author: GIBSON, Circuit Judge.

text:
    UNITED STATES of America, Appellee, v. Clyde R. GOAD et al., Appellants.
    No. 73-1309.
    United States Court of Appeals, Eighth Circuit.
    Submitted Nov. 12, 1973.
    Decided Jan. 14, 1974.
    Rehearing and Rehearing En Banc Denied Feb. 5, 1974.

      Stanley M. Rosenblum, Clayton, Mo., for appellants.
    William M. Piatt, Atty., U. S. Dept, of Justice, Washington, D. C., for appellee.
    Before GIBSON, LAY and HEANEY, Circuit Judges.
   GIBSON, Circuit Judge.

The four defendants were charged and convicted of violating 29 U.S.C. § 501(c) of the Labor-Management Reporting and Disclosure Act of 1959, 29 U.S.C. § 401 et seq. (hereinafter Act). Defendants are Donald D. Lane, president of Local 600 of the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America (hereinafter the Union); Clyde R. Goad, vice-president; Daniel R. Mahany, secretary-treasurer; and Michael Ryan, recording secretary. Defendants each received three different salary increases of $50.00 per week that were not authorized in accordance with the Union’s constitution.

The District Court sentenced Lane to two years imprisonment each on Counts 7, 8, and 9, the sentences to run concurrently, and three years probation each for Counts 1 through 6 and 10 through 12, such probation to run concurrently and to be served following completion of the sentence for Counts 7, 8, and 9. Goad received 18 months imprisonment (six months imprisonment and one year probation) each on Counts 1 and 2, to be served concurrently, and three years probation on Count 3 to be served after the sentence on Counts 1 and 2. Ryan received 18 months imprisonment (six months imprisonment and one year probation) each on Counts 4 and 5, to be served concurrently, and three years probation for Count 6, to be served after the sentence for Counts 4 and 5. Ma-hany received two years imprisonment each on Counts 10 and 11, to be served concurrently and pursuant to parole eligibility under 18 U.S.C. § 4208(a)(2). Mahany also received three years probation for Count 12, to be served after completion of the sentence for Counts 10 and 11. We affirm the convictions of all four defendants.

Members of the Union are 7,500 over-the-road truck drivers operating out of St. Louis and dockhands. The Union is governed by a seven member Executive Board, comprised of the local president, vice-president, secretary-treasurer, recording secretary (the four defendants occupied these offices during the times herein pertinent), and three trustees, all elected by the members every three years. The daily affairs are managed by the four officers, who were in this case first elected in 1968 and reelected by a two-to-one margin in December, 1971. The Union receives over one million dollars in annual dues, and its treasury in December, 1968, totaled approximately $2,000,000.

The previous officers held office for all but one week during 1968 and received the following salaries: president, $21,000; vice-president, $15,000; secretary-treasurer, $19,600; and recording secretary, $17,700. The defendants received the following salaries and expenses from 1968-1971:

President Donald Lane authorized separate $50.00 per week pay increases for the periods commencing May 24, 1969, October 18, 1969, and January 5, 1970. Neither the Executive Board nor the general membership specifically authorized or approved any of the salary increases. Each salary increase was the basis of a charged violation against each defendant for his own salary increases. Lane, however, was charged with three violations for his own three salary increases and with nine violations relating to the three salary increases for each of the three other officers. The Government did not contend that substantial expense money received was illegal.

Section 7.02(b) of the Union’s constitution requires the Executive Board to “Mpprove the salaries, benefits, allowances, direct and indirect disbursements, expenses and reimbursement of expenses for officers, agents and employees.” The minutes from every Executive Board meeting from December 22, 1968, through October 15, 1972, were admitted into evidence, and no approval of the three salary increases for any of the officers was recorded. Defendants make no claim that the Executive Board or the membership expressly approved of the salary increases, and the three trustees testified that they did not know of the increases. In late 1971, when all of the officers were running for reelection, Union members asked at different Union membership meetings what the officers were being paid. Apparently, Lane responded at these times that “I’ll not discuss it with you or anyone else” or “I don’t ask what you make and you shouldn’t ask me what I make.” Ma-hany often said to “[c]ome on up and look at the books; they are always open.” Apparently Union members first learned of the substantial increases in late 1971, when a candidate for president, opposing Lane, obtained accurate salary information from the LM-2 reports filed with the Government pursuant to the Act and mailed copies of those reports to the members.

Defendants’ main contention is that the following resolution approved by the Union membership granted to the President and Secretary-Treasurer the power to increase salaries without approval of the Executive Board:

[T]he President and Secretary-Treasurer have the authority, which is hereby confirmed, verified, and extended to make such expenditures and use of Teamsters Local 600 funds and facilities to whatever extent they believe is related' to the interests and benefit of Teamsters Local 600 without any prior approval.

We agree with the Government that this general resolution cannot be read as rescinding the specific constitutional provision requiring Executive Board approval of salary increases. To do so would defeat the provisions of the Union’s constitution. Defendants urge other contentions that the Union’s constitution authorized the salary increases; however, we think that § 702(b) of the Union’s constitution clearly takes precedence and provides that salary increases must be approved by the Executive Board.

Defendants also argue that the Government must prove “lack of union benefit” as an essential element of a crime under § 501(e). Since the District Court instructed the jury that a § 501(c) crime contains the essential elements of a specific intent to deprive the union of its funds and an unauthorized expenditure of union funds, defendants argue that it was prejudicial error not to include the alleged element of lack of union benefit. Defendants contend that the essential elements of every § 501(c) crime are; (1) specific intent to deprive the union of its funds, (2) unauthorized expenditure of union funds, and (3) lack of union benefit from the expended funds.

In order to decide whether lack of union benefit from expended union funds — in this case, unauthorized salary increases — is an element of a § 501(c) crime, we review the legislative history and Congressional purpose of § 501. This court has clearly held that “Congress intended that it [the Act] should not be interpreted by the Courts narrowly or strictly, but, to the contrary, that its confines are broad.” Johnson v. Nelson, 325 F.2d 646, 650 (8th Cir. 1963) ; accord, Pignotti v. Local # 3 Sheet Metal Workers’ Int. Ass’n, 477 F.2d 825, 832-835 (8th Cir. 1973). We said in Johnson:

Thus it plainly appears that the statute is broad in its reach. Officers and other union representatives may not act adversely to their organization or to the members as a group or acquire a personal interest which is contrary to the interests of the organization. Being trustees the officers must subvert their own personal interests to the lawful mandates and orders of the organization.

Johnson v. Nelson, supra, 325 F.2d at 650.

Section 501 should be interpreted broadly in order to insui-e that elected union officials fulfill their responsibilities as fiduciaries to their members, guard union funds from predators, and keep intact all such funds except those expended in the legitimate operation of the union’s business. The funds should be treated as trust funds belonging to the union’s members. Section 501(a), titled in part “Fiduciary responsibility of officers of labor organizations,” specifically states:

(a) The officers, agents, shop stewards, and other representatives of a labor organization occupy positions of trust in relation to such organization and its members as a group. It is, therefore, the duty of each such person, taking into account the special problems and functions of a labor organization, to hold its money and property solely for the benefit of the organization and its members and to manage, invest, and expend the same in accordance with its constitution and bylaws and any resolutions of the governing bodies adopted thereunder -X- -» *

Much has been written by many courts concerning the fiduciary responsibility of union officials imposed by § 501, however, House Report No. 741, prepared by the Committee on Education and Labor, trenchantly describes the purposes of the Labor-Management Reporting and Disclosure Act. In commenting on union financial and administrative practices, House Report No. 741 said:

The members of a labor organization are the real owners of the money and property of such organizations and are entitled to a full accounting of all transactions involving such money and property. Because union funds belong to the members they should be expended only in furtherance of their common interest. A union treasury should not be managed as though it were the private property of the union officers, however well intentioned such officers might be, but as a fund governed by fiduciary standards.
The conduct of the financial affairs of labor unions and the conduct of union officers in their capacity as officers of labor organizations are matters of proper concern to the Federal Government. This is so because the funds that pass through union treasuries and for which unions and their officers are responsible constitute vast sums of money, and the uses to which these funds are put have a substantial impact on the Nation’s economy. Furthermore, if unions are to enjoy the protection of rights and exercise the broad powers which are guaranteed to them by the National Labor Relations Act and the Railway Labor Act, they ought also to be held responsible for abuses that have accompanied the exercise of such powers and rights by some union leaders.
* * * . * -* *
It is the purpose of this bill to insure that full information concerning the financial and internal administrative practices and procedures of labor organizations shall be, in the first instance available to the members of such organizations.

U.S.Code Cong. & Admin.News, Vol. 2, 86th Cong. 1st Sess.1959, H.Rep.No.741, at 2430.

The statute, cases, and legislative history clearly establish that union officers are fiduciaries for union members, and a willful misappropriation of union funds by officials constitutes a violation of § 501(c). In United States v. Bryant, 430 F.2d 237, 239 (8th Cir. 1970), we indicated that “a conviction would be supported by proof of willful embezzlement.” In Bryant, however, “lack of union benefit” as an essential element was not raised, and we only stated that “[t]he court properly instructed the jury as to the essential elements of each offense charged.” 430 F. 2d at 239. Similarly, other Eighth Circuit cases do not discuss this issue. E. g., Hayes v. United States, 329 F.2d 209 (8th Cir.), cert, denied sub nom. Bennett v. United States, 377 U.S. 980, 84 S.Ct. 1883, 12 L.Ed.2d 748 (1964); Doyle v. United States, 318 F.2d 419 (8th Cir. 1963). The issue of whether “lack of union benefit” is an essential element of the crime under § 501(e) has not been raised before in this circuit. Probably because the common law crime of embezzlement consists of an unauthorized taking for personal use, otherwise stated, a conversion of entrusted funds to the personal use of the fiduciary, any incidental benefits that may fortuitously inure to the benefit of the victim is immaterial. In the broader category of willful misuse or abstraction of union funds and the conversion of them for the personal use of the converter or for non-union purposes, the issue of union benefit might be material where there was proper authorization for the payment of the funds, for example, the payment of authorized political contributions.

