text:
    HOME TITLE INS. CO. v. UNITED STATES.
    No. 225.
    Circuit Court of Appeals, Second Circuit.
    June 1, 1931.

      For the opinion below, see (D. C.) 41 F.(2d) 793.
    Weill, Wolff & Satterlee, of New York City (Hugh Satterlee and I. Herman Sher, both of New York City, of counsel), for appellant.
    Howard W. Ameli, U. S. Atty., and Herbert H. Kellogg, Asst. U. S. Atty., both of Brooklyn, N. Y. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and E. H. Horton, Bureau of Internal Revenue, both of Washington, D. C., of counsel), for the United States.
    Before MANTON, L. HAND, and SWAN, Circuit Judges.
   SWAN, Circuit Judge.

This is a suit brought in the District Court pursuant to section 24 of the Judicial Code, 28 USCA § 41 (20), for the recovery of capital stock taxes. The taxes in litigation were legally collected if the plaintiff was taxable under section 1000 of the Revenue Act of 1921 (42 Stat. 294) in respect to the taxable years 1923 and 1924, and under section 700 of the Revenue Act of 1924 (43 Stat. 325 [26 USCA § 223 note]) in respect to the taxable year 1925, but were illegally collected if the plaintiff was an “insurance company subject to the tax imposed by section 246” of said Revenue Acts (42 Stat. 262; 43 Stat. 290). The court below ruled that it was not an “insurance company” within the meaning-of the section last mentioned. The correctness of that ruling is presented by this appeal.

The plaintiff was incorporated in 1906 under article 5 of the Insurance Law of the state of New York pertaining to title and credit guaranty corporations. New York Laws 1892, c. 690. It is subject to, and has complied with, the regulations of the insurance department of the state, and has regularly filed the annual reports required by law to be filed with the state superintendent of insurance. Its business consists in the insurance of title to real estate and the guaranteeing of real estate mortgages. Because of the government’s contention, which prevailed below, that the plaintiff is not “an insurance company,” it is necessary to state in some detail how its business is conducted.

Plaintiff’s practice with respect to title insurance is as follows: Upon receiving an application for title insurance, plaintiff searches the record title of the real estate in question, and, if the title is found satisfactory, issues its “Policy of Title Insurance” in a stated amount against loss due to defect in title. As consideration therefor, it receives payment of its charges for the examination of title; such charges being in accordance with a fixed scale of rates based on the amount of the policy. If the title is disapproved, no policy is issued, but plaintiff collects from the applicant its charges for the examination of title at the same rate as if the policy had been issued in the amount applied for.

Plaintiff’s practice in connection with guaranteeing mortgages involves the making of loans by it secured by mortgage on real estate. Upon receipt of an application for a mortgage loan, plaintiff not only searches the title, but makes an inspection and appraisal of the property in question. If the title and the value of the security are found satisfactory, plaintiff prepares a bond and mortgage to be executed by the applicant, and, after recordation of the mortgage, pays the applicant the face amount of the bond less its charges for title examination, appraisal, etc. Thereafter the bond and mortgage are sold by plaintiff, principally to savings banks and insurance companies which apply to it for guaranteed loans, for the face value thereof, accompanied by plaintiff’s “policy” of guaranty, the purchaser agreeing that the plaintiff shall collect the interest and principal of the bond and mortgage and shall retain as compensation all interest collected in excess of the rate guaranteed, which is usually one-half of one per cent, less than the interest rate expressed in the bond. This excess of interest collected by the plaintiff constitutes the consideration or “premium” for its “policy.” By the terms of its policy plaintiff “guarantees” to the purchaser, and to subsequent owners of the bond and mortgage, payment at the guaranteed rate of the interest when due under the terms of the bond and mortgage; payment of the principal thereof when collected, and in any'event within twelve months after the same becomes due; that the mortgage is a valid first lien upon a marketable title in fee to the premises described; to enforce prompt payment of fire insurance premiums, taxes, and water rates; and to conduct “without expense to the insured” any litigation involving the bond and mortgage or plaintiff’s guaranty. By accepting the policy the insured appoints plaintiff his agent to collect the interest and principal, and agrees to facilitate any litigation plaintiff may engage in respecting the bond and mortgage, to assign the same to plaintiff upon receiving from it payment in full after maturity, and to allow plaintiff to retain from the interest collected its aforesaid “premium.” Sometimes, instead of disposing of the bond and mortgage in its entirety, plaintiff sells partic-ipations therein and issues what it calls “guaranteed first mortgage certificates.” Such a certificate combines an assignment of an undivided part interest in a specified bond and mortgage with a guaranty similar in terms to the regular guaranty policy as to payment of interest and principal of the mortgage, which plaintiff “certifies” is a valid first lien upon the property therein described. Substantially all mortgage loans are disposed of soon after plaintiff acquires them; the average period during which it holds a mortgage before selling it not exceeding two months. The primary purpose of plaintiff in making loans on bonds and mortgages has not been for investment, but for sale guaranteed as aforesaid.

During the taxable years here in question all plaintiff’s capital, surplus, and undivided profits were employed indiscriminately in its business activities, and no segregation was made on its books of account of its expenses as between that portion of its business described as insurance of titles and that portion described as guaranteeing mortgages. Without attempting to determine exactly how much of plaintiff’s income should be allocated to insurance of titles and how much to guaranteeing of mortgages (the parties not being in agreement), it will suffice to state that a very substantial part of its income is derived from the latter phase of its business.

Under the law of the state of New York, corporations organized under the Banking Laws of the state (Consol. Laws N. Y. c. 2) and subject to supervision of the banking department are authorized to make mortgage loans and sell the same with their guaranty, and the record discloses that during the years in question two such corporations were regularly engaged in substantially the same manner as was the plaintiff in selling to the investing public mortgages and participations in mortgages guaranteed by them, except that they did not guarantee title to the mortgaged premises.

If plaintiff’s business consisted solely in the insurance of titles, the government would apparently concede that it was an insurance company subject to tax under section 246. See Sol. Mem. 5501, V-1 C. B. 102; G. C. M. 5355 VII-2 C. B. 160. But it is contended that the guaranteeing of mortgages is not insurance, and the court below so held. The argument runs that a guaranty, i. e., the promise to pay the debt of. another, cannot be insurance, because it is not a contract of indemnity. Speaking generally, it may be said that a contract of insurance is a contract of indemnity, and many authorities might be cited containing statements to this effect. See United States v. Supplee-Biddle Hardware Co., 265 U. S. 189, 195, 44 S. Ct. 546, 68 L. Ed. 970; Claflin v. U. S. Credit System Co., 165 Mass. 501, 502, 43 N. E. 293; 52 Am. St. Rep. 528; Glendale Woolen Co. v. Protection Ins. Co., 21 Conn. 19, 31, 54 Am. Dec. 309. The statement is true if it means that the insured must have some interest at risk, for otherwise the contract is a wager; but it is not true if construed to mean that the insured can never collect from the insurer more than his actual loss (Empire Development Co. v. Title Guarantee & Trust Co., 225 N. Y. 53, 58, 121 N. E. 468), or that the insured must first salvage what he can and then look to the insurer only for the difference. As is well known, it is the common practice of fire and marine insurers to pay in full and take over the physical remnants of the insured property in the event of injury sufficient to constitute a “total loss.” They do not indemnify the insured in the sense required by the defendant’s argument; rather they pay upon the happening of the condition specified in the policy, and themselves work out the salvage. Similarly, a policy of credit insurance would surely be no less insurance because the contract provided that upon the debtor’s default the insurer would pay in full and take over the claim for collection. See Dane v. Mortgage Ins. Co., [1894] 1 Q. B. 54; Shaw v. Royce, [1911] 1 Ch. 138. This is in substance what the plaintiff agrees to do in its policies of mortgage guaranty. If'the mortgagor pays, the plaintiff will remit as soon as collected, reserving its “premium” from the interest, but in any event it will pay on the date specified in its “policy.” It bears the risk of non-collection from the mortgagor.

