author: SKELTON, Judge:

text:
    The CONTINENTAL INSURANCE COMPANY v. The UNITED STATES.
    No. 459-69.
    United States Court of Claims.
    Feb. 16, 1973.

      Walter J. Rockier, Washington, D. C., attorney of record, for plaintiff; Richard L. Hubbard, Washington, D. C., of counsel.
    Roger A. Schwarz, Washington, D. C., with whom was Asst. Atty. Gen. Scott P. Crampton, for defendant; Philip R. Miller, and Joseph Kovner, Washington, D. C., of counsel.
    Before COWEN, Chief Judge, and DAVIS, SKELTON, NICHOLS, KASH-IWA, KUNZIG, and BENNETT, Judges.
   ON PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT

SKELTON, Judge:

In this case plaintiff seeks to recover income taxes and interest, which it asserts were erroneously and illegally assessed and collected, in the amounts of $2,413.71 for the calendar year 1954 and $475,003.80 for the calendar year 1955. The case is before the court on plaint tiff’s motion for summary judgment and has been briefed and argued orally by both sides. The parties are in basic agreement as to the facts essential to our decision of this motion and these facts are set out below.

Plaintiff, The Continental Insurance Company, is a corporation organized under the laws of the State of New York. It is, and at all relevant times has been, engaged in business as a stock fire and casualty insurance company, transacting its business in each of the states of the United States and in the District of Columbia. Consequently, plaintiff is an insurance company subject to the tax imposed by Section 831 of the Internal Revenue Code of 1954 and computes its taxable income under Section 832 of the Code.

Plaintiff duly filed its federal income tax returns for the calendar years 1954, 1955, 1956, and 1957 and paid the taxes shown to be due thereon. The District Director of Internal Revenue later assessed deficiencies in tax and interest thereon against it for the years 1954 and 1955. Plaintiff paid these assessed tax deficiencies and interest in full and then filed claims for refund with respect to the portions of the deficiencies for 1954 and 1955 which resulted from the adjustment of its deductions for losses paid for the years 1955, 1956, and 1957.

In computing its federal income tax for the years 1954 through 1957, plaintiff included as income the amount of its earned premiums less losses paid and unpaid losses. In making such computation, it reduced losses paid by salvage which had been reduced to cash or its equivalent during the year. It did not, however, reduce losses paid by estimates of salvage that might be recovered on such losses in future years. Salvage consists basically of (1) amounts recouped by the insurer through the sale of damaged property to which it has taken title, and (2) amounts that the insurer recovers from third parties who are found to be ultimately responsible for the damage sustained by the insured (subrogation). During the years at issue the rules of some states barred the use of estimates of salvage, and barred salvage adjustments for property which had not been reduced to cash or cash equivalents.

The District Director determined that plaintiff’s losses paid for the years 1955, 1956, and 1957 should be reduced by salvage recoverable, i. e., by an estimate of the salvage on losses paid in each year that might be recovered in subsequent years, as well as by salvage actually reduced to cash or cash equivalents during each year. He made this adjustment with regard to all plaintiff’s business, and not merely with regard to that portion of the business done in states which did not expressly bar such an adjustment. The result of this determination was to increase plaintiff’s taxable income for 1955 and 1956 and to decrease its taxable income for 1957. The effect of these income adjustments for the year 1954 was to decrease plaintiff’s loss car-ryback from 1956 and consequently, to increase its income taxes for 1954. The effect for 1955 was to increase plaintiff’s taxable income for that year and to increase its loss carryback from 1957, though in a much lesser amount, the net effect of which was to increase its income taxes for 1955. The plaintiff’s claims for refund were denied and this suit followed.

The statutory context of this case can be briefly summarized. Section 831 of the Internal Revenue Code of 1954 imposes corporate taxes (computed as provided in Section 11) on insurance companies such as plaintiff. Section 832 of the Code describes how the “taxable income” of such insurance companies is to be determined. “Taxable income” is defined as “gross income” less certain specified deductions. The two major components of “gross income” are “underwriting income” and “investment income” which, according to Section 832(b)(1)(A), are to be “computed on the basis of the underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners.” The term “underwriting income” means the premiums earned on insurance contracts during the taxable year less “losses incurred” on such contracts and “expenses incurred.” “Losses incurred” during the taxable year on insurance contracts consist of two elements, losses paid and unpaid losses. Section 832(b)(5) provides :

(5) LOSSES INCURRED. — The term “losses incurred” means losses incurred during the taxable year on insurance contracts, computed as follows :
(A) To losses paid during the taxable year, add salvage and reinsurance recoverable outstanding at the end of the preceding taxable year and deduct salvage and reinsurance recoverable outstanding at the end of the taxable year.
(B) To the result so obtained, add all unpaid losses outstanding at the end of the taxable year and deduct unpaid losses outstanding at the end of the preceding taxable year.

Thus, losses paid must be adjusted for the change during the year in salvage and reinsurance recoverable. Any increase in salvage and reinsurance recoverable during the year decreases the amount of losses paid, and any decrease in salvage and reinsurance recoverable during the year increases losses paid.

The statute, however, does not define the term “salvage * * * recoverable” or even describe what is meant by salvage. It is therefore necessary to look beyond the statute to the applicable regulations and to insurance law. As pointed out earlier, salvage includes all tangible property and subrogation claims acquired by an insurance company after indemnifying its insured under contracts of insurance. In Phoenix Insurance Co. v. Erie Transportation Co., 117 U.S. 312, 321, 6 S.Ct. 750, 753, 29 L.Ed. 873 (1886), a case involving the subrogation rights of an insurer, the Supreme Court defined salvage as follows:

From the very nature of the contract of insurance as a contract of indemnity, the insurer, when he has paid to the assured the amount of the indemnity agreed on between them, is entitled, by way of salvage, to the benefit of anything that may be received, either from the remnants of the goods, or from damages paid by third persons for the same loss.

Section 1.832-1 (c) of the Treasury Regulations, 26 C.F.R. 1.832-1 (c), reads as follows:

(c) That part of the deduction for “losses incurred” which represents an adjustment to losses paid for salvage and reinsurance recoverable shall, except as hereinafter provided, include all salvage in course of liquidation, and all reinsurance in process of collection not otherwise taken into account as a reduction of losses paid, outstanding at the end of the taxable year. Salvage in course of liquidation includes all property (other than cash), real or personal, tangible or intangible, except that which may not be included by reason of express statutory provisions (or rules and regulations of an insurance department) of any State or Territory or the District of Columbia in which the company transacts business. Such salvage in course of liquidation shall be taken into account to the extent of the value thereof at the end of the taxable year as determined from a fair and reasonable estimate based upon either the facts in each ease or the company’s experience with similar cases. Cash received during the taxable year with respect to items of salvage or reinsurance shall be taken into account in computing losses paid during such taxable year.
With respect to salvage, the above-quoted paragraph of the regulations has four components, one stated in each sentence. First, salvage recoverable includes all salvage in course of liquidation. Second, salvage in course of liquidation includes all property (other than cash) except that which is excluded by an express statute, rule, or regulation of any state in which the insurer transacts business. Third, salvage in course of liquidation must be taken into account' upon a fair and reasonable estimate based upon the facts in each case or experience in similar eases. Fourth, cash received during the year with respect to salvage is taken into account as a reduction in computing losses paid during the year, before this item is adjusted by estimates of future salvage recoveries.

The parties have stipulated that:

1. During each of the years 1953-1957, the insurance departments of some states in which plaintiff did business during such years had express rules or regulations (within the meaning of Treasury Regulations Section 1.832-1 (c)) prohibiting plaintiff from reducing losses paid by, or otherwise, taking credit for, (a) any property, tangible or intangible, in the form of salvage or subrogation, before such property is reduced to cash or cash equivalents, and (b) estimates of the value of any property, tangible or intangible, in the form of salvage or subrogation, before such property is reduced to cash or cash equivalents.

The issue presented is whether, under Section 832(b)(5)(A) of the Code, plaintiff is required to adjust losses paid by estimates of future salvage recoveries on such losses, in light of (a) Section 1.832-1 (c) of the Treasury Regulations which excludes from the salvage recoverable adjustment to losses paid, any salvage that may not be included under rules or regulations of the insurance department of any state in which plaintiff did business, and (b) the stipulated fact that during the years in issue there were such state rules and regulations prohibiting the recognition of salvage other than in the form of property consisting of cash or cash equivalents. It is a case of first impression.

Plaintiff’s position in this case is rather simple to state. Plaintiff contends that under the above-quoted Treasury Regulations it was not required to reduce losses paid by any salvage for which it was not permitted to take credit under the rules or regulations of the insurance department of any state in which it did business. The parties have stipulated that during the years in issue the insurance department of some states in which plaintiff did business had rules or regulations prohibiting it from taking credit for salvage until reduced to cash or cash equivalents. Therefore, plaintiff submits that it should not be required for federal income tax purposes to reduce its losses paid by estimates of salvage recoverable in the future, i. e., by salvage prior to its reduction to cash or its equivalent. Plaintiff says that it properly subtracted salvage received in cash or cash equivalents in computing losses paid, which was all it was required to do by the Regulations with respect to salvage.