The Second Circuit has had occasion to probe this issue more deeply than any of the other circuits. Its decisions in United States v. Silverman, 430 F.2d 106 (2d Cir.), modified on other grounds, 439 F.2d 1198 (2d Cir. 1970), and United States v. Ferrara, 451 F.2d 91 (2d Cir. 1971), present other factual situations as applied to the proscriptions of § 501(c). In Silverman, the defendant labor official was charged with violations of § 501(c) in Counts 1 through 8 for political contributions and in Counts 10 through 13 with receiving four Christmas gratuity checks. Judge Moore wrote the majority opinion for all counts except the political contributions charges, and his majority opinion on the § 501(c) counts relating to the Christmas checks affirmed defendant’s conviction. Judge Friendly joined by Judge Hays wrote the majority opinion for the charges relating to the political contributions disguised in union records as payments for printing and reversed defendant’s conviction on these counts.

In discussion of the Christmas checks counts, Judge Moore stated that defendant argued that the evidence failed “to support a finding that the money was expended for a non-union purpose.” United States v. Silverman, 430 F.2d at 117. However, the discussion on this issue for these charges does not hold that the Government had to prove lack of union benefit. Judge Moore held that only Silverman knew for what purpose the checks were used and that he failed to offer evidence that the checks were used for union benefit. Since the burden of proof for union benefit was placed on defendant, this would seem to imply that “lack of union benefit” would not be an essential element of a § 501(c) violation to be proved by the Government. Judge Friendly did not discuss the counts relating to the Christmas checks.

The political contributions charges are more fully discussed in Silverman. Judge Moore, dissenting on these charges, said:

[A] conviction under section 501(c) may be made out by a demonstration of a fraudulent intent to deprive the union of its funds and either a lack of bona fide authorization or an absence of benefit to the labor organization from the expenditure.

United States v. Silverman, 430 F.2d at 117 (emphasis added).

Therefore, according to Judge Moore, the essential elements of a § 501(c) violation vary. First, the essential elements may be: (1) a fraudulent intent to deprive the union of its funds and (2) a lack of authorization according to the union’s bylaws and constitution. Second, the essential elements could be: (1) a fraudulent intent to deprive the union of its funds and (2) an absence of benefit to the union. This would most likely apply to the situation where there was authorization on the record but a lack of benefit to the union coupled with a fraudulent intent. United States v. Dibrizzi, 393 F.2d 642 (2d Cir. 1968).

Judge Friendly, whose opinion states the majority view in Silverman on the political contributions counts, only assumes arguendo that Judge Moore’s statement of the essential elements is correct and eventually holds no reasonable jury could be convinced beyond a reasonable doubt of defendant’s guilt on these charges — a failure of proof. The only conclusion, therefore, that can be drawn from Silverman’s discussion on the political contributions counts is that the essential elements were not delineated.

The Government contends that United States v. Ferrara, supra, makes “certain that Judge Friendly * * * had not rejected Judge Moore’s analysis in Sil-verman.” While that analysis might be correct, we do not read Ferrara that broadly. The Government in Ferrara introduced evidence that there was a lack of authorization for long-term auto leases made for the personal benefit of the union officials. The court said that “[b]y its verdict of guilty the jury found that appellants, without authority and for personal purposes, entered into long-term auto leases for themselves and their Union friends.” United States v. Ferrara, 451 F.2d at 96 (emphasis added). It also said in relation to another § 501(c) count that “[t]he first defense to this charge was that the dinners were for Union business, but there was evidence that they were merely social occasions.” 451 F.2d at 96. Finally, the court concluded on this charge that “plainly the jury was justified that these were unauthorized expenditures for personal benefit.” 451 F.2d at 96. Obviously, the jury could have concluded from the evidence presented that there was fraudulent intent, lack of authorization, and lack of union benefit. Since Ferrara neither discusses the district court’s charge nor states the elements of the offense, we certainly cannot say that the Second Circuit has established lack of union benefit as an essential element of a § 501(c) offense. Rather, Judge Moore’s well-reasoned opinion in Silver-man appears to state the Circuit’s view where there is a lack of authorization for the expenditures, and Judge Friendly’s opinion in Silverman states that Circuit’s view where there has been a sufficient authorization.

Thus, we cannot accept defendants’ view that “lack of benefit to the union” is an essential element in this case involving the unauthorized increased salaries of the Union’s officers. We think that the Government sufficiently proved a submissible case by demonstrating that the officers fraudulently intended to deprive the Union of its funds by taking unauthorized salary increases, that is, by knowingly taking increases not authorized according to the Union’s constitution and bylaws. According to Judge Moore’s statement of the essential elements in Silverman, the Government proved a prima facie case by establishing fraudulent intent and lack of authorization.

If the Government establishes fraudulent intent and lack of proper authorization, it should not also be saddled with an additional burden of proving lack of benefit to the union. To do so would emasculate the Act. Aside from the difficulties of proving a negative fact, such as lack of union benefit, we do not think that Congress intended that union funds be the fair subject of embezzlement that is only vaguely premised on claimed union benefit. The conduct of these defendants cannot by any stretch of the imagination or by the use of sophisticated semantics be raised to the level of conduct required of fiduciaries, who at common law and in the ordinary context of that term are charged with a high degree of integrity and candor in their dealings with fiduciary funds, together with strict proscriptions against self-dealing.

Section 501(a) specifically says that a fiduciary responsibility includes expending union funds “in accordance with its constitution and bylaws.” The overall purpose of the Act is to protect union property and funds, to provide full disclosure of financial affairs of the union, to establish self-help remedies for union members, and to impose criminal sanctions under § 501(c). The unauthorized expenditures of union funds with a fraudulent intent alone is exactly what the Act was attempting to reach. The purpose of the Act was “to insure that full information concerning the financial and internal administrative practices and procedures of labor organizations”is available to union members. The exercise of power by union officials is not unfettered, but checked in the first instance by proper approval within its own ranks. The salary increases, which were not approved by the Executive Board, effectively were kept secret until the second reeleetion of defendants. Section 501(e) was designed to reach this exact type of occurrence. In upholding the constitutionality of § 501(c), the District Court in the Northern District of New York perceptively said:

[T]he power of a labor organization to bargain collectively in matters affecting commerce, all of which is now regulated by statute, would be lessened by the misuse or abuse of its funds to the diminution of its power to bargain in matters affecting commerce.

United States v. Haverlick, 195 F.Supp. 331, 332 (N.D.N.Y.1961).

The Government appropriately points out that several “felonious taking” statutes do not require a showing of lack of benefit. Section 501(c) should be interpreted similarly. We do not think that lack of union benefit need be established when the funds are unauthorizedly expended, because § 501(c)’s language of “embezzles, steals, or unlawfully and willfully abstracts or converts to his own use” only “means * * * ‘not to the use of the entruster.’ ” United States v. Harrelson, 223 F.Supp. 869, 870 (E.D.Mich.1963).

We, therefore, hold that the essential elements of a § 501(c) crime in this case are: (1) fraudulent intent to deprive the union of its funds and (2) lack of authorization according to the union’s constitution and bylaws. Since we have held that the salary increases lacked the proper authorization, we do not reach the issue whether there is a § 501(c) violation when there has been a fraudulent intent and proper authorization, but a lack of benefit to the union. That situation presents a more troublesome issue: namely, does § 501(c) protect union funds by penalizing union officials when the members themselves have authorized union officials to expend union funds for non-union purposes? That issue must wait for another day..

In summary, fraudulent intent to deprive the union of its funds and a demonstrated lack of authorization, is sufficient for a prosecution under § 501(c). Lack of union benefit is not essential, but fraudulent intent must be proved; that is, the intent to deprive the union of its funds, not an intent to deprive the union of its funds that are not expended for union benefit. For example, if by mistake or accident a union official spends funds that are unauthorized, he is not liable under § 501(c). To hold that “lack of union benefit” must be affirmatively proved by the prosecution and to allow a showing of union benefit to vitiate fraudulent intent in a case involving unauthorized expenditures would allow union officials to handily evade the broad fiduciary provisions of § 501(c) and the essential elements of a § 501(c) violation.

Defendants finally contend that proffered evidence, for example, on defendants’ longer working hours, was “highly probative” on the matter of intent. According to our above discussion, a case involving lack of authorization under § 501(c) does not require a proof of lack of benefit to the union as an essential element, nor is a showing of benefit relevant to disproving fraudulent intent to deprive the union of its funds where the disbursement was unauthorized. The District Court properly refused to admit all such evidence on the grounds of irrelevancy.

Judgment of convictions affirmed.

      . 29 U.S.C. § 501(c) provides :

        Embezzlement of assets; penalty

      (e) Any person who embezzles, steals, or unlawfully and willfully abstracts or converts to his own use, or the use of another, any of the moneys, funds, securities, property, or other assets of a labor organization of which he is an officer, or by which he is employed, directly or indirectly, shall be fined not more than $10,000 or imprisoned for not more than five years, or both.

      . The Honorable William H. Webster, then United States District Judge of the Eastern District of Missouri, and now of the Eighth Circuit, presided.

      . Previous salary increases granted in 1966 and 1967 were properly approved and recorded in the Board’s minutes.

      . The briefs and record do not indicate exactly when this resolution was in effect. Defendants state that it was in effect from 1966 through April, 1972, and was periodically introduced and approved at Union membership meetings. Due to our above discussion in the text, resolution of the effectiveness of the resolution or resolutions is unnecessary.