It may be important at times to distinguish between contracts of “guaranty,” “suretyship,” or “indemnity,” where the rights of the parties to the contract are involved. But where, as here, the question is whether a company engaged in the business of issuing such contracts in large numbers is doing a business of insurance, the answer is not to be found in technical differences of surety and guarantor. There is no hard and fast line between contracts of insurance and contracts of guaranty. Frost, Law of Guaranty Insurance (2d Ed.) 16; Hunt v. New Hampshire Fire Underwriters’ Ass’n, 68 N. H. 305, 308, 38 A. 145, 38 L. R. A. 514, 73 Am. St. Rep. 602. Insurance differs from guaranty only as ,the business of insurance .differs from a single contract of guaranty, suretyship, or indemnity. The business of insurance consists- in accepting a number of risks, some of which will involve losses, and of spreading such losses over all the risks so as to enable the insurer to' accept each risk at a slight fraction of the possible liability upon .it. As this court said in Tebbets v. Mercantile Credit Guarantee Co., 73 F. 95, at page 97, in respect to credit insurance: “Corporations entering into contracts like the one at bar may call themselves ‘guarantee’ or ‘surety’companies, but their business is in all essential particulars that of insurers, who, upon careful calculation of the risks of such business, and with such restrictions of their liability as may seem to them sufficient to; make it safe, undertake to assure persons against loss,-in return for premiums sufficiently high to make such business commercially profitable. Their contracts are, in fact, policies of insurance, and should be treated as’ such.”

Guaranteeing the payment of mortgages bears a close analogy to credit insurance, and to fidelity insurance as practiced by corporate sureties for profit. See Town of Whitestown v. Title Guaranty & Surety Co., 72 Misc. Rep, 498, 131 N. Y. S. 390, affirmed 209 N. Y. 512, 102 N. E. 1115; State v. Chicago Bonding & Surety Co., 279 Mo. 535; 215 S. W. 20; Young v. Am. Bonding Co., 228 Pa. 373, 77 A. 623; Philadelphia Casualty Co. v. Fechheimer, 220 F. 401, 417, Ann. Cas. 1917D, 64 (C. C. A. 6). If the sole service rendered by a corporation consisted in guaranteeing the payment of mortgages upon application by the mortgagees, it would seem to us perfectly- clear that the business was truly .“insurance.” , See People v. Potts, 264 Ill. 522, 528, 106 N. E. 524.

What raises doubt in the case at’ bar is.the fact, that, although true insurance-.is involved,, ¿he service rendered by plaintiff is not the guaranteeing of mortgages already owned by the applicants for such guaranty, but may be argued to be the procuring for the investing public of sound investments, which incidentally include plaintiff’s guaranty. Which is the dominant and which the incidental feature of the business? In the ease of one who trades in mortgages, the profit in the transaction is expected to come from the spread in purchase and sale prices. This is not true of plaintiff’s business. Its primary purpose in acquiring and disposing of mortgages is not to invest its funds or to sell the mortgages at a profit, but is to dispose of them at their face value accompanied by its guaranty; and it is from the “premium” for such guaranty, together with the fees previously collected from the mortgagor upon the making of the bond and mortgage, that plaintiff’s profit is derived. Such fees cover charges for searching the title, and for inspecting and appraising the property, etc. The fees for title examination may be considered as the premium for the guaranty of title contained in the policy that is subsequently to.be issued upon plaintiff’s disposal of the bond and mortgage. This is none the less title\insurance- because the word “guarantee” rather than “insure” is used. See Title Ins. & Trust Co. v. City of Los Angeles, 61 Cal. App. 232, 214 P. 667. Nor does it matter that the insurance is paid for by one who is not the insured. The fees for inspections, appraisals, etc., may be considered as an incident to the insurance of the mortgage, for it is not an unreasonable incident to the business of guaranteeing mortgages that the insurer should investigate and appraise the property it is to insure. Despite the mounting size of such fees, we think they remain an incident to the guaranty of the mortgage, unless that guaranty itself is to be deemed but incidental to a business of investing in and selling mortgages. In determining which way the business should be viewed, the case of United States v. Cambridge Loan & Bldg. Co., 278 U. S. 55, 49 S. Ct. 39, 73 L. Ed. 180, becomes apposite. There a corporation which by the state law was a building and loan association had power to receive deposits from and make loans to persons who were not members, and the federal tax officials contended that- the exer;cise of such powers made it in substance a banking institution rather- than a “building and loan association”. within the exemption from income tax granted by-section 231 of the Revenue Acts of 1918 and 1921 (40 Stat. 1076, 42 Stat. 253). But the argument,.ya$ rejected on the ground that in exempting such associations Congress was speaking of existing societies that commonly were known as such, so that the term included what the states were content to recognize as building and loan associations, unless there was a gross misuse of the name. In the case at bar the state has classified the business done by plaintiff as insurance, though not with absolute consistency, since banking corporations may also sell mortgages with their guaranty. Nevertheless, it has accepted plaintiff as an insurance company and subjects it to supervision by the department of insurance. The departure from insurance is surely no greater than was the departure from the normal business of loan associations in the Cambridge Case. This recognition by the state of the nature of plaintiff’s business should turn the scales, if the question hangs in doubt. In our opinion the plaintiff should be deemed an “insurance company” subject to tax under section 246.

There is advanced a further argument against this conclusion based upon the contention that what Congress regarded as an insurance company is indicated by its definition of “gross income” set forth in section 246 and by the deductions therefrom permitted by section 247. It is argued that gross income is to be “computed on the basis of the underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners,” and that, since no form for an “annual statement” for title and mortgage guaranty companies was approved by the National Convention until long after the taxable years in question, Congress cannot have intended to include such corporations within the section. This argument, however, proves too much; for it would exclude companies engaged solely in insuring titles, although such companies are coneededly taxable under section 246. See Sol. Mem. 5501 V-1 C. B. 102; G. C. M. 5355 VII-2 C. B. 160. Although section 246 (b) (1) refers to the form of annual statement approved by the National Convention of Insurance Commissioners, other subdivisions of the sebtion proceed to specify how gross and net income are to be computed, so that the absence of such an approved form of annual statement would seem unimportant. See Massachusetts Protective Ass’n v. Commissioner, 18 B. T. A. 810; Western Casualty Co. v. Commissioner, 20 B. T. A. 738. Moreover, the National Convention has approved forms for “miscellaneous insurance companies,” and it is by no means clear that title and mortgage guaranty companies could not fall,within this classification. It is said further that not all of plaintiff’s income can be classified as “investment income” or “underwriting income” as defined in said section 246, so that our conclusion will result in a large part of its income escaping taxation. This argument rests chiefly upon the premise that the income derived from guaranteeing mortgages cannot be deemed “underwriting income” and in the view we take this premise is false. Even if the incidental fees collected for inspections, appraisals, etc., would escape taxation (as to which we express no opinion), it does not follow that plaintiff is not an insurance company within the meaning of section 246. It was not until 1928 that Congress added to the computation of income of insurance companies, other than life or mutual, gain derived from the sale of property (45 Stat. 844, § 204 (b) 1, 26 USCA § 2204), yet it could scarcely be maintained that prior to 1928 such companies, if they had any income of this type, were to be excluded from taxation as insurance companies. Cf. John Hancock Mut. Life Ins. Co. v. Commissioner, 10 B. T. A. 736; Independent Life Ins. Co. v. Commissioner, 17 B. T. A. 757; Massachusetts Protective Ass’n v. Commissioner, 18 B. T. A. 810.