Defendant has, throughout the course of this litigation, maintained four different positions as to why and how plaintiff was required to reduce losses paid by estimates of future salvage recoveries. Its first two positions have been abandoned and will not be discussed. The other two, which are presently being urged by the defendant, are as follows: First, defendant asserts that Regulation Section 1.832-1 (c) requires that estimated amounts of salvage recoverable are excluded for federal tax purposes only to the extent that they relate to business conducted by plaintiff within states which prohibit the recognition of salvage before it is reduced to cash or the equivalent of cash. In other words, defendant interprets the Regulations as requiring a state-by-state approach. Second, defendant contends that a state law, or a rule or regulation of an insurance department, of any state is a proper basis for reducing the Section 832(b)(5)(A) salvage recoverable adjustment if the state law, rule, or regulation excludes specified items of property from being taken into account as salvage in course of liquidation but not if it forbids the making of any adjustment whatsoever for all salvage in course of liquidation, the value of which must be determined by estimation.

At the outset, it must be recognized that the casualty insurance business is a thoroughly regulated industry. The terminology and concepts of the Internal Revenue Code and Regulation provisions dealing with casualty insurance are based directly on industry usage developed in response to state regulation. New Hampshire Fire Insurance Co., 2 T.C. 708 (1943), aff’d, 146 F.2d 697 (1st Cir. 1945). One important aspect of state regulation is the requirement that insurance companies file annual financial reports or statements with the states in which they do business. Over the years, the form of these annual statements has been standardized by the National Association of Insurance Commissioners. This prescribed form is known as the “annual Statement” or the “Convention Form.” It is clear that an insurance company sets forth in its Annual Statement, filed with each state, financial data regarding all of its business, wherever conducted, and that the rules of a state insurance department relating to items reflected in the Annual Statement apply equally to all of the company’s business, wherever conducted. None of the assets or liabilities, or items of income or deduction, are allocated on a state-by-state basis. These fundamental facts were understood to be the ease and taken for granted in numerous judicial decisions considering to what extent the Annual Statement should be followed for federal income tax purposes. See, e. g., Commissioner v. General Reinsurance Corp., 190 F.2d 148 (2d Cir. 1951); Bituminous Casualty Corp., 57 T.C. 58 (1971); New Hampshire Fire Insurance Co., 2 T.C. 708 (1943), aff’d 146 F.2d 697 (1st Cir. 1945). This court has proceeded on the same basis in other cases involving casualty insurance company taxation. See, e. g., Title Guarantee Co. v. United States, 432 F.2d 1363, 193 Ct.Cl. 1 (1970); Colonial Surety Co. v. United States, 178 F.Supp. 600, 147 Ct.Cl. 643 (1959). Cf. Continental Assurance Co. v. United States, 8 F.Supp. 474, 79 Ct.Cl. 756 (1934); Massachusetts Mutual Life Insurance Co. v. United States, 59 F.2d 116, 75 Ct.Cl. 117 (1932), aff’d, 288 U.S. 269, 53 S.Ct. 337, 77 L.Ed. 739 (1933); Minnesota Mutual Life Insurance Co. v. United States, 66 Ct.Cl. 481 (1928), cert. denied, 279 U.S. 856, 49 S.Ct. 352, 73 L.Ed. 998 (1929), all dealing with life insurance companies.

There is a very sound reason for the total approach of the Annual Statement. State insurance departments are concerned with assuring that a company’s financial position is sound enough to protect policyholders in their respective states. In determining the financial strength of a large, multi-state insurer such as plaintiff, it would be illogical for the insurance department of a particular state to scrutinize only that part of plaintiff’s business carried on within that state. Plaintiff’s business in that one state might be prospering, while elsewhere it might be hopelessly insolvent. Thus a state insurance department must examine all of plaintiff’s assets and liabilities, and all of its income and expenses and apply its rules to plaintiff’s total business if policyholders within that state are to be adequately protected. The purpose of the state rule herein involved, prohibiting the use of salvage estimates to increase assets or reduce losses, is obviously to prevent the use of inaccurate estimates which might overstate financial strength and to allow only those items of salvage which are, or will soon be, in the form of cash or otherwise available for the payment of claims. No state limits the application of its salvage rule (or any insurance rule) to business done within that state, for the reasons mentioned above. Consequently, Section 1.832-1 (c) of the Treasury Regulations must be construed to mean that where the exception based on the salvage rule of any state comes into play, the exception applies to salvage property of the insurer wherever located.

This interpretation is substantiated by an examination of the history of this Regulation. Though essentially identical provisions to Sections 831, 832 were first adopted by Congress in 1921, the Treasury promulgated no regulations with respect to salvage under this antecedent to Section 832 for 25 years. Finally, on March 12, 1947, a Proposed Regulation was published which provided simply:

For taxable years beginning after December 31, 1946, that part of the deduction for “losses incurred” which represents an adjustment to “losses paid” for “salvage and reinsurance recoverable” shall include all salvage in course of liquidation and all reinsurance in process of collection.

This Proposed Regulation caused considerable concern within the industry since it was viewed as an attempt to ignore state rules and establish a federal standard. Letters were written to the Commissioner of Internal Revenue by various trade associations representing stock casualty insurance companies and by individual casualty insurers objecting to the Proposed Regulation. They claimed it would require insurance companies to compute their taxable income in a different manner than that used in the Annual Statement and approved by state laws, thus complicating the preparation of tax returns and increasing the administrative burden upon the government. They pointed out the difficulties involved in estimating something as speculative as salvage recoverable and noted that, in the long run, the taxes paid will be substantially the same regardless which method is used.

In apparent deference to these protests from the industry, the Treasury revised its Proposed Regulation to bring it in line with industry practice. Under the final Regulation promulgated in December 1947, which contained language identical to that contained in Section 1.-832-1 (c) of the present Treasury Regulations, if any state in which an insurer did business excluded estimates of future salvage recoveries, then, in line with industry practice, such estimates would be excluded for federal income tax purposes. In essence, the Treasury agreed to follow the most conservative state salvage rule with which the insurer had to comply.

Plaintiff’s construction is also reinforced by comparison to analogous Treasury Regulations, in which the taxation of insurance companies depends on state law. The term “reserves required by law” is significant in the taxation of life insurance companies both in determining taxable income and in determining whether a company is a life insurance company. (See Sections 801(b), 805 and 810 of the Internal Revenue Code of 1954.) In determining the amount of “reserves required by law,” there has never been any suggestion that each state’s reserve requirements should be applied only to business done within the particular state. Courts have explicitly recognized that, for federal tax purposes, state rules on reserves apply across the board to all of a company’s business, in the same way that such rules are applied by the states themselves. See, e. g., Maryland Casualty Co. v. United States, 251 U.S. 342, 40 S.Ct. 155, 64 L.Ed. 297 (1920); Western & Southern Life Insurance Co. v. Commissioner, 460 F.2d 8 (6th Cir. 1972); Massachusetts Mutual Life Insurance Co. v. United States, 56 F.2d 897, 899, 74 Ct.Cl. 162, 167 (1932); Prudential Insurance Co. v. Herold, 247 F. 681, 685-686 (D.N.J.1918). This principle is also recognized in Section 1.803-1 (d) of the Treasury Regulations, 26 C.F.R. 1.803-1(d), which states that:

* -:<• * a company is permitted to make use of the highest aggregate reserve required by any State or Territory or the District of Columbia in which it transacts business, but the reserve must have been actually held.

The salvage adjustment in Regulations Section 1.832-1 (e) here in issue is quite similar to the above-quoted Regulation governing the reserve adjustment. Both affect the measure of income, both rely on state law, both refer to the requirements of “any state” in which the company does business, and both look to the most conservative state rule. It is difficult to see, therefore, why one should be applied state-by-state while the other is applied across the board.

If the defendant’s state-by-state approach were to be followed, companies would be faced with the question of how to allocate salvage property and salvage estimates among states, since the Regulation provides no formula for making such an allocation. The company, for instance, would not know whether to look to the state in which the salvage will be recovered (if such state could be determined), the state in which the loss occurs, the state in which the property is normally located, or the state in which the premiums were paid. And, if this were determined, it would not know what rules to apply in determining, for example, to what state a recovery or loss belongs. Other Regulations requiring allocation typically provide precise rules for effecting the same. For example, Regulations Section 1.953-2, dealing with the definition of “United States risks,” contains elaborate rules for determining whether property is “in the United States,” whether a liability “arises out of activity in the United States,” and whether an individual is a “resident of the United States.” Regulations Section 1.953-4(c) (1) (ii) provides precise rules for determining, in the ease of a controlled foreign corporation, what reserves are deemed to be required under state law. Regulations Section 1.953-4(f) provides specific rules on how to allocate particular items to “United States risks.” If a state-by-state allocation had been actually intended with respect to salvage estimates under Regulations Section 1.832-1 (c), guidance on the proper method for making such allocation would almost certainly have been provided in the Regulations. Finally, the state-by-state argument is even further discredited by the fact that the District Director’s adjustments were made without reference to state rules and regulations, notwithstanding that some states in which plaintiff did business had rules barring the use of salvage estimates. The across the board approach taken by the District Director in this case is clearly inconsistent with the state-by-state approach now argued for by defendant.

