secured the bonds from committing waste. The judgment for the plaintiff set aside fraudulent conveyances and restored the fund. Relying principally on English cases requiring a trust fund to pay for the costs of its own administration, the- Supreme Court affirmed the award to plaintiff of attorneys’ fees and other reasonable expenses incurred in' the litigation. The Court’s decision made clear that the plaintiff must bear his proportionate share of expenses, id., 105 U.S. at 537-538, 26 L.Ed. 1157, and other class members must likewise bear their share of the litigation’s expense. Id. at 532-537, 26 L.Ed. 1157.

The second “cause of action” for award of attorneys’ fees under the equitable fund doctrine belongs to the attorney. The attorney’s claim is that his conduct of the suit conferred a benefit on all the class members, that one or more class members has agreed by contract to pay for the benefit the attorney conferred upon him, and that the remaining class members should pay what the court determines to be the reasonable value of the services benefiting them. This claim was presented to the Supreme Court in Central Railroad & Banking Co. v. Pettus, supra, 113 U.S. at 120-121, 5 S.Ct. 387, 28 L.Ed. 915, three years after the Greenough decision. In Pettus, the Court upheld the award of fees directly to attorneys who had conducted a class action resulting in the establishment of a fund from which numerous creditors of the defendant railroad could be paid. The attorneys had contracted with the complainant and, during the course of the litigation, with certain other creditors for payment of contingent fees from those creditors’ shares of the recovery. The Court found that the attorneys were entitled to the reasonable value of the services they rendered to the class members with whom the attorneys had not contracted. Id. at 127, 5 S.Ct. 387, 28 L.Ed. 915.

We recognize the close relation between the equitable claims for attorneys’ fees that clients and attorneys, respectively, may advance. An attorney’s claim for the value of his services to unrepresented class members may be subsumed, fully or partially, in the “expenses” claim of the attorney’s client who had paid more than his share of the value of the attorney’s services to the class. We need not, however, decide now the manner in which courts should treat such overlapping claims by attorney and client. In this case, the only claims made were by attorneys. In passing upon the sums which represent the value of attorneys’ services to unrepresented claimants, we do not intimate any view concerning the ability of these attorneys’ private clients to require application against the attorneys’ charges to them of all or part of the fees paid by unrepresented claimants. We reject appellants’ contention that there is no basis for the award of fees directly to the attorneys absent a finding that such award is necessitated by their clients’ interests.

Standards Governing Fee Awards

In awarding attorneys’ fees, the district judge is empowered to exercise his informed discretion, and any successful challenge to his determination must show that the judge abused that discretion. Tranberg v. Tranberg, 456 F.2d 173, 175 (3d Cir. 1972). Appellants contend that, by failing to observe appropriate standards and procedures, the judge below did abuse his discretion in awarding fees to Kohn and Berger. Friendswood and Humble are correct in arguing that failure to adhere to proper standards and to follow appropriate procedures would constitute abuse of the district ‘ court’s discretion to award attorneys’ fees. We proceed, therefore, to an examination of appellants’ claim that the standards applied below in awarding fees to Kohn and Berger were improper.

The district judge listed four factors that he considered in his award of fees to Kohn and Berger. These were: the percentage of a . claimant’s recovery awarded as attorneys’ fees in other eases, the amount of the recovery from which fees were being awarded, the amount the attorneys received from their clients under private agreements, and the time spent by Kohn and Berger “in connection with this litigation.” 341 F.Supp. 1077, 1089-1090 (E.D.Pa.1972). The court below elaborated on these considerations by noting that the percentage of a recovery awarded as attorneys’ fees should decline as the amount of the recovery increased and that the time spent by the attorneys was not so important here as in most cases. The judge did not indicate why time was less important here, nor did he explain what use was made of his knowledge of Kohn and Berger’s private fee agreements.

The mere listing of four factors for consideration by the court makes meaningful review difficult and gives little guidance to attorneys and claimants. In detailing the standards that should guide the award of fees to attorneys successfully concluding class suits, by judgment or settlement, we must start from the purpose of the award: to compensate the attorney for the reasonable value of services benefiting the unrepresented claimant. Before the value of the attorney’s services can be determined, the district court must ascertain just what were those services. To this end the first inquiry of the court should be into the hours spent by the attorneys —how many hours were spent in what manner by which attorneys. It is not necessary to know the exact number of minutes spent nor the precise activity to which each hour was devoted nor the specific attainments of each attorney. But without some fairly definite information as to the hours devoted to various general activities, e. g., pretrial discovery, settlement negotiations, and the hours spent by various classes of attorneys, e. g., senior partners, junior partners, associates, the court cannot know the nature of the services for which compensation is sought.

Ascertaining, within appropriately specific categories, the time spent is only the first step the district court should follow in determining the proper attorneys’ fees to be awarded. In light of the comments of the judge below, however, we wish to make clear its importance. In this case, partly as a result of the procedures employed by the district court, the only information furnished to the district judge regarding the time spent by Kohn, Berger and their associates was that they had spent “in excess of 6,000 hours in connection with this litigation.” 341 F.Supp. at 1090. This information was insufficient to support the award of fees to Kohn and Berger.

After determining, as above, the services performed by the attorneys, the district court must attempt to value those services. In some cases it may be possible to identify the hours spent as having benefited the individual client, the unrepresented claimants, or both. Where this is feasible, the district judge may want to assess directly the value of the attorneys’ services to the unrepresented claimants without first determining the overall value of the attorneys’ services in the case. Here, it would seem artificial to segregate the attorneys’ efforts into categories as aiding clients, unrepresented claimants or the entire class. A single fund was created after negotiations on behalf of all claimants. Absent some contrary showing, we presume that all the attorneys’ time contributed to the recoveries of each claimant. Where all of an attorney’s services benefit the whole class, it seems simplest to determine the value of his services to the class and then to assess the extent to which the unrepresented claimants benefited from these services as compared with the rest of the class'.

The value of an attorney’s time generally is reflected in his normal billing rate. A logical beginning in valuing an attorney’s services is to fix a reasonable hourly rate for his time — taking account of the attorney’s legal reputation and status (partner, associate). Where several attorneys file a joint petition for fees, the court may find it necessary to use several different rates for the different attorneys. Similarly, the court may find that the reasonable rate of compensation differs for different activities.

Finding the reasonable hourly rate for each attorney does not end the court’s inquiry into the value of the attorney’s services. The court cannot properly fix attorneys’ fees merely by multiplying the hourly rate for each attorney times the number of hours he worked on the case. Before discussing the other factors to be considered in fixing fees, we stress, however, the importance of deciding, in each case, the amount to which attorneys would be entitled on the basis of an hourly rate of compensation applied to the hours worked. This figure provides the onty reasonably objective basis for valuing an attorney’s services. As Judge Wyzanski observed a decade ago in a case similar to this:

No one expects a lawyer to give his services at bargain rates in a civil matter on behalf of a client who is not impecunious. No one expects a lawyer whose compensation is contingent upon his success to charge, when successful, as little as he would charge a client who in advance had agreed to pay for his services, regardless of success. Nor, particularly in complicated cases producing large recoveries, is it just to make a fee depend solely on the reasonable amount of time expended. Yet unless time spent and skill displayed be used as a constant check on applications for fees there is a grave danger that the bar and bench will be brought into disrepute, and that there will be prejudice to those whose substantive interests are at stake and who are unrepresented except by the very lawyers who are seeking compensation. Cherner v. Transitron Electronic Corp., 221 F. Supp. 55, 61 (D.Mass.1963).

While the amount thus found to constitute reasonable compensation should be the lodestar of the court’s fee determination, there are at least two other factors that must be taken into account in computing the value of attorneys’ services. The first of these is the contingent nature of success; this factor is of special significance where, as here, the attorney has no private agreement that guarantees payment even if no recovery is obtained. In assessing the extent to which the attorneys’ compensation should be increased to reflect the unlikelihood of success, the district court should consider any information that may help to establish the probability of success. The most important such information in a civil antitrust suit may be the progress of any criminal action brought against the defendants. Here, the United States had obtained indictments against all the defendants before the civil suits were filed; the defendants who pleaded not guilty had been convicted before serious settlement negotiations were begun; and those convictions were affirmed before the court gave final approval to the settlement. The court may find that the contingency was so slight or the amount found to constitute reasonable compensation for the hours worked was so large a proportion of the total recovery that an increased allowance for the contingent nature of the fee would be minimal.

