author: LEVIN H. CAMPBELL, Circuit Judge.

text:
    UNITED STATES of America, Appellee, v. Stephen William JERROLD, Defendant-Appellant.
    No. 72-1320.
    United States Court of Appeals, First Circuit.
    Submitted Dec. 14, 1973.
    Decided Jan. 11, 1974.

      Stephen W. Silverman, Springfield, Mass., for defendant-appellant.
    Robert B. Codings, Asst. U. S. Atty., with whom James N. Gabriel, U. S. Atty., was on brief, for appellee.
    Before COFFIN, Chief Judge, ALD-RICH and CAMPBELL, Circuit Judges.
   LEVIN H. CAMPBELL, Circuit Judge.

Jerrold’s conviction for refusal to submit to induction in violation of 50 U.S.C. App. § 462(a) was reversed by this court, 480 F.2d 1293 (1st Cir. 1973). After notice of order to report for induction had been mailed to Jerrold but before he had refused to submit thereto, the Local Board had granted him a “courtesy interview” on his post-notice claim for conscientious objector status, and had thereafter refused to reopen his classification. Since it was unclear whether the Local Board had failed to reclassify for jurisdictional reasons, see Ehlert v. United States, 402 U.S. 99, 91 S.Ct. 1319, 28 L.Ed.2d 625 (1971) or had decided the claim on the merits, we declined to hold that Jerrold could be placed in a “no-man’s land in which his conscientious objection claim might later be denied review by the Army on the assumption that the Board had already considered and rejected it as without merit.” 480 F.2d at 1295.

The United States filed a petition for rehearing. Subsequently we granted its motion to stay action on the petition for rehearing until the Supreme Court acted in Musser v. United States and Waldron v. United States, for which certiorari petitions had then been filed but not acted upon. The Supreme Court has now decided these cases, 414 U.S. 31, 94 S. Ct. 196, 36 L.Ed.2d 190 (1973) (per cur-iam), making it clear that under 32 C. F.R. § 1625.2 (1971) as construed in Eh-lert, a Local Board is without any power to reopen in late crystallization conscientious objector cases and that, therefore, the Army could not deem “an expressed or unexpressed indication of the Board’s views of the claim ... a denial of those claims on the merits.” Id. at 38, 94 S.Ct. at 201. Because consideration of Jerrold’s claim would not be foreclosed, the no-man’s land problem disappears. Id. at 40, 94 S.Ct. 202. (Douglas, J., dissenting).

Although the Supreme Court’s decisions would appear to have eliminated the sole ground upon which we reversed Jerrold’s conviction, he now seeks to distinguish his case on the ground that the State Director himself, acting under since-rescinded 32 C.F.R. § 1625.3, had later recommended a reopening of his classification. See Musser, supra at 31, 94 S.Ct. 196 n. 6. We do not see how the State Director’s recommendation to the Local Board, made two months after Jerrold had failed to submit to the induction order in question, was relevant to the prior validity of that order.

Following its second consideration, the Local Board, on December 10, 1970, reopened Jerrold’s classification and reclassified him I-A. A second order to report for induction was mailed on January 26, 1971. Jerrold claims that the subsequent reopening and second induction order turned his post-induction order conscientious objector claims into pre-induction ones, thus avoiding the Ehlert problem. See White v. United States, 422 F.2d 1254 (9th Cir. 1970). But Jerrold was indicted for failure to submit to induction on September 22, 1970. At the time Jerrold refused to submit, his post-induction order conscientious objector claim could not on any theory have been a pre-induction one. The reopening and issuance of the second order did not cancel a prior violation of law. United States v. Hos-mer, 434 F.2d 209 (1st Cir. 1970). “[0]nce a valid order to report for induction has been wilfully disobeyed, a crime has been committed, and ‘[w]hat occurs after refusal ... is not relevant to that issue.’ ” United States v. Powers, 413 F.2d 834, 838 (1st Cir.), cert, denied, 396 U.S. 923, 90 S.Ct. 256, 24 L.Ed.2d 205 (1969). Accord, Palmer v. United States, 401 F.2d 226 (9th Cir. 1968). We find no merit in any of Jerrold’s attempts to distinguish his situation from that well-settled rule.

Jerrold made other challenges to the legality of the induction order which we did not discuss in our previous opinion. Jerrold asserted that he made out a prima facie case for a hardship deferment. On December 4, 1969, Jerrold, who was then classified II-S, Informed the Local Board by letter that he had left school and requested a hardship deferment. The Board had previously been advised of his marriage and the birth of a child. The Local Board rejected, without reasons, Jerrold’s hardship claim, and advised him by mail of his rights to personal appearance and appeal. Several days later he wrote to the Board indicating his wish to appeal and requesting a dependency questionnaire form, with which he said he would provide the Board “additional information not enclosed in my previous letter.” Although the Board mailed the form to Jerrold, he never returned it, nor did he forward further information or request a personal appearance. On January 15, 1970, the Local Board forwarded his file to the State Appeal Board which upheld his classification. Jerrold’s December fourth letter, the only evidence of hardship received by the Local Board, does not contain sufficient factual information indicating that “induction into the armed forces would result in extreme hardship (1) to his wife . . . child ...” 32 C.F.R. § 1622.30(b) (1967). See 50 U.S.C. App. § 456(h). “The test is not inconvenience, or even hardship, but extreme hardship.” Weissman v. Officer of the Day, 444 F. 2d 1326 (2d Cir. 1971). The financial data in the letter to the Board consisted of Jerrold’s monthly salary and his assertion that “[t]his money goes for our rent and food of which a large part is needed for my son.” There was no itemized breakdown of living costs or debts. Two outstanding debts totalling $580 were mentioned, but no repayment schedule provided. The Board was not told that there were no other viable sources of income, such as relatives or savings. See Winfield v. Riebel, 438 F. 2d 271, 278 (6th Cir. 1970). Jerrold’s conclusion that his armed services salary would put “a considerable financial strain” on his family does not assert a financial hardship greater than that experienced by many forced to leave civilian life. In the absence of evidence concerning the degree of stress, the Board did not abuse its discretion. Furthermore, since a prima facie case was not made out, the Local Board did not act improperly in failing to state its reasons when it classified Jerrold I-A. United States v. Edwards, 450 F.2d 49 (1st Cir. 1971).

Jerrold next says the Board acted improperly in not reopening his I-A classification on the basis of information, including a letter from Jerrold, indicating possible physical and mental disabilities. After Jerrold was classified I-A, he was examined at the Armed Forces Examining and Entrance Station (AFEES) on April 15, 1970. At this time he completed Standard Form 89 (Report of Medical History), stating that he was troubled by several ailments, including nervous disorders, depression, nightmares, “trick” knee, dizziness, and a drug habit. Subsequently Jerrold was examined by a psychiatrist at AFEES who noted on the Clinical Record/Consultation Sheet that Jerrold used a variety of drugs and that some of his symptoms are drug effects, but nonetheless concluded that Jerrold was fit for duty. Shortly afterwards, Jerrold wrote to the Local Board requesting an interview with the Medical Advisor “as I have certain medical defects which are listed as disqualifications for service in the Armed Forces” and also requesting an interview with the government appeal agent. On June 19, 1970, Jerrold was found fully acceptable for induction by AFEES. There was testimony from the Executive Secretary of the Local Board that it could be inferred from the Board’s notation on Jerrold’s letter concerning his medical defects that he was informed, on June 26, 1970, that he should submit any additional medical information to the Board, that he was not entitled to an interview with the medical advisor, see 32 C.F.R. §§ 1628.1, 1628.4(c), (e) (1967), and was supplied with the name of the appeal agent so that he could contact him for an interview. Jerrold failed to follow this recommended course of action. Jerrold’s contention that such a response from the Local Board was a denial of due process is patently frivolous. On July 7, 1970, AFEES requested the Local Board to return Jerrold’s medical papers for further medical evaluation, reporting later that month that the acceptability determination remained unchanged.

In United States v. King, 455 F.2d 345, 349 (1st Cir. 1972), we held that neither the compendium of symptoms checked off by a registrant on Standard Form 89 nor the AFEES’ doctor’s report were sufficient to make out a prima facie case entitling the registrant to reopening. Obviously neither Jerrold’s notations on Standard Form 89 and his brief reference to phychological addiction “to some drugs” on his Statement of Personal History, nor the record of the psychiatric examination, were sufficient to require the Board, on its own initiative, to reopen; the Board was entitled to accept AFEES’ evaluation at least until further information was brought to its attention. Jerrold’s later letter, even if construed as a request for reopening, added nothing. It did not even identify the medical defects upon which Jerrold relied. The Board could not know whether he was relying upon defects already inquired into by AFEES or upon new ones. Cf. United States v. Stockwell, 485 F.2d 700 (1st Cir. 1973); United States v. Ford, 431 F.2d 1310 (1st Cir. 1970). The test for a prima facie case for classification, which if met eliminates the Board’s discretion on reopening, is the assertion of “nonfrivolous allegations of facts that have not been previously considered by his board, and that, if true, would be sufficient under regulation or statute to warrant granting the requested classification . . . ” Mulloy v. United States, 398 U.S. 410, 416, 90 S.Ct. 1766, 1771, 26 L.Ed.2d 362 (1969).

The only further information Jerrold furnished was a physician’s letter dated September 18, 1970. (Jerrold refused induction on September 22, 1970.) A Report of Information in Jerrold’s file indicates he informed the Board on September 28, 1970, that he had refused induction and had taken a letter to AFEES on the day of the induction. It is thus doubtful that the letter ever reached the Board before Jerrold's refusal to submit. See United States v. DeLiso, 468 F.2d 813 (9th Cir. 1972). In any event, it was submitted long after Jerrold received his notice to report. As the letter concerned his involvement with drugs, a subject already raised, it did not deal with a “change in the registrant’s status resulting from circumstances over which the registrant had no control.” 32 C.F.R. § 1625.2 (1971). The Local Board would have had no authority to reopen.