      . E. g., Lawson v. United States, 300 F.2d 252, 254 (10th Cir. 1962) (“highest standards of ethical conduct”) ; Johnson v. Nelson, 325 F.2d at 650; United States v. Harmon, 339 F.2d 354, 357 (6th Cir. 1964), cert, denied, 380 U.S. 944, 85 S.Ct. 1025, 13 L.Ed.2d 963 (1965) ; United States v. Silverman, 430 F.2d 106, 113 (2d Cir.) (Moore, J., dissenting on this issue), modified on other grounds, 439 F.2d 1198 (2d Cir. 1970) ; Pignotti v. Local # 3 Sheet Metal Workers’ Int. Ass’n, 477 F.2d at 834; United States v. Haverlick, 195 F.Supp. 331, 332 (N.D.N. Y.1961) (“highest standards of responsibility and ethical conduct in administering the affairs of their organization”). Although the section’s major thrust is to protect union funds from fiduciary embezzling or converting, this court has held that it is not “an essential element of the crime charged [under § 501(c)] that the moneys had been held by the appellant in some fiduciary capacity.” Doyle v. United States, 318 F.2d 419, 423 (8th Cir. 1963).

      . House Report No. 741 discussed the Eliot Bill (H.R. 8342), one of four separate bills covering this same area of labor law. Pig-notti v. Local # 3 Sheet Metal Workers’ Int. Ass’n, 477 F.2d at 833. The Eliot Bill contained a fiduciary provision identical to a provision contained in the Landrum-Griffin Bill, which eventually became the Labor-Management Reporting and Disclosure Act. Pignotti v. Local # 3 Sheet Metal Workers’ Int. Ass’n, 477 F.2d at 833; Johnson v. Nelson, 325 F.2d at 650. House Report No. 741 is, therefore, proper legislative source material to ascertain Congress’ purpose in passing § 501.

      . U.S.Code Cong. & Admin.News, Vol. 2, 86th Cong. 1st Sess. 1959, H.Rep.No.741, at 2430.

      . E. g., 18 U.S.C. § 641, 18 U.S.C. § 645, 18 U.S.C. § 654, 18 U.S.C. § 655, 18 U.S.C. § 656, 18 U.S.C. § 657, 18 U.S.C. § 658, 18 U.S.C. § 659, 18 U.S.C. § 660, 18 U.S.C. § 661, and 15 U.S.C. § 80a-36.

      . Accord, United States v. Harrelson, 228 F.Supp. 869 (E.D.Mich.1963).

      . United States v. Bryant, 430 F.2d at 239, held that “willfulness is an essential element of the offense charged.” Willfulness or criminal intent is commonly defined as an “act (or omission) * * * committed (or omitted) by defendant voluntarily, with knowledge that it was prohibited by law, and with the purpose of violating the law, and not by mistake, accident or in good faith.” United States v. Rabb, 394 F.2d 230, 232 (3rd Cir. 1968), quoting Manual on Uniform Jury Instructions in Federal Criminal Cases of the United States District Court for the Northern District of Illinois, 33 F.R.D. 529, 553 (1963). We think, under the circumstances of this case, “good faith” cannot include, as a matter of law, spending union funds thinking it proper since the union would benefit from the expenditure. The fiduciary responsibility requires union officials to follow the proper procedures to authorize the expenditure of funds. A union official cannot be acting in “good faith” when not following his union’s own procedures for authorizing expenditures. An elected union official must know the proper procedures for conducting his union’s business.


source: Caselaw Access Project

author: LUMBARD, Circuit Judge: FEINBERG, Circuit Judge

license: Public Domain

text:
    G. I. DISTRIBUTORS, INC., et al., Plaintiffs-Appellees, v. Patrick MURPHY, Individually and in his capacity as Police Commissioner of New York City, Defendant, Frank S. Hogan, Individually and in his capacity as District Attorney of New York County, Defendant-Appellant.
    Cal. 431, Docket 72-1208.
    United States Court of Appeals, Second Circuit.
    Dec. 20, 1973.
    Certiorari Denied April 15, 1974.
    See 94 S.Ct. 1941.
    Herald Price Fahringer, Buffalo, N. Y. (Lipsitz, Green, Fahringer, Roll, Schuller & James, Buffalo, N. Y., of counsel, on the brief), for appellees.
    Frank S. Hogan, Dist. Atty., New York County, New York City, appellant pro se. (Michael R. Juviler and Hugh Anthony Levine, Asst. Dist. Attys., of counsel, on the brief).
    Before LUMBARD, FRIENDLY and FEINBERG, Circuit Judges.
   LUMBARD, Circuit Judge:

By an order dated June 25, 1973, the Supreme Court vacated the decision of this court in G.I. Distributors v. Murphy, 469 F.2d 752 (1972), and remanded the case to us for further consideration in light of its decisions in Miller v. California, 413 U.S. 15, 93 S.Ct. 2607, 37 L. Ed.2d 419 (1973), Paris Adult Theatre I v. Slaton, 413 U.S. 49, 93 S.Ct. 2628, 37 L.Ed.2d 446 (1973), Kaplan v. California, 413 U.S. 115, 93 S.Ct. 2680, 37 L.Ed.2d 492 (1973), United States v. Twelve 200-Ft. Reels of Super 8 mm. Film, 413 U.S. 123, 93 S.Ct. 2665, 37 L.Ed. 500 (1973), United States v. Orito, 413 U.S. 123, 93 S.Ct. 2674, 37 L.Ed.2d 500 (1973), Heller v. New York, 413 U.S. 483, 93 S.Ct. 2789, 37 L.Ed.2d 745 (1973), Roaden v. Kentucky, 413 U.S. 496, 93 S.Ct. 2796, 37 L.Ed.2d 757 (1973), and Alexander v. Virginia, 413 U.S. 836, 93 S.Ct. 2803, 37 L.Ed.2d 993 (1973). Having given careful consideration to these decisions, we conclude that they do not require us to alter our prior opinion.

In our earlier opinion, we held that G.I. Distributors’ first amendment rights had not been violated when the police temporarily sequestered overnight 19,000 of the company’s magazines until an adversary hearing could be held and a warrant obtained the following morning. We emphasized the unique facts of the case. Armed with search warrants authorizing seizure of six copies of 56 magazines which allegedly were obscene, the police went to the warehouse of G.I. Distributors on January 6, 1972 and discovered the additional 19.000 copies of the publications sometime after 6 P.M. in the course of their search of the warehouse. Aware that these magazines might be destroyed or moved to a hiding place, they segregated the copies and stationed a guard on the premises overnight. As soon as possible the following morning, a full adversary hearing was held before Judge Moldow of the New York City Criminal Court. After examining samples of the magazines, he found probable cause to believe they were obscene and issued a search warrant authorizing the seizure of the 19.000 copies, which were then removed from the warehouse.*

In arguing that the minimal prior restraint exercised by the police in this case was unconstitutional, G.I. Distributors relies principally on the Supreme Court’s decisions in Heller v. New York and Roaden v. Kentucky, supra. We believe, however, that neither of these cases supports G.I. Distributors’ contention. In Heller, the Court actually affirmed that part of a decision of the New York Court of Appeals which failed to find an infringement of first amendment rights, although an allegedly obscene film had been seized without a prior adversary hearing. Echoing the words of the Court of Appeals, the Supreme Court in Heller concluded that there is no absolute constitutional requirement of an adversary hearing prior to a seizure of a movie; a prompt judicial determination following the seizure will often be an adequate guarantee of first amendment rights.

The procedure followed by the police in the present ease was in no way at odds with this holding. Within hours after the police came across the 19,000 magazines and set them aside, an adversary hearing was held at which Judge Moldow found probable cause to believe the publications were obscene. Nevertheless, G.I. Distributors argues that much- of the language in Heller, if not its holding, requires us to reverse our earlier decision. In particular, it is urged that the Supreme Court condemned all prehearing seizures, except those in which a limited number of copies of the allegedly obscene materials are seized solely for evidentiary purposes. In our view, there is no basis for such a broad reading of Heller. Moreover, the prehearing sequestration which occurred here was such a temporary restraint that no real injury was done first amendment rights. At worst, G.I. Distributors was prevented from distributing its publications for a few hours on the morning of January 7, although even this is by no means certain since the record reveals no attempt at distribution by the company.

There is little similarity here with the massive prehearing seizures for the purpose of the permanent destruction of books which occurred in Quantity of Copies of Books v. Kansas, 378 U.S. 205, 84 S.Ct. 1723, 12 L.Ed.2d 809 (1964) and Marcus v. Search Warrants of Property, 367 U.S. 717, 81 S.Ct. 1708, 6 L.Ed.2d 1127 (1961). As we noted in our earlier decision:

Marcus involved an attempt to suppress allegedly obscene books by means of a vague search warrant which in effect allowed the police to seize anything that they deemed to be obscene. A Quantity of Books concerned the seizure of a large number of books under a statute which did not permit a hearing on the books’ obscenity until at least 10 days after the seizure and did not require the judge to make a speedy decision after the hearing. Unlike these cases, no extended interruption in the public’s access to the magazines nor long term suppression of possibly nonobscene literature was threatened here. 469 F.2d at 756.

But perhaps the most telling reason for not requiring a preseizure adversary hearing in cases such as the present one is the danger that, having been forewarned about the evidence the government is seeking, putative defendants may attempt to destroy, conceal, or otherwise dispose of this incriminating material. Indeed, as the Heller Court stated, in terms likewise applicable to the magazines at issue here:

Counsel for New York has argued that movie films tend to “disappear” if adversary hearings are afforded prior to seizure. We take judicial notice that such films may be compact, readily transported for exhibition in other jurisdiction, easily destructible, and particularly susceptible to alteration by cutting and splicing crucial parts of film. 93 S.Ct. 2789, 2795 (1973).

G.I. Distributors also argues that Roaden v. Kentucky, supra, necessitates a reversal of our earlier decision. We disagree. Roaden involved a warrantless seizure of a film incident to the arrest of the manager of the drive-in theatre at which the film was being exhibited. Holding that the seizure was unconstitutional, the Supreme Court emphasized that there had been no prior probable cause determination by a judicial officer on the question of the obscenity of the movie. On the basis of this holding, it is urged here that the warrantless seizure of the 19,000 magazines by the New York City police was likewise unconstitutional. But in arguing that the language used in Roaden should be applied broadly to the present case, G.I. Distributors overlooks the Supreme Court’s admonition in Roaden that each case must be determined on the basis of its particular facts. The fourth amendment is not to be read “in a vacuum. A seizure reasonable as to one type of material in one setting may be unreasonable in a different setting or with respect to another kind of material.” 93 S.Ct. 2796, 2800 (1973).