The question presented by this appeal appears to have been presented to the courts in but three other eases. In Lawyers’ Mortgage Co. v. Bowers, 34 F.(2d) 504, which we have this day affirmed, 50 F.(2d) 104, the District Court decided in favor of the taxpayer. In Louisville Title Co. v. Lucas, 27 F.(2d) 413 (D. C. W. D. Ky.), and Title Guarantee & Trust Co. v. United States (D. C. S. D. Cal.) 49 F.(2d) 641, decided April 29, 1931, the government prevailed. The latter of these two cases may be distinguished upon its facts, but the former must probably be admitted to be inconsistent with the conclusion we have reached. It should be noted, however, that it was decided prior to the Supreme Court’s opinion in United States v. Cambridge Loan & Bldg. Co., supra.

Judgment reversed.


source: Caselaw Access Project

author: CHASE, Circuit Judge. L. HAND, Circuit Judge

license: Public Domain

text:
    KENAN et al. v. BOWERS.
    No. 381.
    Circuit Court of Appeals, Second Circuit.
    June 1, 1931.
    L. HAND, Circuit Judge, dissenting in part.
    Root, Clark & Buckner, of New York City (George E. Cleary, of New York City, of counsel), for appellants.
    George Z. Medalie, U. S. Atty., of New York City (Walter H. Schulman, Asst. U. S. Atty., of New York City, of counsel), for appellee.
    Before MANTON, L. HAND, and CHASE, Circuit Judges.
   CHASE, Circuit Judge.

The plaintiffs, as executors and trustees of the estate of Mary L. (Flagler) Bingham, deceased, brought this suit to recover income taxes paid on income for 1917 which they now claim was deductible from the gross income of the taxpayer.

Mrs. Bingham’s former husband, Henry M. Flagler, died in 1913. Under his will, which was duly proved and allowed in Florida, a trust was created for five years, and for five additional years, if in the opinion of the trustees the trust should be continued for the second five-year period. His widow was the principal cestui que trust. Her interest as such so far transcended that of all other beneficiaries that they may be disregarded for the purposes of this ease and the subject-matter dealt with as though Mrs. Bingham had been the sole beneficiary.

Mr. Flagler’s will provided for three trustees, and fixed their annual compensation at $5,000 each. The trustees accepted the trust, qualified under their appointment, and acted as such from May 24,1913, until one of them died October 13, 1913. The appointment of a successor was, of course, of concern to Mrs. Bingham. The corpus of the trust had a valuation in excess of $26,000,000 and consisted in part of a chain of hotels and a railroad to be operated. She recognized that the yearly compensation of $5,000 to each of the trustees was insufficient in view of the labor and responsibility involved and might make it difficult to secure a competent man to act as the new trustee, although the two remaining original trustees were willing to continue to act. Accordingly, she agreed to pay the trustees from her own funds, in addition to the $5,000 allowed to each trustee annually in accordance with the terms of Mr. Flagler’s will, the sum of $400,000 at the expiration of five years from May 24,1913, to be in full compensation for their services whether the trust was continued for the second five-year period or not. A new trustee was then appointed to fill the vacancy. He qualified and acted with the other two.

On July 11, 1917, Mrs. Bingham desired to, and did, pay to the trustees the sum of $308,860.69 which was the part of the $400,-000 she had agreed to pay May 24, 1913, that had been earned to the time of payment. The payment so made was not deducted from her gross income for 1917, and the taxes paid as a result of the failure to deduct it are those involved in this suit. Mrs. Bingham died July 27, 1917, and the return filed in her behalf was on a cash basis, and covered the period from January 1, 1917, to the date of her death.

The appellants base their claim, of right to deduct the $308,860.69 on section 5 (a) (1) of the Revenue Act of 1916 (39 Stat. 759), which provided for the deduction in computing the net income of a citizen or resident of the United States of “the necessary expenses actually paid in carrying on any business or trade, not including personal, living or family expenses.”

It is undisputed that the taxes this suit was brought to recover were paid o.n income. If the deduction claimed is not allowable, the suit must fail. Income is taxable and taxed, and it is only by way of legislative favor that any taxpayer bas the benefit of any deductions. Consequently we need not first find these taxes laid in the law, but rather need look only to determine whether they come within what amounts to an exception to the law which lays them. This depends wholly upon whether the payment by Mrs. Bingham falls fairly within the meaning of “necessary expenses actually paid in carrying' on any business or trade” as distinguished from purely personal expenses for which no deduction may be taken.

No one denies that business was carried on by the trust. No one can maintain that the carrying on of that business was not one of the reasons for the appointment of trustees. But no one can accord to Mrs. Bing-ham any right to interfere in the conduct of that business so long as the trustees performed their duty.' They were officers of the court who appointed them, responsible to the court and removal for cause shown. In the absence of any indication whatever that the court would not have appointed a competent trustee to fill the vacancy, had Mrs. Bingham not promised additional compensation, and in the face of the known fact that the two remaining trustees would have continued to serve anyway, it would be going far to assume that the payment of the sum for which deduction is claimed was more than to satisfy her sense of the fitness of things.

The business carried on by the trust was separate and distinct from other business. The legal title to the property was in the trustees, who were accountable for its preservation and management. The duty to conduct the business of the trust was theirs. While it may be true that the amount of compensation may well have been a factor in determining whether or not to accept the trust, it is hardly fair to believe that, having once accepted, the manner of performance of the duty was dependent upon the compensation received. Until the contrary is indicated, it is rather to be believed that the trustees would have performed their duty to the best of their ability as long as they remained trustees. Quite aside from that, however, Mrs. Bingham, as cestui que trust, had no right to conduct the business of the trust. Her only right in respect to it was to have competent trustees do their duty according to law. It is axiomatic that a court will not let a trust fail for want of trustees, and there is nothing whatever to show that this trust was ever in any such danger.

If, then, Mrs. Bingham was carrying on a business or trade, in taking upon herself .the obligation to pay additional compensation to the trustees either to make it easier for the court to fill the vacancy or to assure herself that the trustees would do their duty, the claimed deduction should be allowed; otherwise not. But to hold that Mrs. Bing-ham made this payment as a necessary expense in carrying on the business of the trust would require us to ignore the status of the trustees appointed by the court, charged with the duty and clothed with the power to carry on that business themselves, and treat Mrs. Bingham as having the same power to control the property she would have had if the legal title to it had been given to her and the trustees were merely her servants and agents for business purposes. It has been suggested that this ease is governed by Merle-Smith v. Commissioner (C. C. A.) 42 F.(2d) 837. That case, however, had to do with deductions for depletion of mining properties and with income derived from working such property rather than with expenses.