Jerrold also asserted that the Appeal Board may have lacked a quorum when it determined to classify him I-A by a vote of 2-0. See 32 C.F.R. §§ 1604.22, 1604.26 (1972). The issue was not raised below and the record does not reveal how many persons sit on the Appeal Board. Without such information, it cannot be determined whether or not a quorum existed.

The prior judgment of this court is vacated and our prior opinion is withdrawn.

The judgment of the district court is affirmed.


source: Caselaw Access Project

author: RONEY, Circuit Judge:

license: Public Domain

text:
    George T. and Ruth A. KIMBELL, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
    No. 73-3411
    Summary Calendar.

    United States Court of Appeals, Fifth Circuit.
    Feb. 22, 1974.
    Harold D. Rogers, Wichita Falls, Tex., for plaintiffs-appellants.
    Scott P. Crampton, Asst. Atty. Gen., Tax Div., Meyer Rothwacks, Chief, App. Sec., Dept, of Justice, Washington, D. C., Frank D. McCown, U. S. Atty., Ft. Worth, Tex., William W. Guild, Atty., Tax Div., Dept, of Justice, Bennet N. Hollander, Dallas, Tex., Charles E. Anderson, Attys., Tax Div., Dept, of Justice, Washington, D. C., for defendant-appellee.
    Before COLEMAN, DYER and RO-NEY, Circuit Judges.

       Rule 18, 5th Cir.; see Isbell Enterprises, Inc. v. Citizens Casualty Co. of New York et al., 5th Cir. 1970, 431 F.2d 409, Part I.

   RONEY, Circuit Judge:

In this tax refund suit, the District Court upheld the determination of the Commissioner of Internal Revenue that $49,500 expended by the taxpayer was a capital loss and not a fully deductible business expense. We affirm.

In 1961, taxpayer sold his interest in two oil and gas leases and reported a long-term capital gain of $190,000 from the sale. In 1962, it was discovered that the wells on the two leases were illegally slanted and production was halted. A bank which had obtained a security interest in the leases from the buyer at the time of purchase then threatened a lawsuit against taxpayer. Taxpayer settled the claim based on fraud for $49,500 in 1967 and deducted the payment as an ordinary and necessary business expense. The Commissioner allowed the deduction only as a capital loss.

Taxpayer testified that he and his attorney were convinced that the bank’s claim was entirely without merit but that nonetheless he agreed to settle because a lawsuit alleging illegal slant wells would have had a detrimental effect on his business reputation in the oil and gas industry. Taxpayer argues that the claim was settled to (1) protect taxpayer’s business reputation since a lawsuit would result in unfavorable publicity, (2) save large attorney’s fees and court costs, and (3) prevent the possibility of lawsuits by adjoining lease owners for drainage.

Taxpayer argues that this undisputed evidence requires a finding that the payments were made to protect a taxpayer’s business or to avoid unfavorable commercial publicity and thus are ordinary business expenses under Helvering v. Community Bond & Mortgage Corp., 74 F.2d 727 (2d Cir. 1935); Paul Draper, 26 T.C. 201 (1956), and William L. Butler, 17 T.C. 675 (1951). In none of those cases, however, was the payment connected with a prior capital transaction from which a taxpayer derived the benefit of lower tax rates on capital gains.

We agree with the District Court that the principle in Arrowsmith v. Commissioner of Internal Revenue, 344 U.S. 6, 73 S.Ct. 71, 97 L.Ed. 6 (1952) is controlling. In Arrowsmith, two taxpayers liquidated their jointly owned corporation, reporting their profit on the transaction as capital gain. Subsequently, they, as transferees of the corporate assets, were required to pay a judgment rendered against the corporation. They sought to deduct the payments as business expenses. The Supreme Court held the payments to be a part of the original liquidation transaction, requiring classification as capital losses.

The taxpayer argues that Arrowsmith is distinguishable because the payments there were made against a legal liability existing prior to final liquidation and the Arrowsmith taxpayers did not make the payments to protect their business reputations.

There is no indication in Arrowsmith, however, that the claim’s existence prior to liquidation was in any way controlling. The basic character of the transaction giving rise to the settlement payment would be the same whenever the legal claim was asserted. Taxpayer’s subjective motivation for making a settlement payment is irrelevant to the determination of its deductibility. It is the origin and character of the claim against the taxpayer that controls the characterization of settlement expenses for federal tax purposes. Anchor Coupling Co. v. United States, 427 F.2d 429 (7th Cir. 1970), cert, denied, 401 U.S. 908, 91 S.Ct. 866, 27 L.Ed.2d 806 (1971); see United States v. Hilton Hotels Corp., 397 U.S. 580, 90 S.Ct. 1307, 25 L.Ed.2d 585 (1970); Woodward v. Commissioner of Internal Revenue, 397 U.S. 572, 90 S.Ct. 1302, 25 L.Ed.2d 577 (1970); United States v. Patrick, 372 U.S. 53, 83 S.Ct. 618, 9 L.Ed.2d 580 (1963); United States v. Gilmore, 372 U.S. 39, 83 S.Ct. 623, 9 L.Ed.2d 570 (1963).

Explaining the rationale in Arrow-smith, the Supreme Court later said “if money was taxed at a special lower rate when received, the taxpayer would be accorded an unfair windfall if repayments were generally deductible from receipts taxable at the higher rate applicable to ordinary income.” United States v. Skelly Oil Co., 394 U.S. 678, 685, 89 S. Ct. 1379, 1383, 22 L.Ed.2d 642 (1969).

Taxpayer relies on five Tax Court opinions to establish the principle that a payment made to protect a taxpayer’s business reputation and avoid unfavorable publicity is deductible as an ordinary and necessary business expense. Charles I. Brown, T.C. Memo 1973-275 (Dec. 17, 1973); Nathan Cummings, 60 T.C. 91 (1973), appeal docketed, No. T3065, 2d Cir., Jan. 8, 1974; James E. Anderson, 56 T.C. 1370 (1971), rev’d, 480 F.2d 1304 (7th Cir. 1973); William L. Mitchell, 52 T.C. 170 (1969), rev’d, 428 F.2d 259 (6th Cir. 1970), cert, denied, 401 U.S. 909, 91 S.Ct. 868, 27 L. Ed.2d 807 (1971); Laurence M. Marks, 27 T.C. 464 (1956). Those cases involved the deductibility of corporate insiders’ payments to their corporations of profits from short swing transactions in company stock, pursuant to section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78p(b). The Tax Court held that the insiders’ obligation to make the payments derived from their status as insider employees covered by section 16(b) and not from the stock transactions. That Court noted that the short swing profits for which an insider is accountable — the difference between the sale proceeds and the cost of purchasing replacement stock — is unrelated to the amount of capital gain realized— the excess of the sale proceeds over the cost of the stock sold. Thus, the Tax Court distinguished Arrowsmith and Skelly Oil on the ground that a section 16(b) payment is not directly and integrally related to the earlier capital-gains-producing sale.

Both the Sixth and Seventh Circuits have rejected the Tax Court’s position. Anderson v. Commissioner of Internal Revenue, 480 F.2d 1304 (7th Cir. 1973); Mitchell v. Commissioner of Internal Revenue, 428 F.2d 259 (6th Cir. 1970), cert, denied, 401 U.S. 909, 91 S.Ct. 868, 27 L.Ed.2d 807 (1971). They applied the Arrowsmith principle on the ground that the liability of the taxpayers was predicated on sales resulting in capital gains. These Circuits characterized a section 16(b) payment to a corporation as representing a portion of the stock’s sales price and as an adjustment on that price, which would ordinarily reduce the amount of capital gain. Despite the Mitchell and Anderson reversals, the Tax Court, in Cummings (now on appeal in the Second Circuit) and Brown, has expressly declined to adopt a different standard for determining the character of the deduction claimed in those cases. Comment on the merits of this dispute between the Courts of Appeal and the Tax Court is neither appropriate nor necessary to the resolution of this appeal.

Assuming arguendo the validity of the Tax Court position, the fair implication of that Court’s opinions supports the application of the Arrowsmith principle to this case. The Tax Court recognizes that even a narrow interpretation of the Supreme Court’s ruling would control a “situation where the taxpayer, having received money in one capacity, was required in that same capacity to repay that money to the same person who made the payment.” James E. Anderson, supra, 56 T.C. at 1376. Here the taxpayer obtained the proceeds of the sale of his oil leases in his capacity as their seller. The claim that he deemed expedient to settle was asserted against him because he was the seller. The settlement payment was delivered to the nominee of the bank which had succeeded to the interest of the purchaser. Thus, taxpayer fails even under a narrow interpretation of Arrowsmith.

In short, we hold that a payment made by a taxpayer in satisfaction of a liability arising from an earlier transaction, on which that taxpayer reported capital gain, must be treated as a capital loss at least to the amount of the capital gain, regardless of the taxpayer’s motivation for making the payment.

Affirmed.


author: PER CURIAM.

text:
    UNITED STATES of America, Plaintiff-Appellee, v. Ernest McNEAL, Jr., Defendant-Appellant.
    No. 73-1358.
    United States Court of Appeals, Sixth Circuit.
    Argued Oct. 9, 1973.
    Decided Dec. 27, 1973.
    Milton R. Henry, Detroit, Mich., on brief, for defendant-appellant.
    Lee Jones, Detroit, Mich., for plaintiff-appellee; Ralph B. Guy, Jr., U. S. Atty., William C. Ibershof, Asst. U. S. Atty., Chief-Crim. Div., Detroit, Mich., on brief.
    Before WEICK, EDWARDS and LIVELY, Circuit Judges.
   PER CURIAM.

This is the appeal from conviction on three counts of an indictment charging one purchase and two sales of heroin, in violation of 26 U.S.C. §§ 4704(a) and 4705(a) (1970). Appellant was sentenced to concurrent terms of ten years on the purchase count and fifteen years on the two counts pertaining to sale of heroin.