We turn now to defendant’s second argument. Defendant has asserted that the only circumstance under which state rules may affect the salvage recoverable adjustment for tax purposes is one in which the state law excludes certain items of property from plaintiff’s salvage in course of liquidation, but not where such rule flatly forbids the adjustment for so much of plaintiff’s salvage in course of liquidation which must be valued by estimation. This assertion is based on defendant’s interpretation of the third sentence of Regulations Section 1.832-1 (c), previously set out in full, which reads:

* * * Salvage in course of liquidation includes all property (other than cash), real or personal, tangible or intangible, except that which may not be included by reason of express statutory provisions (or rules or regulations of an insurance department) of any State or Territory or the District of Columbia in which the company transacts business.

Defendant contends that the words “except that” refer back to the word “property” and not to the term “salvage in course of liquidation” that precedes it. Thus, says defendant, a company’s salvage in course of liquidation will include all property except that property which may not be included by virtue of state law. According to defendant, the exclusion is directed at particular items of property, e. g., a particular item of intangible salvage property which, for whatever reason, will not be recognized by the state insurance department as salvage of the company in course of liquidation. Unfortunately, defendant has been unable to proffer a specific example of the type of state rule contemplated by its argument, such as a state rule which would exclude from salvage some specified kind of property.

Plaintiff is willing to admit that the words “except that” refer back to the word “property,” but claims that this adds nothing to the consideration of the case. We agree. In fact, the stipulation between the parties, set forth supra, provided that some states in which the plaintiff did business had rules prohibiting the reduction of losses paid for property (potential salvage or subrogation) not yet reduced to cash or cash equivalents. It is, therefore, difficult to understand this contention of the defendant. There is no discernible limitation on the state rule exception in the language of the Regulation itself. It does not refer to “specified items” of property or to “a particular item of intangible salvage property” as defendant would have us believe. Therefore, defendant cannot prevail on its second argument.

Affidavits filed with plaintiff’s motion indicate that from 1921 on through the years involved in this suit plaintiff never reduced its losses paid, for either federal income tax or state reporting purposes, by estimates of future salvage recoveries or by any salvage not in the form of cash or cash equivalents. They indicate further that the Internal Revenue Service, or its predecessor, the Bureau- of Internal Revenue, audited plaintiff’s income tax returns for all but a few of those years and never once proposed any adjustment with respect to plaintiff's treatment of salvage prior to the 1966 audit which precipitated this law suit. Based on the above circumstances, plaintiff argues that its construction of the Regulation, and of the underlying statute, is strongly reinforced by decades of administrative practice and therefore must be given great weight. While a demonstrated practice of the Internal Revenue Service is admittedly very important in construing a statute or a regulation, it cannot be inferred from this that the non-action of the Service is entitled to the same weight. If the Service had taken no action with respect to plaintiff while at the same time requiring regional insurers doing business only in states not having any rules on salvage to make salvage estimates, such non-action with respect to the plaintiff might well be entitled to great weight. Here, however, from all that appears in the record, the Service did nothing with respect to anyone. Thus, we do not feel that the non-action on the part of the Service is entitled to the great weight that plaintiff would have us attribute to it, though we feel it is certainly a factor to be considered in reaching a decision in this case.

Defendant has argued that plaintiff’s construction of the Regulation will nullify the statute and that the federal income tax law should not be construed so as to discriminate between casualty insurers who may or may not do business in one state which excludes estimated salvage recoverable. Plaintiff’s construction, however, does not nullify the statute. The statute would apply with full force to regional casualty insurance companies which only do business in states which have no restrictive rules on salvage. Moreover, where the exception for restrictive state salvage rules comes into play, plaintiff’s interpretation does not confine the Regulation to cash adjustments. Other property in the form of cash equivalents would also constitute salvage for which adjustments would be required. It is true that, under plaintiff’s interpretation, the Regulation distinguishes among insurers depending on where they do business (a fact which, to a lesser extent, is also true under both of defendant’s interpretations). However, the fact that differences in state laws may produce different federal tax consequences in no way invalidates the Regulations. See, e. g., Poe v. Seaborn, 282 U.S. 101, 117-118, 51 S.Ct. 58, 75 L.Ed. 239 (1930); Florida v. Mellon, 273 U.S. 12, 17, 47 S.Ct. 265, 71 L.Ed. 511 (1927); Early v. Lawyers Title Insurance Corp., 132 F.2d 42, 46 (4th Cir. 1942); Colorado Title Guaranty Co. v. Allan, 212 F.Supp. 341, 343 (D.Colo. 1962).

Finally, we have considered the fact that in the long run it will make no substantial difference in the amount of taxes paid whether salvage recoveries are treated on a “paid” basis or whether estimates are required to be made. Sooner or later salvage recoveries must be taken into income for tax purposes. Thus, there is no question of tax avoidance presented here, but merely a question of when salvage is to be taken into account for purposes of the federal income tax. We are also mindful of the fact that salvage is a relatively minor item when compared with reinsurance, etc. In these circumstances it seems best not to overthrow long-established practice merely to accelerate the receipt of taxes. Such a course of action would cause needless trouble and expense to insurance companies without the realization of any significant offsetting advantage to the government.

For all of the reasons discussed above, we conclude that the plaintiff’s interpretation of the Regulation is correct. We hold that Section 1.832-1 (c) of the Treasury Regulations permits plaintiff to exclude from its salvage recoverable adjustment all salvage not yet reduced to cash or cash equivalents where the rule of any state in which it does business bars the reporting of such salvage. Accordingly, the plaintiff’s motion for summary judgment is granted and judgment is entered for plaintiff in the amount of four hundred seventy-seven thousand four hundred seventeen dollars and fifty-one cents ($477,417.51) plus statutory interest thereon as provided by law.

      . 26 U.S.C. § 832 (1958) reads, in pertinent part, as follows:
      “§ 832. Insurance company taxable income.
      “(a) Definition of taxable income.
      “In the case of an insurance company subject to the tax imposed by section 831, the term ‘taxable income’ means the gross income as defined in subsection (b) (1) less the deductions allowed by subsection (c).
      “(b) Definitions.
      “In the case of an insurance company subject to the tax imposed by section 831—
      “(1) Gross income.
      “The terms ‘gross income’ means the sum of—
      “ (A) the combined gross amount earned during the taxable year, from investment income and from underwriting income as provided in this subsection, computed on the basis of the underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners.
      «{! •!» «t*
      “(3) Underwriting income.
      “The term ‘underwriting income’ means the premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred.
      “(4) Premiums earned.
      “The term ‘premiums earned on insurance contracts during the taxable year’ means an amount computed as follows:
      “(A) From the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance.
      “(B) To the result so obtained, add unearned premiums on outstanding business at the end of the preceding taxable year and deduct unearned premiums on outstanding business at the end of the taxable year.
      * * * * *
      “(5) Losses incurred.
      “The term ‘losses incurred’ means losses incurred during the taxable year on insurance contracts, computed as follows:
      “(A) To losses paid during the taxable year, add salvage and reinsurance recoverable outstanding at the end of the preceding taxable year and deduct salvage and reinsurance recoverable outstanding at the end of the taxable year.
      “(B) To the result so obtained, add all unpaid losses outstanding at the end of the taxable year and deduct unpaid losses outstanding at the end of the preceding taxable year.”

      . The National Convention of Insurance Commissioners is now known as the National Association of Insurance Commissioners.

      . This definition of salvage was quoted with approval by the Board of Tax Appeals in George S. Van Schaick, 32 B.T.A. 736, 741 (1935), aff’d, 83 F.2d 940 (2d Cir. 1936), a case which arose under Section 204 of the Revenue Act of 1928, a predecessor to Sections 831, 832 of the Internal Revenue Code of 1954.

      . Applicable to the years in issue. See Section 1.832-3 of the Treasury Regulations.

      . Defendant originally argued that no state in which plaintiff did business had any statute, rule or regulation barring salvage estimates. (It has since stipulated to the contrary.) Next, defendant contended that state rules and regulations regarding salvage were irrelevant and that a federal standard as to the meaning of salvage recoverable outstanding should be applied.