The proper concern of Mrs. Bingham was to have the trustees administer the trust in such a way that she would receive her just share, and this would follow if they performed their duties to >the best of their judgment and ability. Whatever expense she saw fit to incur to satisfy herself that they would do so.was a personal expense for which no deduction is allowed. In this respect, this case is like that of Commissioner of Internal Revenue v. Field (C. C. A.) 42 F.(2d) 820, 823. There the expense of litigation to construe the will under which the trust was created was claimed deductible as a business expense. It was held to be “within those general costs of protecting one’s property for which the statute makes no allowance.” The quoted words apply as aptly to this case. The additional compensation paid by Mis. Bingham falls within the same category, and, as Congress did not see fit to make such expenses deductible from gross income, the taxes paid cannot be recovered.

Judgment affirmed.

L. HAND, Circuit Judge

(dissenting in part).

I agree as to Kenan and Beardsley, because it appears that they would have served without added pay. However, there is enough in the record to show that Blount would not have accepted the post at a salary of $5,000. The trust needed three trustees, and the added payment to him was therefore “necessary” to the conduct of the business. Was it Mrs. Bingham’s business? On the whole it seems to me that it was. I cannot believe that the statute will not credit a beneficiary with sums paid to make up for the penurious standards of the testator, after it turns out that these make impossible the proper conduct of the business. I think the plaintiff should recover one-third of the amount paid.


author: MANTON, Circuit Judge.

text:
    BONSALEM v. BYRON S. S. CO., Limited.
    No. 388.
    Circuit Court of Appeals, Second Circuit.
    June 1, 1931.
    Kirlin, Campbell, Hickox, Keating & McGrann, of New York City (Vernon S. Jones, Walter X. Connor, and Robert P. Nash, all of New York City, of counsel), for appellant.
    Jesse L. Rosenberg, of New York City, for appellee.
    Before MANTON, SWAN, and CHASE, Circuit Judges.
   MANTON, Circuit Judge.

The appellee, a Erench Algerian, signed shipping articles in the British Consular office and labored as a fireman on the steamship Lord Guilford, of British registry. The ship sailed for Greeee and, on January 10, 1924, arrived at Palermo, Italy. On that day, appellee, informed by other members of the crew that they had received wages, went to the chief steward and asked permission to see the mate to obtain his earned wages. Whereupon, without cause, the steward struck him with a broom and otherwise brutally beat him, and, he says, that he was also assaulted by the captain, chief mate, and other officers, and that he was handcuffed, and, but for the interference of a shore watchman, he would have been further assaulted. He was treated in the hospital. Later he returned to the ship. He made complaint in the presence of the captain and chief mate at the consul’s office, but the consul referred the complaint to the general consul at Pirsens. The latter advised him to make cpmplaint to the general consul at Constantinople, and appellee says the mate refused to allow him to do so. He was later transferred to the steamship Byron, owned by the same company, and returned to New York in February or March, 1924. When paid off at the consul’s office in New York, he says he made claim for damages for the injury to his nose. He was advised to make his claim in England. He did not do so, but wrote a letter to the Board of Trade, receiving no reply. He started an action March 30,1926, against the National Steam Navigation Company of Greece, mistaking it for the owner or agent of the ship upon which he was assaulted. Because of the delay in instituting this libel, a plea of laches is made. We need not consider that plea, for the ap-pellee has not established that he is entitled to damages in this suit.

The Lord Guilford was a British ship, and the assault, if committed, was in Italian waters. The libel does not plead the British or Italian law. The applicable law should be the lex loci delicti, which must be either the law of the flag (British) or the law of the territorial waters (Italian). In Cain v. Alpha S. S. Corp., 35 F.(2d) 717, we applied the law of the flag, but that was also the law of the forum. In some cases, the law of the territorial waters has been applied, not the law of the flag. But in such cases the law of the territorial waters was likewise the law of the forum. Heredia v. Davis, 12 F.(2d) 500 (C. C. A. 4); The Hanna Nielsen, 25 F.(2d) 984 (D. C. W. D. Wash.). Where the territorial waters as well as the flag are foreign, the rule is to apply the law of the flag. The Hanna Nielsen, 273 F. 171 (C. C. A. 2); The Lamington (D. C.) 87 F. 752. In Cuba R. R. Co. v. Crosby, 222 U. S. 473, 32 S. Ct. 132, 56 L. Ed. 274, 38 L. R. A. (N. S.) 40, the action was for personal injuries which occurred in Cuba. Cuban law was not established, and the plaintiff had judgment on the theory that, if the Cuban law differed from the lex fori, it was for the defendant to establish it. The Supreme Court reversed, holding that it was incumbent upon the plaintiff to establish the Cuban law, and, since Cuba was a civil law jurisdiction, there was no basis upon which to assume its law the same as our common law.

A recovery will not be allowed under unproved foreign law if it cannot be had under the lex fori, and we think that, under the American law, recovery may not be had here. Indeed, the basis for such recovery would not be rudimentary enough to permit a presumption that the foreign law was the same

as our own. At most, a recovery may not be had under our law unless an assault was committed in the master’s presence, and he failed to protect the seaman, or the assault was a disciplinary measure. A recovery might be allowed on the theory of incompetence of officers which constituted unseaworthiness, and su’eh brutality of treatment of a seaman would constitute incompetence, for the owner is unqualifiedly bound to provide a seaworthy vessel. The Rolph, 299 F. 52 (C. C. A. 9). In either case, the basis of recovery would not seem to be sufficiently fundamental to permit the assumption here that the foreign law is the same as the lex fori. As held in the case of Cuba R. R. Co. v. Crosby, supra, where the right of recovery for tort committed in a foreign jurisdiction arises only by virtue of the law of that jurisdiction, such law is part of the plaintiff’s case, and must be pleaded and proved as a fact, but the recognized exception to the rule is that it will be presumed that liability exists where the wrong is one of those “rudimentary acts or torts made or committed abroad, such as promises to pay money for goods or services, or battery of the person or conversion of goods.” 222 U. S. 478, 32 S. Ct. 132, 56 L. Ed. 274, 38 L. R. A. (N. S.) 40. See G. Gerli & Co., Inc., v. Cunard S. S. Co. (The Berengaria), decided March 3, 1931, 48 F.(2d) 115 (C. C. A. 2). The American admiralty courts will not presume that the foreign general law of civil law jurisdictions is the same as that of the United States, although it will be presumed that the law of common law countries is the same. In the Hanna Nielsen, 273 F. 171, this court held it was incumbent upon the libelant to show the English law on which he relied for recovery of care and maintenance, since such relief arises out of contract. In The Scotland, 105 U. S. 24, 29, 26 L. Ed. 1001, the court said: “Hence, if a collision should occur in British waters, at least between British ships, and the injured party should seek relief in our courts, we would administer justice according to the British law, so far as the rights and liabilities of the parties were concerned, provided it were shown what that law was. If not shown, we would apply our own law to the case.”