On appeal defendant-appellant’s principal attack is directed at claimed error in the District Judge’s refusal to quash the indictment because of asserted variances from the provisions of the Jury Selection Act of 1968, 28 U.S.C. § 1861 et seq. (1970). Appellant claims that the voter registration list employed for the jury wheel from which the grand jury in question was chosen was not the list of persons registered to vote in the most recent state or federal general election, that the list had not been procured from the Election Commission of the City of Detroit, as provided for by the Jury Plan, and that a person who was not a federal employee, namely the sister of the jury clerk, had allegedly worked on the selection of the names to go into the jury wheel.

On disputed but persuasive evidence, the District Court found that the voter lists which were employed were 1967 lists. The court also held that the “most recent” election within the meaning of 28 U.S.C. § 1869(c) was that of November 8, 1966. We find no error of fact or law on this issue.

As to the source of the voter list, it appears that the jury clerk procured an official list of registered Detroit'voters from the Recorder’s Court of the City of Detroit rather than from the Election Commission. While this seems somewhat inappropriate to us, it does not violate the language of 28 U.S. C. § 1869(c), since the lists used were “official records” which had been supplied to Recorder’s Court by the “local election officials” within the meaning of 28 U.S.C. § 1869(c).

As to the sister of the jury clerk, there is no evidence that she played any role in choosing names for the jury wheel, nor is there any hint of misconduct on her part.

28 U.S.C. § 1867(d) (1970) provides the standard for challenging compliance with selection procedures. We find (as did the District Judge) that there was no “substantial failure to comply with the provisions” of the act.

We have read the instances of limitation of cross-examination complained of by appellant concerning his trial and we do not find that any relevant questions were excluded.

Nor do we find any substance to the claim that the government withheld or destroyed evidence arguably material and which “might have led the jury to entertain a reasonable doubt about [defendant’s] guilt.” See United States v. Bryant, 142 U.S.App.D.C. 132, 439 F.2d 642 (1971).

The judgment of the District Court is affirmed.


text:
    UNITED STATES of America, Plaintiff-Appellee, v. Gwendolyn JONES, Defendant-Appellant.
    No. 73-1521.
    United States Court of Appeals, Sixth Circuit.
    Argued Oct. 9, 1973.
    Decided Jan. 3, 1974.
    Thomas E. Jackson, Detroit, Mich., for defendant-appellant; Martin I. Rei-sig (Court Appointed), Detroit, Mich., on brief.
    Dennis M. Furman, Asst. U. S. Atty., Detroit, Mich., for plaintiff-appellee; Ralph B. Guy, Jr., U. S. Atty., Richard L. Delonis, Asst. U. S. Atty., Detroit, Mich., on brief.-
    Before PECK and McCREE, Circuit Judges, and ALLEN, District Judge.

       The Honorable Charles M. Allen, Judge, U. S. District Court for ti)e Western District of Kentucky, sitting by designation.

   PER CURIAM.

Appellant’s brief sets forth the following statement of issues for our consideration: (1) whether Rule 32(c)(2) of the Federal Rules of Criminal Procedure which allows discretionary disclosure of the presentence report is to be interpreted in favor of disclosure, and (2) whether failure to disclose the pre-sentence report violates the constitutional due process requirements of right to effective counsel and right to confrontation.

Appellant was indicted for possession of stolen mail and for illegal possession of a key used by the United States Postal Service for a receptacle for deposit of mail in violation of 18 U.S.C. § 1708 and 18 U.S.C. § 1704, respectively. After her plea of guilty to one count of possession of stolen mail was duly accepted, a four year custodial sentence was imposed. The maximum penalty authorized is five years imprisonment and a $2,000 fine.

Thereafter, appellant filed a motion under Rule 35, Federal Rules of Criminal Procedure for reduction of sentence and for disclosure of the presentence report. The motion for disclosure was denied but the sentence was reduced to two and one-half years. This appeal was then noticed.

Since Rule 32(c)(2) applies only to disclosure of a presentence report at the sentencing of a defendant, we determine that the issues appellant seeks to present are not before us in this appeal.

It is well-settled that motions for reduction of sentence under Rule 35, Fed.R.Crim.P. are addressed to the sound discretion of the district court and there is no requirement of a hearing, United States v. Sanders, 438 F.2d 344 (5th Cir. 1971); United States v. Krueger, 454 F.2d 1154 (9th Cir. 1972).

Inasmuch as Rule 35 does not require a court to hear argument or to hold a hearing, it follows that appellant’s second issue about due process requirements of right to effective counsel and right to confrontation is not presented.

In our determination that the issues presented by appellant do not require resolution here, we expressly decline to determine whether Rule 32(c)(2) requires disclosure of the presentence report upon request at the time of sentencing.


text:
    Charles M. EMORY, Jr., and Johnnie K. Emory, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
    No. 73-1547.
    United States Court of Appeals, Sixth Circuit.
    Argued Dec. 12, 1973.
    Decided Jan. 10, 1974.

      Perry Shields, Knoxville, Tenn., on brief, for plaintiffs-appellants.
    Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, Crombie J. D. Garrett, Murray S. Horwitz, Attys., Tax Div., Dept, of Justice, Washington, D. C., on brief, for defendant-appellee; John L. Bowers, Jr., U. S. Atty., of counsel.
    Before EDWARDS, CELEBREZZE and MILLER, Circuit Judges.
   PER CURIAM.

This is an appeal from the denial of a tax refund sought by taxpayers in a suit in the United States District Court for the Eastern District of Tennessee. The years in question are 1965, 1966 and 1967, and the income (in the amount of $49,515.78) which the Commissioner had required to be taxed to appellants represented 25% of the profits of a construction business which had been operated as a partnership between Charles Emory and David Richards, until Richards’ death in 1964.

A written agreement between the partners provided for the exact terms under which the estate of the partner who died first would be reimbursed for his interest. The agreement was drafted in 1952 prior to the adoption of I.R. C. § 736 (26 U.S.C. § 736 (1970)). Quite ambiguously, the agreement refers both to dissolution of the partnership and to the sale and purchase of the deceased partner’s interest.

The legal question in the ease is whether, as found by the Commissioner and by District Judge Taylor, I.R.C. § 741 (26 U.S.C. § 741 (1970)) requires recognition of income received by the surviving partner and paid by him to the deceased partner’s estate. On the other hand appellant argues I.R.C. § 736 allows such income to be taxed to the decedent’s estate if payments were made in liquidation of the partnership.

Judge Taylor’s analysis of what actually occurred recognized the ambiguity of the language employed in the agreement, but planted decision primarily upon the nature of the consideration paid:

Although the economic and legal results may be the same, there is a fundamental difference between a sale and a liquidation. A sale is a bilateral act of parties acting at arms’ length which concludes with a property exchange. Inherent in a sale is a fixed or readily ascertainable amount of money, which is traded for something of value. In contrast, a liquidation is the process of reducing assets to cash, discharging liabilities and dividing surplus or loss. If the business continues, surplus or loss is determined by an accounting; and, the remaining partners pay the withdrawing partners for their interests. Thus, in a liquidation the amount received is contingent on the financial condition of the business at the time of dissolution. It is not a fixed sum or formula. By this test the partnership agreement in the instant case was a sale. 73-1 U.S.Tax Cas. ¶ 9148 (E.D.Tenn.1972). (Footnote omitted.)

On this basis, clearly § 741 would apply.

Since we believe that the quoted rationale is an entirely proper deduction from the facts and represents a sound statement of law, the judgment of the District Court is affirmed.


text:
    Virgil Dale AGEE, Appellant, v. Kenneth HICKMAN et al., Appellees.
    No. 73-1496.
    United States Court of Appeals, Eighth Circuit.
    Submitted Jan. 14, 1974.
    Decided Jan. 31, 1974.
    Arthur A. Benson, II, Kansas City, Mo., for appellant.
    William A. Moon, Springfield, Mo., for appellees.
    Before VAN OOSTERHOUT, Senior Circuit Judge and LAY and STEPHENSON, Circuit Judges.
   PER CURIAM.

This is an action brought by plaintiff Agee against Hickman and Smart, Deputy Sheriffs of Greene County, Missouri, individually and in their official capacities, for damages caused by excessive force alleged to have been used in arresting plaintiff and taking him into custody.

Jurisdiction is based on 28 U.S.C. § 1343. Plaintiff’s action is brought for violation of his constitutional rights pursuant to 42 U.S.C. § 1983.

The case was tried to the court (Judge Collinson) without a jury, no request for a jury trial having been made. Judge Collinson dismissed the complaint on the basis of his finding of fact that the force used by the officer-defendants was reasonable and necessary to effect his arrest. This timely appeal is based upon plaintiff’s contention that such finding is clearly erroneous. We disagree and affirm for the reasons hereinafter set out.

We shall briefly summarize the pertinent evidence. Plaintiff and his companion Watts, both of whom had substantial criminal records, on October 1, 1970, had been driving around in plaintiff’s car and admitted that they had consumed a considerable amount of whiskey and beer. Deputy Sheriffs Hickman and Smart, while on routine duty, observed plaintiff’s car with his name printed thereon parked on a road about four miles from Springfield, Missouri. The officers stopped to investigate. They heard a woman scream and shortly after saw a twelve-year-old girl running out of the woods toward the road with the plaintiff in pursuit. Hickman went to the girl, whom he recognized as a neighbor. Her clothing was torn and she was sobbing and hysterical. The girl said she had been raped and her clothing, appearance and mental distress corroborated her story.

Officer Smárt stopped the plaintiff, arrested him, and handcuffed him with his hands placed behind his back, and brought him to the patrol car. Shortly thereafter Hickman arrived in the patrol car with the victim. He directed Smart to remove the handcuffs and this was done. Hickman took hold of plaintiff by the shoulder and asked him if he had raped the little girl. Plaintiff backed away, squared off and clenched his fists, and declared that he was in pretty good shape. Hickman admits that at this point he punched the plaintiff in the stomach with his fist and slapped him a couple of times on the face. Plaintiff claims he was hit more often. Each deputy then took the plaintiff by a hand and had him lean over the car hood to put on the handcuffs. Plaintiff raised up suddenly before the cuffs were replaced and he was pushed down to a bending position, his face striking the hood of the car. The handcuffs were then placed on the plaintiff with his hands behind his back and he was taken to headquarters and booked.