      . Estimates of future salvage recoveries are by their very nature extremely speculative. In the case of subrogation claims the amount of recovery will often depend on something as uncertain as a jury verdict.

      . See Washington Title Insurance Co. v. United States, 135 F.Supp. 426, 133 Ct.Cl. 164 (1955) for a good illustration of how state insurance rules are applied and how such application has been accepted for federal tax purposes. Three insurance companies, operating as a pool and writing title insurance in Virginia, Maryland and the District of Columbia, attempted to establish unearned premium reserves on a state-by-state basis. Upon examination, state insurance officials required them to apply the strictest state rule on reserves (Virginia’s) to all their business. The companies complied and proceeded to use the strictest state rule in computing unearned premiums for federal income tax purposes. This court concluded that the companies were entitled to deduct the reserves required to be set aside by the strictest state for federal income tax purposes. The Internal Revenue Service cited this case with approval in Rev.Rul. 57-48, 1957-1 Cum. Bull. 212.

      . Proposed addition to Regulations 111, Section 29.204-2 (the predecessor of current Regulation Section 1.832-1 (c)), 12 Fed.Reg. (Part 3) 1688.

      . See T.D. 5593, 1947-2 Cum.Bull. 97, and 12 Fed.Reg. (Part 12) 8229 (1947).

      . See generally Regulations Sections 1.-953-1 through 1.953-5. For other examples of Regulations providing detailed allocation rules, see, e. g., Regs. Sec. 1.482-2 (allocations among affiliated taxpayers in the case of loans, performance of services, use of tangible property, transfer or use of intangible property, and sales of tangible property) ; Regs. Sec. 1.819-2 (allocation of the business of a foreign life insurance company between the United States and foreign countries) ; Regs. Secs. 1.826-4 and 1.826-7 (allocation of expenses by an electing reciprocal underwriter) ; Regs. Secs. 1.861-1 through 1.-861-8 (determination of United States source income) ; Regs. Secs. 1.863-1 through 1.863-6 (allocation of items between sources within and without the United States) ; Regs. Sec. 1.873-1 (allocation of deductions allowed nonresident alien individuals) ; Regs. Sec. 1.882-3 (b) (2) (allocation of deductions allowed foreign corporations). See also Proposed Regulations Sections 1.864 — 3 through 1.-864-7, 34 Fed.Reg. 1030 (1966).

      . Oasli equivalents, or so-called “admitted assets” other than cash, means property which is reasonably available to pay claims. Thus, an insurer would have to include such noncash items as escrowed collateral to which it was entitled upon payment on a real estate construction bond or undertaking, its rights to a temporarily frozen account in a bank in liquidation, and its rights to stock or securities recovered after payment of a loss on a fidelity bond, for example.


source: Caselaw Access Project

author: RICH, Judge.

license: Public Domain

text:
    Application of Alexander P. de SEVERSKY.
    Patent Appeal No. 8816.
    United States Court of Customs and Patent Appeals.
    March 8, 1973.
    Rehearing Denied April 19, 1973.

      Michael Ebert, Atty., of record, New York City, for appellant.
    S. Wm. Cochran, Washington, D. C., for the Commissioner of Patents. R. V. Lupo, William H. Beha, Jr., Washington, D. C., of counsel.
    Before MARKEY, Chief Judge, and RICH, ALMOND, BALDWIN, and LANE, Judges.
   RICH, Judge.

This appeal is from the decision of the Patent Office Board of Appeals, adhered to on reconsideration, affirming the rejection of claims 1 and 10 of appellant’s application serial No. 723,810, filed April 24, 1968, entitled “Multi-Con-centric Wet Electrostatic Precipitator,” for obviousness under 35 U.S.C. § 103. We affirm.

Generally, the wet precipitator includes two concentric cylinders which define an annular space between them. Contaminated air or gas to be cleaned is directed through this annular space. Water is caused to flow on the inside surface of the outer cylinder as well as on the outside surface of the inner cylinder. A discharge electrode structure is disposed within the annular space to establish an electrostatic field between the liquid films which line the annular passage. Contaminated gas is introduced through the bottom end of the passage between the cylinders through annular Venturi slots and is subjected to the electrostatic field which causes the particles in the gaseous stream to become ionized and migrate to the collecting films on the surfaces of the tubes lining the passages. The liquid films then carry the extracted matter away into a drain.

The significant aspect of this invention is the Venturi inlet which causes the gas flow to spread outwardly against the water films and press them against the walls of the annular passage. Claim 1 reads (emphasis ours):

1. An electrostatic wet precipitator comprising: (a) concentrically arranged collector tubes defining at least one vertically-disposed annular gas passage,
(b) means to produce downwardly-flowing films of liquid on the complementary surfaces of adjacent tubes which line said passage thereby to form liquid collectors,
(c) a discharge-electrode structure disposed within said passage in spaced relation to said liquid collectors;
(d) inlet means including a Venturi opening to feed a contaminated gaseous stream into the lower end of each passage to produce an expanding gas which flows upwardly through said passage in counter-current relationship to said liquid films to force said films against said surfaces to maintain the uniformity thereof,
(e) means to apply a high voltage between said discharge-electrode structure and said liquid collectors to ionize the contaminants in the gaseous stream flowing through said passage to cause migration of contaminants toward said liquid collectors and thereby purify the gas; and
(f) outlet means at the upper end of said passage to discharge the purified gas.

Claim 10 is a dependent claim and no separate argument is made as to its pat-entability if claim 1 is not patentable.

The references principally relied on and the only ones we need consider are:

Nesbit 1,357,202 Oct. 26,1920

Burns 1,250,088 Dec. 11,1917

de Seversky (A) 3,238,702 Mar. 8,1966

It is unnecessary to discuss the disclosures of these references because of an admission by appellant made in his reply brief before the board and in substance repeated at oral argument in this court, as follows:

The primary question before the Board is whether there is any prior-art reference of record, whose date is effective against the instant application, which discloses a Venturi inlet for feeding contaminated gas into an electrostatic precipitator tube.
If such a reference exists, then appellant concedes that this reference, when combined with the other references of record, makes the present invention obvious and unpatentable. However it is appellant’s contention that de Seversky (A), which discloses a Venturi inlet, is not an effective reference whereas those references which are effective do not even remotely disclose a Venturi inlet.

The solicitor’s brief, in turn, contains the admission that “Nesbit and Burns do not disclose venturi inlets in the contaminated gas openings of their precipi-tators.”

The solution of this case, therefore, depends upon the answer to a single question of law: has appellant overcome the date of the de Seversky (A) patent so that it is not available as a reference? There is, of course, no question that de Seversky (A) is a good reference unless its date is overcome because it issued as a patent over two years before the application at bar was filed.

■ Appellant argues here, as he' did below, that de Seversky (A) is not available as a reference because he is entitled to the date of a parent application filed in 1960, which antedates the de Seversky (A) patent, in which certain disclosure of a Venturi gas inlet is incorporated by reference from a still earlier grandparent application filed in 1955, referred to as de Seversky (C). The sequence is as follows:

I. de Seversky (C) — Patent 3,-053,029 — Sept. 11,1962. Grandparent, filed January 5, 1955.
II. de Seversky parent, application serial No. 53,255. Filed August 31, 1960, a “continuation-in-part” of I.
III. de Seversky instant application, serial No. 723,810. Filed April 24, 1968, a “continuation-in-part” of II.

It will be seen that so far as antedating de Seversky (A) is concerned, appellant relies for filing date only on serial No. 53,255, II above. That parent application, however, is totally devoid of any reference to a Venturi inlet and by itself is of no help to appellant as support for the appealed claims. Appellant admits to this defect in the parent application, saying in his brief, “parent application Serial No. 53,255 did not directly disclose a Venturi inlet.” He urges, however, that the defect is cured because the grandparent, de Seversky (C), discloses a Venturi inlet and because the parent application is a “continuation-in-part” of the grandparent that disclosure is, ipso facto, “incorporated by reference” in the parent.

It should be noted in this connection that the parent application, No. 53,255, contains no “incorporation-by-reference” language whatsoever. Its only relation to de Seversky (C) is indicated by the simple statement that it is a “continuation-in-part” thereof. That language is insufficient to incorporate any part of de Seversky (C) into the parent case. All it means is that insofar as the disclosure of the parent finds corresponding disclosure in the grandparent, the parent is entitled to the filing date of the grandparent. 35 U.S.C. § 120.

Appellant is confusing two distinctly different things: (1) the right to have the benefit of the filing date of an earlier application under § 120 for subject matter claimed in a later application because that subject matter is disclosed in an earlier application to which “a specific reference” is made — i. e., a reference to the earlier application per se, and (2) the incorporation by reference in an application of matter elsewhere written down (not necessarily in a patent application), for economy, amplification, or clarity of .exposition, by means of an incorporating statement clearly identifying the subject matter which is incorporated and where it is to be found.