The circumstances under which the magazines were seized in the present case differ markedly from those under which the seizure of film took place in Roaden. In the latter case the film seized was being shown at a commercial theatre during regularly scheduled performances to the general public. Without difficulty, the sheriff could have first obtained a warrant and then seized the movie. In contrast, the police here stumbled upon additional copies of obscene magazines in a warehouse at night and sought merely to preserve them until an adversary hearing could be held and a search warrant obtained the following morning, by which time the contraband might otherwise have been destroyed, concealed, or transferred out of the jurisdiction. Whatever the police action in this case be called, it was the most limited form of detention consistent with preventing removal of the magazines prior to getting a warrant the next morning. The police did not destroy the material, transport it, or apparently even interfere with tfye owners’ access to it. They merely prevented the owners from moving the magazines for the period between the search and the adversary hearing the next morning. The courts have often advised police that when they have no warrant for a search or seizure, the proper course is to watch the item under suspicion in order to prevent it from being moved, during which time the search warrant can be obtained. Cf. Coolidge v. New Hampshire, 403 U.S. 443, 465, 91 S.Ct. 2022, 29 L.Ed.2d 564 (1971); United States v. Marshall, 488 F.2d 1169, 1189-1190 (9th Cir. 1973). Essentially, that is what happened here. The police kept watch over the material pending the issuance of a warrant. Perhaps they could have gotten a warrant that night. Instead, they chose to get the warrant after the adversary hearing. — certainly a reasonable course to follow, since having a hearing before confiscating all the magazines would actually benefit the owners. The-procedure followed here, in short, may be termed a “seizure,” but if it is, it is the most limited form of seizure imaginable, and therefore should not be classified as one with warrantless seizures that “become in themselves a form of censorship.” Heller v. New York, 93 S.Ct. 2787, 2793 (1973).

Moreover, the police had ample grounds for assuming that the 19,000 publications were, indeed, contraband. In contrast to Roaden, in which “the seizure proceeded solely on a police officer’s conclusions that the film was obscene,” in the present case all 19,000 magazines sequestered temporarily overnight were copies of publications which two judges had already found probable cause to believe were obscene and for which warrants had been issued. Acting entirely on the basis of this judicial determination of obscenity, the police did not go any further than was absolutely necessary under the circumstances in sequestering these copies overnight until a supplemental warrant could be obtained the following day permitting their removal from the warehouse.

Affirmed.

FEINBERG, Circuit Judge

(dissenting) :

I dissent for two reasons from the reversal of Judge Weinfeld’s order and from the adherence to our prior opinion.

The first ground is set forth in my original dissent, G.I. Distributors, Inc. v. Murphy, 469 F.2d 752, 758-760 (2d Cir. 1972). There, I distinguished between seizing all copies of an allegedly obscene book or magazine, such as occurred here in the overnight “sequestration,” and seizing only a few copies for evidentiary purposes; I expressed the view that in the former situation, a prior adversary hearing must be held. The reasons for that view are fully explained in my prior dissent, which I incorporate here. Since then, the Supreme Court’s decisions in Heller v. New York, 413 U.S. 483, 93 S.Ct. 2789, 2794, 37 L.Ed.2d 745 (1973), and Roaden v. Kentucky, 413 U.S. 496, 93 S.Ct. 2796, 2800, 37 L.Ed.2d 757 (1973), by citing with approval A Quantity of Books v. Kansas, 378 U.S. 205, 84 S.Ct. 1723, 12 L.Ed.2d 809 (1964), upon which I mainly relied,. further reinforce my conclusion that appellees’ conduct in this case infringed the first and fourteenth amendments.

The second ground for my dissent rests on the fourth amendment and derives from the Roaden decision, supra, 93 S.Ct. at 2801, which emphasizes the illegality of seizing “all the books in a bookstore” without “a constitutionally sufficient warrant . . . . ” The majority concedes, as it must, that the “quarantine” of the 19,000 magazines prior to the issuance of a warrant after an adversary hearing “may be termed a ‘seizure,’ . . . . ” My brothers, however, attempt to distinguish this case from Roaden — in part, because of the “ample grounds for assuming that the . . . publications were, indeed, contraband” since warrants had already issued for a limited number of copies. But probable cause is not the only prerequisite to a valid fourth amendment seizure. Additionally,

the constitutional requirement that warrants must particularly describe the “things to be seized” is to be accorded the most scrupulous exactitude when the “things” are books, and the basis for their seizure is the ideas which they contain. [Footnote omitted.]

Stanford v. Texas, 379 U.S. 476, 485, 85 S.Ct. 506, 511, 13 L.Ed.2d 431 (1965). The original warrants authorizing the taking of six copies of 56 magazines did not call for seizing all copies of the offending publications. To the extent that the seizure exceeded the specimens allowed by the warrants, it had no warrant authorization at all. In calling for “a constitutionally sufficient warrant,” Roaden nowhere implied that courts were henceforth to distinguish between greater and lesser degrees of inadequacy based on a sliding scale of “cause.” On the contrary, the Supreme Court held that warrantless seizures — such as occurred in the present case — were simply unconstitutional.

The majority also differentiates this set of facts from Roaden on the ground that there was no time to seek a warrant since the magazines might meanwhile “have been destroyed, concealed, or transferred out of the jurisdiction.” (This observation, of course, does not apply to the six sample copies of each magazine, which the police could, and did, take under the original warrants for evidentiary purposes.) Roaden did suggest in dictum that exigent conditions might permit an occasional warrantless seizure. 93 S.Ct. at 2802. The Court, however, specifically stated that:

The facts surrounding the “massive seizures” of books in Marcus and Quantity of Books . . . presented no such “now or never” circumstances.

Id. Marcus v. Search Warrant, 367 U.S. 717, 81 S.Ct. 1708, 6 L.Ed.2d 1127 (1961), dealt with the seizure of thousands of magazines from a warehouse — just the kind of situation involved in the sequestration here. It is therefore clear that the “urgency” claimed on these facts cannot, any more than the existence of “cause,” justify the warrantless seizure of the 19,000 publications, particularly since “prior restraint of the right of expression, whether by books or films, calls for a higher hurdle in the evaluation of reasonableness.” Roaden, supra, 93 S.Ct. at 2801.

Accordingly, I would withdraw our prior opinion and affirm the order of the district court.

      . The police actually found only 55 of the magazines at the warehouse. G.I. Distributors v. Murphy, 469 F.2d at 753 n. 2.

      . As to the 19,000 magazines, we have recently been advised by the parties that they were shipped back to the suppliers of G.I. Distributors after the district court held the police actions unconstitutional and ordered the magazines returned to G. I. Distributors. 336 F.Supp. 1036 (S.D. N.Y.1972).
      G.I. Distributors apparently offered no objection in the district court to the retention by the police or the District Attorney of the 330 magazines initially seized pursuant to search warrants. The 330 copies were to be used as evidence in a still pending New York state criminal prosecution of G.I. Distributors and two of its officers, Alvin Druss and Irving Herman. On May 4, 1973, however, Justice Harold Birns of the New York Supreme Court ordered this evidence suppressed. The government has not appealed from this order, apparently intending to rely on other evidence.

      . 29 N.Y.2d 319, 327 N.Y.S.2d 628, 277 N.E. 2d 651 (1971).

      . A search warrant for 24 of the magazines had been issued by Judge Tyler of the New York Criminal Court. A search warrant for the other 32 magazines had been issued by Judge McQuillian, another Criminal Court judge. Although approximately a year and a half later Justice Birns of the New York Supreme Court determined that these search warrants were constitutionally invalid, see fn. 2 supra, at the time of the seizure the police had no reason to doubt their validity.

      . Indeed, the anomaly is that at the very time that the majority breathes life into the massive seizures here, by again overruling Judge Weinfeld’s order, a state judge has already held illegal even the original seizures of sample copies of the magazines. See note 2 of the majority opinion.


author: ALDISERT, Circuit Judge.

text:
    HEMPT BROS., INC., Appellant, v. UNITED STATES of America.
    No. 73-1296.
    United States Court of Appeals, Third Circuit.
    Argued Nov. 2, 1973.
    Decided Jan. 14, 1974.

      Sheldon M. Bonovitz, John F. Fan-smith, Jr., Duane, Morris & Heckscher, Philadelphia, Pa., for appellant.
    Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, Ernest J. Brown, Attys., Tax Div., Dept, of Justice, Washington, D. C., for appellee.
    Before ALDISERT and WEIS, Circuit Judges, and LATCHUM, District Judge.
   OPINION OF THE COURT

ALDISERT, Circuit Judge.

In this appeal by a corporate taxpayer from a grant of summary judgment in favor of the government in a claim for refund, we are called upon to decide the proper treatment of accounts receivable and of inventory transferred from a cash basis partnership to a corporation organized to continue the business under 26 U.S.C. § 351(a). This appeal illustrates the conflict between the statutory purpose of Section 351, postponement of recognition of gain or loss, and the assignment of income and tax benefit doctrines.