Therefore, in the absence of allegation or proof to the contrary, the appellee cannot succeed with this libel. The ship or shipowner is not liable for injuries received by a seaman from an assault committed outside the scope of the employment of those on the vessel who are alleged to have assaulted him. This appellee was assaulted without provocation, and the assault was not committed by any officer of the vessel in furtherance of the appellant’s business. The appellant did not authorize the officers of the ship to beat and assault him without cause or for a reason unconnected with the navigation of the ship. In Davis v. Green, 260 U. S. 349, 43 S. Ct. 123, 67 L. Ed. 299, an employer was held not liable to the estate of an employee who was killed by a brutal assault committed on him by a fellow servant not in the course of their common employment. As here, the assault was committed for some undisclosed reason.

The Jones Act (41 Stat. 988) has no application. If it had any bearing, the action was not brought within two years from the day the cause of action accrued. This is a condition precedent to obtaining the benefits of the act. Reading Co. v. Koons, 271 U. S. 58, 46 S. Ct. 405, 70 L. Ed. 835; American R. R. Co. v. Coronas, 230 F. 545, L. R. A. 1916E, 1095 (C. C. A. 1).

Decree reversed.


author: MANTON, Circuit Judge. SWAN, Circuit Judge

text:
    DANG FOO v. DAY, Commissioner of Immigration.
    No. 385.
    Circuit Court of Appeals, Second Circuit.
    Argued May 5, 1931.
    Decided June 1, 1931.
    SWAN, Circuit Judge, dissenting.
    James C. Thomas, of New York City (A. Warner Parker, of Washington, D. C., of counsel), for appellant.

      George Z. Medalie, U. S. Atty., of New York City (Harry G. Herman, Asst. U. S. Atty., of New York City, of counsel), for appellee.
    Before MANTON, SWAN, and CHASE, Circuit Judges.
   MANTON, Circuit Judge.

The appellant, a citizen of China, arrived at the port of Seattle with a certificate of his government describing him as a traveler coming to the United States for an indefinite stay, issued under article 2 of the Treaty with China of 1880 (22 Stat. 826, 827), and in pursuance of section 6 of the Chinese Exclusion Act of May 6,1882, as amended by the Act of July 5, 1884 (22 Stat. 58, 23 Stat. 115 [8 USCA § 265]). These are acts to execute treaty stipulations relative to Chinese. The certificate was viséed by the consular office of the United States as required by section 6 of the Chinese Exclusion Act. It bore, indorsed upon its back, a visé issued by the American consul pursuant to the second ■clause of section 3 of the Immigration Act of May 26, 1924 (43 Stat. 154 [8 USCA § 203]), in which the holder was described as a nonimmigrant and classed as a temporary visitor. His exclusion by the Immigration Board at Seattle was affirmed by the District Court [Ex parte Dang Foo, 6 F.(2d) 171], but reversed by the Circuit Court of Appeals for the Ninth Circuit [Dang Foo v. Weedin, 8 F.(2d) 221]. The order entered on the mandate, November 25,1925, reads:

“Dang Foo, is entitled to be admitted to the United States from China as a Chinese exempt, with all of the rights given to him by the Section Six Certificate which was issued to him by the Chinese government under the Chinese Exclusion Laws and the Treaty of Trade and Commerce between China and the United States, which said certificate is on file herein; and he is hereby ordered discharged from the further custody and control of the United States Commissioner of Immigration at Seattle, Washington and the Department of Labor, and likewise discharged from the further custody and control of this Court; and it is hereby further ordered that the said Section Six Certificate, when withdrawn from the files herein, shall be returned to said petitioner.”
Appellant was thereupon admitted to the United States, and the immigration inspector at Seattle wrote on the face of the section six certificate, “Admitted at Seattle, Wash. Nov. ■ 16, 1925 as a See. 6 traveler.”

He alleged that he came to the United States to investigate commercial conditions in this country before determining whether he would engage in business here and remain indefinitely, and claims that he was entitled to earry out the purposes for which he came. After investigation, he embarked in business as a merchant in the city of New York, in July, 1926, and became active in such business. His business consisted of importing merchandise from China. In August, 1928, intending to go to China on business, he submitted an application for a re-entry permit as a lawfully domiciled Chinese merchant. It was denied. Relying on the advice of others, he submitted to the Department, in March, 1929, an application for “extension of temporary admission.” This was granted by the immigration officials, but, as a condition, he was required to give a bond of $1,000, conditioned for his departure from the United States on or before October 1, 1929. The bond was furnished and a Liberty bond deposited as collateral with the Commissioner of Immigration at Ellis Island, N. Y. On December 16, 1929, the Department gave appellant instructions that he should furnish proof of his. departure before January 1, 1930, or suffer a forfeiture of the bond. Thereupon this suit was brought seeking to obtain a return of the bond and forbidding its forfeiture, upon the elaim that the appellant was lawfully here as a treaty merchant.

Article 2 of the Treaty of 18801 with China provides that “Chinese subjects, whether proceeding to the United States as teachers, students, merchants or from curiosity, together with their body and household servants, and Chinese laborers who are now in the United States shall be allowed to go and come of their own free will and accord, and shall be accorded all the rights, privileges, immunities, and exemptions which are accorded to the citizens and subjects of the most favored nation.”

Under section 6 of the Aets of 1882 and 1884 (8 USCA § 265), a certificate is provided for merchants or travelers, to be properly viséed or approved by an American consul, and is sufficient evidence on which, no matter of which class the Chinese may be a member, to admit him into the United States at the port of arrival. By the same section, the certificate is made the evidence thereof to be produced “to the proper authorities of the United States whenever lawfully demanded,” and this production is for the purpose of-proving that the holder has been lawfully admitted and is entitled to remain in the United States.

Prior to the Immigration Aet of 1924 (43 Stat. 153), a, treaty exempt Chinese might, after entry, become a laborer without being subject to deportation. It should not alter his position that he changes to another exempt classification. Lui Hip Chin v. Plummer, 238 F. 763 (C. C. A. 9); Louie Dai v. United States, 238 F. 68 (C. C. A. 3); Lo Hop v. United States, 257 F. 489 (C. C. A. 6); In re Yew Bing Hi, 128 F. 319 (D. C. Dist. Mass.). The Supreme Court held that the 1880 treaty provisions, as to the merchant class and their families, is still in force, and the reason given is the reluctance to interpret an act of Congress as abrogating a treaty; also that section 3 (6) of the Act of 1924 (8 USCA § 203 (6) specifically provides for their admission as treaty merchants. Cheung Sum Shee v. Nagle, 268 U. S. 336, 45 S. Ct. 539, 69 L. Ed. 985.

Article 2 of the Treaty includes, as well as merchants, those proceeding to the United States “from curiosity.” Section 3 (6) of the 1924 Immigration Act includes only the treaty merchants. It would appear that the exclusion 6f others was intentional. House Report on Restriction of Immigration, Sixty-Eighth Congress, First Session, No. 350. Section 3 (2) of the Immigration Act of 1924 (8 USCA § 203 (2) applies to travelers and-admits them temporarily for pleasure or business. And in Ex parte Wong Gar Wah, 18 F.(2d) 250 (C. C. A. 9), it was held that, where a Chinese with a section six certificate was admitted temporarily under section 3 (2) of the Aet .of 1924, he might be deported though he later,became a merchant. The certificate gives him only temporary rights, and, under section 6, he must give a certificate as a merchant if he claims to be such. The same court held in Weedin v. Wong Tat Hing, 6 F.(2d) 201, and Dang Foo v. Weedin, 8 F. (2d) 221, that the effect of a section six certificate remains unimpaired by the 1924 aet, as proof prima facie of the facts therein stated.