Appellant’s parent application, serial No. 53,255 is not, however, in either category (1) or (2) above. The Venturi inlet is not disclosed therein and the application contains no statement which incorporates anything by reference. There is nothing but the statement that the parent is a “continuation-in-part” of the grandparent application, now the issued de Seversky patent (C).

An argument similar to that appellant is making here was made in In re Lund, 54 CCPA 1361, 376 F.2d 982, (1967), where the Patent Office contended that disclosure in an abandoned application was “incorporated by reference” into the disclosure of a patent used as a reference by virtue of the statement that the application for the patent was a “continuation-in-part” of the abandoned application. We there held that such a statement does not operate to incorporate in an application any part of the disclosure of the parent application so referred to.

To be sure, the statement that an application is a continuation-in-part, or a continuation, or a division, or in part a continuation of another application is in a broad sense a “reference” to the earlier application, but a mere reference to another application, or patent, or publication is not an incorporation of anything therein into the application containing such reference for the purposes of the disclosure required by 35 U.S.C. § 112. Likewise it does not serve to bring a disclosure within the requirements of 35 U.S.C. § 120 so as to give a later application the benefit of the filing date of an earlier application. The later application must itself contain the necessary disclosure. As we said in Lund,

As the expression itself implies, the purpose of “incorporation by reference” is to make one document become a part of another document by referring to the former in the latter in such a manner that it is apparent that the cited document is part of the referencing document as if it were fully set out therein. [Emphasis added.]

We held in Lund that the mere statement that an application is a “continuation-in-part” does not do that. Appellant relies on language in Lund but that case decided the legal question appellant presents here flatly contrary to his contentions.

Since there is admittedly no disclosure of the crucial Venturi inlet in appellant’s parent application, No. 53,255, and that parent application contains no incorporation by reference of any of the disclosure of the de Seversky (C) grandparent case, appellant is entitled to the filing date of neither for the subject matter of the appealed claims and the de Seversky (A) reference has not been antedated or overcome. In view of the admission made, the appealed claims are not patentable. The decision of the board is affirmed.

Affirmed.

       See the opinion of the Court of Appeals for the District of Columbia in de Seversky v. Brenner, 137 U.S.App.D.C. 369, 424 F.2d 857 (1970), in an action under 35 U.S.C. § 145 on claim 20 of serial No. 53,255, the rejection of which was affirmed, bearing on this point.


author: LANE, Judge.

text:
    Application of Robert J. HERSCHLER.
    Patent Appeal No. 8889.
    United States Court of Customs and Patent Appeals.
    March 8, 1973.
    Robert E. Howard, San Francisco, Cal., attorney of record, for appellant. Thomas R. Lampe, San Francisco, Cal., of counsel.
    S. Wm. Cochran, Washington, D. C., for the Commissioner of Patents. Fred E. McKelvey, Washington, D. C., of counsel.
    Before MARKEY, Chief Judge, RICH, ALMOND, BALDWIN, and LANE, Judges.
   LANE, Judge.

This appeal is from the decision of the Board of Appeals, adhered to on reconsideration, sustaining the rejection of claims 16, 27, 28, 29, 35, 36 and 38 of appellant’s application entitled “Enhanced Plant Tissue Penetration” as un-patentable under 35 U.S.C. § 103 in view of a publication of The Stepan Chemical Company (hereafter Stepan). We reverse.

Appellant describes his invention as follows:

This invention relates to a method and compositions whereby the penetration of plant-active agents into a living plant may be enhanced. More particularly, the invention relates to a method and compositions where plant-active agents are applied to plants along with dimethyl sulfoxide so that they may be penetrated into plant tissue which previously barred penetration or permitted penetration of the agents to a lesser degree.

The invention clearly stems from the recognition of the ability of dimethyl sulfoxide (hereafter DMSO) to enhance the penetration of a plant-active agent into the plant tissue.

Within the sense of the term “plant-active agent,” appellant ineuldes “plant growth regulators, nutrients, some herbicides, insecticides, fungicides, viru-cides, antibiotics, [and] defoliants * * * ,” which “are only effective to the extent that they can penetrate into plant tissue.” Appellant also contemplates the improvement in the effectiveness of such agents as “pesticides, colorants, odorants, [and] defoliants * * * ,” agents which apparently can perform their functions by their presence on only the surface of the plant but which seemingly work better with penetration.

Claims 16 and 35 are representative of the appealed claims, all of which are method claims, and read as follows:

16. A method of enhancing penetration of a plant-active agent into the living tissue of a living rooted plant, said agent being capable of effecting a physiological response within the plant, which comprises contacting the plant with a liquid composition comprising an amount of said agent effective to obtain physiological response by said plant and dimethyl sulfoxide in an amount effective to enhance penetration of said agent into the living tissue of said plant, the concentration of dimethyl sulfoxide in said composition being at a substantially non-phytotoxic level for the selected amount and route of application of said composition to the plant.
35. A method of enhancing penetration of a herbicide into the living tissue of a living rooted plant which comprises contacting the plant with a composition comprising an effective amount of a herbicide and dimethyl sulfoxide in an amount effective to enhance penetration of said herbicide into the living tissue of said plant.

The remaining claims impose various limitations on the composition and method of applying it to a plant. Some of those claims specify that the composition contains a major amount of water or “agricultural diluent” and limit the concentration of DMSO to up to 10% by weight of the composition.

The sole reference relied upon is Ste-pan, a publication which lists many substances which are soluble in DMSO. The pages specifically referred to merely contain a listing of each substance and its degree of solubility at 20-30° C. (room temperature), 90-100° C., and 130-180° C. Among the substances are some fifteen insecticides, all of which appear to be quite soluble at room temperature. The board focused on one such insecticide, 2, 4-dichlorophen-oxyacetic acid (hereafter 2, 4-D), indicated to be “very soluble” at room temperature, reasoning as follows:

[Stepan] discloses not only the association of dimethyl sulfoxide with various standard insecticides as a solvent but also the similar association of this solvent with 2, 4-dichlorophen-oxyacetic, an or even “the,” outstanding hormonal herbicide in general, which operates through its extreme growth-enhancing or “regulating” effect. This compound is so well known for this utility that its association with the specified compound as a very effective solvent would suggest to any person in the art its applicability to plants, or vegetable growth as a herbicide. No utility of significant proportions with respect to agricultural insecticides is similarly evident so that the herbicide does not stand in the same position as the insecticides with which it is grouped. (The grouping, no doubt, is a matter of convenience rather than strict classification.) The disclosure of the insecticide-solvent combinations does not carry the same necessary association of the dimethyl sulfoxide with plant utility because these insecticides are not restricted to plant treatment. As applied to herbicides, and particularly 2, 4-dichloro-phenoxyacetic acid, the provision of emulsifying agents, wetting agents, and application in the form of an aqueous emulsion of herbicidal solution are so much to be expected that they would contribute nothing unob-vious to the basic concept provided by the reference * * * .

In a decision on reconsideration, the board referred to that portion of appellant’s specification which states the following :

Plant-active agents are conventionally applied in dilute form in composition with various nonphytotoxic agricultural diluents or carriers, in most eases water. Where the plant-active agent is insoluble in the diluent, emulsifiers or dispersing agents are utilized to maintain the agent in a dispersed condition in diluent. Only a very few agents penetrate well into plant tissue even with such diluents or carriers and still fewer have the ability to move through the vascular system of the plant (translocate) once they are penetrated. It has generally been accepted that the choice of diluent or carrier or of surfactant seldom increases the rate of penetration of a given agent since their role is merely to bring the agent into better distribution and intimate contact with the plant surfaces. Few (if any) substances are available which may be applied with the agent, in either concentrated or dispersed form, to materially increase penetration.

The board also alleged as a fact “that the spreading powers of the DMSO are an important consideration in the employment of the DMSO as an herbicidal solvent and that on the record there was no reason to question the spreading characteristics of the solvent.”

OPINION

We are of the view that, on the record before us, the claimed subject matter would not have been obvious to one of ordinary skill in the pertinent art at the relevant time. Stepan discloses the solubility of a known herbicide, 2, 4-D, in DMSO, but does not teach that such a solution may be applied directly to plants. While the board, as well as the solicitor, has attempted to strengthen the import of Stepan by relying on appellant’s specification disclosure, all we glean from that disclosure, reproduced above, is that a plant-active agent is normally applied in dilute form in various non-phytotoxic agricultural diluents, usually water. The missing link is any suggestion that either DMSO was a known “agricultural diluent” at the time appellant’s invention was made or that it was known at that time to use any solvent in the capacity of “agricultural diluent.” We are not inclined to agree with the board that the “association” of a well known herbicide with a certain solvent, without more, necessarily suggests the application of a solution of the herbicide in that solvent to a plant.