The facts were wholly stipulated; therefore, they may be summarized as set forth by the government in its brief:

The taxpayer is a Pennsylvania corporation with its principal place of business in Camp Hill, Pennsylvania. It files its federal income tax returns for a fiscal year beginning March 1.
From 1942 until February 28, 1957, a partnership comprised of Loy T. Hempt, J. F. Hempt, Max C. Hempt, and the George L. Hempt Estate was engaged in the business of quarrying and selling stone, sand, gravel, and slag; manufacturing and selling ready-mix concrete and bituminous material; constructing roads, highways, and streets, primarily for the Pennsylvania Department of Highways and various political subdivisions of Pennsylvania, and constructing driveways, parking lots, street and water lines, and related accessories.
The partnership maintained its books and records, and filed its partnership income tax returns, on the basis of a calendar year and on the cash method of accounting, so that no income was reported until actually received in cash. Accordingly, in computing its income for federal income tax purposes, the partnership did not take uncollected receivables into income, and inventories were not used in the calculation of its taxable income, although both accounts receivable reflecting sales already made and physical inventories existed to a substantial extent at the end of each of the partnership’s taxable years. Rather than using the inventory method of accounting, the partnership deducted the costs of its physical inventories of sand, gravel, and stone as incurred.
On March 1, 1957, the partnership business and most of its assets were transferred to the taxpayer solely in exchange for taxpayer’s capital stock, the 12,000 shares of which were issued to the four members of the partnership. These shares constituted 100% of the issued and outstanding shares of the taxpayer. This transfer was made pursuant to Section 351(a) of the Internal Revenue Code of 1954; . Thereafter, the taxpayer conducted the business formerly conducted by the partnership.
Among the assets transferred by the partnership to the taxpayer for taxpayer’s shares of stock were accounts receivable in the amount of $662,824.40 arising from performance of construction projects, sales of stone, sand, gravel, etc., and rental of equipment prior to March 1, 1957. Also among the assets transferred were physical inventories of sand, gravel, and stone, with respect to which the partnership had deducted costs of $351,266.05 and the value of which was no less than $351,266.05.
Commencing with its initial fiscal year [which] ended February 28, 1958, taxpayer maintained its books and filed its corporation income tax returns on the cash method of accounting and, accordingly, did not take uncollected receivables into income and did not use inventories in the calculation of its taxable income. In its taxable years ending in 1958, 1959, and 1960, taxpayer collected the respective amounts of $533,247.87, $125,326.71 and $4,249.72 of the accounts receivable in the aggregate amount of $662,824.40 (sic) that transferred to it, and included those amounts in income in computing its income for its federal income tax returns for those years, respectively.
As a result of an examination extending over a period of years, it was determined by the Commissioner of Internal Revenue, and agreed to by the taxpayer, that the use of the cash receipts and disbursements method of accounting with regard to purchases and sales, without taking into account merchandise on hand at the beginning and end of the taxable year, did not clearly reflect taxpayer’s income. Accordingly, taxpayer’s income was adjusted as set forth in an examination report of August 24, 1964 to accrue unreported sales [accounts receivable] made during the taxable years in question and to take into account inventories in computing its cost of goods sold. In computing taxpayer’s cost of goods sold under the inventory method, for the fiscal year ended February 28, 1958, the Commissioner of Internal Revenue, in conjunction with his accrual method treatment, fixed the beginning inventory of stone, sand, and gravel, which had been transferred to the taxpayer by the partnership, at zero, and the ending inventory at $258,201.35. The result was an increase in taxpayer’s taxable income for the fiscal year ended February 28, 1958, in the amount of $258,201.35.

The Commissioner of Internal Revenue assessed deficiencies in taxpayer’s federal income taxes for its fiscal years ending February 28, 1958, and 1959. The taxpayer paid the amounts in 1964, and in 1965 filed claims for refund of $621,218.09 plus assessed interest. The claims were disallowed in full on September 24, 1968, and the district court action was timely instituted on December 5, 1968.

The district court held: (1) taxpayer was properly taxable upon collections made with respect to accounts receivable which were transferred to it in conjunction with the Section 351 incorporation, and (2) the court lacked jurisdiction to entertain taxpayer’s contention that the tax-benefit theory of recovery entitled it to an opening inventory of not' less than $351,266.05, since that theory of recovery was not presented in taxpayer’s claim for refund. Hempt Bros., Inc. v. United States, 354 F.Supp. 1172 (M.D. Pa.1973).

I.

Taxpayer argues here, as it did in the district court, that because the term “property” as used in Section 351 does not embrace accounts receivable, the Commissioner lacked statutory authority to apply principles associated with Section 351. The district court properly rejected the legal interpretation urged by the taxpayer.

The definition of Section 351 “property” has been extensively treated by the Court of Claims in E. I. Du Pont de Nemours and Co. v. United States, 471 F.2d 1211, 1218-1219 (Ct.C1.1973), describing the transfer of a non-exclusive license to make, use and sell area herbicides under French patents:

Unless there is some special reason intrinsic to [Section 351] . the general word “property” has a broad reach in tax law. . For section 351, in particular, courts have advocated a generous definition of “property,” and it has been suggested in one capital gains case that nonexclusive licenses can be viewed as property though not as capital assets. .
We see no adequate reason for refusing to follow these leads.

We fail to perceive any special reason why a restrictive meaning should be applied to accounts receivables so as to exclude them from the general meaning of “property.” Receivables possess the usual capabilities and attributes associated with jurisprudential concepts of property law. They may be identified, valued, and transferred. Moreover, their role in an ongoing business must be viewed in the context of Section 351 application. The presence of accounts receivable is a normal, rather than an exceptional accoutrement of the type of business included by Congress in the transfer to a corporate form. They are “commonly thought of in the commercial world as a positive business asset.” Du Pont v. United States, supra, at 1218. As aptly put by the district court: “There is a compelling reason to construe ‘property’ to include [accounts receivable]: a new corporation needs working capital, and accounts receivable can be an important source of liquidity.” Hempt Bros., Inc. v. United States, supra, at 1176. In any event, this court had no difficulty in characterizing a sale of receivables as “property” within the purview of the “no gain or loss” provision of Section 337 as a “qualified sale of property within a 12-month period.” Citizens Acceptance Corp. v. United States, 462 F.2d 751, 756 (3d Cir. 1972).

The taxpayer next makes a strenuous argument that “[t]he government is seeking to tax the wrong person.” It contends that, the assignment of income doctrine as developed by the Supreme Court applies to a Section 351 transfer of accounts receivable so that the transferor, not the transferee-corporation, bears the corresponding tax liability. It argues that the assignment of income doctrine dictates that where the right to receive income is transferred to another person in a transaction not giving rise to tax at the time of transfer, the transferor is taxed on the income when it is collected by the transferee; that the only requirement for its application is a transfer of a right to receive ordinary income; and that since the transferred accounts receivable are a present right to future income, the sole requirement for the application of the doctrine is squarely met. In essence, this is a contention that the nonrecognition provision of Section 351 is in conflict with the assignment of income doctrine and that Section 351 should be subordinated thereto. Taxpayer relies on the seminal case of Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 16, 74 L.Ed. 600 (1930), and its progeny for support of its proposition that the application of the doctrine is mandated whenever one transfers a right to receive ordinary income.

On its part, the government concedes that a taxpayer may sell for value a claim to income otherwise his own and he will be taxable upon the proceeds of the sale. Such was the case in Commissioner v. P. G. Lake, Inc., 356 U.S. 260, 78 S.Ct. 691, 2 L.Ed.2d 743 (1958), in which the taxpayer-corporation assigned its oil payment right to its president in consideration for his cancellation of a $600,000 loan. Viewing the oil payment right as a right to receive future income, the Court applied the reasoning of the assignment of income doctrine, normally applicable to a gratuitous assignment, and held that the consideration received by the taxpayer rcorporation was taxable as ordinary income since it essentially was a substitute for that which would otherwise be received at a future time as ordinary income.

Turning to the facts of this case, we note that here there was the transfer of accounts receivable from the partnership to the corporation pursuant to Section 351. -We view these accounts receivable as a present right to receive future income. In consideration of the transfer of this right, the members of the partnership received stock — a valid consideration. The consideration, therefore, was essentially a substitute for that which would otherwise be received at a future time as ordinary income to the cash basis partnership. Consequently, the holding in Lake would normally apply, and income would ordinarily be realized, and thereby taxable, by the cash basis partnership-transferor at the time of receipt of the stock.

But the terms and purpose of Section 351 have to be reckoned with. By its explicit terms Section 351 expresses the Congressional intent that transfers of property for stock or securities will not result in recognition. It therefore becomes apparent that this case vividly illustrates how Section 351 sometimes comes into conflict with another provision of the Internal Revenue Code or a judicial doctrine, and requires a determination of which of two conflicting doctrines will control.

As we must, when we try to reconcile conflicting doctrines in the revenue law, we endeavor to ascertain a controlling Congressional mandate. Section 351 has been described as a deliberate attempt by Congress to facilitate the incorporation of ongoing businesses and to eliminate any technical constructions which are economically unsound.

Appellant-taxpayer seems to recognize this and argues that application of the Lake rationale when accounts receivable are transferred would not create any undue hardship to an incorporating taxpayer. “All a taxpayer [transferor] need do is withhold the earned income items and collect them, transferring the net proceeds to the Corporation. Indeed the transferor should retain both accounts receivable and accounts payable to avoid income recognition at the time of transfer and to have sufficient funds with which to pay accounts payable. Where the taxpayer [transfer- or] is on the cash method of accounting [as here], the deduction of the accounts payable would be applied against the income generated by the accounts receivable.” (Appellant’s Brief at 32.)

While we cannot fault the general principle “that income be taxed to him who earns it,” to adopt taxpayer’s argument would be to hamper the incorporation of ongoing businesses; additionally it would impose technical constructions which are economically and practically unsound. None of the cases cited by taxpayer, including Lake itself, persuades us otherwise. In Lake the Court was required to decide whether the proceeds from the assignment of the oil payment right were taxable as ordinary income or as long term capital gains. Observing that the provision for long term capital gains treatment “has always been narrowly construed so as to protect the revenue against artful devices,” 356 U.S. at 265, 78 S.Ct. at 694, the Court predicated its holding upon an emphatic distinction between a conversion of a capital investment — “income-producing property” — and .an assignment of income per se. “The substance of what was assigned was the right to receive future income. The substance of what was received was the present value of income which the recipient would otherwise obtain in the future.” Ibid., at 266, 78 S.Ct. at 695. A Section 351 issue was not presented in Lake. Therefore the case does not control in weighing the conflict between the general rule of assignment of income and the Congressional purpose of nonrecognition upon the. incorporation of an ongoing business.