There is a conflict in the evidence as to the extent of plaintiff’s injuries. Plaintiff testified as a witness and was unable to say how often he was beaten. In answer to the question, “As best you recall, how many times were you struck?”, he replied, “It would be hard for me to say, several times.” With respect to the removal of the handcuffs his testimony is, “I don’t recall the handcuffs ever being removed.”

Plaintiff further testified that he made no complaints to the sheriff, the jailer or anyone else about being beaten. He made no complaint about abusive treatment until approximately one year after the incident, as evidenced by the following testimony. When asked, "Was it when you filed your 2726 about a year later?”, he answered, “Possibly, yes, sir, I believe so.” It is undisputed that the plaintiff suffered no permanent injury and that no medical attention was requested by plaintiff or required.

Prior to the commencement of this suit, plaintiff was convicted of rape of the little girl and was serving a ninety-nine-year prison sentence. No challenge has been made to the validity of plaintiff’s arrest. Plaintiff’s sole contention is that the officers used more force than necessary to accomplish his arrest and that the blows inflicted upon him were for the purpose of punishing him and were not necessary to effect the arrest or keep him in custody.

We are somewhat troubled by the release of plaintiff from his handcuffs at the direction of Hickman. Hickman was produced as an adverse witness by the plaintiff. On examination by defendants’ counsel, the following evidence was received.

Q Lt. Hickman, why did you ask that handcuffs be removed from Virgil Agee at the time you asked it to be done, that evening ?
* * * X ' X X
A We were driving a dog car. The back seat is removed from a dog car so a dog can be hauled back there. At the time we had no dogs in the ear.
XXX * ' X X
A And a person has to sit flat in the ear, not in a seat, and it’s kind of hard to sit behind in a dog car with your hands behind you. I cheeked to see if Mr. Agee had his cuffs put on too tight, I was going to put them in front of him, where it would be easier for him to ride in the back end of the car.
Q Was that the sole purpose why you had the cuffs removed, then, from behind Mr. Agee at that time:
A At the time I had them removed, that was the only thing that was in my mind at the time.
X X X X- X X
Q And what happened immediately after the cuffs were removed from behind Virgil Dale Agee by Mr. Smart ?
A He made the statement to me, he said, “You are making a big mistake because I’m in pretty good shape.”
Q What did he do?
A He kind of squared off at me like he was ready to fight. This is the impression I got from Mr. Agee.
Q Now, after you hit him in the stomach, was there still a tussel with him to get the cuffs back on him, then?
A After I hit him in the stomach and Officer Smart took his arm and put him on the hood of the patrol car and was going to cuff him. He resisted being cuffed again and became belligerent.
Q And were the cuffs put back on him, then?
A Yes, sir, in back of him, sir.

Judge Collinson in his well-reasoned opinion, not reported, states:

The testimony of the officers was most candid. They both frankly admitted that they were outraged at what they had seen and were angry. They did not contend that the plaintiff struck or kicked éither of them. The only resistance offered by the plaintiff was by doubling his fists and “squaring off,” and by abruptly straightening up when they had bent him over the car hood to put cuffs on him.
On the other hand, when a man under arrest doubles his fists and “squares away,” there is no legal or practical reason that the officer has to give him the first “lick” before using reasonable force to overcome the show of force. A quick punch in the stomach and a few slaps across the face may save the officer from getting skinned up in a fist fight.

The trial court saw and heard the witnesses and thus is in a far better position to make credibility findings than is this court upon the basis of the cold record. The right and responsibility for making credibility findings rest with the trial court.

The officers were not asked why plaintiff was re-handcuffed with his hands behind his back. The trial judge could reasonably infer that the circumstances of Agee’s belligerent condition after he had been released from the handcuffs justified replacing them behind his back. It is also obvious that it is easier to place handcuffs behind the back of a belligerent person than in front of his body and that so placing the handcuffs places greater restraint upon the person handcuffed. In any event, no violation of plaintiff’s constitutional rights arises out of placing handcuffs behind the back.

We have carefully examined the entire record and are satisfied that plaintiff has failed to demonstrate that Judge Collinson’s determination that the force used was reasonable and necessary under the circumstances to effect plaintiff’s arrest and to keep him in custody was clearly erroneous. We limit our holding to the facts of this case as disclosed by the record. As Judge Collin-son aptly states:

This Court does not mean to condone, by this opinion, the use of any force by officers simply because a suspect is argumentative, contentious or vituperative. It is the policeman’s lot to take such verbal abuse without retaliation by force. Force can only be used to overcome physical resistance or threatened force, as in this case.

The judgment of dismissal is affirmed.

      . Mickey Owen, Sheriff of Greene County, was made a party to the action. Plaintiff voluntarily dismissed as to Owen.


author: CUMMINGS, Circuit Judge.

text:
    Peter J. BRENNAN, Secretary of Labor, Plaintiff-Appellant, v. INDEPENDENT LIFT TRUCK BUILDERS UNION, Defendant-Appellee.
    No. 73-1065.
    United States Court of Appeals, Seventh Circuit.
    Heard Nov. 30, 1973.
    Decided Jan. 18, 1974.

      Harlington Wood, Jr., Asst. Atty. Gen., Robert E. Kopp, Atty., Dept, of Justice, Washington, D. C., Henry A. Schwarz, U. S. Atty., Danville, Ill., for plaintiff-appellant.
    Sherman Carmell, Sheldon M. Char-one, Stephen B. Horwitz, Chicago, Ill., for defendant-appellee.
    Before CLARK, CUMMINGS and PELL, Circuit Judges.

       Associate Justice Tom C. Clark, Retired, of the United States Supreme Court, is sitting by designation.

   CUMMINGS, Circuit Judge.

This suit was filed by the Secretary of Labor pursuant to the Labor-Management Reporting and Disclosure Act (29 U.S.C. § 401 et seq.) challenging the validity of the December 18, 1970, election of Terry Payne as president of the Independent Lift Truck Builders Union. The Union is an independent organization that represents approximately 900 employees of the Hyster Company at its Danville, Illinois, plant.

On October 16, 1970, union member Arthur Wolfe was discharged as an employee of Hyster. The Union initiated grievance proceedings on his behalf. On October 27, 1970, he filed a charge with the National Labor Relations Board contesting his discharge; this resulted in the issuance of a complaint by the Board’s General Counsel alleging that Hyster had violated Sections 8(a)(1) and 8(a) (3) of the National Labor Relations Act (29 U.S.C. § 158(a)(1) and 158(a)(3)). Because of this development, the Union did not pursue arbitration over the grievance it had filed with respect to Wolfe’s discharge.

On September 22, 1971, a Labor Board trial examiner concluded that Hyster’s discharge of Wolfe violated the National Labor Relations Act, and on January 26, 1972, the Board ordered Hyster to reinstate Wolfe with back pay. 195 NLRB 84. On March 20, 1973, this Court issued an order enforcing the Board’s order. National Labor Relations Board v. Hyster Company (7th Cir. Nos. 72-1288 and 1403).

The'Union’s president has primary responsibility for enforcing the collective bargaining agreement with Hyster. Although paid by the Company, the president’s entire working day is spent on union duties, mostly on Hyster’s premises. As a discharged employee, Wolfe was barred by company rules from coming on its premises.

On November 23, 1970, Wolfe was nominated for the office of union president. However, on advice of counsel, the Union’s election committee ruled that Wolfe’s name could not appear on the ballot because of the following provisions of the Union’s constitution:

“Article III, Section 1. * * * This Union shall consist of hourly-rated factory employees and other workers who may in the past, present or future be declared under the jurisdiction of this Union.”
“Article XV, Section 3. * * * Candidates must be members in the Union for 24 months previous to the day of election and must have completed three years of continuous employment with the employer of the members of this Union.”

In addition to relying on these constitutional provisions, the election committee reasoned that since the union president was required to give constant attention to problems and grievances occurring daily on Hyster’s premises, Wolfe’s inability to appear on the Company’s premises as a discharged employee would disable him from carrying out the president’s duties.

Although his name did not appear on the ballot at the December 18, 1970, election, Wolfe voted in that election and continued to mail his dues to the Union after his discharge. The Union permitted Wolfe to vote in the election because, without waiving any rights, it chose not to litigate an injunctive proceeding he had commenced against it. It did not cash his dues checks because it believed the dues might have to be returned if Wolfe were unsuccessful in the Labor Board ease involving his discharge. The Union took the position that Wolfe was no longer a member, although he was never suspended or expelled through any trial-type proceeding.

Wolfe filed a post-election protest with the Union. After the protest was denied, Wolfe filed a complaint with the Secretary of Labor on February 1, 1971, claiming that he was a paid-up member in good standing with the Union and that as a result of the Labor Board General Counsel’s December 7, 1970, complaint, he was still an employee of Hys-ter for purposes of the election.

On February 3, 1971, a Department of Labor compliance officer requested union president Payne to produce all the Union’s records concerning that election. The Union, through counsel, said it would only make available information with respect to Wolfe’s status as a union member. Because of the Union’s attitude, the Department of Labor served the Union and three of its officers with subpoenas ad testificandum and duces tecum on February 20, 1971: The subpoena duces tecum was limited to the Union’s records “pertaining to the nominations of officers conducted on November 23, 1970, and the election of officers conducted on December 18, 1970 * *” After union counsel wrote the Department of Labor asking for its statutory authority for issuing the subpoenas, a Labor Department attorney telephoned him to respond but was informed that he was on vacation. The Regional Solicitor of the Department of Labor thereupon wrote union counsel that compliance with the subpoenas was expected on their March 3, 1971, return date. Because the subpoenas were not honored, the Secretary brought an enforcement action on April 28, 1971. Hodgson v. Independent Lift Truck Builders Union, No. Cv 71-63-D (E.D. Ill.). On July 8, 1971, the district court entered an order in that action requiring compliance with the subpoenas. Due in part to union counsel’s vacation plans, the parties agreed to July 28, 1971, as the date for complying with the district court’s order of July 8, 1971, and the records were examined and the testimony was taken on July 28th.