. The ‘ order of discharge of 'appellant at Seattle- above referred to places him in the non-immigrant class, and he was admitted for an indefiíiite time. The certificate - referred to him as a traveler, and it was indorsed by the vice consul as a temporary visitor, a non-immigrant under section 3 (2) of the act of 1924. In the decision by the Circuit Court of Appeals for the Ninth Circuit in Dang Foo v. Weedin, supra, the court reversed on the ground that he had not had a fair hearing. The court held that his certificate under section 6 provided for his entry into the United States for an indefinite stay, whieh might mean days or years according as his plans required. In entering the order on the mandate, no limitation or condition was placed on the admission. He was granted an unconditional admission by that order. There was no requirement of a bond. The department has taken the position that the Immigration Act of 1924 applies to Dang Poo and abrogated the treaty provisions whieh would otherwise apply. The Court of Appeals said that, if the reference to “other features” found in the Department decision “was to the Immigration Aet of 1924, we need only say that nothing contained in that act impaired the effect of the certificate in question or abrogated or destroyed existing treaty rights.” 8 F.(2d) 221, 222.

. In Cheung Sum Shee v. Nagle, 268 U. S. ' 336,45 S. Ct. 539, 69 L. Ed. 985, the Supreme Court, quoting from the treaty, held that, under article 2 of the Chinese Treaty, those proceeding to the United States as teachers, students, merchants, or from curiosity are allowed to go and come of their own free will and accord, and are accorded the rights, privileges, immunities, and exemptions of citizens and subjects of the most favored nation. In that ease, the court was dealing with the wife and minor children of a Chinese merchant. But a person “proceeding * * * from curiosity,” which would include a traveler, is embraced within the same disposition. In Weedin v. Wong Tat Hing, 6 F.(2d) 201 (C. C. A. 9), the court said that the certificate prescribed by section 6 of the Act of 1884 was the sole evidence permissible for a Chinese ' merchant to establish his right of entry. And in Jeu Jo Wan v. Nagle, 9 F.(2d) 309, 310 (C. C. A. 9), the court excluded a teacher because he presented no evidence of being a teacher as the term is defined in detail in see- ' tion 4 of the- Immigration Act of 1924 (8 USCA § 204). But the court said: “This construction’ of the Immigration Act is not in conflict with the decisions in Cheung Sum Shee v. Nagle, 268 U. S. 336, 45 S. Ct. 539, 69 L. Ed. 985, Weedin v. Wong Tat Hing (C. C. A.) 6 F.(2d) 201, and Dang Poo v. Wee-din, 8 F.(2d) 221, decided by this court on October 19, 1925, as claimed. It was held in these cases that, the Immigration Act of 1924 does not exclude merchants and their families, or travelers,-and this for the reason that no provision of that act is in direct conflict with the treaty rights of the classes just mentioned.”

Section 6 provides that, “if the certificate be sought for the purpose of travel for curiosity, it shall also state whether the applicant intends to pass through or travel within the United States, together with his financial standing in the country from whieh such certificate is desired.” This would seem to contemplate that certificates of limited effect would be granted and information must be given as to the material factor, to wit, financial standing of the traveler. But it is clear that the release granted to the appellant by the order of the District Court, entered upon the mandate of the Circuit Court of Appeals, did not admit him as a temporary visitor only. No period of his allowed stay was fixed at the time of his admission by either court or the immigration officials.

Appellant having-entered as a non-immigrant traveler for an indefinite stay and having changed his occupation to that of a merchant, the Department of Labor was without authority to exact a bond conditioned on his departure from the United States at the time specified. The effect of the order of the court was to provide that Dang Foo should be absolutely released from further custody and control of the immigration officials or of the Department of Labor.

There was nothing to forbid his changing his status to that of a merchant. Non-immigrants, by the plain language of the statute, are entirely outside the general purposes of the law establishing quotas for immigrants, and there was nothing to forbid a member of any one of the six non-immigrant classes to become a member of any other one of such six classes. He came as a traveler or visitor, whieh kept" him out of the general purposes and scope of the quota law, and, after being admitted as a traveler, he became a merchant, and in doing this remained as a non-immigrant, and was still without the scope of the quota law. Under these circumstances, a bond should not have been required as long as he remained here and was not otherwise deported. This construction will keep the provisions of the 1924 aet in harmony with the treaty.

Section 15 of the Immigration Aet (8 USCA § 215), permitting a bond to be exacted in cases of temporary visitors to insure their return at the expiration of the temporary period of admission or upon failure to maintain the status under whieh admitted, has no application to this appellant. The bond, now statutorily provided, has for its purpose insuring that a person, admitted as a non-immigrant (classes of which are described in section 3 of the 1924 act), shall maintain his status here as a non-immigrant, and obviously, so long as he does maintain that status and does not, by the adoption of an inhibited occupation or otherwise, become an immigrant, there can be no reason for requiring him, to leave the country, for he is here under those circumstances not in excess of any quota allotted to any country by the statute or otherwise in derogation of any substantial purpose of the Legislature. This is not in conflict with the Chinese treaty. A Chinese or other alien who might enter as a temporary visitor and who has no intention of becoming, while here, a member of any one of the six classes of non-immigrants entitled to remain longer, can be required to give a bond for his departure after completing a reasonable visit, if any reasonable doubt existed as to the bona fides of his express inten-tiofi; while the alien who .came as a temporary visitor and who expressed the intention to shift or later shifted into one of the other exempt classes, as, by becoming a merchant, would be allowed to remain as long as he maintained his exempt status as a non-immigrant treaty merchant. Thus the treaty would be effective and the 1924 Immigration Law applied to its fullest extent, accomplishing its purposes. The courts held, in the Cheung Sum Shee Case and the Wong Tat Hing Case, supra, that, with respeet to the mercantile class, the provisions of the act and the treaty are harmonious regarding the exempt classes of Chinese.

The bond was unlawfully exacted and the appellant has been notified that it will be forfeited and covered into the Treasury of the United States. Under these circumstances, it is proper for a court of equity to intervene and enjoin the appropriation for the benefit of the United States of the proceeds of the Liberty bond herein involved and that the Commissioner be enjoined from such action.

Order reversed.

SWAN, Circuit Judge

(dissenting).

The appellant, Dang Foo, applied for admission on a certificate whieh described him' as a “traveler” coming for an “indefinite stay.” He was admitted pursuant to court order. Dang Foo v. Weedin, 8 F.(2d) 221 (C. C. A. 9). But in my opinion this gave him no greater or different rights than he would have had if the immigration officials had never questioned his eligibility to enter. In' July, 1926, he ceased to be a “traveler” and engaged in business in the city of New York. He contends that he thereby became a “merchant” within the meaning of that term as used in the treaty with China. I think not, for the treaty, as construed by the section 6 of the Chinese Exclusion Act of 1882, as amended by the Act of July 5, 1884 (8 USCA § 265), contemplates that the Chinese who enters as a merchant should be a merchant in China before he comes here, as is indicated by the disclosure required to- be made in a section 6 certificate. , But, in any event, Dang Foo entered as a traveler, not as a treaty merchant.