We also find no appreciation in Step-an of the underlying basis of the invention, recognition of the ability of DMSO to enhance penetration. We do not understand the Patent Office to challenge the assertion that DMSO so functions and are aware of nothing in the record tending to rebut the contention that it is unexpected. When the evidence presented by appellant is weighed against the case for obviousness made out by the Patent Office, patentability is convincingly established.

For the reasons stated, the decision of the board is reversed.

Reversed.

      . Serial No. 615,377 filed February 13, 1967, as a continuation-in-part application of Serial No. 344,558 filed February 13, 1964, which was, in turn, a eontinuation-in-part application of both Serial No. 203,743 filed June 20, 1962, and Serial No. 67,493 filed November 7, 1960.

      . “Solubilities of Various Substances in Di-methyl Sulfoxide,” January 1956, pp. 1-10.


text:
    60 CCPA
    The UNITED STATES, Appellant, v. F & D TRADING CORP., Appellee.
    No. 5407.
    United States Court of Customs and Patent Appeals.
    March 1, 1973.

      Harlington Wood, Jr., Asst. Atty. Gen., Andrew P. Vance, Chief, Customs Section, Bernard J. Babb, New York City, for the United States.
    Rode & Qualey, New York City, attorneys of record, for appellee. Ellsworth F. Qualey, New York City, of counsel.
    Before MARKEY, Chief Judge, and RICH, ALMOND, BALDWIN and LANE, Judges.
   LANE, Judge.

This appeal is from the decision and judgment of the Customs Court, Third Division, Appellate Term, 64 Cust.Ct. 810, A.R.D. 268 (1970), wherein a majority of the Appellate Term reversed the decision and judgment of a single judge sitting in reappraisement, 59 Cust.Ct. 666, 273 F.Supp. 431, R.D. 11360 (1967). We affirm the judgment of the Appellate Term.

The merchandise in issue consists of eight Volkswagen automobiles which were exported from West Germany in 1963. Automobiles, being on the Final List of the Secretary of the Treasury, T.D. 54521, are subject to appraisement under section 402(a) of the Tariff Act of 1930, as amended by the Customs Simplification Act of 1956, 91 Treas. Dec. 295, T.D. 54165. The present automobiles were appraised on the basis of export value (section 402a(d)) while the importer-appellee claims the proper basis is cost of production (402a(f)). By the provisions of section 402a(a), the value of merchandise is determined on the basis of cost of production only if export value, foreign value and United States value cannot be satisfactorily ascertained.

Paragraphs of section 402a which are particularly involved here read:

(d) Export value — The export value of imported merchandise shall be the market value or the price, at the time of exportation of such merchandise to the United States, at which such or similar merchandise is freely offered for sale to all purchasers in the principal markets of the country from which exported, in the usual wholesale quantities and in the ordinary course of trade, for exportation to the United States, plus, when not included in such price, the cost of all containers and coverings of whatever nature, and all other costs, charges, and expenses incident to placing the merchandise in condition, packed ready for shipment to the United States.
(e) United States value — The United States value of imported merchandise shall be the price at which such or similar imported merchandise is freely offered for sale for domestic consumption, packed ready for delivery, in the principal market of the United States to all purchasers, at the time of exportation of the imported merchandise, in the usual wholesale quantities and in the ordinary course of trade, with allowance made for duty, cost of transportation and insurance, and other necessary expenses from the place of shipment to the place of delivery, a commission not exceeding 6 per centum, if any has been paid or contracted to be paid on goods secured otherwise than by purchase, or profits not to exceed 8 per centum and a reasonable allowance for general expenses, not to exceed 8 per centum on purchased goods.
(f) Cost of production — For the purpose of this subtitle the cost of production of imported merchandise shall be the sum of—
(1) The cost of materials of, and of fabrication, manipulation, or other process employed in manufacturing or producing such or similar merchandise, at a time preceding the date of exportation of the particular merchandise under consideration which would ordinarily permit the manufacture or production of the particular merchandise under consideration in the usual course of business;
(2) The usual general expenses (not less than 10 per centum of such cost) in the case of such or similar merchandise;
(3) The cost of all containers and coverings of whatever nature, and all other costs, charges, and expenses incident to placing the particular merchandise under consideration in condition, packed ready for shipment to the United States; and
(4) An addition for profit (not less than 8 per centum of the sum of the amounts found under paragraphs (1) and (2) of this subdivision) equal to the profit which ordinarily is added, in the case of merchandise of the same general character as the particular merchandise under consideration, by manufacturers or producers in the country of manufacture or production who are engaged in the production or manufacture of merchandise of the same class or kind.

The record consists of affidavits of Thure Dommenget and Rudolf Raab, testimony of Erwin Losch, James Westburg and Bertram Saul, and accompanying affidavits. Dommenget and Raab were dealers who sold Volkswagens outside the franchise of the manufacturer, Volkswagen Werke, in West Germany. Losch was a buyer and seller of Volks-wagens for appellee and Westburg was another buyer and exporter of Volkswa-gens outside the manufacturer’s franchise. Saul was the customs examiner in charge of appraisement and classification of automobiles and spare parts at the port of New York.

The evidence indicates that the Volks-wagens at bar were purchased in West Germany from dealers or “exporters” who acquired them either from dealers franchised by the manufacturer, Volkswagen Werke, or from private individuals. Appellee paid these “exporters” for the automobiles in cash and accepted delivery in the free trade zone of Hamburg. Delivery was made there so that the “exporters” would receive a rebate the West German government made on exported merchandise. Since the automobiles had not been manufactured for exportation to the United States and thus did not meet all American standards, appellee had them “Americanized” at its expense in Hamburg. That process included installing safety glass windshields, leather seats, mileage speedometers, sealed beam headlight housings, white directional lights and bumpers, as needed. These imported Volkswagens lacked the manufacturer’s warranty because those franchised dealers who sold them were unwilling to expose their identity and risk the possibility of Volkswagen Werke taking punitive measures against them. About 4,000 Volkswagens in 1962, and about 5,000 in 1963, were purchased and exported to the United States by appellee in this manner. At that time there were about 15 West German “exporters” selling Volkswagens to appellee and other American importers.

Upon importation, these Volkswagens were appraised at statutory export value, that value being determined by adding to the price appellee paid for each vehicle the amount it spent to Americanize it. The witness Saul testified that customs considered the vehicles used rather than new because they had left the regular distribution channels by which Volkswagen Werke distributed vehicles in the United States. In response to a subpoena duces tecum, he produced a so-called cost of production sheet, Exhibit 3, which he had circulated to appraising officers of the Customs Bureau throughout the country for the purpose of showing the value, based on cost of production, § 402a(f) supra, at which to appraise Volkswagens imported through channels of Volkswagen Werke and by tourists from February 1, 1963 to July 31, 1963.

In denying appellee’s appeal for reap-praisement at cost of production, the trial court held that it had failed to “negative the existence of export value,” which “is alone sufficient to preclude it from prevailing in this case.” The court further held that appellee had neither “negatived” the existence of statutory United States value nor established a value predicated on statutory cost of production.

A majority of the Appellate Term disagreed on all points. It found the evidence to show that there was no statutory export value or United States value, that the absence of foreign value was “virtually conceded,” and that statutory cost of production had been proved. Hence it found statutory cost of production to be the proper basis for appraisement. Except that it does not claim that there is any statutory foreign value, appellant disputes each of those findings of the majority of the Appellate Term.

By statute, the jurisdiction of this court in reappraisement cases is limited to a review of the judgment below on matters of law, which include the question whether that judgment is supported by substantial evidence in the record. United States v. E. R. Squibb & Sons, 42 CCPA 23, 26, C.A.D. 564 (1954).

Under that standard, the finding of the majority of the Appellate Term as to export value must be sustained. The majority observed that the value of merchandise for reappraisement purposes must be determined in accordance with its condition at the time of exportation. It then stated:

[T]he difficulty with the appraise-ments at bar is that they do not purport to determine a market value or price as distinguished from a mathematical calculation. It is settled law that export value may not be determined by such a calculation. United States v. Alatary Mica Co., 19 CCPA 30, T.D. 44871 (1931); United States v. S. Shamash & Sons, Inc., 32 Cust. Ct. 665, A.R.D. 41 (1954).

We agree that the appraisements here do not comply with the statutory provisions for export value. The value found- was not, in terms of section 402a(d), “a market value or * * * price” at which merchandise such as or similar to the Americanized Volkswagens imported here were “freely offered for sale,” to all purchasers in the principal markets of West Germany “in the ordinary course of trade.” Contrary to the import of appellant’s arguments, use of the term “market value” in the statute does not avoid the necessity of basing export value on an amount at which the merchandise is “freely offered for sale.” Muser v. Magone, 155 U.S. 240, 15 S.Ct. 77, 39 L.Ed. 135 (1894), cited by appellant, is not authority to the contrary. The appraisement upheld there was made under a statute including a provision for appraisers, “by all reasonable ways and means, * * * to ascertain, estimate, and appraise the true and actual market value and wholesale price * * * of merchandise * * *." The statute did not include an express requirement that the appraised value be based on an amount at which the merchandise was “freely offered for sale.”