On September 7, 1971, the Secretary of Labor brought this suit asserting that a union member in good standing had been denied the right to be a candidate and that union members were denied a reasonable opportunity to nominate and vote for the candidate of their choice, all in violation of 29 U.S.C. § 481(e). The Secretary sought a declaratory judgment that the December 18, 1970, election for the office of union president was null and void and requested the court to direct defendant to conduct new nominations and an election for that office under the Secretary’s supervision.

In an unreported opinion, the district court found that the Secretary’s complaint was barred by the sixty-day limitation in 29 U.S.C. § 482(b). The court also held that Wolfe was not a union member in good standing within the meaning of 29 U.S.C. § 481(e) “because at the time of nomination he was not an hourly-rated factory employee as required by the defendant union’s constitution.” Accordingly, the district court found no violation of the Labor-Management Reporting and Disclosure Act. We reverse.

Wolfe’s complaint with the Secretary was filed on February 1, 1971. Under 29 U.S.C. § 482(b), the Secretary had sixty days from the filing of Wolfe’s complaint to bring a civil action (note 2 supra). This 60-day statute of limitations is tolled by “conduct on the part of the union which impede[s] or delay [s] the Secretary’s investigation.” Hodgson v. International Pressmen, 440 F.2d 1113, 1118-1119 (6th Cir. 1971), certio-rari denied, 404 U.S. 828, 92 S.Ct. 63, 30 L.Ed.2d 56. Here defendant Union declined to cooperate with the Department’s investigation or to honor its subpoenas, requiring the Secretary to obtain a judgment ordering the Union to honor the subpoenas. Pursuant to that judgment, which was not appealed, the records sought were made available to the Secretary and the requested testimony was taken on July 28, 1971.

The Union argues that its lack of cooperation should not toll the limitations period because it was at all times prepared to give the Secretary all documents relevant to Wolfe’s complaint. Since the Secretary’s complaint was no broader than Wolfe’s, and could not have been under the Union’s reading of Hodgson v. Steelworkers Local 6799, 403 U.S. 333, 91 S.Ct. 1841, 29 L.Ed.2d 510, its refusal to provide documents relevant to other aspects of the election assertedly did not hinder the Secretary’s investigation. But the Steelworkers case makes clear that the Secretary is entitled to investigate and raise in his complaint violations of which the union member was unaware. 403 U.S. at 340-341, 91 S.Ct. 1841. The Secretary was therefore entitled to all records pertaining to the election, as the district court held in enforcing the subpoenas, and the Union was not entitled to compel a piecemeal investigation by insisting that he accept whatever part of the documents it offered. The fact that the Secretary did not find probable cause to allege any violations of which Wolfe was unaware cannot retroactively validate the Union’s offer of partial compliance.

We hold that the statute of limitations was tolled from February 3, 1971, when the Secretary first requested this information from the Union, to at least July 8, 1971, when the court below compelled compliance with the subpoenas. The sixty-day limitation would therefore have ended on Saturday, September 4, 1971. Since September 5 was a Sunday and September 6 was Labor Day, September 7 was the next business day and a complaint filed on that day was still timely. Wirtz v. Pennsylvania Shipbuilders Association, 382 F.2d 237 (4th Cir. 1967). This resolution of the issue makes it unnecessary to decide the Secretary’s further argument that the tolling continued until July 28, 1971, when the information was finally made available.

Addressing ourselves to the merits, we hold that 29 U.S.C. § 481(e) was violated because Wolfe was denied the right to be a candidate for union office. Wolfe was a member in good standing within the meaning of 29 U.S. C. § 402(o) because he had been an hourly-rated employee as required by Article III, Section 1 of the union constitution, and had not thereafter voluntarily withdrawn from membership nor been expelled or suspended “after appropriate proceedings.” As a member in good standing, he was entitled to run for office unless barred by “reasonable qualifications ' uniformly imposed.” 29 U.S.C. § 481(e) (note 1, swpra).

The Union claims that its constitutional requirement that the candidate be a member who has completed three years of continuous employment with Hyster is such a qualification. We note initially that if the usage of “member” and “employment” in the union constitution is parallel to the statutory definitions of “member” and “employee”, then Wolfe was still an employed member at the time of nomination and election. The statutory definition of “member” has just been discussed. 29 U.S.C. § 402(f) defines an employee as including any individual whose work has ceased “because of any unfair labor practice.” Wolfe’s discharge was of no effect to deprive him of his status as an employee since he was at all relevant times actively contesting his discharge on unfair labor practice grounds, and he ultimately prevailed. In fact, the Union itself has conceded that “Wolfe, even after his discharge, fell within the statutory definition of ‘employee’ ” (Br. 17).

The Union suggests, however, that its requirement of “hourly-rated factory employee” is more restrictive than any of the statutory definitions. The term “hourly-rated factory employee” appears in the section of the union constitution defining the consist of the Union. Article III, Section 1, supra. But it could arguably be incorporated into the section on candidate qualifications by that section’s usage of “member” or “employment.” Article XV, Section 3, supra. If “hourly-rated factory employee” is construed to bar from eligibility for office a member discharged by an employer where, as here, the member is actively contesting the discharge, then it is not a reasonable qualification. The reasonable qualification exception to Section 481(e) is not to “be given a broad reach.” Wirtz v. Hotel Employees Local 6, 391 U.S. 492, 499, 88 S.Ct. 1743, 20 L.Ed.2d 763. We hold that for purposes relevant here, the Union was obligated to consider Wolfe as an employee until the question of the propriety of his discharge was resolved. It is true that if Wolfe were elected and his discharge finally upheld before his term of office expired, the Union might choose to demand his resignation or remove him and be put to the inconvenience of a special election. But this is a possibility for the union members to consider at election time, for they are the ones primarily responsible for passing on the qualifications of candidates under this statute. Wirtz v. Hotel Employees Local 6, 391 U.S. 492, 504, 88 S.Ct. 1743, 20 L.Ed.2d 763. This possible inconvenience to the Union is insignificant when compared to the threat to employee choice posed by permitting an employer to render a candidate ineligible for union election by illegally discharging him. Since Hyster discharged Wolfe because of “the nature and extent of his union activities as a steward” for the Union (195 NLRB at 91), it certainly would have disfavored his election as the union president.

“ ‘Member’ or ‘member in good standing’, when used in reference to a labor organization, includes any person who has fulfilled the requirements for membership in such organization, and who neither has voluntarily withdrawn from membership nor has been expelled or suspended from membership after appropriate proceedings consistent with lawful provisions of the constitution and bylaws of such organization.”

The Union admits that its candidacy requirement of a full-time active employee could be found unreasonable in the case of an international union (Br. 22), and it has not demonstrated to our satisfaction why its being a 900-member independent somehow makes the rule reasonable. It is suggested that the union president is paid by Hyster, and for Hyster to pay a non-employee would violate Section 302 of the National Labor Relations Act (29 U.S.C. § 186). Whether that Section would be violated is not before us, but if the Union is correct, its position in this case is not helped. The record shows that Hyster pays the union president, who spends full time on union business and does no work for Hyster. Whether such payments violate Section 302 does not depend on whether the union officer who does no work for Hyster is or is not labeled an employee. The policy of Section 302 is to reduce management influence over employee representatives, and it would be contrary to that purpose to construe the Section in a manner which gave management an option to pay or not to pay a union officer’s salary by designating or not designating him as an employee without regard to whether he actually performed any work for the company.

Finally, if Wolfe were elected union president, Hyster would have to allow him on its premises to avoid committing an unfair labor practice under Section 8(a)(1) of the National Labor Relations Act (29 U.S.C. § 158(a)(1)). Mid-America Transportation Company v. National Labor Relations Board, 325 F. 2d 87 (7th Cir. 1962).

The Union has not only deprived Wolfe of his right to be a candidate for union office, but has also deprived its members of their rights under 29 U.S.C. § 481(e) to nominate and vote for him. The Secretary is entitled to a judgment declaring this election to be null and void and directing the Union to conduct new nominations and another election for the office of president under the Secretary’s supervision. Wirtz v. Bottle Blowers Local 153, 389 U.S. 463, 88 S. Ct. 643, 19 L.Ed.2d 705.

Reversed and remanded.

      . Section 481(e) provides in pertinent part:
      “In any election required by this section which is to be held by secret ballot a reasonable opportunity shall be given for the nomination of candidates and every member in good standing shall be eligible to be a candidate and to hold office (subject * * * to reasonable qualifications uniformly imposed) and shall have the right to vote for or otherwise support the candidate or candidates of his choice, without being subject to penalty, discipline, or improper interference or reprisal of any kind by such organization or any member thereof. * * * The election shall be conducted in accordance with the constitution and bylaws of such organization insofar as they are not inconsistent with the provisions of this subchapter.”

      . Section 482(b) provides in pertinent part:
      “The Secretary shall investigate such complaint and, if he finds probable cause to believe that a violation of this subchap-ter has occurred and has not been remedied, he shall, within sixty days after the filing of such complaint, bring a civil action * * * to set aside the invalid election, if any, and to direct the conduct of an election * * * under the supervision of the Secretary * *

      . Although this case involved a union waiver of the 60-day provision, the court of appeals and the district court both approved the reasoning of various impeding cases cited therein. See also Hodgson v. Machinists Lodge 851, 454 F.2d 545, 547 (7th Cir. 1971).

      . See note 1 supra.

      . Section 402(o) provides:

      . “ [A] ppropriate proceedings” in Section 402 (o) is apparently a reference to Section 411(a) (5), which provides:
      “No member of any labor organization may be fined, suspended, expelled, or otherwise disciplined except for nonpayment of dues by such organization or by any officer thereof unless such member has been (A) served with written specific charges; (B) given a reasonable time to prepare his defense; (G) afforded a full and fair hearing.”