The second additional factor the district court must consider is the extent, if any, to which the quality of an attorney’s work mandates increasing or decreasing the amount to which the court has found the attorney reasonably entitled. In evaluating the quality of an attorney’s work in a case, the district court should consider the complexity and novelty of the issues presented, the quality of the work that the judge has been able to observe, and the amount of the recovery obtained. This last factor may be the only means by which the quality of an attorney’s performance can be judged where a suit is settled before any significant in-court proceedings. In making allowance for the quality of work, the court must keep in mind that the attorney will receive an otherwise reasonable compensation for his time under the figure arrived at from the hourly rate. Any increase or decrease in fees to adjust for the quality of work is designed to take account of an unusual degree of skill, be it unusually poor or unusually good. If the district judge determines that particular work was of a typical quality, he should, in increasing or decreasing the fee, be cognizant of the amount of time devoted to that given activity. Further, in increasing or decreasing an attorney’s compensation, the district judge should set forth as specifically as possible the facts that support his conclusion, particularly where, as in this case, the judge determining the fees to be awarded did not sit in the case throughout the entire proceeding. The value to be placed on these additional factors will, of course, vary from case to case. Often, however, their value will bear a reasonable relationship to the aggregate hourly compensation.

After determining the total reasonable value of 'an attorney’s services in securing recovery of a fund for the class, the district court must determine what portion of the amount arrived at should be paid by the unrepresented claimants. Absent extraordinary circumstances, the unrepresented claimants should pay for the attorneys’ services in proportion to their benefit from them — that is, the unrepresented claimants should pay a percentage of the reasonable value of the attorneys’ services to the class equal to their percentage of the class’ recovery. We reiterate that we are not here called upon to decide whether his private clients can require that all or part of the fees recovered by the attorney be applied against the fees charged those clients.

Procedure — Requirement of a Hearing

Friendswood and Humble contend that the district judge erred in failing to grant the requested evidentiary hearing before awarding fees. Had the district court been guided by the proper standards for setting attorneys’ fees, the necessity of an evidentiary hearing would have been apparent. In determining the amount of time spent by various attorneys on different activities, the standard billing rate appropriate for each attorney, the extent of the contingency, and the degree to which an attorney’s efforts advanced the interests of claimants from whom he seeks fees, the district judge must possess a great deal of information not presented below. Much of the evidence on which the judge will base his award or denial of fees may be disputed; the evidence presented by an attorney petitioning for fees maybe incomplete. The denial of fees obviously harms the petitioning attorney. Just as obviously, award of attorneys’ fees harms the unrepresented claimant by reducing his net recovery. These opposing interests should be afforded a hearing to provide an evidentiary basis for resolution of disputed factual matters and to allow the parties to supplement possibly incomplete statements of opposing parties.

Courts have noted that expert testimony is not necessary to establish the value of a lawyer’s services and have, on that ground, sanctioned the award of attorneys’ fees on the basis of affidavits without a hearing. E. g., Tranberg v. Tranberg, supra, 456 F.2d at 175. A judge is presumed knowledgeable as to the fees charged by attorneys in general and as to the quality of legal work presented to him by particular attorneys ; these presumptions obviate the need for expert testimony such as might establish the value of services rendered by doctors or engineers. Although expert opinion evidence is not required in awarding attorneys’ fees, where the facts to be weighed in light of the judge’s expertise are disputed, an evidentiary hearing is required. See Thomas v. Honeybrook Mines, Inc., 428 F.2d 981, 988-989 (3d Cir. 1970), cert, denied, 401 U.S. 911, 91 S.Ct. 874, 27 L. Ed.2d 809 (1971). The Supreme Court endorsed the view taken here in Perkins v. Standard Oil Co., 399 U.S. 222, 90 S. Ct. 1989, 26 L.Ed.2d 534 (1970), a case involving the award of attorneys’ fees under Section 4 of the Clayton Act. The Court stated that “[t]he amount of the award for such services should, as a general rule, be fixed in the first instance by the District Court, after hearing evidence as to the extent and nature of the services rendered.” Id. at 223, 90 S.Ct. at 1990.

We conclude that the failure of the district court to hold an evidentiaryhearing and its failure to follow proper standards in awarding fees to attorneys Kohn and Berger were inconsistent with the sound exercise of discretion.

The Thoma Petition

Of the attorneys whose petitions for fees were denied, only one group has appealed. These attorneys are members of the firm of Thoma, Schoenthal, Davis, Hockenberg and Wine (hereinafter “Thoma”). In denying the Thoma petition, which asked for $17,646, the district court did not hold an evidentiary hearing nor was it guided by the standards set forth above. We hold that the denial of the Thoma petition was inconsistent with the sound exercise of discretion.

The orders granting attorneys’ fees to Kohn and Berger and denying fees to the Thoma attorneys are vacated and the matters remanded to the district court for further proceedings consistent with this opinion.

      . No question has been raised as to whether Lindy Bros. Builders and the Philadelphia Housing Authority are the proper appellees. We note that attorneys Kohn and Berger filed a petition for fees in their own name and no request for contribution was made on-behalf of the named appellees. See discussion of the nature of equitable claims for attorneys’ fees, infra pp. 164-165.

      . Many of the defendants had pleaded nolo contendere, but several had pleaded not guilty, including some of the larger corporate defendants.

      . At the time the court below ruled on petitions for attorneys’ fees, the fund plus interest amounted to approximately $26 million.

      . Twelve petitions were filed; eleven were denied in toto. '

      . At the time of the district court ruling on the fee petitions, the fees sought by Kohn and Berger from this category of claimants amounted to $745,733.

      . The fees Kohn and Berger asked of unrepresented claimants totalled nearly $2.3 million at the time of their fee petition, bringing the amount requested from the third and fourth categories to over $3 million.

      . The “iund” in Pettus was a lien on the railroad property.

      . Cf. Cherner v. Transitron Elec. Corp., 221 F.Supp. 55, 62-63 (D.Mass.1963).

      . Appellants-attorneys of the Thoma group have argued that we should apply a broader standard of review here because the district judge was not sitting in the initial pretrial proceeding. We reject this contention. Although the district judge should be particularly diligent in setting forth specifically the facts that support his conclusion where he did not sit throughout the entire proceedings, the standard of review to be applied by the appellate court remains the abuse of discretion standard.

      . Appellants also claim that even if the district judge did observe the proper standards and procedures, he abused his discretion in awarding an excessive fee to Kohn and Bergei'. In light of our conclusions as to the appropriate standards and procedures, we do not find it necessary to decide this issue.

      . All private agreements here were for contingent fees.

      . The threshold issue in antitrust eases is the defendant’s violation of the antitrust laws. If the defendant in a criminal antitrust action is convicted after a plea of not guilty, the criminal conviction is prima facie evidence of violation of the antitrust laws. 15 U.S.C. § 16 (1970). We recognize that convictions following pleas of nolo contendere are not entitled to the same evidentiary position as convictions following not ’ guilty pleas and that even where violation of the antitrust laws is established, civil plaintiffs must prove that they were injured by the violation.


source: Caselaw Access Project

author: TYLER, District Judge. OAKES, Circuit Judge

license: Public Domain

text:
    UNITED STATES of America, Appellee, v. Robert WYLER, Appellant.
    No. 1074, Docket 71-1937.
    United States Court of Appeals, Second Circuit.
    Argued July 19, 1973.
    Decided Nov. 1, 1973.

      L. Kevin Sheridan, Asst. U. S. Atty. (Robert Morse, U. S. Atty., E. D. New York, on the brief), for appellee.
    Herald Price Fahringer, Buffalo, N. Y. (Laurence A. Schulz and Lipsitz, Green, Fahringer, Roll, Schuller & James, Buffalo, N. Y., on the brief), for appellant.
    Before MOORE and OAKES, Circuit Judges, and TYLER, District Judge.

       Of the Southern District of New York, sitting by designation.

   TYLER, District Judge.

Appellant Wyler was convicted with nine other defendants after a jury trial in the Eastern District of New York (Mishler, Ch.J.) of conspiracy to violate the narcotics laws. 21 U.S.C. §§ 173 and 174. On July 8, 1971, Wyler was sentenced to ten years in prison, consecutive to a New York State sentence he was then serving. Thereafter, Wyler and the other nine defendants appealed to this court, with the result that their convictions were affirmed. United States v. Vega et al., 458 F.2d 1234 (1972). Notwithstanding this affirmance of his conviction, this court thereafter, on July 12, 1972, ordered Wyler’s appeal “reinstated” because of his post-affirmance claim of a conflict of interest possessed by the lawyer then representing him on appeal and who had been trial counsel for a co-defendant, Vega. A different panel of this court now having heard Wyler’s reinstated appeal, we once again affirm the conviction.

In light of the previous opinions of this court, United States v. Vega, supra; see also United States v. Nathan, 476 F. 2d 456, decided March 16, 1973, familiarity with the facts as proved by the government will be assumed.

On (his reinstated appeal, Wyler makes three arguments: (1) there was insufficient evidence that Wyler was a knowing and purposeful member of the scheme to traffic in cocaine and heroin; (2) the trial judge improperly exercised his discretion in denying him a severance of his case for trial; and (3) he was “denied his Sixth Amendment right to compulsory process of witnesses favorable to the defense.” Each of these contentions will be dealt with hereinafter.