We are persuaded that, on balance, the teachings of Lake must give way in this case to the broad Congressional interest in facilitating the incorporation of ongoing businesses. As desirable as it is to afford symmetry in revenue law, we do not intend to promulgate a hard and fast rule. We believe that the problems posed by the clash of conflicting internal revenue doctrines are more properly determined by the circumstances of each case. Here we are influenced by the fact that the subject of the assignment was accounts receivable for partnership’s goods and services sold in the regular course of business, that the change of business form from partnership to corporation had a basic business purpose and was not designed for the purpose of deliberate tax avoidance, and by the conviction that the totality of- circumstances here presented fit the mold of the Congressional intent to give nonrecognition to a transfer of a total business from a non-corporate to a corporate form.

But this too must be said. Even though Section 351(a) immunizes the transferor from immediate tax consequences, Section 358 retains for the transferors a potential income tax liability to be realized and recognized upon a subsequent sale or exchange of the stock certificates received. As to the transferee-corporation, the tax basis of the receivables will be governed by Section 362.

II.

The taxpayer contends that the court erred in ruling that its inventory argument was not reasonably encompassed within its claim for refund, and that had the court considered this contention for the fiscal year commencing March 1, 1957, the taxpayer-corporation would have been entitled to a beginning inventory of $351,266.05 instead of zero by application of the tax benefit rule.

The government restates thé reason for the district court’s refusal to consider taxpayer’s argument but by its brief advises: “We believe it unnecessary for this Court to explore the often obscure distinction between the facts to support a claim and the theory of a claim” and that “[w]ithout joining in the debate over facts versus theory, examination of the substance of taxpayer’s claim for inventory adjustment makes it clear that the facts asserted in its claim for refund do not support it and the agreed facts negative it.” (Appellee’s brief at 19.) Regardless of the procedural question, we are persuaded that appellant’s tax benefit argument does not apply to this factual complex, and “[w]e pass at once to a consideration of . [the merits].” B. F. Goodrich Co. v. United States, 321 U.S. 126, 64 S.Ct. 471, 88 L.Ed. 602 (1944).

The tax benefit rule can be simply stated: If a taxpayer makes an expenditure or suffers a loss for which it takes a deduction giving rise to a reduction in its income tax and later recovers the funds or property that it has spent or lost, it must take the amount recovered as income. Connery v. United States, 460 F.2d 1130, 1132 (3d Cir. 1972); Alice Phelan Sullivan Corp. v. United States, 381 F.2d 399, 401-402 (Ct.C1.1967).

Applying this rule to the facts of this case taxpayer contends that partnership’s receipt of stock in exchange for inventory previously expensed but presently valued at $351,266.05 constituted a “recovery” which stepped up the basis of the inventory from zero to $351,266.05 and that this stepped-up basis became the basis to the partnership and the corporation under Sections 358 and 362.

Relying on Nash v. United States, 398 U.S. 1, 90 S.Ct. 1550, 26 L.Ed.2d 1 (1970), and the various courts of appeals decisions in Commissioner v. An-ders, 414 F.2d 1283 (10th Cir. 1969); Spitalny v. United States, 430 F.2d 195 (9th Cir. 1970); Connery v. United States, supra, and Citizens’ Acceptance Corp. v. United States, supra, taxpayer proceeds to equate “value” of the inventory with tax “basis” as conceptualized in Sections 358 and 362. This keystone in the taxpayer’s arch of reasoning proves to be most fragile upon close inspection.

Although Justice Douglas in Nash addressed a transfer of receivables under Section 351(a), the Court did not have before it the critical question posed here —whether a partnership’s “basis,” and ultimately the corporation’s “basis,” in a previously expensed inventory is equal to the “value” of the inventory when transferred.

“In Nash the Court held that when eight partnerships transferred their assets to eight newly formed corporations in exchange for shares in the corporations — transfers that produced no gain or loss under § 351 of the Internal Revenue Code — there was no ‘recovery’ of the bad debt reserves under the tax benefit rule ‘[s]ince the reserve for purposes of this case was deemed to be reasonable and the value of the stock received upon the transfer was equal to the net value of the receivables. . . .’ 398 U.S., at 4, 90 S.Ct., at 1552 (emphasis in original).” Citizens’ Acceptance Corp. v. United States, supra, 462 F.2d at 754. While it is true that Justice Douglas stated that “[a] 11 that petitioners received from the corporations were securities equal in value to the net worth of the accounts transferred, that is the face value less the amount in reserve for bad debts”, 398 U.S. at 4, 90 S.Ct. at 1551, the sole issue before the Court was whether such receipt constituted a “recovery” within the meaning of the tax benefit rule. It was not necessary for the Nash Court ever to reach the question of the tax “basis” in the hands of either the transferor or transferee. Thus, the taxpayer would have us read into Nash a holding which did not appear therein, which was not posed by the facts, and which does not inexorably nor logically follow therefrom.

Nor may the taxpayer find solace in the decisions of the various courts of appeals upon which it relies. At issue in Anders and Spitalny were inventories which had been completely expensed and therefore had a zero basis. After the inventories were sold, the liquidated corporations attempted to assert a no-gain immunity from tax liability by virtue of the operation of § 337. In each case the court held the sale proceeds would not be considered as non-recognizable gain.

We find nothing in the teachings of the Ninth and Tenth Circuits supporting taxpayer’s contention that in a Section 351(a) transfer the accounting basis for property must equal the actual or market value thereof. At the time taxpayer’s inventory was totally expensed on the cash basis books of the partnership that property had mercantile value in the sense as described by Justice Douglas in Nash but for accounting purposes and as a tax basis it still had a zero value. The mere fact that an asset has been transferred under Section 351(a) from a partnership ownership to a corporate ownership does not in itself alter its tax basis.

We now turn to our decisions in Connery and Citizens. The Connery issue was whether tax benefit principles applied following recovery of previously expensed prepaid advertising. We agreed with the Commissioner in the application of the tax benefit rule because the taxpayer realized income equivalent to the value of the previously expensed advertising costs. We said that the taxpayer incurred a tax liability based on the difference between a zero basis and the amount previously expensed.

The difficulty presented in both Section 337 and Section 351 cases is that the statute expressly provides for no-gain and no-loss tax consequences by virtue of the actual liquidation or transfer. Nothing in the statutory schema permits an immunization of normal tax consequences arising out of those separate activities which may accompany a liquidation under Section 337 or a transfer under Section 351 but which are not inherently a necessary aspect of the liquidating or transferring process. The tax imposed in Connery was not the result of the liquidation process per se; it was imposed because of the recovery of an item previously expensed. The happenstance that the recovery took place as an additional feature of the liquidating process does not immunize that recovery from normal tax consequences. The prepaid advertising expenses had a zero basis before the liquidation process began; it had the same basis during the liquidation process.

The Citizens issue was the extent to which the taxpayer had recovered its previously deducted bad debt reserve. Our holding in Citizens was simply a reiteration of the holding in Nash, that the receivables had to be valued on the basis of face value less bad debt reserve. Citizens did not involve an adjustment of the tax basis.

In the case before us, whatever may have been the actual value of the inventory at the time of the transfer, the “basis of . the property exchanged,” Section 358(a) (1), remained the same as it appeared in the partnership’s books —zero. As to the distributees, the “basis of the . . . [stock] permitted to be received under . i . [Section 351] shall be the same as that of the property exchanged” — zero. Section 358(a)(1).

As to the corporation, according to Section 362(a) “the basis shall be the same as it would be in the hands of the transferor [partnership]. . . . ” This must be zero as well. Accordingly, the taxpayer cannot prevail in his contention that he is entitled to a basis for the inventory in the amount of $351,266.05.

III.

Appellant raised at oral argument a question which, on first blush, is extremely attractive and appealing. It questions the fundamental fairness of the Commissioner’s action in requiring a corporation to change from a cash to an accrual basis without permitting adjustments to the predecessor partnership. We note, however, that appellant does not dispute the Commissioner’s determination that its use of the cash receipts and disbursements method of accounting with respect to purchases and sales, without taking into account merchandise on hand at the beginning and end of the year did not clearly reflect income. (Appendix at 18a).

The argument is premised on the history of IRS audits of the previous partnership books, and -the failure of the Commissioner to direct that the partnership change from a cash to an accrual basis. To this is added the reality that the identical partnership business was continued by the corporation with present stock ownership reflecting past partnership interests. The argument continues: requiring the corporate taxpayer to make a sudden change in accounting methods, generating huge new tax liabilities, is basically unfair to the taxpayer; that at the very least, there should now be permitted a reopening of the partnership books to allow for adjustments under 26 U.S.C. § 481 so that a new basis for an opening inventory may be permitted and a distribution of increased tax liabilities shared by the previous partnership.

Where a method of accounting differs from that under which the taxpayer’s income for a preceding calendar year was computed, Section 481(a) provides for adjustments in previous years which are determined to be necessary solely by reason of the change, in order to prevent an amount from being duplicated or omitted. Notwithstanding the adjustment provisions of Section 481(a), a corporation formed for a business purpose is a separate entity and a separate taxpayer from the stockholders who are responsible for its creation. Moline Properties v. Commissioner, 319 U.S. 436, 63 S.Ct. 1132, 87 L.Ed. 1499 (1943). And because of the separate taxable corporate entity, it has been held that where the change in the accounting practices is ordered for the first year of the corporation’s existence, the corporation had no preceding taxable year, and, therefore, Section 481 is inapplicable. Ezo Products Co., supra, at 394. “Equally clearly, section 481 may be applied only to the petitioner [corporation] and not to make adjustments with respect to its predecessor [partnership].” Dearborn Gage Co., 48 T.C. 190, 198 (1967) citing E. Morris Cox, 43 T.C. 448 (1965); Ezo Products Co., supra.