The Immigration Act of 1924 is broad enough in terms, and has been assumed by Department rules, to apply to Chinese. See Buies of October 1, 1926, governing the admission of Chinese, Buies 2 and 18. I think it does so app-ly, although it must be construed, if possible, so as not to- conflict with treaty obligations. Cheung Sum Shee v. Nagle, 268 U. S. 336, 345, 45 S. Ct. 539, 69 L. Ed. 985; Jeu Jo Wan v. Nagle, 9 F.(2d) 309 (C. C. A. 9). Clauses (2) and (6) of section 3 of the Immigration Act of 1924, 8 USCA § 203 (2) and (6), classify as non-immigrants temporary visitors and traders entitled to enter under a treaty, and other provisions of the act permit the entry of such non-immigrants.. Section 3 (6) does not apply to Dang Foo- for reason already stated. Section 3 (2) does apply to him, for a traveler is necessarily a temporary visitor, unless we are to say that the Immigration Act of 1924 does not apply to Chinese at all — a contention which is clearly impossible when, as here in respect to section 3 (2), there is no conflict between the statute and the treaty. See Chang Chan v. Nagle, 268 U. S. 346, 45 S. Ct. 540, 69 L. Ed. 988. Section 15 of the Immigration Act (8 USCA § 215) imposes limitations upon the length of stay allowed to temporary visitors as defined in section 3 (2). If this be applied to Chinese travelers, it will reduce the “indefinite stay” formerly permitted them under the treaty; but I see no escape from giving it that effect, nor, indeed, any reason for supposing that Congress intended to treat Chinese travelers more favorably than tourists of other nationality. This was the construction adopted in Ex parte Wong Gar Wah, 18 F.(2d) 250 (C. C. A. 9), certiorari denied 275 U. S. 529, 48 S. Ct. 21, 72 L. Ed. 409. I agree with it. Believing that Dang Foo was deportable under the Immigration Act of 1924,1 think the order appealed from should be affirmed.


author: SWAN, Circuit Judge.

text:
    WHITE & WELLS CO. v. COMMISSIONER OF INTERNAL REVENUE.
    No. 414.
    Circuit Court of Appeals, Second Circuit
    Argued May 8, 1931.
    Decided June 1, 1931.
    Henry F. Parmelee, of New Haven, Conn. (Barry Mohun, of Washington, D. C., of counsel), for petitioner.
    G. A. Youngquist, Asst. Atty. Gen. (Sewall Key and Andrew D. Sharpe, Sp. Assts. to Atty. Gen., C. M. Charest, General Counsel, Bureau of Internal Revenue, of Washington, D. C., and De Witt M. Evans, Sp. Atty., Bureau of Internal Revenue, of Washington, D. C., of counsel), for respondent.
    Before MANTON, SWAN, and CHASE, Circuit Judges.
   SWAN, Circuit Judge.

The sole point in dispute is the amount of profit realized by the petitioner in 1920 upon the sale of its Naugatuck paper box factory as a going concern; and this in turn depends upon the going concern value on March 1, 1913. The Board of Tax Appeals fixed such value at $31,441.60. The petitioner contends that so low a valuation cannot be sustained by the record, and asks us to find the value to be not less than $73,689.75.

The box factory was located and equipped with special reference to convenience and efficiency in supplying the needs of two manufacturers of rubber goods, whose entire requirements had for many years been purchased from petitioner and constituted practically all the box factory’s business. The business with the rubber companies was done under a series of five-year contracts fixing prices, and the record discloses that it had been profitable over a long period of years. The net earnings of the factory for each of the five calendar years immediately preceding March 1, 1913, were found to be as follows: 1908, $38,549.98; 1909, $28,104.60; 1910, $16,555.63; 1911, $806.99; 1912, $18,-691.67. This shows average yearly net earnings of slightly more than $20,500, while the average yearly value of net tangible assets employed during this five-year period was found to be only $58,000. The prices in effect on March 1, 1913, were fixed under five-year contracts made in 1910; those for the years 1908 and 1909 were fixed under earlier contracts. The rubber companies were subsidiaries of the United States Rubber Company, and in 1920 the latter company decided that it would be advantageous and profitable to take over the box factory as a going concern, and thereafter make its own paper boxes. It paid petitioner $150,000 for the purchase. The residual value of the tangibles acquired by the purchaser was fixed by the Commissioner at $67,904.86, and this figure is not disputed. This left $82,095.14 of the purchase price ascribable to intangibles. The testimony of Mr. Rodenbach, who negotiated the purchase for the purchaser, is to the effect that he regarded the going concern value as worth at least $75,000 in addition to all tangibles.

The Board of Tax Appeals was of opinion that the going concern value on March 1, 1913, should be predicated upon operating results covering the years 1910, 1911, and 1912; and, by applying to these years the formula for the computation of good will value set forth in Appeal and Review Memorandum 34 (2 C. B. 31), the Board'obtained the figure it adopted, $31,441.60. Had the formula been applied to the five-year period, it would have produced the value claimed by the petitioner; namely, $73,689.75,

The application of the said formula is not the exclusive way to value good will; but its use in appropriate eases has been sanctioned not only by the Board of Tax Appeals but also by this court. Pfleghar Hardware Specialty Co. v. Blair (C. C. A.) 30 F.(2d) 614. If it is to be used, however, it should be so applied as to be a fair measure of valuing good will; that is, the past earnings to which the formula is applied should be such as fairly reflect the probable future earnings. As stated by the general counsel of the Bureau of Internal Revenue, ordinarily the period taken should not be less than five years, and abnormal years, whether above or below the average, should be- eliminated. S. R. 5545, IV-2 C. B. 242. See, also, Independent Ætna Sprinkler Co. v. Commissioner, 15 B. T. A. 521, 534; Mead Cycle Co. v. Commissioner, 10 B. T. A. 887, 895; D. M. & E. Walter & Co. v. Commissioner, 10 B. T. A. 620, 629; Appeal of C. F. Hovey Co., 4 B. T. A. 175. Pertinent also are state tax decisions recognizing that abnormal years should either be disregarded, or a long enough period taken so that unusually bad years may be offset by unusually good ones in order to get a fair average. In re Dupignac’s Estate, 123 Misc. Rep. 21, 204 N. Y. S. 273, 281; In re Ball’s Estate, 161 App. Div. 79, 146 N. Y. S. 499, 503; In re Bolton’s Estate, 121 Misc. Rep. 51, 200 N. Y. S. 325, 327; In re Lincoln’s Estate, 114 Misc. Rep. 45, 185 N. Y. S. 574, 576. This the Board did not -do in the ease at bar. It included the year 1911, which was evidently abnormally poor, since it was under the same price-fixing contracts as the profitable years 1910 and 1912, but it refused to include either of the exceptionally good years of 1908 and 1909. The reason given for their exclusion, namely, that they fell under contracts antedating those in effect on March 1, 1913, we cannot regard as valid. The issue before the Board was not the value of the particular five-year contracts under which the taxpayer was operating on March 1, 1913, but the value of the good will at that date. Even if the contracts had been so unfavorable to the taxpayer as to result in operation at a loss for the contractual period, it would not necessarily follow therefrom that the taxpayer had no good will, in 1913. Other factors relevant to the probable future earnings of the factory for an indefinite future time would have to be considered. The experience of the company in the past, though under contracts other than those in force at the time, would normally be an appropriate consideration. The formula which the Board applied can result in a fair estimate of good will only when the past earnings which are considered are fairly indicative of the probable future earnings. Hence we think it was erroneous to apply the formula to a period of only three years, one of which was exceptionally poor.