I

According to Wyler, the government offered no evidence to show that he knew of or participated in the charged conspiracy, which, as proved by the government, can be simply described as a heroin and cocaine business dominated by defendant Torrado. As Wyler views it, the only proof against him dealt with a June 8, 1968 transaction wherein one Estrada, an employee of Torrado, offered to sell some cocaine to Wyler. Wyler concedes that he, “acting as a go-between, obtained some money from another person in the bar and gave it to Estrada.” This narrow view overlooks other evidence of importance. There was testimony of a meeting, for example, on June 26, 1968 at the Butterscotchman Lounge. According to the testimony of one Gomez, he was then present during a conversation between Wyler and Boulier having to do with heroin. That conversation, according to Gomez, included a statement by Wyler (referred to as “Bobby the Italian”) that he would not be paying any more money for the heroin which he had been buying from Torrado. Furthermore, Gomez testified to a later conversation, apparently in July, 1968, wherein Torrado instructed Boulier to deliver i/^th kilogram to Bobby Wyler. Accordingly, we have no difficulty in concluding that there was sufficient non-hearsay evidence to permit the trial court to submit the case to the jury, United States v. Geaney, 417 F.2d 1116, at 1120 (2d Cir. 1969), and ample evidence, hearsay and non-hearsay, to convince a jury of Wy-ler’s guilt beyond a reasonable doubt. Id. at 1121. Moreover, contrary to the view of our dissenting colleague, we deem,this evidence sufficient to support the jury’s obvious finding that Wyler was no mere user of heroin and cocaine.

It is necessary to deal with a corollary argument advanced by Wyler to the effect that the evidence submitted about him to the grand jury was insufficient to sustain the indictment. As he correctly points out, the only evidence before the grand jury relating to Wyler was the testimony of Oscar Estrada. Before the grand jury, Estrada testified that on June 8, 1968, at the Butterscotchman Lounge he sold Wyler i/gth of a kilogram of heroin. As noted, his testimony at trial on this transaction was different in that he said that what he sold to Wyler on that day was i/sth kilogram of cocaine. Not surprisingly, this and another discrepancy were thoroughly explored by Wyler, who, with occasional assistance of attorneys Rosner and Mahler, ably defended himself at trial, on cross-examination of Estrada. It is perhaps sufficient for us to observe that this contention of Wyler is disposed of by the' rule of Costello v. United States, 350 U.S. 359 at 363, 76 S.Ct. 406 at 408, 100 L.Ed. 397 (1956), wherein it was held that federal indictments are not “open to challenge on the ground that there was inadequate or incompetent evidence before the grand jury.” But, assuming that the indictment is open to challenge for inadequate evidence, Estrada’s testimony, even with his error as to the type of hard drug involved, was certainly sufficient to indicate a reasonable probability of Wyler’s knowing involvement in the conspiracy charged. See Silverthorne v. United Stated, 400 F.2d 627, at 634 (9th Cir. 1968), appeal on remand 430 F.2d 675 (1970), cert, denied, 400 U.S. 1022, 91 S.Ct. 585, 27 L.Ed.2d 633 (1971) ; United States v. Potash, 332 F.Supp. 730 at 734 (S.D.N.Y.1971).

II

Prior to his trial, Wyler timely moved for an order severing his case for trial. He renewed this motion orally on the first day of trial. On those motions, as now, Wyler argued in substance that, absent severance, he would be unable to certainly obtain the testimony of certain co-defendants who, he claimed, would have demonstrated his lack of complicity in the conspiracy. Technically, we believe that the severance issue has already been resolved against Wyler by the panel of this court in United States v. Vega, supra, 458 F.2d at p. 1236. In any event, focusing upon this issue once again in respect to the peculiar facts pertaining to Wyler, it is only necessary to note that he was able to ask questions about his own involvement during the course of his cross-examination of certain co-defendants who took the stand at trial. For reasons which are obscure to us, it appears to be the view of our dissenting colleague that severance was required in order to permit Wyler to question all of his co-defendants. Even assuming that the remaining defendants would have been willing to testify, we doubt that their answers would have been more impressive than those given by other co-defendants at trial. Without extended discussion, therefore, we conclude that the trial judge was well within his discretion in denying the motions for severance; further, it is clear in hindsight that no prejudice resulted to Wyler by virtue of the judge’s rulings. It is, of course, horn-book law that co-conspirators’need not be shown to know one another; in this case, this principle has considerable practical importance due to the fact that four of the remaining defendants tried with Wyler were not “wholesalers” or their immediate agents but rather were “retailers” like Wyler.

III

Appellant also contends that he was unconstitutionally denied the right by the trial judge to issue subpoenas for witnesses and records favorable to his defense. See Washington v. Texas, 388 U.S. 14, 87 S.Ct.1920, 18 L.Ed.2d 1019 (1967). This contention effectively breaks into two separate parts, the first of which is plainly frivolous.

In his main brief on appeal, Wyler contended that the trial court erred in refusing to subpoena certain Central Intelligence Agency records and personnel as live witnesses. According „to that theory, Wyler obtained money from a third party in order to pay it over to Estrada on June 8th for the cocaine; the third party allegedly was an agent of the CIA operating under the cover name of “Alex Two”. In effect, then, the claim of appellant at trial and now is that he had been working for the CIA when he bought the cocaine on June 8th. Passing the inherent incredibility of such a claim, it is plain that the trial judge endeavored to come to a sensible solution of the problem; rather than allow a wholesale production of CIA records and unidentified personnel of that agency, he had the personnel director of the CIA, a Mr. Fred E. Lott, appear and testify for the appellant. (See SM2457-58). Not surprisingly, Mr. Lott’s testimony established that the CIA had no record of ever having employed Wyler or any of the other individuals he claimed were CIA employees dealing with him. We have no difficulty, then, in concluding that the trial judge properly exercised his discretion in regard to this aspect of the matter.

Apparently surmising that this court would reach such a conclusion, appellant and his counsel raised quite a different contention under this general heading in his reply brief on appeal. Specifically, Wyler therein claimed for the first time that the trial court erred in refusing to subpoena two witnesses, Lucretia Lum from Florida and one Clem Nash from Detroit. According to Wyler, Lucretia Lum could have testified that he, Wyler, was not known as “Bobby the Italian”, despite this identification by prosecution witnesses. Nash, a named defendant in the alleged conspiracy (though not on trial with Wyler), would have testified about some unspecified subjects which would cast in doubt the credibility of witnesses Estrada and Gomez. We have little difficulty with the Nash request, if only because the record is totally unclear that he could have given any helpful testimony to appellant. Thus, the trial judge was well within his discretion to refuse, as he did, to call Nash because Wyler and assisting counsel Rosner were not only distressingly vague as to Nash’s potential “evidence” but also aware that Nash might invoke his Fifth Amendment privilege. (SM2458-60)

Because the government had offered evidence tending to establish that Wyler was known as “Bobby the Italian” by other conspirators, the question regarding Lucretia Lum is arguably a closer one. Assuming, as Wyler does, that Miss Lum would not have invoked her privilege under the Fifth Amendment, we still note that there was no particular assurance that she, allegedly a girlfriend of principal defendant Torrado, would have been in any position to testify that Wyler was not called “Bobby the Italian”. As Wyler himself put it, “I would like to see if she knows who Bobby the Italian is”. (SM2461). The trial judge, who struggled constantly through the long trial to pass on Wyler’s legion requests for witnesses, was painfully aware of his responsibilities in this area. (See, e. g. SM2008-9; 2348-46; 2458-61.) As applicable Rule 17(b), F. R.Cr.P., indicates by its terms, the trial court is obliged to be satisfied that the production of a desired witness is “. . . necessary to an adequate defense.” Unlike the dissent, we cannot find that the aforementioned quotation of Wyler was an “explicit, relevant and important” offer of proof. Wyler at this point said nothing further; hence we are left with the unmistakable inference that Wyler himself had no reason to know what Miss Lum would say about this matter. Earlier, during another colloquy between the court, Wyler and other counsel, it is true that Wyler had stated that he wished to ask Miss Lum about the “credibility” of Estrada and Gomez. Government counsel immediately responded that he would object — with what we consider to be good reason — to any views which Miss Lum might have as to the credibility of Gomez and Estrada. Moreover, the trial judge thereupon turned to Mr. Rosner, who was then assisting Wyler, saying: “Now, do you want Miss Lum up here . ?” Rosner replied: “I don’t want her up.” (SM2345-46). With this state of the record, we cannot say that the trial court abused its discretion in concluding that there was no reasonable certainty that Miss Lum would testify in a manner helpful to Wyler. See United States v. Lepiscopo, 458 F.2d 977, at 978 (10th Cir. 1972); United States v. Panczko, 429 F.2d 683, at 688-689 (7th Cir. 1970).

The judgment of conviction is affirmed.