Judge Tannewald’s observations in Dearborn seem pertinent to our facts: “We recognize that, if petitioner [corporation] had never been formed, and the predecessor partnership had continued in büsiness, and the issue before us involved a comparable change in the latter’s method of accounting for overhead costs, respondent . . . would, under the applicable decisions, have been required, in making the necessary computations, to . [make adjustments] both in the opening inventory and closing inventory for the . . . [previous years permitted by Section 481]. Thus, petitioner- — a taxpayer separate and distinct from its predecessor — appears to fare worse than its predecessor would have. We also recognize . . . the tax benefit of the deductions . taken by petitioner’s predecessor may not have been as great as the tax burden which our rationale now requires petitioner to bear, e.g., because the partners may have been in lower tax brackets or the partnership may have operated at a loss in some of the prior years. Moreover, if the ownership of petitioner’s stock had changed prior to the taxable years herein involved, the economic effect of the tax benefit would not inure to, nor would the tax burden fall upon, the same persons. But these are nothing more than some of the myriad of different consequences which may result from a change to the corporate form of doing business or from the acquisition of stock of a corporation rather than corporate assets.” 48 T.C. at 199-200 (footnote omitted).

Applied to this case, these principles preclude a judicial command that the Commissioner make adjustments in the predecessor business entity to supplement the direction that the new corporate taxpayer convert to an accrual basis.

We have carefully considered each of appellant’s contentions and have concluded that the judgment of the district court will be affirmed.

      . Sec. 351. Transfer to Corporation Controlled by Transferor.
      (a) General Rule. — No gain or loss shall be recognized if property is transferred to a corporation (including, in the case of transfers made on or before June 30, 1967, an investment company) by one or more persons solely in exchange for stock or securities in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c)) of the corporation. For purposes of this section, stock or securities issued for services shall not be considered as issued in return for property,

      . The Commissioner of Internal Revenue assessed deficiencies in the amounts of $364,154.20 plus interest of $125,740.42 and $75,995.46 plus interest of $24,343.53 for fiscal years ending in 1958 and 1959 respectively. Taxpayer filed claims for refund of $456,218.76 plus assessed interest for fiscal 1958, $113,163.03 plus assessed interest for fiscal 1959 and $51,836.30 for fiscal 1960.

      . Du Pont v. United States, supra, at 1214, citing P. A. Birren & Son, Inc. v. Commissioner, 116 F.2d 718 (7th Cir. 1940), observed that nonrecognition under Section 351 has been granted for accounts receivable. In the recent case of Thatcher v. Commissioner, 61 T.C. 28 (42 U.S.L.W. 2228, October 30, 1973), the Tax Court reaffirmed its decision in Raich v. Commissioner, 46 T. C. 604 (1966), holding that accounts receivable transferred by a cash basis taxpayer to a corporation under Section 351 had a zero basis. By placing a tax basis in that which was transferred, the Tax Court by implication assumed that accounts receivable are “property” within the meaning of Section 351.

      . We put aside the pragmatic consideration that the transferee-corporate taxpayer raises the argument that the partnership should be taxed at a time when the statute of limitations has presumably run against the transferor partners, who ostensibly are the stockholders of the new corporation.

      . United States v. Basye, 410 U.S. 441, 93 S.Ct. 1080, 35 L.Ed.2d 412 (1973) ; Commissioner v. First Security Bank of Utah, 405 U.S. 394, 92 S.Ct. 1085, 31 L.Ed.2d 318 (1972) ; Commissioner v. Culbertson, 337 U.S. 733, 69 S.Ct. 1210, 93 L.Ed. 1659 (1949) ; Commissioner v. Sunnen, 333 U.S. 591, 68 S.Ct. 715, 92 L.Ed. 898 (1948) ; Helvering v. Eubank, 311 U.S. 122, 61 S.Ct. 149, 85 L.Ed. 81 (1940) ; Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75 (1940).

      . Weiss, Problems in the Tax-Free Incorporation of a Business, 41 Ind.L.J. 666, 676 (1966). See, e. g., Henry McK. Haserot, 41 T.C. 562 (1964), rev’d and rein’d 355 F.2d 200 (6th Cir. 1965).

      . “One of the purposes of this section [Section 202(c) (3) of the Revenue Act of 1921] was to permit changes in form [of business] involving no change in substance to be made without undue restriction from the tax laws.” Note, Section 351 of the Internal Revenue Code and “Mid-Stream” Incorpora-tions, 38 U.Cin.L.Rev. 96 (1969). See, S. Rep.No.275, 67th Cong. 1st Sess. 11 (1921). This in ten ti in is also reflected in the report of the House of Representatives accompanying § 351 of the Internal Revenue Code of 1954. H.R.Rep.No.1337, 83rd Cong. 2d Sess. 34 (1954).
      The House Ways and Means Committee recommended that nonrecognition treatment be granted for incorporation, reorganization and certain other types of exchanges to “permit business to go forward with the readjustments required by existing conditions” and to prevent “taxpayers from taking colorable losses in wash sales and other fictitious exchanges.” See H.R.Rep.350, 67th Cong., 1st Sess. 10 (1921). The Senate Finance Committee added that such treatment would eliminate “many technical constructions which are economically unsound.” See S.Rep.275, 67th Cong., 1st Sess. 12 (1921).
      Weiss, supra, 41 Ind.L.J. 666 n. 4 (1966).

      . A second issue in Fleming, a companion case to Lake, raised tlie question whether an oil payment for real estate was a “like kind” exchange under § 112(b) (1) of the Internal Revenue Code of 1939. The Court held that the exchange was not “like kind” since its effect is a transfer of future income from oil leases in exchange for real estate. There is no “like kind” requirement under Section 351. Bee note 1, ante.

      . The Commissioner has apparently taken the position that irrespective of the general principle that income is based upon he who earns it, other considerations should normally control Section 351 transfers. “However, the Service’s ruling policy apparently is subject to the proviso that the taxpayer enter into a closing agreement assuring that the corporation will report the income reflected in the receivables upon their collection or other disposition. It would also appear that favorable rulings will not be issued where the timing of the transfer will be such as to result in a distortion of income. For example, such a ruling presumably could not be obtained if a seasonable business were to be incorporated during the portion of the year occurring after sizeable operating expenses had been incurred but before the income attributable thereto was collected.” Weiss, supra, 41 Ind.L.J. at 681 (footnote omitted).

      . Sec. 358. Basis to Distributees.
      (a) General Rule. — In the case of an exchange to which section 351, 354, 355, 356, 361, or 371(b) applies—
      (1) Nonrecognition property. — The basis of the property permitted to be received under such section without the recognition of gain or loss shall be the same as that of the property exchanged—
      (A) deceased by—
      (i) the fair market value of any other property (except money) received by the taxpayer,
      (ii) the amount of any money received by the taxpayer, and
      (iii) the amount of loss to the taxpayer which was recognized on such exchange, and
      (B) increased by—
      (1) the amount which was treated as a dividend, and
      (ii) the amount of gain to the taxpayer which was recognized on such exchange (not including any portion of such gain which was treated as a dividend).
      (2) Other property. — The basis of any other property (except money) received by the taxpayer shall be its fair market value.

      . Sec. 362. Basis to Corporations

      (a) Property acquired, l>y issuance of stock or as paid-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.

      . § 337. Gain or loss on sales or exchanges in connection with certain liquidations (a) General Rule. — If—•
      (1) a corporation adopts a plan of complete liquidation on or after June 22, 1954, and
      (2) -within the 12-month period beginning on the date of the adoption of such plan, all of the assets of the corporation, are distributed in complete liquidation, less assets retained to meet claims, then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property within such 12-month period.
      26 U.S.C. § 337(a).

      . Where the Commissioner has accepted over a long period of years or approved a method of accounting by a taxpayer, this fact will be given weight in determining whether the Commissioner is justified in changing the method used by such taxpayer. Ezo Products Co., 37 T.C. 385, 391 (1961) ; Geometric Stamping Co., 26 T.C. 301 (1956). The Commissioner’s authority to order a change, in accounting methods when the taxpayer has regularly employed a consistent method depends upon the validity of his finding that the taxpayer’s method does not clearly reflect income. Glenn v. Kentucky Color & Chemical Co., 186 F.2d 975 (6th Cir. 1951). The Commissioner is not es-topped from computing a taxpayer’s income on an accrual method of accounting because he has not objected to the method used by the taxpayer in his examination of prior returns. Caldwell v. Commissioner, 202 F.2d 112 (2d Cir. 1953). The Commissioner’s regulation requiring that purchases and sales be reported on an accrual basis where it is necessary to use an inventory is one of long standing and has received the approval of the courts. Iverson’s Estate v. Commissioner, 255 F.2d 1 (8th Cir. 1958), cert, denied, 358 U.S. 893, 79 S.Ct. 154, 3 L.Ed.2d 120 (1958).

      . “The critical question which we must resolve is whether . . . [there can be adjustments] in opening inventory for 1957. In so doing, we must decide which of two general principles applies. The first principle requires that opening inventory must be computed on the same basis as closing inventory . . . The second principle requires that, . . ., in a tax free exchange such as occurred herein when the predecessor partnership transferred its assets to petitioner, the basis of the transferred assets in the hands of the latter is the same as it was in the hands of the former. In implementing this second principle, it has been held that the basis of initial opening inventory in the hands of the transferee corporation should not be adjusted in order to correct for an erroneous method of accounting for that inventory by the predecessor transferor.”
      Dearborn Gage v. Commissioner, supra, at 198.

      . Had these applicable principles permitted an adjustment to the predecessor partnership accounting principles, any attempt by the Commissioner to increase the tax liabilities of the partners would probably be barred by the statute of limitations. In Pursell v. Commissioner, 38 T.C. 263, 276, (1962) aff’d. per curiam, 315 F.2d 629 (3d Cir. 1963), we considered and rejected the approach similar to that urged by the taxpayer here: “Petitioners’ argument, if sustained, would logically require an examination of every taxable year that [taxpayer] has been in business, since it appears that the sale of merchandise has always been an income producing factor. Section 481 would have to be interpreted as permitting the correction of errors long since ordinarily barred by the statute of limitations. We do not believe that Section 481 sanctions such corrections, even if they could be accurately determined.”


author: PER CURIAM:

text:
    SUPERMARKETS GENERAL CORPORATION et al., Plaintiffs-Appellants, v. GRINNELL CORPORATION et al., Defendants-Appellees. CITY OF DETROIT et al., Plaintiffs-Appellees, v. GRINNELL CORPORATION et al., Defendants-Appellees. MANHATTAN-WARD, INC., et al., Plaintiffs-Appellees, v. GRINNELL CORPORATION et al., Defendants-Appellees. 1225 VINE STREET BUILDING, INC., et al., Plaintiffs-Appellees, v. GRINNELL CORPORATION et al., Defendants-Appellees.
    Nos. 172 thru 178, Dockets 73-1640-73-1643, 73-1879, 73-1883 and 73-1887.
    United States Court of Appeals, Second Circuit.
    Argued Dec. 17, 1973.
    Decided Jan. 10, 1974.