The Appellate Term considered the evidence to show the only Volkswagens comparable to the Americanized grey market Volkswagens as imported here to be the Volkswagens controlled by the manufacturer for distribution in the American market either through its American distributor or through American tourists. It correctly noted that the evidence was uncontroverted that the regular channels for such distribution were controlled and would not support a finding of export value under the statute. Losch testified that purchasers of grey market Volkswagens for export to the United States other than appellee all operated in substantially the same way as appellee. That testimony, along with testimony of Westburg and statements of the affiant Raab that tend to confirm it, provides substantial evidence to support the finding that the other Americanized Volkswagens imported, like the eight at bar, were not offered for sale in West Germany in the condition in which they were exported. Hence the Appellate Term did not err in finding that the existence of an export value under the statute had been negated.

On the question of United States value, appellee faces no adverse presumption. The Appellate Term noted that it was the intention of the West German manufacturer to retain absolute control in the United States, as well as in the home market, of the distribution of its output down to the consumer. It further noted that the Americanized, or grey market, Volkswagens represented a diversion of vehicles manufactured for German consumption and that they lacked the conventional manufacturer’s warranty. The Appellate Term stated:

It seems rather incongruous that the New York appraiser, once he found the styles 113 and 117 of the model 1200 Volkswagens as imported by dealers outside of the franchise not to be significantly different from the counterpart models imported within the franchise, as the record shows, would, after appraising the extra-franchise vehicles under a statutory value basis predicated upon market value or price (i. e,., export value), thereafter proceed to appraise the franchise vehicles under the residual value basis (cost of production), unless it was apparent to him at the time of appraising the franchise vehicles that transactions involving the extra-franchise vehicles were not in the ordinary course of trade. For if he thought otherwise he would have been obliged to appraise all of such vehicles, whether within or without the franchise, under the export value basis, in view of the statutory priorities. The fact that he did not do so here is indicative that transactions outside of the franchise with respect to these Volkswa-gens were not considered to be in the ordinary course of trade. And in either case the manufacturer’s practice has been shown here to be one of strict controls.
It, therefore, follows from the foregoing that we find ourselves in disagreement with [the Government] that a United States value for the involved merchandise exists by default in proof, as the result of our views on the matter of the ordinary course of trade. For the reason stated we are of the opinion that the evidence negatives the existence of a United States value for the involved merchandise, and that the proper basis for appraising said merchandise is cost of production.

As to cost of production, the Appellate Term held, contrary to the trial court, that Exhibit 3, the schedule of cost of production values used for Volkswagens imported into the United States through the manufacturer’s channels, was admissible in evidence. Regarding those Volkswagens as either “such or similar” merchandise under section 402a(f), the Appellate Term found that appellee had established prima facie a cost of production value for the Volkswagens in this ease equal to the value set forth in Exhibit 3 for corresponding models.

We agree with the Appellate Term’s conclusions as to United States value and cost of production. Those views are predicated on the premise that the Volkswagens imported through the manufacturer’s channels are “such or similar merchandise,” under both statutory provisions, with respect to the Americanized Volkswagens imported by appellee. That premise finds overwhelming support in the evidence. The evidence is uncontradicted that the grey market and regular channel Volkswagens were nearly identical with the differences, extremely minor, residing in the holes drilled in the fenders, use of amber or red portions in the tail lights and variations in speedometer fittings.

Saul revealed that the reason Customs appraised the present vehicles differently was that they were considered second hand because they had left the usual distribution channels. That position is unsound for several reasons. First, there is uncontroverted evidence that appellee’s Volkswagens were not previously used by a consumer and that they were “new” by accepted standards. Second, Saul testified that Customs also applied the Exhibit 3 values to Volkswagens imported by tourists, which in some cases at least were certainly used abroad prior to importation. In addition, there is no evidence to support a conclusion that Volkswagens substantially the same as those imported directly from the manufacturer became other than “such or similar” merchandise simply by reason of some previous use.

As to accepting Exhibit 3 in evidence, the Appellate Term clearly did not err. The testimony of Saul definitely establishes its authenticity and probative value as setting forth cost of production values that Customs applied to such or similar merchandise during the time period pertinent under the statute. This exhibit, along with the evidence of its use, gives rise to the presumptions that there was no statutory United States value for the imported Volkswa-gens and that the values set forth therein represented the true cost of production under the statute, that is, the sum of the individual items that section 402a(f) decrees shall make up cost of production. To reject those values because a breakdown is not provided, as appellant asks, would be unreasonable under the circumstances and merely thwart the obvious intent of the statute to appraise at the true value.

For the reasons stated, appraisement of the imported Yolkswagens at the cost of production values found by the Customs Court, Third Division, Appellate Term is correct, and its judgment is affirmed.

Affirmed.

       155 U.S. at 244, 15 S.Ct. at 79.


author: BALDWIN, Judge.

text:
    Arvid C. WALBERG, Appellant, v. Richard O. PROBST, Appellee.
    Patent Appeal No. 8772.
    United States Court of Customs and Patent Appeals.
    March 8, 1973.
    Penrose Lucas Albright, Arlington, Va., Mason, Albright & Stansbury, Chicago, Ill., attorneys of record, for appellant.
    David H. Badger, Greenwich, Conn., Richard R. Trexler, Richard S. Phillips, Chicago, Ill., attorneys of record, for appellee.
    Before MARKEY, Chief Judge, and RICH, ALMOND, BALDWIN and LANE, Judges.
   BALDWIN, Judge.

This appeal is from the decision of the Board of Patent Interferences awarding priority of invention to appel-lee Probst, the junior party. Probst is involved through his application serial No. 272,615, filed April 12, 1963. Wal-berg is involved through application serial No. 471,965, filed July 14, 1965, which is a division of application serial No. 254,899, filed January 30, 1963.

The Invention

The invention relates to electrostatic-hydrostatic coating apparatus described in appellant’s brief as follows:

The invention involves an electrostatic spray painting device of a type which utilizes a high voltage (generally 50,000 to 100,000 volts) to charge atomized paint as or soon after it leaves the nozzle. Paint so charged tends to seek grounded objects, usually manufactured objects, which travel past the painting device on a conveyor. A relatively high percentage of the charged paint is attracted to the objects thus painted - and, indeed, the attraction is such that much paint spray missing the objects is drawn back and thus both sides may be painted even though only one side faces the painting device. This is known as “wrap around.” Until the instant invention, the atomization of the paint in such devices was generally accomplished either electrostatically or by air atomizing jets.
-X- -X- * * * -X-
Basically the invention is a hydrostatic (also referred to as “airless”) spray gun with electrostatic charging means. The gun has an elongated body of insulating material. There is one passage through the elongated body for carrying paint to the spray gun’s nozzle at pressures up to 3,000 psi and a second passage for carrying a high voltage (up to and over 100,000 volts) in an electric circuit to a charging electrode operatively associated with paint discharged from the orifice of the gun’s nozzle. Both passages terminate near the forward end of the body. As set forth in the second count, a resistor is carried in the electrical passageway and both passages extend longitudinally through the body. The purpose of the resistor is to limit discharge from the charging electrode should it be accidentally grounded.

Two counts are in issue, count 1 reading as follows (paragraphing added):

Apparatus for hydrostatic atomization and electrostatic deposition of coating material on a surface to be coated, comprising:
an elongated body of insulating material having two passages there-through, terminating adjacent the forward end thereof;
means connecting one of said passages with a supply of liquid coating material under sufficient pressure to effect discharge of said material through an orifice for hydrostatic atomization;
means for controlling the flow of coating material through said one passage;
circuit means in the other of said passages, connectable with a source of high potential;
first means mounted on said body, closing the other of said passages;
second means mounted on said body and extending across said one passage and including a surface defining the orifice in communication with said one passage;
a conductive charging electrode op-erably associated with the discharge from said orifice;
and further circuit means connecting said electrode through the circuit means in said other passage with said high potential source for electrostati-cally charging atomized particles of coating material discharged from said orifice.

Count 2 specifies that the “two passages” in the “body” extend “longitudinally therethrough” and are offset from the axis of the body and calls for “resistor means” in the other passage.

The Board’s Decision

The board considered evidence by both parties directed to showing conception and reduction to practice prior to their filing dates. It held that appellee’s evidence showed that a spray gun built by Probst’s assignee, Ransburg, embodying the limitations of count 1, was successfully operated as early as October 18, 1961, and thus proved reduction to practice of the invention of the count by that date. It found that evidence including a drawing introduced as Exhibit P-1 established conception of the invention of count 2 as early as July 13, 1961. The board further held that appellee’s evidence was sufficient to establish a reduction to practice of a spray gun meeting both of the counts as early as April 25, 1962. '

In arriving at the above holdings with respect to conception and reduction to practice by Probst, the board rejected a “contention of conflicting and confused evidence of conception” urged by Wal-berg “as not supported by the record.” It characterized Walberg’s allegation as “akin to a contention of third party in-ventorship which is not entitled to consideration in an interference proceeding in accordance with a long line of decisions” citing Foster v. Antisdel, 14 App.D.C. 552, 1899 C.D. 413, and Huang v. Cheney, 362 F.2d 816, 53 CCPA 1355 (1966).