OAKES, Circuit Judge

(dissenting):

I dissent.

I believe Wyler was substantially prejudiced by being tried with other members of the conspiracy. He had timely moved for a severance ,six months before trial and renewed the motion subsequently. While Wyler may have been a participant in the overall conspiracy, his participation was so quantitatively, if not qualitatively, different from that of the codefendants, at least six of whom were wholesalers and all of whom had major roles, that he would invariably be prejudiced in a trial with them. Indeed, with the exception of one instance where he acted as a runner or go-between in a small sale, Wyler’s purchases could as well have been for his own consumption, given the evidence. Of the codefendants who testified, none knew Wyler. With a severance he would have been able to examine all of them. This is precisely the kind of case where Mr. Justice Jackson’s remarks on conspiracy trials in Krulewitch v. United States, 336 U.S. 440, 446, 69 S.Ct. 716, 93 L.Ed. 790 (1949) (Jackson, J., concurring), which have been quoted so often that they do not need repetition here, still apply. A separate trial, the trial court acknowledges, would have taken only two days.

I also think the trial court should have subpoenaed both Lucretia Lum and Nash. Washington v. Texas, 388 U.S. 14, 87 S.Ct. 1920, 18 L.Ed.2d 1019 (1967). The majority states that “there was no particular assurance” that Lum could have testified favorably to Wyler. It goes on to say that because Wyler, representing himself pro se, had made unjustified requests for subpoenas earlier, the trial judge did not abuse his discretion in concluding “there was no reasonable certainty that Miss Lum would testify in a manner helpful to Wyler.” I do not agree. The offer of proof was explicit, relevant and important — that Lum would testify that Wy-ler was not the “Bobby the Italian” referred to by the prosecution witnesses, and perhaps knew who the real “Bobby the Italian” was; that she was very close to Jesus Torrado, the boss of the narcotics chain conspiracy, and hence had reason to know this. There was no question that she was involved in some way with this organization and had indeed testified both in a rape case against Estrada and Gomez, two of the conspirators, and in a narcotics prosecution against her. As for Nash, while perhaps the offer of proof was not explicit, the Government, having alleged that Nash was a coconspirator, should not be permitted to deny the relevance of his testimony as one of the alleged co-conspirators. Since the Government itself named him as a coconspirator, the burden should be on it to show the irrelevancy of Nash’s testimony.

The evidence of Wyler’s involvement in the conspiracy was in any event thin at best. He received a ten year sentence. Because I think he was deprived of due process of law by the denial of his motion to sever and his sixth amendment right to call witnesses in his own behalf, I dissent from the affirmance of his conviction.


author: LEWIS R. MORGAN, Circuit Judge:

text:
    UNITED STATES of America, Plaintiff-Appellee, v. Johnny Ray SMITH, Defendant-Appellant.
    No. 72-2619.
    United States Court of Appeals, Fifth Circuit.
    Nov. 8, 1973.

      Henry R. Barksdale, court-appointed, Pensacola, Fla., for defendant-appellant.
    Willliam H. Stafford, Jr., U. S, Atty., J. Worth Owen, Asst. U. S. Atty., Pensacola, Fla., for plaintiff-appellee.
    Before GEWIN, AINSWORTH and MORGAN, Circuit Judges.
   LEWIS R. MORGAN, Circuit Judge:

Appellant, Johnny Ray Smith, was convicted in the Federal District Court for the- Northern District of Florida for forging, counterfeiting, passing, uttering and publishing two United States Postal Money Orders, in violation of 18 U.S.C. § 500. We affirm.

This court has examined all of appellant’s contentions as to error in the district court. The one issue that caused this court concern was appellant’s insistence that he was deprived of his right to a speedy trial. This will be discussed below. None of the other contentions of error were found to have merit.

FACTS

On or about May 24, 1968, several stolen money orders were passed at various businesses in the State of Florida. On June 24, 1968, appellant was arrested and charged with violating the Dyer Act and therefore came to be in federal custody for reasons separate from the charge we are concerned with. On July 31st, appellant was questioned by a postal inspector and at that time he gave the inspector a sample of his handwriting and made an oral statement. In March of 1969, appellant was transferred to the Tarrant County Jail in Fort Worth, Texas, for trial in federal court there on a two-count indictment under 18 U.S. C. § 500. Appellant was charged there with having passed forged U. S. Postal Money Orders, just as he was charged in Florida. Appellant was convicted in Texas on both counts and sentenced to a term of ten years imprisonment.

The United States Attorney’s office in the State of Florida went before a grand jury on November 9, 1971, and obtained an indictment against appellant for his Florida violations of 18 U.S.C. § 500. Approximately five months later, appellant was brought to trial and convicted and sentenced to serve a term of ten years, to be consecutive to the sentence imposed by the federal district court in Texas. The period of time between indictment and trial, approximately five months, was the result of appellant’s counsel moving for a continuance. Appellant does not contend that this five-month period was part of the delay which deprived him of his right to a speedy trial.

THE SPEEDY TRIAL QUESTION

The contention of appellant is that approximately three and one half years elapsed between the time he came to be in federal custody and the time he was indicted for the above-mentioned offenses and such pre-indictment delay is in violation of his constitutional right to a speedy trial. Although appellant urges upon this court the test espoused by the Supreme Court in Barker v. Wingo, 407 U.S. 514, 92 S.Ct. 2182, 33 L.Ed.2d 101 (1973), we find that test not to be applicable in this case. Here we are faced with a pre-indictment delay which, according to the Supreme Court, is not to be counted for the purposes of a Sixth Amendment motion absent a showing of actual prejudice. United States v. Marion, 404 U.S. 307, 92 S.Ct. 455, 30 L.Ed.2d 468 (1971), Hoskins v. Wainwright (5 Cir. 1973), 485 F.2d 1186. Therefore, the only question facing this court is whether actual prejudice did occur.

Actual prejudice is that prejudice resulting from a delay that has so impaired the defendant’s capacity to prepare a defense as to amount to an infringement on his right to a speedy trial. United States v. Capaldo (2 Cir. 1968), 402 F.2d 821 at 823. It should be remembered that the applicable statute of limitations, in this case five years, is not the only control on pre-indictment delay. But where unconstitutional pre-indictment prejudicial delay is alleged, it must be supported. Schlinsky v. United States (1st Cir. 1967), 379 F.2d 735 at 737. Justice White specifically stated in Marion, supra, 404 U.S. at 315, 92 S.Ct. at 460, 30 L.Ed.2d 468:

No opinions of this Court intimate support for appellees’ thesis [Sixth Amendment applicability to pre-indictment delay where no prejudice was shown] and the courts of appeals that have considered the question in constitutional terms have never reversed a conviction or dismissed an indictment solely on the basis of the Sixth Amendment speedy trial provision where only pre-indictment delay was involved, (footnotes omitted).

This Court of Appeals has recognized the Sixth Amendment right to a speedy trial only after a prosecution has been formally initiated and has held that the sole safeguard against pre-indictment delay absent prejudice is the relevant statute of limitations. Kroll v. United States (5 Cir. 1970), 433 F.2d 1282, cert, den., 402 U.S. 944, 91 S.Ct. 1616, 29 L.Ed. 2d 112 (1971), United States v. Grayson (5 Cir. 1969), 416.F.2d 1073. See United States v. Durham (5 Cir. 1969), 413 F.2d 1003; United States v. Wilson (2 Cir. 1965), 342 F.2d 782, cert, den., 382 U.S. 860, 86 S.Ct. 119, 15 L.Ed.2d 98. This circuit most recently held in United States v. Davis (October 16, 1973), 487 F.2d 112, that absent a showing of extreme prejudice amounting to a Fifth Amendment denial of due process, the commencement of prosecution is controlled exclusively by the applicable statute of limitations. In that opinion, the court quoted from United States v. Marion, supra, where the Supreme Court stated:

It is appropriate to note. here that the statute of limitations does not fully define the appellee’s rights with respect to the events occurring prior to the indictment. Thus, the government conceded that Due Process Clause of the Fifth Amendment would require dismissal of the indictment if it were shown at trial that the pre-indictment delay in this case caused substantial prejudice to appellee’s rights to a fair trial and that delay was a purposeful device to gain tactical advantage over the accused. 404 U.S. at 324, 92 S.Ct. at 465.

ACTUAL PREJUDICE?

Appellant, Johnny Ray Smith, has gone to great lengths in his pro se supplemental brief to demonstrate to this court that actual prejudice occurred. According to Smith, at the time the offenses with which he was charged occurred, he was participating in a domino tournament in Vance, Mississippi, at the mobile home of a friend. Smith insists that all of the eight persons present at the domino tournament are now either dead or missing. It is contended that but for the extremely long period of time between the occurrence of the offenses charged and the trial, Smith would have been exonerated at trial by his many alibi witnesses and would therefore be a free man today.