      . Section 402(f), provides in relevant part:
      “ ‘Employee’ means any individual employed by an employer, and includes any individual whose work has ceased as a consequence of, or in connection with, any current labor dispute or because of any unfair labor practice * *


author: WILLIAM J. CAMPBELL, Senior District Judge. CUMMINGS, Circuit Judge

text:
    Norman J. FISCHER and Mary P. Fischer, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
    No. 72-1273.
    United States Court of Appeals, Seventh Circuit.
    Argued April 12, 1973.
    Decided Dec. 28, 1973.

      Kenneth K. Luce, Robert A. Schnur, Milwaukee, Wis., for plaintiffs-appellants.
    Scott P. Crampton, Asst. Atty. Gen., James H. Bozarth, Atty., Tax Div., U. S. Dept, of Justice, Washington, D. C., for defendant-appellee.
    Before HASTINGS, Senior Circuit Judge, CUMMINGS, Circuit Judge, and CAMPBELL, Senior District Judge.

       Senior District Judge William J. Campbell of the Northern District of Illinois is sitting by designation.

   WILLIAM J. CAMPBELL, Senior District Judge.

This income tax refund suit was commenced in the District Court for the Eastern District of Wisconsin by the plaintiffs, Norman J. and Mary P. Fischer. The facts were either stipulated or agreed to by the parties, and the trial resulted in a denial of the taxpayer’s refund claim. We affirm. ■>

The undisputed facts show that the taxpayer, Norman J. Fischer, was the president and a member of the board of directors of Medalists Industries Inc. (hereafter “Medalists”), and that he owned 12,015 shares of its common stock. Additionally, taxpayer had the right under a qualified stock option plan to purchase 25,000 shares of Medalists common stock at a price of $6.00 per share. Medalists, originally incorporated under the name of J. M. Nash Company, Inc., is a manufacturer of athletic equipment, automated woodworking machinery, ductile iron products, and other equipment.

Under an indenture dated April 1, 1960, Medalists issued subordinated debentures convertible into its common stock in the principal amount of #370,000.00. During 1967, outstanding convertible debentures existed in the principal amount of $260,000.00 and they were owned by two small business investment companies and an individual.

From April, 1960 through June 30, 1967, the authorized common stock of Medalists equaled four million shares with a par value of one dollar per share. There were 1,729,000 shares outstanding as of June 30, 1967. On that date, Medalists’ shareholders amended its Articles of Incorporation to effect a reverse stock split whereby the authorized common stock was reduced from four million shares to one million shares, with a resultant increase in the par value per share from $1.00 to $4.00. After the reverse stock split, there were 432,250 shares of Medalists common stock outstanding. A proxy statement was distributed to the Medalists shareholders with the notice of the June 30, 1967 meeting, and with reference to the convertible debentures, stated:

“The reduction in the outstanding shares of common stock and the accompanying exchange of shares will necessitate corresponding adjustments in the conversion price at which the 6%% convertible subordinated debentures may be converted into the common stock of the company.”

On June 30, 1967 Medalists notified the debenture holders that it intended to redeem the debentures on the next interest paying date, October 1, 1967.

Shortly thereafter, on about July 27, 1967, two of the debenture holders asserted that there was no provision in the April 1, 1960 debenture indenture for an adjustment of the conversion price of the debentures in the event of a reverse stock split. The debenture holders claimed that they were entitled to convert their debentures into 91,550 shares of common stock at the conversion price of $2.84 per share, irrespective of the reverse stock split. Medalists denied the claim and maintained that the conversion price should be for 22,887 shares of common stock at a price of $11.36 per share.

There followed a period of negotiations and threats of litigation, after which a settlement was reached on or about September 18, 1967. The terms of the settlement provided that Medalists would purchase the debentures from the holders for $457,740.00 plus interest.

Although this settlement was consummated on or about September 26, 1967, it was originally rejected by the debenture holders. In order to induce the debenture holders to enter into the settlement, the taxpayer offered to sell and did sell to them on September 26, 1967, 2250 shares of his common stock for $4.-20 per share. At the time of the sale by the taxpayer, the stock in the O-TC market had a value of $16.625 per share.

The taxpayer’s purpose or motive in acceding to this transaction was also adduced in the District Court. At the time of the transaction, the taxpayer was aware that the company’s board of directors was dissatisfied with his role in the situation and believed that it was his negligence which had caused the problem. Unless the dispute was settled, the taxpayer understood that his resignation would be demanded. He also thought that the resulting publicity would adversely affect his business reputation and jeopardize his future as a corporate executive. Moreover, since the taxpayer had a stock interest in Medalists valued at $630,000, if the debenture holders prevailed in the dispute, the value of his interest in Medalists would be substantially diluted. It was also shown that this dispute was interfering with the company’s active acquisition program, and that the publicity attending the dispute might reduce the public’s confidence in the company, all of which might adversely affect the value of the company’s stock, including the taxpayer’s interest therein.

Upon these facts, taxpayer filed his claim for refund,- asserting that he was entitled to deduct the full amount of the difference between the fair market value of the common stock and the price at which he sold the shares to the debenture holders on September 26, 1967. The deduction is authorized, the taxpayer maintains, either as a business expense pursuant to Section 162, or as an expense incurred for the maintenance or conservation of property held for the production in income pursuant to Section 212 of the Internal Revenue Code. As stated, the District Court denied the taxpayer’s claim for refund and this appeal followed.

Although the District Court held otherwise, the government now concedes that for tax purposes a salaried corporate officer is engaged in a trade or business separate and distinct from that of his corporation, the business of rendering services for compensation. Noland v. Commissioner, 269 F.2d 108, 111 (4th Cir. 1959); Folker v. Johnson, 230 F.2d 906, 908-909 (2d Cir. 1956). Thus, Section 162 will authorize a deduction by a corporate employee for expenditures which are “ordinary and necessary” to the continuation of his employment. In this regard, the court in Noland remarked:

“. . . . every person who works for compensation is engaged in the business of earning his pay, and that expense which is essential to the continuance of his employment is deductible .. . The business of a corporation, however, is not that of its officers, employees or stock holders. Though the individual stock holder— executive, in his own mind, may identify his interests and business with those of the corporation, they legally are distinct, and, ordinarily, if he voluntarily pays or guarantees the corporation’s obligations, his expense may not be deducted on his personal return. [Citations]” Noland v. Commissioner, 269 F.2d 108, 111 (4th Cir. 1959).

Thus, where a corporate executive or employee undertakes to discharge the responsibility of the corporation, he is not incurring an expenditure of his trade or business within the meaning of Section 162. See also, Deputy v. duPont, 308 U.S. 488, 60 S.Ct. 363, 84 L.Ed. 416 (1940). Following a similar rationale, it has been recognized that where a corporate officer pays the debts of his employer-corporation, however “necessary” that may be from a practical standpoint, such payments are not “ordinary” expenditures of the corporate officer. See Welch v. Helvering, 290 U.S. 111, 54 S. Ct. 8, 78 L.Ed. 212 (1933).

In the case at bar, the claim which prompted the taxpayer’s sale of his stock was a claim against Medalists, the taxpayer’s employer-corporation. The basis of the debenture holders’ claim against Medalists lay in the corporation’s obligation under the indenture agreement dated April 1, 1960. The obligation under that agreement related to the business of the corporation, not the trade or business of the taxpayer, although his status would concededly be affected thereby. Although taxpayer, in his own mind, might have felt compelled to participate in the settlement agreement, the expenditures he incurred were not thereby attributable to his trade or business within the meaning of Section 162.

With respect to Section 212 of the Internal Revenue Code, the taxpayer maintains that he sold his stock at his cost in order to protect his investment in Medalists and that, therefore, he may deduct the loss of the unrealized capital gain as an expense under this Section. To qualify as a deduction under Section 212, the expenditure must satisfy the same requirements that apply to a trade or business expense under Section 162 except that the person claiming the deduction need not be in the trade or business. See United States v. Gilmore, 372 U.S. 39, 83 S.Ct. 623, 9 L.Ed.2d 570 (1963). Also, where the expense is litigation related, the origin and character of the claim which generated the expense, rather than the potential consequence of the claim upon the taxpayer, will determine whether the expense is deductible under Section 212. Anchor Coupling Co. v. United States, 427 F.2d 429 (7th Cir. 1970); cert, denied, 401 U.S. 908, 91 S.Ct. 866, 27 L.Ed.2d 806 (1971); see also, Clark Oil and Refining Corp. v. United States, 473 F.2d 1217 (7th Cir. 1973).

In the case before us, the origin of the claim concerning the sale of the taxpayer’s stock was a threatened suit by Medalists’ debenture holders against the corporation itself. It related to Medalists’ financing operation and not to the taxpayer’s personal stock dealing. Although the potential harm to the taxpayer’s status and reputation as a corporate executive was not insignificant, the deductibility of an expense under Section 212 does not turn upon the possible consequences of a claim to the fortunes of the taxpayer. For these reasons, we hold that Section 212 does not authorize a deduction by the taxpayer of the loss of the unrealized capital gain caused by the sale of his stock to the debenture holders.

Since we have concluded that the claimed expense here was not deductible under either Section 162 or Section 212 of the Internal Revenue Code, the judgment of the district court is affirmed.

Affirmed.

CUMMINGS, Circuit Judge

(dissenting)-

The expense incurred was ordinary and necessary for the reasons stated in Judge Campbell’s dissenting opinion in Anderson v. Commissioner: “The taxpayer’s payment * * * was made to preserve his employment and to avoid injury to his business reputation * * * ” 480 F.2d 1304, 1309 (7th Cir. 1973). The majority in Anderson did not disagree with the dissent on this point; instead Anderson held that the rule of Arrowsmith v. Commissioner, 344 U.S. 6, 73 S.Ct. 71, 97 L.Ed. 6, required what might otherwise be ordinary expenses to be treated as a capital loss because, on the particular facts of that case, they were essentially a refund of a previous capital gain. The expense incurred here is not in the nature of a refund, and Arrowsmith is therefore inapplicable.