      Geoffrey M. Kalmus, New York City (Nickerson, Kramer, Lowenstein, Nessen & Kamin, New York City, of counsel), for plaintiffs-appellants Supermarkets General Corp. and subsidiaries.
    Bud G. Holman, New York City, for defendants-appellees.
    Cahill, Gordon & Reindel, New York City, Denis Mclnerney, Thomas F. Cur-nin, and Allen S. Joslyn, New York City, of counsel, for defendant-appellee Grin-nel Corp.
    White & Case, New York City, Mac-donald Flinn, and Thomas McGanney, New York City, of counsel, for defendant-appellee American District Telegraph Co.
    Kelley, Drye, Warren, Clark, Carr & Ellis, New York City, Bud G. Holman, and Thomas R. Cosgrove, New York City, of counsel, for defendant-appellee Holmes Electric Protective Co.
    Olwine, Connelly, Chase, O’Donnell & Weyher, New York City, William F. Sondericker, and Joseph M. Burke, New York City, of counsel, for defendant-ap-pellee Automatic Fire Alarm Co. of Delaware.
    Before LUMBARD, FRIENDLY and OAKES, Circuit Judges.
   PER CURIAM:

After the decision in United States v. Grinnell Corporation, 384 U.S. 563, 86 S.C.t. 1698, 16 L.Ed.2d 778 (1966), that Grinnell and others had engaged in unlawful monopolization of the business of providing central station protection services, many customers, including appellants (hereafter Supermarkets), and competitors commenced private treble damage actions, mostly in the District Court for the Southern District of New York. The three class actions seeking such relief, which are listed in the caption immediately below Supermarkets’ action, were brought in other districts. As a result of directives of the Judicial Panel on Multidistrict Litigation, 28 U. S.C. § 1407, all these actions found their way to Judge Metzner in the Southern District of New York.

On December 13, 1971, the judge entered in the three class actions Settlement Order No. 1. This, inter alia, granted class action designation for the purposes of settlement only; defined the class in a manner including Supermarkets; directed a committee of attorneys for the class action plaintiffs and for the defendants to mail notices, in a form attached, to all customers whose names appeared on lists to be furnished by the defendants and to publish notice once per week for three consecutive weeks in The New York Times and The Wall Street Journal (including all regional editions); fixed January 26, 1972, as the last day for filing requests for exclusion under F.R.Civ.P. 23(c)(2) and February 10, 1972 as the. last day for a member of the class to file a sworn statement of claim; directed the committee to prepare and file on or before March 21, 1972, a statement of all filed and challenged claims; directed counsel of record for the class representatives to file on or before that same date a proposed plan of allocation and an application for attorneys’ fees and expenses; and set a hearing on April 27, 1972, on the approval of the settlement, the plan of allocation and the application for attorneys’ fees. Attached as an exhibit was a letter dated August 27, 1971 from defendants’ counsel to David Berger, Esq., of Philadelphia, counsel for the class action plaintiffs, agreeing to settle-the actions for $10,000,000. The form of notice, also attached as an exhibit, advised in detail in regard to all of the above and also that Mr. Berger and his firm intended to apply for fees of 25% of the gross settlement recovery. An affidavit of the Production Manager of Appeal Printing Co., an experienced and reputable New York law printer, attests that among those to whom notice was mailed was Supermarkets General Corp. at its corporate headquarters in Woodbridge, N.J.

The December 13, 1971 order did not direct any additional notice to counsel for the plaintiffs who had filed individual suits. However, it appears that Barry J. Brett, Esq., of the New York firm of Parker, Chapin and Flattau, had been designated to serve as liaison between counsel for the individual plaintiffs and counsel in the class actions, and that on September 15, 1971, counsel for one of the defendants wrote him that they had recently executed a settlement agreement with Mr. Berger, which had been submitted for Judge Metzner’s consideration. The judge’s opinion recounts that Mr. Brett had advised the attorneys for the individual plaintiffs of this communication by letter dated September 17. Although we have been unable to find this in the record, counsel for Supermarkets does not deny it was received.

Supermarkets did not file a request for exclusion by January 26, 1972, or a proof of claim by February 10, 1972, since, as is alleged and not controverted, the mailed notice did not reach any responsible officer of the company, and no responsible officer nor counsel had seen the notices in The New York Times and The Wall Street Journal. According to appellants’ papers it was not until mid-May that counsel for Supermarkets in its own action learned, from one of the “lead counsel” for individual plaintiffs, that Supermarkets should have filed an exclusion request by January 26. Within a few days after learning this and prior to the settlement hearing, which had been adjourned to May 24, Supermarkets’ counsel orally requested defendants’ counsel to consent to a belated opting-out; defendants’ counsel responded that the request should be made in writing. Supermarkets’ counsel submitted a written request to Judge Metzner on May 25, with a copy to defendants’ counsel; the judge advised that the application should be by formal motion. Defendants’ counsel, on June 8, 1972, declined to consent; Supermarkets moved on June 15.

The judge did not rule on the motion until March 7, 1973, when he denied it in an opinion. In the interim, on January 23, 1973, he had entered a final judgment in the class actions which by its terms bound appellants. Primarily because of the court’s partial reliance in the March 7 denial of Supermarkets’ motion on the latter’s alleged delay in seeking exclusion even after learning of its lapse, Supermarkets moved for rear-gument. The court granted this motion but adhered to its decision. This appeal followed.

Rule 23(c)(2) requires that in any class action maintained under subdivision (b) (3), as was the case here, “the court shall direct to the members of the class the best notice practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort.” See also F.R.Civ.P. 23(d)(2). The mailed notice to Supermarkets was “individual notice”; the problem which concerned us in Eisen v. Carlisle & Jacquelin, 479 F.2d 1005, 1015 (2 Cir.), cert, granted, 414 U.S. 908, 94 S.Ct. 235, 38 L.Ed.2d 146 (1973), does not here arise. Supermarkets contends rather that mailing and publication were not “the best notice practicable under the circumstances” with respect to the plaintiffs in individual actions, since defendants were aware of the names and addresses of their attorneys. It might indeed be desirable for the future to include in orders under F.R.Civ.P. 23(c)(2) and 23(e) a provision that notice shall be sent to attorneys for all members of the class who, to a defendant’s knowledge, have instituted individual actions, and for all members who have appeared by an attorney in the class action itself. However, Supermarkets has cited no decision requiring this and no general practice to that effect. We are loath to impose such a requirement retroactively, and particularly to do this on the facts of this case. The letter of September 15 from one of the defendant’s attorneys to Mr. Brett, liaison counsel for individual plaintiffs, and his letter of September 17 to his colleagues put counsel for all individual plaintiffs on notice that a settlement was in the making and imposed on them a duty of diligence to keep abreast of developments.

The same consideration requires rejection of Supermarkets’ argument that its time to opt out should have been extended under F.R.Civ.P. 6(b)(2) or 60(b)(1), or in the court’s general discretion under Rule 23 itself. We assume that Rules 6(b)(2). and 60(b)(1) cover excusable neglect by a party, or by its attorneys, or by both, and we also agree with appellants that the relevant standards are no different if the matter is viewed as arising simply under the court’s discretion to implement Rule 23. But determination whether neglect in a particular case is excusable rests within the sound discretion of the district judge, and his ruling will be upset only if discretion is abused. Graham v. Pennsylvania R. R., 119 U.S.App.D.C. 335, 342 F.2d 914 (1964), cert, denied, 381 U.S. 904, 85 S.Ct. 1446, 14 L.Ed.2d 286 (1965). While the claim of prejudice from allowing Supermarkets a belated opt-out is not very impressive, especially in light of the long delay in the ruling on its motion, neither are Supermarkets’ contentions that its neglect was excusable or that it will be substantially prejudiced by the court’s action.

Here again the case stands differently than if there were nothing but the failure of the mailed notice to reach Supermarkets’ legal department; the judge was much influenced, as we are, by counsel’s undenied receipt of the letter of September 17. The district court also noted that defendants have raised no objection to a belated filing of a claim by Supermarkets in the class action. Cf. Zients v. LaMorte, 459 F.2d 628 (2 Cir. 1972). In consequence, the only prejudice Supermarkets may suffer will be if its individual action would have produced a larger net recovery than the court-approved class action settlement. Plaintiffs in eleven other individual actions, some apparently with claims as large as appellants’, thought acceptance of the settlement was in their interest; a larger number did not. Only time will tell who was right. Under all the circumstances we cannot say the judge abused his discretion in denying Supermarkets the dispensation which is sought.

Affirmed.

      . Supermarkets does not seem to argue that service on its attorneys was required by F.R. Civ.P. 5(b), providing that
      AVhenever under these rules service is required or permitted to be made upon a party represented by an attorney the service shall be made upon the attorney unless service upon the party himself is ordered by the court.
      Such an argument would be without basis. The notice was in the class actions, where Supermarkets was not yet represented by an attorney. And “service upon the party himself” was “ordered by the court.”

      . An affidavit by Supermarkets’ mail room supervisor stated that it received more than 1000 pieces of mail per day and that none of the 12 mail room employees recalled receiving a notice of the sort described to her. However, she candidly added that “considering the volume of mail we receive, neither I nor any of the other mail room employees can state with certainty that no such document was received.”