This court has examined the record below, giving specific emphasis to the hearing on Smith’s motion to dismiss the indictment for failure to afford him a speedy trial. Appellant Smith was given a full hearing concerning any prejudice he might have suffered due to the delay between the offenses charged and trial. It would be of no advantage for us to go into the details of that hearing at this point. It was demonstrated at the motion to dismiss that there was no intentional delay by the government in order to gain a tactical advantage. In fact, part of the delay was due to Smith having pleaded insanity during his trial in Texas concerning offenses identical in time and substance to the offenses charged below. Smith had appealed that conviction upon the ground that he should have been found insane. This circuit affirmed that Texas conviction in January of 1971. United States v. Smith (5 Cir., 1971), 436 F.2d 787. It is asserted that because both the Florida offenses and the Texas offenses were identical except for location, the government was guilty of no misconduct by waiting to see how Smith’s appeal came out before proceeding with indictment in the case below. Although this fact, in and of itself, is no justification for a delay found to be prejudicial, that is not the case here.

When is governmental delay reasonable? Clearly a deliberate attempt by the government to use delay to harm the accused, or governmental delay that is “purposeful or oppressive” is unjustifiable .... The same may be true of any governmental delay that is unnecessary, whether intentional or negligent in origin. A negligent failure by the government to ensure a speedy trial is virtually as damaging to the interest protected by the right as an intentional failure; when negligence is the cause the only interest necessarily unaffected is our common concern to prevent deliberate misuse of the criminal process by public officials. Thus the crucial question in determining the legitimacy of governmental delay may be whether it might reasonably have been avoided — whether it was unnecessary. To determine the necessity for governmental delay, it would seem important to consider, on the one hand, the intrinsic importance of the reason for the delay, and, on the other, the length of the delay and its potential for prejudice to inter-tests protected by the speedy-trial safeguard. 398 U.S. at 51, 90 S.Ct. at 1575.

The indictment here was brought well within the applicable statute of limitations. This court also finds that no actual prejudice occurred. United States v. Marion, supra; United States v. Edwards (5 Cir. 1972), 458 F.2d 875; United States v. Schools (5 Cir. 1973), 486 F.2d 557. The other allegations of error concerning appellant’s involuntary statement, the denial of his application for witness subpoenas, and his attack on the weight and sufficiency of the evidence, have been examined and found to be without merit. The judgment of the district court is

Affirmed.

      . The Texas federal district court appeared to impose upon appellant a rather heavy sentence because that court was under the impression that appellant was not going to be indicted or tried for the similar offenses he allegedly committed in Florida. During the sentencing, that court stated, “The indications from all that was said in the present ease are that he was not filed on for any of the other offenses involved in this statement. He got off light under the circumstances. . . . ” See page 44 of memorandum denying motion for a new trial in C.R.. 4-656, U.S.D.C., Northern District Texas, dated and filed February 27, 1970.
      At oral argument before this court, counsel for the government stated that this sentence had since been reduced- to a term of three and a half years in light of the fact that appellant was eventually tried and sentenced in Florida.

      . Twenty-eight of Smith’s 48 years on earth have been spent in various penitentiaries. Much of his incarceration time has been in maximum security. United States v. Smith (5 Cir. 1971) 436 F.2d 787 at 789. Smith’s word alone, then, alleging prejudice is without other proof and is not, in the opinion of this court, sufficient to show actual prejudice under the circumstances.

      . Justice Douglas in his separate opinion in United States v. Marion, 404 U.S. 307, 92 S.Ct. 455, quoted Justice Brennan’s discussion on the question of what constitutes reasonable governmental delay:

      . 18 U.S.C. § 3282 Offenses Not Capital

      Except as otherwise expressly provided by law, no person shall be prosecuted, tried or punished for any offense, not capital, unless the indictment is found or the information is instituted within five years next after such offense shall have been committed.


author: HAYS, Circuit Judge:

text:
    AJAYEM LUMBER CORP., Plaintiff-Appellee, v. PENN CENTRAL TRANSPORTATION CO. et al., Defendants-Appellees, The Long Island Rail Road Company, Defendant-Appellant. The LONG ISLAND RAIL ROAD COMPANY, Third-Party Plaintiff-Appellant, v. UNITED STATES of America, Third-Party Defendant-Appellant, and Interstate Commerce Commission, Third-Party Defendant-Appellee. PENN CENTRAL TRANSPORTATION CO. et al., Plaintiffs-Appellees, v. The LONG ISLAND RAIL ROAD COMPANY, Defendant-Appellant.
    Nos. 843, 848, Dockets 72-2123, 72-2189.
    United States Court of Appeals, Second Circuit.
    Argued June 4, 1973.
    Decided Nov. 7, 1973.

      John B. Wyss, Washington, D. C. (Carl D. Lawson, Thomas E. Kauper, Asst. Atty. Gen., Dept. of Justice, Washington, D. C., on the brief), for appellant United States.
    Raymond M. Zimmet, Washington, D. C. (Fritz R. Kahn, Gen. Counsel, I. C. C., Washington, D. C., on the brief), for ap-pellee I. C. C.
    Edward A. Kaier, Philadelphia, Pa. (Jerome H. Shapiro, New York City, Richard J. Murphy, Philadelphia, Pa., Richard B. Wachenfeld, Newark, N. J., Frederick G. Hoffmann, New York City, Andrew C. Armstrong, Baltimore, Md., on the brief), for appellee Railroads.
    Walter J. Myskowski, Washington, D. C. (George M. Onken, Jamaica, Robert R. Prince, New York City, Richard H. Stokes, Jamaica, on the brief), for appellant Long Island Rail Road Co.
    Before HAYS, MANSFIELD and MULLIGAN, Circuit Judges.
   HAYS, Circuit Judge:

This is an appeal from a decision and order of the United States District Court for the Eastern District of New York in a case which has had a four year history of litigation and adjudication in the Interstate Commerce Commission and the courts. Although there are innumerable complexities involved in the issue of rate-making for railroad carriers of freight, the sole issue upon which this appeal rests is whether the Long Island Rail Road successfully divorced itself — or “flagged out” in Interstate Commerce Commission parlance— from the action of the Tariff Executive Association-Eastern Railroads (“TEA-ER”) when that body filed a master tariff with- the ICC proposing 6% increases in the joint freight rates of the Long Island and its other member railroads. The district court, in upholding the position of the appellee railroads and the ICC, determined that the Long Island has been unsuccessful in its attempt to “flag out” of the proposed rate increase when notified of it by the TEA-ER and thus it- enjoined the LIRR from refusing to accept freight cars tendered to it and from refusing to apply the newly established formula for division of joint rate revenues — a “self-help” action taken by the LIRR in response to the refusal on the part of the TEA-ER and the ICC to recognize its flag out.

I. Factual Background

The Tariff Executive Association— Eastern Railroads is' an association of railroads authorized by section 5a of the Interstate Commerce Act, 49 U.S.C. § 5b, and approved by the Commission. The Long Island and the appellee railroads are members of the TEA-ER and have an agreement authorizing joint actions by the Association. The TEA-ER provides a focal point for joint consideration of rate changes and it acts as a tariff bureau which files and publishes the necessary documents to make a rate change effective. To this end, the Association, as do other similar bodies throughout the nation, holds power of attorney from its members which enables it to make publications and filings on behalf of its members. Because such concerted action in the area of rate-making clearly falls within the proscriptions of the federal anti-trust laws, Congress in authorizing such associations exempted them from the anti-trust laws, but in so doing it provided that any agreement establishing the procedure for the determination of joint rates must afford “each party the free and unrestrained right to take independent action either before or after any determination arrived at through such procedure.” 49 U.S.C. § 5b(6).

The “flagging out” procedure which is at the center of the controversy at bar is one method by which member railroads can exercise their right of independent action under section 5a of the Act. It enables a member of a rate-making association to divorce itself from a “joint” decision made by such an association (if that decision has the effect of changing established rates) by giving due notice to all concerned parties. After that notice is given, the association, acting as agent for the railroads, notes when it publishes the new tariff schedule, that the new rate will not be applicable to the railroad which has “flagged out.”

The Interstate Commerce Act provides for two methods for changing existing joint rates. Rates may be changed by a single carrier, by several carriers acting independently of their association, or by all carriers through the action of their association after the consent of all of the affected carriers is received. The new rates are then subject to review by thé ICC under 49 U.S.C. § 15(7) where a determination of the reasonableness of the new rates is made. The second method of changing existing joint rates is through the action of the Commission —either at the request of other carriers or on its own motion — under section 15(1) after a full hearing is accorded where the views of an objecting carrier may be presented. When the membership of a rate-making association decides to propose changes in existing rates, a dissenting member by giving due notice, i. e. “flagging out,” may continue to charge the previously existing rates. Since proposed rates constitute changes in existing rate schedules, the proposal is subject to ICC examination and possible suspension under section 15(7). Thus in the present case where the Long Island wanted to maintain the status quo its request was not subject to any procedure other than one for “flagging out” or, eventually, if requested by the ICC or a carrier, a section 15(1) full hearing to determine whether the existing rates which it wished to maintain were correct, just and reasonable.