The Government also argues that no expense was incurred because the stock was sold at a price equal to the taxpayer’s basis. The taxpayer is entitled to a deduction based on the fair market value of the property transferred, but he must also recognize the long-term capital gain implicit in disposition of the property. United States v. General Shoe Corp., 282 F.2d 9 (6th Cir. 1960), certiorari denied, 365 U.S. 843, 81 S.Ct. 801, 5 L. Ed.2d 808; International Freighting Corp., Inc. v. Commissioner, 135 F.2d 310 (2d Cir. 1943). Since the Government has not counterclaimed for the capital gains tax, that issue is not before us. Accordingly, I would allow the deduction as claimed.

      . Mary P. Fischer is a party to this action by reason of her filing a joint tax return with her husband, Norman J. Fischer.

      . As a part of his inducement, a Mr. Harmon J. Jongebloed, a director and substantial stock holder in the corporation who is not involved in this litigation, also agreed to sell 1250 shares of his common stock in Medalists to the debenture holders for $4.20 per share.

      . In pertinent part, Section 162 of the Internal Revenue Code provides:
      “(a) In General. — There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business, ...”

      . In pertinent part, Section 212 of the Internal Revenue Code provides:
      “In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year—
      (1) . . .
      (2) for the management, conservation, or maintenance of property held for the production of income; . . .

      . The $4.20 per share figure at which the taxpayer sold his stock to the debenture holders was equal to his cost basis of the stock.

      . Contrary to the view expressed in Judge Cummings’ dissenting opinion, I do not consider our ruling in the instant case to be inconsistent with the position expressed in my dissenting opinion in Anderson v. Commissioner, 480 F.2d 1304, 1309 (7th Cir. 1973). As Judge Cummings correctly observes “Anderson held that the rule of Arrowsmith v. Commissioner, 344 U.S. 6, 73 S.Ct. 71, 97 L.Ed. 6, required what might otherwise he ordinary expenses to be treated as a capital loss because, on the particular facts of that case, they were essentially a refund of a previous capital gain.” (emphasis added).
      The distinction between our holding in the instant case and my dissent in Anderson is basically that Anderson involved what was quite clearly the taxpayer’s personal tax liability, i. e., payment of “what otherwise might be ordinary expense.” The instant case involves payment by the taxpayer of his employer’s obligation under an indenture agreement. It is this distinction which renders Sections 162 and 212 inapplicable.

      . In its brief, the government has also argued that the taxpayer here has not “paid or incurred” any expense since the $4.20 per share figure at which he sold his stock to the debenture holders was precisely equal to his per share cost basis in the stock. In other words, the government maintains that the loss of an unrealized gain is not an “expense” within Section 162 or Section 212. Since we have disposed of the appeal on other grounds, we intimate no views as to this issue.


author: SPRECHER, Circuit Judge.

text:
    Ethelyn Wheeler HAMILTON et al., as Co-Executors of Estate of Harold L. Hamilton, Deceased, Plaintiffs-Appellants, v. GENERAL MOTORS CORPORATION, Defendant-Appellee.
    No. 72-1960.
    United States Court of Appeals, Seventh Circuit.
    Argued Oct. 24, 1973.
    Decided Dec. 17, 1973.

      Francis J. McConnell, Chicago, Ill., for plaintiffs-appellants.
    A. Leslie Hodson and Frank Cicero, Jr., Chicago, Ill., for defendant-appellee.
    Before SWYGERT, Chief Judge, SPRECHER, Circuit Judge and GRANT, Senior District Judge.

       Senior District Judge Robert A. Grant of the Northern District of Indiana is sitting by designation.

   SPRECHER, Circuit Judge.

The primary question posed by this diversity appeal is when does the statute of limitations commence to run in regard to a claim for services performed by a major witness in complex litigation : when what turns out to be the last service is performed or later when the litigation is concluded? The answer requires the resolution of the more fundamental problem of whether public policy permits any compensation to be paid to a non-expert witness.

The executors’ complaint to recover for the decedent’s services was dismissed for failure to conform to the applicable-statute of limitations. The district-court found that the last act performed by the decedent was the affixation of his signature to a deposition in September, 1966, whereas the complaint had been filed on January 26, 1972, more than five years thereafter.

I

Harold L. Hamilton was one of the pioneers in the development of the diesel locomotive industry. In 1922, he formed Electro-Motive Engineering Corporation, which manufactured electrically-powered gasoline locomotives. In 1930, ElectroMotive was sold to General Motors Corporation in a stock transaction. Hamilton built and headed General Motors’ diesel locomotive plant at LaGrange, Illinois. He held the title of Vice President of General Motors upon his retirement in 1955 at age 65.

By 1955, the diesel locomotive, which was virtually unknown in 1922, had entirely supplanted the steam engine, with General Motors’ Electro-Motive Division capturing 85% of the locomotive market with total sales in excess of $200,000,000 annually.

Hamilton’s compensation from General Motors from 1942 to his retirement in 1955 was $30,000 per year. His retirement benefits which commenced June 30, 1955, were only $13,800 annually; he was not required to perform any services for that sum.

In November, 1955, Hamilton testified before the Senate Kilgore Committee in regard to the diesel locomotive industry; in 1957 the United States Department of Justice initiated an antitrust investigation; and, grand jury subpoenas were issued to General Motors in 1959. General Motors sought out and interviewed Hamilton at great length in 1957 and again in 1959.

General Motors was indicted under the antitrust laws on April 12, 1961. On May 25, 1961, the case was transferred from the Southern District of New York to the Northern District of Illinois, Eastern Division, on the ground of more convenient forum. A government civil anti-trust action was also filed on January 14, 1963, charging General Motors with monopolizing the diesel locomotive business and with violating Section 7 of the Clayton Act through acquisition of the Electro-Motive Corporation and the Winton Engine Company. The relief sought in the civil action was divestiture of the Electro-Motive Division located at LaGrange, Illinois.

After the filing of the criminal action in 1961, the General Motors’ trial attorneys, who were located in Chicago, and corporate legal staff from Detroit again sought out and interviewed Hamilton, who was living in California. From February, 1962, to September, 1966, Hamilton performed the following services at the specific request of and for the benefit of General Motors: Building upon the Senate hearing testimony of Hamilton in 1955 and upon his interviews in 1957 and 1959, a comprehensive memorandum of his knowledge was developed by the trial lawyers. They met with Hamilton four times in late 1962 and early 1963, three times in California and once in Chicago, developing the basic statement. The criminal action was dismissed on December 28, 1964, without the necessity of Hamilton testifying.

Three additional meetings then took place in 1965 and early 1966, one in California and two in Chicago, aimed primarily at preparing Hamilton for his deposition, which was taken in California from March 22 through March 31, 1966 and comprised 692 pages. In April, Hamilton reviewed the transcript of his deposition and ultimately signed it in September, 1966.

In addition, throughout the period of 1962-1966 correspondence moved between Hamilton and the General Motors’ attorneys, relating to details of his statement and ultimate deposition, and concerning exhibits, 79 of which were identified during the deposition. The complaint alleged that “Hamilton came out of his retirement and thereafter for approximately ten years regularly devoted substantially all of his time and effort in assisting GMC officials and counsel in this regard.”

The civil action was dismissed on June 2, 1967. In May, 1969, Hamilton died. Thereafter his widow and daughter learned that he had not been compensated for these services except for out-of-pocket expenses. After some preliminary discussions with General Motors’ representatives, this action was filed on January 26, 1972. Upon dismissal of the action as foreclosed by the applicable statute of limitations, the plaintiffs appealed.

II

The parties on appeal have concentrated narrowly upon the single question presented by the district court’s judgment; that is, whether the statute of limitations commenced to run from the last service performed by the decedent or when the litigation was concluded on June 2, 1967, which latter date falls within the five year statutory period.

We believe that the resolution of this appeal requires a much broader consideration of the important policy considerations underlying the alleged implied contract which the complaint sought to enforce. There was no express contract or agreement or understanding that Hamilton would be paid for his assistance to General Motors; he never requested any payment; he was never promised any payment; and he never told the members of his family that he expected to be paid. The plaintiffs in seeking payment relied upon an implied contract: “where one person, in the absence of any express agreement, renders valuable services to another which are knowingly accepted by such other, the law will imply a promise to pay a fair and reasonable compensation for such services.” Highway Commissioners v. City of Bloomington, 253 Ill. 164, 172, 97 N.E. 280, 284 (1912).

Hamilton rendered services to General Motors and they were valuable. He prepared himself mightily and at length, first in anticipation of being a witness at the trial of the criminal case and later, when that case was dismissed in 1964, in anticipation of testifying upon deposition. His efforts were at least partially responsible for the ultimate dismissal of the civil suit in 1967.

In seeking to avoid the impact of the Illinois limitations statute, the plaintiffs have relied principally upon two Illinois cases relating to attorneys’ claims for services which held that the causes of action did not accrue until the litigation terminated. Walker v. Goodrich, 16 Ill. 341 (1855); Meyer v. McCumber, 75 Ill.App. 119 (1st Dist., 1898). The rationale for those holdings was expressed by the Illinois Supreme Court in Walker, 16 Ill. at 343:

“No other case than this could be required to illustrate the propriety of this rule. Here was a suit pending in court for more than twelve years, during all of which time the defense was conducted by these solicitors, with great ability, and the most constant assiduity, requiring, at one time, an almost constant attendance before the master, for about nine months, in stating the accounts of a partnership involved in that suit. Did the statute of limitations commence running at the termination of each day, as to the services rendered on that day? Were the solicitors obliged to pause in their defense, within each period of five years, to commence a suit against their clients for the services already performed, or forfeit them? The very statement of the proposition shows how embarrassing, inappropriate, and indeed, impracticable, such a rule would be.”

In order to determine whether the attorney rationale should be applied to Hamilton, it should be noted that recently the Illinois Appellate Court held in Otto v. Kropp, 105 Ill.App.2d 464, 245 N.E.2d 516 (1st Dist., 1969), that although there was an earlier suspension of services performed by an accountant on a specific tax audit, his claim for services did not accrue for limitations purposes until the litigation involving that audit had terminated. That case, in effect, applied the litigation-termination theory to an expert witness as well as to attorneys. Also, Hamilton was never told at the termination of his deposition or at any other time that his services were no longer required. As far as he knew, he could have been called upon as a trial witness or as a trial consultant if the civil case against General Motors ever went to trial.