As to Walberg, the board held that the record established conception no earlier than January 27, 1962 and reduction' to practice no earlier than June 26, 1962. With respect to claims by Wal-berg to earlier dates it stated;

5. The evidence of Walberg relating to the earlier models of spray guns in which the high voltage cable was:
(1) connected adjacent the forward end of the barrel (Exhibit W-“A”), (2) provided with a sleeve of insulating material loosely mounted on the handle of the gun, which sleeve * * * [was], taped to the paint tube to prevent the connection at the front end from breaking (Exhibit W“H”), and (3) incorporated in a tube of insulating material detachably mounted adjacent the paint tube (Exhibit W-“P” and W — “Yl”) [,] has presented us with the issue of whether or not such models meet the counts of the interference. The resolution of such issue requires the consideration of three kinds of electrical connections in which the insulation material for a high voltage wire or cable and the insulated shielding for such insulated cable is suggested by Walberg as forming a body with the like material of the device to which the cable is connected. The insulation of the wire connected to the forward portion of the gun in Exhibit W-“A” or the polyethylene tube welded to the insulation of the cable in Exhibit W-“H” appears no different than the insulation on a usual electrical connection and, therefore, does not in our opinion constitute with the paint tube an elongated body of insulating material having two passages therethrough as required by the counts of the interferences [sic]. The insulating material of the other electrical cable wherein one end is securely attached with a metal clamp to the handle of the gun, as shown in Exhibit W-“P” and additionally provided with a slidable bracket of insulating material at its other end, as shown in Exhibit W-“Y1” is regarded as an electrical connection not unlike that shown in Exhibit W — “H”, and consequently, is not considered to form with the paint barrel a body “having two passages therethrough”, as claimed within the context of the disclosures of both parties. The guns shown in Exhibits W-“P” and W-“Yl”, consequently, fail to support the counts of interference. The decisions cited by the senior party, obviously, do not postulate any collection or connection of parts to be a body and hence we are not persuaded to hold that the insulating material surrounding the electrical cables referred to above cooperates with the insulating material of the paint tube to form the body having the two passages therethrough as required by the counts of interference ; the cooperation so urged we believe was presented as an afterthought on the part of Walberg. Wal-berg’s doubts as to the soundness of such urging is reflected in both the offer to dig up some firm data on one-piece construction (last paragraph, Exhibit W-“RR1”), and his earlier statement in the penultimate paragraph of page 5 of Exhibit W-“TT2” that “In our older design, the high voltage cable was separate from the gun.”

Opinion

1. Appellant’s Date of Invention

Appellant does not rely here on the guns referred to by the board as items (1) and (2) in the above quotation. He contends rather that the gun (or guns) referred to in item (3), which he designates the “DB-gun” (“DB” standing for “double barrel”) meets the terms of the counts and was successfully tested and reduced to practice on or before September 7, 1961.” Since the board based its rejection of the DB gun as a reduction to practice on the holding that the structure of that gun does not comply with the counts without specific consideration of the tests of the gun, the question of compliance with the counts is the determinative question before us for review. More specifically, the issue is whether the DB gun, comprising spaced plastic tubes attached at front and rear and forming separate passages, meets the requirement for “an elongated body of insulating material having two passages therethrough” in count 1 and the corresponding more limited recitations in count 2.

Both parties’ applications disclose paint guns in which two parallel longitudinal passages for the coating material and the high potential electrical circuit are formed in a forwardly extending body of plastic material. The front of the coating material passage ends in an orifice that atomizes the material as it passes therethrough and a charging electrode associated with the orifice is energized from the electrical circuit in the other passage. In the Probst structure connection of the electrical circuit to a high potential source is made through á handle attached at the rear end of the insulating body and the passage for the coating material communicates with a source of material through a fitting located just in front of the handle. In the Walberg structure, the handle is formed integrally with the body forming the barrel portion and communication of both passages to their supply sources is through the handle.

On the other hand, the DB gun was doubled barreled as noted. It gave the appearance of a paint gun provided with the usual handle, to which a tubular electrical device has been attached. The tube or barrel portion containing the cable or circuit was spaced slightly from, and parallel to, the paint gun barrel. An electrical connection between the barrels was made at the nozzle end of the paint gun barrel through what appears to be a small spacing tube. The barrels were connected at the other end by means of a narrow clamp member. A fitting for engagement with a paint supply line communicated with the barrel of the paint gun portion. A cable for connecting a potential source to the conducting means in the other barrel extended from the rear end of that barrel unsupported by the paint gun portion or its handle.

Appellant contends that the word “body” has such broad connotation that the DB gun, with its two tubular barrels attached together in spaced side-by-side relationship meets the claim limitation to “an elongated body of insulated material having two passages therethrough.” He cites a definition of “body” in the broad sense as “the main central or principal part of anything as distinguished from subordinate parts, such as the extremities, branches, wings, etc.” He also refers to broad interpretations in prior eases, e. g., Ex parte Clark, 97 USPQ 165 (Bd.Appls. 1952), as indicating that a “body” need not be a single piece. He further observes that an interference counts should ordinarily be given the broadest interpretation that it will reasonably support, citing Mahan v. Doumani, 333 F.2d 896, 51 CCPA 1516 (1954). Appellant argues alternatively that, even if the word “body” is considered ambiguous as used in the counts, it should be interpreted in such a manner that the counts read on the DB gun. In support, he refers both to the use of “body” to describe other elements in the Probst application, in which the counts originated, and to arguments made during the prosecution of that application.

We accept the broad definitions which appellant cites and agree with the general propositions of law on which he relies. But, giving the word “body” the broadest interpretation that it will reasonably support, we are not persuaded that there is any error in the board’s finding that DB gun did not include a “body” having passages as recited. That gun comprises two basically separate elements, the paint gun and the electrical-potential-providing means, attached to one another in horizontal spaced relationship. While the elements were oper-atively associated through the electrical connection at the front end, the spacing between the two was substantial and the attachment between them was by narrow means that were widely spaced at opposite ends of the barrels. The barrels thus constituted two distinct members despite the attachment. They cannot reasonably be designated as one “body” nor could the two passages therein be regarded as in the same part or “body.” Moreover, consideration of the points appellant makes with regard to the Probst application and its file history reveals no reason for reaching a different conclusion.

2. Alleged Third-Party Inventorship

Appellant charges that the preponderance of the evidence establishes that Williams, a witness who had been a design engineer for Ransburg at the time of the development, “is the actual inventor in this case or that it was, at best, a joint invention, in which Mr. Probst participated.” Appellant’s principal point is that if Williams was a joint inventor, his testimony cannot be relied on for corroboration.

The board stated:
The conception of conflicting and confused evidence of conception urged by Walberg is not considered to be supported by the record inasmuch as the invention of the count does not appear to be attributed to or claimed by anyone other than Probst. Probst obviously has been considered by Rans-burg, the assignee, as the inventor.

We think that the board was plainly correct in holding that Walberg’s charge is not supported by the record.

Probst testified unequivocally that he was the inventor of the subject matter of the count. He also testified that the gun shown in Exhibit P-1 found to have constituted a reduction to practice of count 2, was his conception. Although Williams drew Exhibit P-1, he testified that he “always looked to Probst as the project engineer” for the Ransburg gun and stated that he “was instructed to” draw the gun. The record here is completely lacking in evidentiary support for either a contention that Williams was a joint inventor or that the work of Williams does not inure to the benefit of Probst. See Willens v. Breen, 343 F.2d 477, 52 CCPA 1210 (1965); Applegate v. Scherer, 332 F.2d 571, 51 CCPA 1416 (1964).

The decision of the board is affirmed.

Affirmed.

      . Assigned to Ransburg Electro-Coating Corp.

      . Assigned to H. G. Fischer & Co.

      . Appellee points out that electrostatic-hydrostatic coating or spraying basically was known prior to the inventions of the present applications, directing attention to U. S. Patents No. 3,048,498 and 3,169,-883 and to a discussion of the development of the art in Ransburg Electro-Coating Corp. v. Nordson Corp., 293 F.Supp. 448 (N.D.Ill.1968).

      . Appellee points out that the record does not contain a contemporary drawing of the “DB” gun under consideration. We have found it unnecessary to rule on the deficiencies alleged to exist in appellant’s evidence concerning the structure of that gun.

      . Attributed to The Webster Encyclopedia Dictionary of the English Language (1963).