To expedite a rate change, the ICC may give railroads special permission to dispense with some of the publication requirements and proceed in what is known as -the short-form method. This, procedure was followed in the case at bar. The sequence of events surrounding the challenged action is set forth in detail in the district court’s opinion, 350 F.Supp. 111, 114-117 (E.D.N.Y.1972), and will not be repeated here.

II. The District Court Decision

The district court concluded that the Long Island was not entitled to claim its local rates because it was bound by the action of its agent, the TEA-ER, in publishing the new rates in its behalf. The court held that the railroad’s actions in notifying the Association of its desire not to be included in the new rate schedule were not sufficient to enable the Long Island to maintain its existing rates. The court ruled that a member railroad could opt out of an association decision on rate-making only by revoking the power of attorney that the railroad had given the association. It further decided that such a revocation could only occur in strict accordance with the rules as laid down by the Commission, which would include filing a formal statement of its own proposed revised tariffs for submission to the ICC for approval under 49 U.S.C. § 15(7).

The district court rejected the argument of the Long Island, also made by the United States which had confessed error, that the actions of the TEA-ER and the other carriers in forcing the higher joint rates upon the Long Island violated the right of independent action guaranteed to members of associations such as the TEA-ER by section 5a of the Act. The court found that section 5a, the Reed-Bulwinkle Act, did not call for any change in the consequences of the powers of attorney which were in effect at the time of the adoption of section 5a, and that the Long Island could have exercised its right of independent action by revoking the power of attorney it had filed with the Association.

We reverse. The Interstate Commerce Commission erred in finding that the Long Island Rail Road failed to take the proper steps to opt out of the increased rates submitted to the Commission by the tariff-publishing agent of the eastern railroads. It is clear that the Long Island took every step possible to “flag out” of the proposed increased rates submitted to the ICC by the Tariff Executive Association. The railroad appellees and the ICC agree that but for their interpretation of the power of attorney issued by the LIRR to the TEA-ER the Long Island could not be held to have acquiesced in the new rate schedule. We think it patent, however, that the powers of attorney between the railroad members of associations such as the TEA-ER and their agent only give the latter the authority to file proposed rate changes and not to set them without consultation or concurrence of the member railroads. Indeed, by letter of October 9, 1969, the chairman of the TEA-ER wrote to the Long Island and stated that the proposed rate schedule was about to be submitted for approval and that he assumed that the Long Island would “join with the other railroads.” But, he continued, if “this should be contrary to your desires you may direct me to eliminate the name of your company and the petition will be amended accordingly.” Such procedures as the Long Island followed in this case have been considered adequate in the past to enable a member railroad to disassociate itself from association actions.

The ICC persists in arguing that member railroads of the TEA-ER can revoke their powers of attorney only on giving 60 days notice of intention to file a formal withdrawal. Not only does it appear that the 60-day notice provision is applicable only when a principal is revoking the total power of attorney held by its agent preparatory to its retaining another agent, but, more importantly, as we have said, the power of attorney did not authorize the TEA-ER to propose or consent to new tariffs or rates; it merely permitted the filing of tariffs consented to by member railroads. A carrier does not waive its right of independent action under section 5a of the Act by giving a power of attorney. The suggestion of the ICC, that the Long Island’s remedy was to file a suit in equity to compel the agent to file the flag out can hardly be called the kind of independent action which the Reed-Bulwinkle Act was designed to protect.

The ICC also contends that the Long Island’s effort to flag out of the new rates was defective because it was not made as a formal motion or similar procedure, the exact nature of which the counsel for the ICC never made clear. The statute does not require any specific form for the “flag out” notice to the Commission and the Long Island’s efforts to notify all concerned about its intentions were clearly adequate, especially in view of ICC’s lack of precision in what it would require for a “formal” flag notice.

If the Long Island’s right of independent action was to be given any méaning at all, it was entitled to a hearing before the new joint rates went into effect. Until such a hearing was held and a determination made of the lawfulness of the rates as proposed, the Long Island had a right to insist on the maintenance of its existing joint rates. See ICC v. Columbus & Greenville Ry., 319 U.S. 551, 555, 63 S.Ct. 1209, 87 L.Ed. 1580 (1943).

Although we are persuaded that the position taken by the Long Island must prevail we are not so clear as to the consequences which should follow upon our reversal of the district court’s decision. The Long Island is entitled to recover from the railroad defendants only such damages as it actually suffered by reason of the defendant’s institution of the new higher rates before the hearing and determination of lawfulness to which the Long Island was entitled. If we were to order that the Long Island should collect as damages the difference between what it had to charge as divisions of the joint rate and what its local rates were when the changes were made, the Long Island would receive a windfall without any showing of actual damages. Moreover, the ICC has reached the merits of the reasonableness of the increases involved in this dispute and has found that the increases were lawful in that they did not exceed reasonable maximum levels. 337 ICC 274, 286 (1970). Finally, since there have been several subsequent increases, further ICC rate proceedings in this action would appear to be unjustified.

The Long Island, in asking this court to reverse the decision of the district court contends that the effect of the higher rates has been to lower the volume of traffic on its road, causing it loss of revenue. It suggests that it be permitted to negotiate new divisions of the joint rates sufficient for it to retain as damages no more than an amount necessary to cover the full costs of performing the freight service with no return on investment or profit above such full costs. While expressing no views as to the merits of this proposal, we note that it is one of several possible solutions to the question of the proper remedy.

A remand is necessary so that the district court may determine the amount of damages, if any, which the Long Island is entitled to receive as a result of our decision determining that the Long Island should have been allowed to flag out of the new joint rates submitted by the TEA-ER and authorized by the ICC.

Reversed and remanded.

      . Joint rates are employed when shipments are transported over the tracks of more than one railroad. The rate paid is divided between the railroads over whose tracks the shipments pass according to a schedule established by agreement of the affected railroads. The share of each railroad in the joint rates is usually lower than the charge for a comparable local shipment, i. e., the charge for shipments which travel over th« tracks of only one railroad.


author: STEPHENSON, Circuit Judge.

text:
    FEHRS FINANCE COMPANY, Appellant, Cross-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Appellee, Cross-Appellant.
    Nos. 72-1638, 73-1068.
    United States Court of Appeals, Eighth Circuit.
    Submitted Sept. 10, 1973.
    Decided Nov. 6, 1973.

      William P. Sutter, Chicago, Ill., for Fehrs Finance Co.
    Michael L. Paup, Atty., Tax Div., Dept, of Justice, Washington, D. C., for the Commissioner.
    Before HEANEY, STEPHENSON and WEBSTER, Circuit Judges.
   STEPHENSON, Circuit Judge.

The focal point of this controversy concerns the basis attributable to certain stock in the hands of the acquiring corporation in connection with a redemption of stock through the use of related corporations pursuant to 26 U.S.C. §§ 304(a) and 362(a)(2).

Our task is to review the decision of the United States Tax Court wherein, after an extensive examination of the facts and the several sub-issues, the court determined that the basis of the stock in question was zero since the transferors had recognized no gain on the transfer for the tax year in question.

We affirm the Tax Court in all respects and set out only those facts that become necessary to a determination and explanation of the issues.

The transaction which began this case is not complex. Mr. and Mrs. Fehrs owned all of the stock of Fehrs Rental Corporation (Rental). Mr. Fehrs gave a small portion of his stock to his wife, son-in-law, daughters and grandchildren. Approximately two months thereafter Fehrs Finance Company (Finance) was newly incorporated with two of the Fehrs’ daughters as sole shareholders. Mr. and Mrs. Fehrs then transferred all of the remaining Rental stock to Finance in return for Finance’s promise to pay to the Fehrs annuities totaling $70,000 per year for their lives. Finance immediately resold the Rental stock to Rental in exchange for $100,000 in cash and an unsecured promissory note in the sum of $625,000.

The Tax Court held that Finance realized a taxable gain of $100,000 in 1965 (the cash received in 1965) since its basis was zero. The parties stipulated that the basis of the stock in the hands of Mr. and Mrs. Fehrs was zero. • Finance (taxpayer) contends that Mr. and Mrs. Fehrs realized a capital gain on the transfer which, in turn, increased the basis of the stock in the hands of taxpayer, Finance. The Tax Court disagreed. We agree with the Tax Court.

The parties do not quarrel with the Tax Court’s characterization of the foregoing transaction ' as a redemption through the use of related corporations. 26 U.S.C. § 304(a).

According to § 304 the acquiring corporation (Finance) must treat the stock acquired as a contribution to its capital.