Unfortunately for the plaintiffs here, however, Hamilton was not an expert witness and that fact brings into play a host of countervailing public policy. We start with the proposition that Hamilton was called into service because of his vast knowledge of the subject matter of two lawsuits then pending in the federal courts. The federal policy regarding federal witnesses is so positive that it provides (18 U.S.C. § 201 (i)):

“Whoever, directly or indirectly, asks, demands, exacts, solicits, seeks, accepts, receives, or agrees to receive anything of value for himself for or because of the testimony under oath or affirmation given or to be given by him as a witness upon any such trial, hearing, or other proceeding, or for or because of his absence therefrom-—
“Shall be fined not more than $10,000 or imprisoned for not more than two years, or both.”

The above language “shall not be construed to prohibit the payment or receipt of witness fees provided by law, or the payment, by the party upon whose behalf a witness is called and receipt by a witness, of the reasonable cost of travel and subsistence incurred and the reasonable value of time lost in attendance at any such trial, hearing, or proceeding, or in the case of expert witnesses, involving a technical or professional opinion, a reasonable fee for time spent in the preparation of such opinion, and in appearing and testifying” (18 U.S.C. § 201(j)).

The policy expressed in 18 U.S.C. § 201 is also a common law policy (14 Wil-liston on Contracts § 1716 (3rd ed. 1972)):

“As it is the duty of a citizen, when required to do so, to testify in court concerning facts within his knowledge for the compensation allowed him by law, a bargain to pay one who is amenable to process a further sum for his attendance as a witness is invalid both on grounds of public policy and for lack of consideration.”

See also, Restatement of Contracts § 552(1) (1932); 6A Corbin, Contracts § 1430 (1952); Calamari & Perillo, Contracts § 369 (1970).

In Wright v. Somers, 125 Ill.App. 256 (1906), a witness demanded $200 for his loss of time and a jury awarded him that amount. In reversing the judgment, the Illinois Appellate Court said at 257-258:

“We cannot affirm this judgment. The contract upon which it is based is against public policy. If affirmed, it would give ground for witnesses to extort unreasonable fees for their testimony; and might make it impossible for a poor suitor to obtain his rights.
“It is against the spirit of our Constitution, which says: ‘Every person ought to find a certain remedy in the laws for all injuries and wrongs which he may receive in his person, property or reputation; he ought to obtain, by law, right and justice freely and without being obliged to purchase it, completely and without denial, promptly and without delay.’ Section 19, Article II.
“The legislative department of our State has declared that every witness attending in his own county upon trials in the courts of record shall be entitled to receive the sum of one dollar for each day’s attendance and five cents per mile each way for necessary travel. Section 47, chapter 53, R. S. Hurd. This is all the witness is entitled to receive. To demand more is forbidden by the policy and spirit of this statute.
“If a witness, who knows a fact material to the issue in the cause, either before or after the service of a subpoena upon him, can traffic with the suitor, who desires to call him, as to the value of his testimony, and then call upon the courts to enforce the contract thus made, the tendency to evil consequences is apparent. Such a ruling leans toward the procurement of perjury; toward the raising up of a class of witnesses who, for a sufficient consideration, will give testimony that shall win or lose the lawsuit, toward the perversion of justice; and toward corruption in our courts.
“We are not charging that any of these dangerous consequences happened in this case. It does not appear but that appellee when called in the damage case testified simply and purely to the truth. But the affirmance of this judgment would so clearly tend to evil consequences that we must declare the contract upon which it is founded void as against public policy. Walker v. Cook, 33 Ill.App., 561; Gillett [Gillet] v. Board of Supervisors, 67 Ill., 256; Dodge v. Stiles, 26 Conn., 463; Quirk v. Muller, 14 Mont., 467 [36 P. 1077].
“The alleged contract is without consideration. When subpoenaed one is bound to attend the trial, and there to submit himself to an examination upon the facts in issue.”

Although Hamilton may have been one of the foremost experts in regard to some of the matters as to which he had first-hand knowledge and although he may have devoted as much if not more time than an ordinary expert witness would have spent in the preparation of his anticipated testimony, the fact was that he was testifying to matters of his own personal knowledge. Although he was not a party to the lawsuits, his past interest in the subject-matter was such that he could not have qualified as a disinterested, independent or impartial expert.

While in a particular case such as this it may seem unfair for a non-expert witness to be expected to prepare and testify under such strict limitations upon his reimbursement when expert witnesses in the same case are substantially compensated, we can not say that the strong public policy considerations which dictate that result are not warranted in the over-all interest of justice.

Consequently, we conclude that the services of non-expert witnesses are not analogous to lawyers or even to expert witnesses. Inasmuch as the kinds and amounts of reimbursement to which such witnesses are entitled are so severely circumscribed, the only contract that the law could imply would be for “reasonable cost of travel and subsistence incurred and the reasonable value of time lost in attendance” (18 U.S.C. § 201(j)).

These reimbursable items could only accrue as expended; there could be no implied agreement for any lump-sum payment at the end of the litigation as in the case of attorneys’ fees. Hamilton in fact reported his reimbursable expenses as they were incurred, and he was reimbursed. He was thus put on notice that reimbursements were being made from time to time. If he had any additional claims (for lost time, for example), he had an opportunity to make them as the time was expended. None of the reasons for treating attorneys’ services differently for limitations’ purposes applies to the services of the non-expert witness.

Therefore we predict that if the courts of Illinois were confronted with this question they would hold as the district judge held in this case.

Judgment of dismissal is affirmed.

Affirmed.

      . The district court held that the statement of claim for relief was barred by Illinois Revised Statutes, 1971, chapter 83, § 16 which provides in pertinent part that “actions on unwritten contracts, expressed or implied and all civil actions not otherwise provided for, shall be commenced within 5 years after the cause of action accrued.” The defendant also argued in the district court and on appeal that, in the alternative, the action was barred by a California two-year statute of limitations (Cal.Code Civ. Proc. § 339) by virtue of Illinois’ “borrowing” statute, which applies “[w]hen a cause of action has arisen in a state . . . out of this state . . . . ” Ill.Rev.Stat. 1971, ch. 83, § 21.
      A federal court in a diversity action is required to apply the conflict of law rules of the state in which it sits. Klaxon Co. v. Stentor Elec. Mfg. Co., Inc., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Illinois would probably follow the “most significant relationship” test. Earle, Conflict of Laws and the Second Restatement — Illinois Accepts the Tort Provisions; What about Contracts?, 61 Ill.Bar.J. 292 (1973). Inasmuch as the implied contract alleged here related to a lawsuit pending in Illinois, Illinois undoubtedly had the most significant relationship to that contract. Consequently, it can not be said that the district court was clearly erroneous in the imj)licit finding that the Illinois “borrowing” statute would not' apply because the cause of action “arose” in Illinois.

      . Both at the time he testified on deposition and later after the filing' of this suit, the Chicago trial lawyers, the corporate legal staff members and General Motors officials were unstinting in their praise of Hamilton’s knowledge, ability and performance as a deposition witness. The lavishness of this praise culminated when the attorneys endorsed Hamilton’s copy of the deposition transcript as follows:
      “ . . . And for us who had the job of seeing that the story was told in the defense of the locomotive case, we know, and wish here to declare, that these pages record one of the most remarkable feats of testimony we have ever been privileged to attend, not only in accuracy, detail and sharpness of recollection of thirty years of history, the clarity of expression, and the tremendous knowledge and understanding manifested, but in the solid impression — favorable to our cause — made upon opposing counsel, which we are confident played a large part in the ultimate successful outcome.”

      . Hamilton wrote to the chairman of the board of General Motors in 1966: “The tiring part has been the several years of continuous and repeated review of all important phases of the development ‘from 1922 to 1943.”

      . The reason for taking Hamilton’s desposition was to perpetuate his testimony at a time when his health was failing, but also because the lawyers were “hoping to psychologically demoralize . . . the Government with the force of Mr. Hamilton’s testimony” (Nitschke dep., 90). “[W]e hoped that Mr. Hamilton’s deposition would be so persuasive that government counsel would decide to dismiss the case” (Abrams dep., 50-51). And apparently that is what happened on June 2, 1967.

      . The plaintiffs further relied upon two opinions by Judge Learned Hand (Potts v. Village of Haverstraw, 93 F.2d 506, 110 F.2d 58 (2nd Cir. 1937, 1940)), in the second of which he said at 60:
      “We said that he [a civil engineer] was in the same position as an attorney, who need not sue until the job is over; that is, until lie has been discharged, or otherwise learns that he will not be required to do anything more. The village never informed the plaintiff that his employment was at an end until February 10, 1931, and he had no reason to speculate as to whether it would further prosecute the application to the commission and go on with the work.”

      . United States v. General Motors Corporation, 61 Cr. 356 (S.D.N.Y.), transferred on May 25, 1961 to the Northern District of Illinois, Eastern Division; United States v. General Motors Corporation, 63 C 80 (N.D. Ill.).

      . The Code of Professional Responsibility became effective for American Bar Association members on January 1, 1970, after the services involved here took place, but it codified prevalent ethical standards and public policy. Ethical Consideration 7-28 provides: “Witnesses should always testify truthfully and should be free from any financial induee-ments that might tempt them to do otherwise. A lawyer should not pay or agree to pay a non-expert witness an amount in excess of reimbursement for expenses and financial loss incident to his being a witness; however, a lawyer may pay or agree to pay an expert witness a reasonable fee for his services as an expert.”

      . In Illinois, loss of time may not be reimbursable under Wright v. Somers, 125 Ill. App. 256 (1906).

      . Hamilton reported expenses of $95.58 in 1962; $229.77 in 1963; $896.96 in 1964; and $583.12 in 1965; or a total of $1,805.43. This was broken down into $839.67 for transportation, $280 for meals and $685.76 for lodging (Nitschke dep. Ex. 75).

      . Not even the “embarrassment” of commencing frequent suits against a client. Walker v. Goodrich, 16 Ill. 341, 343 (1855).