When the stock in question has been treated as a contribution to capital, the basis of that stock in the hands of the transferee (Finance) is the same as it would be in the hands of the transferor (the Fehrs), increased by the amount of gain recognized to the transferor on the transfer.

It becomes necessary due to the inter-workings of sections 304 and 362 of the Internal Revenue Code to determine whether or not the Fehrs realized any gain on the redemption. If they did not, the basis of the Rental stock in the hands of Finance would be zero; i. e., the substituted basis of Mr. and Mrs. Fehrs. If they realized a gain, the basis of the Rental stock to Finance would be increased by the amount of that gain. Hence, Finance’s gain on resale would be less.

Only gain realized by the Fehrs on a sale or exchange (capital gain) will allow Finance to receive the “stepped-up” basis for which it argues. If the transaction gave rise to dividend or ordinary income to the Fehrs it would not affect Finance’s basis.

Finance advances two theories, either of which it says will support the assertion that the transaction was an exchange giving rise to capital gain to the Fehrs, and therefore increasing Finance’s basis in the stock. The two theories are found in 26 U.S.C. § 302(b)(1) and (3) and will be discussed separately.

I.

Dividend Equivalency

The essence of 302(b) (1) is that a redemption will be treated as an exchange if it “is not essentially equivalent to a dividend.” Paramount to the dividend equivalency test are several preliminary rules which we must consider.

To qualify for the preferred treatment of 302(b)(1) the redemption “must result in a meaningful reduction of the shareholder’s proportionate interest in the corporation.” United States v. Davis, 397 U.S. 301, 313, 90 S.Ct. 1041, 1048, 25 L.Ed.2d 323 (1970). It is . settled that the attribution rules of section 318(a) apply to the stock ownership interest when 302(b)(1) dividend equivalency is in question. Davis, supra at 305-307, 90 S.Ct. 1041.

Determination as to whether or not the redemption had a “business purpose” is no longer a relevant inquiry regarding dividend equivalency under 302(b)(1). Davis, supra at 312, 90 S. Ct. 1041. Johnson v. United States, 434 F.2d 340, 343 (C.A.8 1970); Wright v. United States, 482 F.2d 600, 608-609 (C.A.8 1973).

The Tax Court recognized the above guidelines and concluded:

Thus, insofar as it is relevant in determining the question of dividend equivalence in this ease, we conclude that the attribution rules require that Mr. Fehrs must be treated as continuing in actual control of Rental after the transaction here in issue, (citation omitted) We hold that the redemption cannot be treated as an exchange under section 302(b)(1). 58 T.C. at 188.

We agree. The judgment as to whether a redemption is “not essentially equivalent to a dividend” turns on the facts of each case. Wright, supra 482 F.2d at 606. Viewing this case in the setting which the attribution rules dictate, the only stock which is not constructively owned by the Fehrs is the fifteen shares given by Mr. Fehrs to his son-in-law. See 58 T.C. at 176. Even after the resale of the Rental stock back to Rental, and the subsequent cancellation of that stock diminishing the Fehrs ownership interest from 98.2 to 88.69 percent, the proportionate interest of these stockholders in this corporation was not meaningfully reduced. Davis, supra 397 U.S. at 313, 90 S.Ct. 1041. It is not necessary for us to determine whether the Fehrs post-redemption ownership must be measured before or after cancellation of the stock. We agree with the Tax Court that even if we “assume for the sake of argument that the redemption reduced the Fehrs’ ownership interest from 98.2 percent to 88.69 percent” the mandates of Davis would not be fulfilled. We are not convinced that the Tax Court findings are against the clear weight of evidence or induced by an erroneous view of the law. Commissioner of Int. Rev. v. Ironsport Mfg. and Equip. Co., 478 F.2d 731, 734 (C.A.8 1973); Riss v. Commissioner of Int. Rev., 478 F.2d 1160, 1164 (C.A.8 1973).

Complete Redemption

Finance strongly urges that this redemption qualifies as an exchange since there was a “complete redemption of all of the stock of the corporation owned by the shareholder.” 26 U.S.C. § 302 (b)(3). If Finance is to be successful on this point it must show that the provisions of 302(c)(2)(A) have been fulfilled. That section frees a taxpayer from the application of the attribution rules to its redemption provided the three tests are fulfilled.

There is no question that the Fehrs themselves no longer own any Rental stock. Nevertheless, they constructively own those shares owned by their daughters and grandchildren.

Finance asserts that the Fehrs are protected from that constructive ownership in this instance because they have fully complied with the 302(c)(2)(A) criteria.

This appeal concerns only the third proviso of 302(e)(2)(A), which obligates the taxpayer to file an agreement with the Internal Revenue Service. Thereunder the taxpayer promises to notify the IRS of any reacquisition (other than by bequest or inheritance) of stock in the corporation within ten years after the distribution.

The corresponding regulation is Treas.Reg. (1973) § 1.302-4 providing:

Section 302(b)(3) provides that a distribution in redemption of all of the stock of the corporation owned by a shareholder shall be treated as a distribution in part or full payment in exchange for the stock of such shareholder. In determining whether all of the stock of the shareholder has been redeemed, the general rule of section 302(c)(1) requires that the rules of constructive ownership provided in section 318(a) shall apply. Section 302(c)(2), however, provides that section 318(a)(1) (relating to constructive ownership of stock owned by members of a family) shall not apply where the specific requirements of section 302(c)(2) are met. The following rules shall be applicable in determining whether the specific requirements of section 302(c)(2) are met:
(a) The agreement specified in section 302(c) (2) (A) (iii) shall be in the form of a separate statement in duplicate signed by the distributee and attached to his return timely filed for the year in which the distribution described in section 302(b)(3) occurs. The agreement shall recite that the distributee has not acquired any interest in the corporation (as described in section 302(c) (2) (A) (i) since such distribution, and that he agrees to notify the district director of internal revenue for the district in which such return is filed of any acquisition of such an interest in the corporation within 30 days after such acquisition if such acquisition occurs within 10 years from the date of such distribution.
* * * * * *

When this case was decided the Fehrs had not yet filed the required agreement. Not surprisingly, therefore, the Tax Court held that the mandates of the Code has not been met. Immediately following the Tax Court decision the Fehrs filed the agreement with the Omaha IRS office. Finance now asserts that this belated filing should be deemed by us to be sufficient.

We have carefully considered the cases relied upon by Finance which hold that only “substantial compliance” with 302(c)(2)(A) is required. Cary v. Commissioner, 41 T.C. 214 (1963); United States v. Van Keppel, 321 F.2d 717 (C.A.10 1963); Pearce v. United States, 226 F.Supp. 702 (W.D.N.Y. 1964).. But see, Archbold v. United States, 201 F.Supp. 329 (D.N.J.1962), affirmed per curiam 311 F.2d 228 (C.A. 3 1963). We have no disagreement with those cases wherein taxpayers were allowed to file tardy agreements before the law suits were tried. While it is not our function to reconcile other decisions of the Tax Court, Jantzer v. C.I.R., 284 F.2d 348, 355 (C.A.9 1960), we find the instant ease clearly distinguishable.

The agreement in this ease was not filed until after the Tax Court decision declaring that the Fehrs had not complied with the statute. Finance made no request upon the Tax Court to reconsider its opinion in light of the belated filing.

We are not at liberty to digress from the provisions of the governing statutes merely because.a case may present hard facts. Fearing v. C.I.R., 315 F.2d 495, 499 (C.A.8 1963) (Blackmun, J.). We hold that in this case the filing of the statutory agreement, over six years after the returns were due and only after an adverse decision in the Tax Court, does not substantially comply with section 302(c)(2)(A) of the Internal Revenue Code.

II.

Having determined the Fehrs’ redemption scheme does not qualify for treatment as an exchange pursuant to 302(b) we must view it as a distribution of property governed by section 301. 26 U.S.C. § 302(d). The Tax Court properly set out the application of section 301:

Section 301(c)(1) provides in effect that, to the extent that it is made out of the corporation’s earnings and profits, the distribution is treated as a dividend and is taxed as ordinary income to the recipient. Section 301(c)(2) goes on to provide that, to the extent that the distribution is not a dividend, it is first applied against the recipient’s adjusted basis in the stock, and then, according to section 301(c)(3), the amount which exceeds such adjusted basis is treated as gain from the-sale or exchange of property. 58 T.C. at 190.

The Tax Court went on to hold:

(1) The mere forming of the annuity contracts between Finance and the Fehrs in 1965 did not constitute a “distribution of property” for 301 purposes in 1965.

(2) Since the Fehrs received no payments under the annuity contracts in 1965 no property distributions were in fact made within the meaning of 301 for the 1965 tax year.

(3) Since no distribution of property was made to the Fehrs in 1965 they realized no capital gain under 301(c) (3) (A) which could, in turn, be attributed to Finance as a stepped-up basis in the Rental stock. 58 T.C. 174, 191-194.

On the basis of the well reasoned Tax Court opinion, we affirm the determination that no property distribution within the meaning of sections 301 and 317 was made in 1965.

Finance urges that the recent case of Estate of Lloyd G. Bell, ¶ 60.52 P-H T.C. 287 (June 26, 1973) requires a contrary result.

Bell involved a sale of stock in exchange for a private annuity. The Tax Court held that gain should have been recognized by the transferor of the stock in the year of the sale. The measure of gain was determined .to be the difference between the adjusted basis of the stock and the actuarial value of the annuity contract. Finance suggests that same philosophy should be applied here and that its basis in the Rental stock should be $552,373.84, that is, the amount of gain properly recognized by the Fehrs under the Bell opinion. We do not agree.

We recognize several of the same characteristic distinguishing factors in Bell which the Tax Court found in the cases cited by Finance at trial. See 58 T.C. at 191-192.

In Bell the Tax Court points out 01 60.52 P-H T.C. 287, 288):

Here, we are dealing with an annuity which is amply secured, not only by the property transferred, but also by a cognovit judgment that would subject all the property of the transferees to attachment without court proceedings.

Moreover, the corporation — obligors involved in Bell were clearly viable corporations with several years of operating history.

In the instant case the obligor on the annuity contracts, Finance, is a newly formed corporation with a total capitalization of $100,000 in cash plus an unsecured promissory note of Rental in the principal sum of $625,000. Yet Finance has obligated itself to pay out . $70,000 per year. The Tax Court was compelled to say:

Unlike the recipient of an ordinary promise to make a payment at a certain time in the future, the Fehrses did not receive anything in 1965 which they could have disposed of even at a substantial discount. 58 T. C. at 191.

We think the Bell case is inapposite to the situation which this case presents. Indeed, the more established doctrine of the Tax Court has been that where unsecured private annuities are involved, gain need not be reported in the year of the transfer due to the uncertainty of payment involved. Bell, supra at 291 (dissenting opinion); J. Darsie Lloyd, 33 BTA 903 (1936); Commissioner v. Kann’s Estate, 174 F.2d 357 (C.A.3 1949) (affirming an unreported decision of the Tax Court).

For all of the foregoing reasons, the basis of the Rental Company stock held by Finance is (under section 362(a)(2) of the Internal Revenue Code) the same as it was in the hands of Mr. and Mrs. Fehrs — zero.

III.

The final point for consideration on this appeal concerns the argument of the Internal Revenue Service on cross-appeal. IRS attacks that portion of the Tax Court decision modifying the original reported opinion.

Subsequent to the redemption transaction between Finance and Mr. and Mrs. Fehrs the IRS determined that the Fehrs were required to pay gift taxes on the difference between the value of the stock transferred and the value of the annuities. ’ Mr. and Mrs. Fehrs promptly paid the gift tax and filed for refund. See 58 T.C. at 179.

In an unreported memorandum of August 14,1972, the Tax Court held:

-x- * * that the petitioner is entitled to an increased basis in the Rental stock by reason of the gift taxes paid, if such taxes are not refunded before the entry of the decision in this case.

The Court awarded the addition to basis pursuant to 26 U.S.C. § 1015(d)(1)(A) which provides in applicable part:

If—
(A) the property is acquired by gift * * * the basis shall be the basis * * * increased (but not above the fay: market value of the property at the time of the gift) by the amount of gift tax paid with respect to such gift, •X * *

IRS contends that the tax has not been “paid” within the meaning of 1015 since the claim for refund is still pending. For that reason IRS contends that the gift tax cannot be added to basis on a 1015 pretext. The Service also declares that since the Tax Court had no evidence upon which it could premise an independent determination that a gift was in fact made it cannot hold that 1015(d) warrants an increase in basis. No authority is offered by IRS for its contention and we have found none.

The Tax Court said in its unreported memorandum:

There is no indication that the word “paid” in section 1015(d) is to be given anything but its ordinary meaning. In deciding whether a tax was paid within the meaning of other provisions of the tax laws, the courts have examined the facts to find whether the funds transferred to the taxing authority were transferred as security for taxes to be determined in the future or in satisfaction of a tax liability which has already been determined by the taxing authority. Rosenman v. United States, 323 U.S. 658 [65 S.Ct. 536, 89 L.Ed. 535] (1945); Ameel v. United States, 426 F.2d 1270 (C.A.6, 1970); Estate of Benjamin Piller, 29 B.T.A. 799 (1934). If the amount transferred was in satisfaction of such a tax liability, the courts have concluded that a .payment was made even though the determination of tax liability was being contested by the taxpayer. Rosenman v. United States, supra; see Ameel v. United States, supra.

A review of the above decisions cited by the Tax Court satisfies us that the decision here has a reasonable basis in law* and is warranted by the record.

The judgment of the Tax Court is affirmed.

      . The Tax Court opinion is reported at 58 T.C. 174 (1972). Our jurisdiction is conferred by 26 U.S.C. § 7482(a).

      . An increased basis for gift taxes paid by Mr. and Mrs. Fehrs was allowed by the Tax Court. The same will be later discussed.

      . Sec. 304. Redemption through use of related corporations
      (a) Treatment of certain stock purchases.—
      (1) Acquisition by related corporation (other than subsidiary). — For purposes of Sections 302 and 303, if—
      (A) one or more persons are in control of each of two corporations, and
      (B) .in return for property, one of the corporations acquires stock in the other corporation from the person (or persons) so in control, then (unless paragraph (2) applies) such property shall be treated as a distribution in redemption of the stock of the corporation acquiring such stock. In any such case, the stock so acquired shall be treated as having been transferred by the person from whom acquired, and as having been received by the corporation acquiring it, as a contribution to the capital of such corporation.
      * ¡Ü !¡: * *

      . Section 362(a) states:
      (a) Property acquired by issuance of stock or as pmd-in surplus. — If property was acquired on or after June 22, 1954, by a corporation—
      (1) in connection with a transaction to which section 351 (relating to transfer of property to corporation controlled by transferor) applies, or
      (2) as paid-in surplus or as a contribution to capital, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of' gain recognized to the transferor on such transfer.
      (b) Transfers to corporations. — If property was acquired by a corporation in connection with a reorganization to which this part applies, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain recognized to the transferor on such transfer. This subsection shall not apply if the property acquired consists of stock or securities in a corporation a party to the reorganization, unless acquired by the exchange of stock or securities of the transferee (or of a corporation which is in control of the transferee) as the consideration in whole or in part for the transfer.

      . The basis of the Rental stock in the hands of Mr. and Mrs. Fehrs was stipulated to be zero.

      . Section 302 in relevant part states:
      (a) Q-eneral Rule. — If a corporation redeems its stock (within the meaning of section 317(b)), and if paragraph (1), (2), (3), or (4) of subsection (b) applies, such redemption shall be treated as a distribution in part or full payment in exchange for the stock.
      (b) Redemptions treated as exchanges.— (1) Redemptions not equivalent to dividends. — Subsection (a) shall apply if the redemption is not essentially equivalent to a dividend.
      * * sH * *
      (3) Termination of shareholder’s interest. — Subsection (a) shall apply if the redemption is in complete redemption of all of the stock of the corporation owned by the shareholder.

      . Under section 318 an individual is considered as owning stock held by his spouse, parent, child, or grandchild.

      . That section provides :
      (c)' Constructive ownership of stock.—
      (2) For determining termination of interest.—
      (A) In the case of a distribution described in subsection (b) (3), section 318(a) (1) shall not apply if—
      (i) immediately after the distribution the distributee has no interest in the corporation (including an interest as officer, director, or employee), other than an interest as a creditor,
      (ii) the distributee does not acquire any such interest (other than stock acquired by bequest or inheritance) within 10 years from the date of such distribution, and
      (iii) the distributee, at such time and in such manner as the Secretary or his delegate by regulations prescribes, files an agreement to notify the Secretary or his delegate of any acquisition described in clause (ii) and to retain such records as may be necessary for the application of this paragraph.

      . Id.

      . The present posture of this issue in the ease presents some question as to whether this court should consider an issue not squarely faced by the Tax Court. Joslin v. C. I. R., 424 F.2d 1223, 1227 (C.A.7 1970). Our consideration is warranted since no new or more expansive factual determinations need be made. Estate of Byrd v. C. I. R., 388 F.2d 223, 233-234 (C.A.5 1967) ; Frederick Steel Co. v. C. I. R., 375 F.2d 351, 355 (C.A.6 1967).

      . § 317. (a) Property. — For purposes of this part, the term “property” means money, securities, and any other property; except that such term does not include stock in the corporation making the distribution (or rights to acquire such stock).

        (b) Redemption of stock. — For purposes of this part, stock shall be treated as redeemed by a corporation if the corporation acquires its stock from a shareholder in exchange for property, whether or not the stock so acquired is cancelled, retired, or held as treasury stock.