The petitioner asks us to direct the Board to apply the formula to the five-year period, which would result in fixing the value of good will at the figure $73,689.75. We do not think we are at liberty so to do. The period to be used is, within limits of fairness of application, to be determined by the Board. It may select a longer period than five years or a shorter period, if the years selected fairly reflect average past earnings.

Without the use of the formula, the record is not sufficient either to sustain the valuation adopted by the Board or the valuation claimed by petitioner. The value in 1913 was not proven to be as great as in 1920. Mr. Rodenbaeh said that the situation at the time of purchase “was practically like that in 1913”; but he also said that “the value had increased much in 1920 over 1913 on account of the war.” This leaves his opinion of 1913 value too indefinite to avail either litigant.

Accordingly the order is reversed, and the cause remanded for further proceedings in conformity with this opinion.


author: CHASE, Circuit Judge. SWAN, Circuit Judge

text:
    UNITED STATES v. BAKER et al.
    No. 421.
    Circuit Court of Appeals, Second Circuit.
    June 1, 1931.
    SWAN, Circuit Judge, dissenting in part.
    Emanuel Sustiek, of Brooklyn, N. Y. (Joseph G. M. Browne, of Brooklyn, N. Y., of counsel), for appellants.
    George Z. Medalie, U. S. Atty. and Bernard Tompkins, Asst. U. S. Atty., both of New York City, for the United States.
    Before MANTON, SWAN, and CHASE, Circuit Judges.
   CHASE, Circuit Judge.

The indictment contained six counts. As to counts I and VI, the jury disagreed. The defendants were found guilty on counts II, III, IV, and V. The individual defendants were officers of the corporate defendant. The indictment charged, in the counts on which the defendants were convicted, and the government introduced evidence to show, that they planned and attempted to defraud three fire insurance companies by falsely representing the cost and value of goods, insured by those companies and destroyed by fire in the premises of the corporate defendant, to be greatly in excess of their actual cost and value.

To carry out this scheme, it was charged in count II that a letter signed by Murray E. Baker in behalf of the Economy Steel & Tool Company, addressed to St. Lawrence Trading Company, 100 Fifth avenue, New York, N. Y. was mailed November 5, 1926. In count III, the letter charged to have been mailed was written by attorneys for two of the defendants and addressed to Importers’ & Exporters’ Insurance Company, 47 Beaver street, New York, N. Y. It had to do with the attempt to collect the insurance after the fire. The letter of count IV was written by the same attorneys addressed to British American Assurance Company, Darby Pollock Corporation, 2 Liberty street, New York, N. Y., was of like import, and was charged to have been mailed. That of count V, written by the same attorneys, addressed to- Hartford Fire Insurance Company, Hartford, Conn., and charged to have been mailed, was like the other two. The indictment was the last of three indictments found against these defendants on account of this same business. It was filed March 14, 1930.

The only thing which gives a federal court jurisdiction of such offenses as are here alleged is the use of the mails. Olsen v. United States (C. C. A.) 287 F. 85; Freeman v. United States (C. C. A.) 20 F.(2d) 748, 750. The mailing of the letter of count II was alleged to have been on a date more than three years and four months before this indictment was found. The statute of limitations is three years. 18 USCA § 582, It had run unless, as has been argued, the former indictments found within the three-year period served to suspend the bar of the statute. There appears to be no good reason why a former unconnected indictment found by some other grand jury should have any such effect as has been suggested, and that it does not has already been decided. United States v. Ballard, 24 Fed. Cas. 972, No. 14,507. See also, Armstrong v. United States (C. C. A.) 16 F.(2d) 62.

The evidence of the mailing of the letter of count III was very meager. The lawyer who wrote it testified that he did not know whether it was mailed or not, and that a great many letters delivered by his office were not mailed. It bore the so-called mailing stamp of the addressee, but no witness could tell whether it had been received by mail or not, and the testimony indicated that letters which had been received by messenger would have been so stamped. The evidence as to the mailing of the count IV letter was similar. It simply bore the stamp of the addressee, and it was shown that all correspondence it received was so stamped, whether coming by mail or not. The count V letter was shown-to have been received by the addressee at Hartford, Conn., and to have been stamped with its in-coming mail stamp, Nothing else was shown about it except that a former clerk in the addressee’s office, who did not testify from any knowledge about the letter except his conclusion drawn from the addressee’s stamp it bore, was asked, “In the ordinary course of your business would you say that that letter came through the mail?” and answered “Absolutely.”

Since proof of the mailing of one of these letters was the sine qua non of the crime charged, it is necessary to look closely to this question and answer upon which so much depends to determine whether it supplied the requisite proof. Of course, the necessary proof -may be furnished by circumstantial evidence alone. Freeman et al. v. United States, supra, and cases cited. But the circumstances proved must exclude all reasonable doubt. While it is often difficult to decide when the evidence is sufficient to reach the point of exclusion of reasonable doubt, it can be only when the presumption of innocence is overcome. When the value of this question and answer is considered, no more is proved by the evidence than when a letter was received through the mail in the ordinary course of business it was stamped with the incoming mail stamp of the former employer of the witness. 1 From this it is a non sequitur to say that every letter so stamped came through the mail or in the ordinary course of business and that this letter did. We do not know whether the Hartford Fire. Insurance Company put this stamp on all letters it received. We know only that the in-coming mail was so stamped. Nothing appears as to letters received without using the mail. But if the weakness of such proof of the mailing of this letter is not otherwise apparent, the evidence that the two other insurance offices which received similar letters Used the same stamp whether letters were received by mail or in. some other way would serve to engender considerable doubt as to proof of mailing which rests on the imprint of such a stamp. Since this letter went from New York to Hartford, it is very likely that it went by mail, as that is a convenient and customary way to send letters from one city to the other. That is really all the “proof” of mailing there is. If the guilt of an accused under the mail fraud statute requires no more proof of the mailing of a letter than proof that it was written in one city and received in another, the task of a federal prosecutor in such a case is much simpler than had hitherto been supposed, Freeman v. U. S., supra; Underwood v. U. S. (C. C. A.) 267 F. 412, 418; and 18 U. S. C. A. § 338, would become by construction not' a mail fraud but a letter fraud statute, lacking in the essential basis of federal jurisdiction wbicb tbe use of the mail provides. To avoid such a perversion of the statute; in the guise of passing upon the weight of evidence, it is necessary to insist upon real proof, circumstantial or direct, that, beyond a reasonable doubt, the mail was used.

Judgment reversed.

SWAN, Circuit Judge

(dissenting).

I agree that the conviction upon counts 2, 3, and 4 cannot stand. The use of the mails charged in count 2 was barred by the statute of limitations; and mailing of the letters charged in counts 3 and 4 was not proved. But the evidence as to. count 5 was, in my opinion, sufficient. The letter was written in New York, addressed to a company in Hartford, Conn., and there received by it. The writer of the letter did not say of this, as he did of the two letters mentioned in counts 3 and 4, that it might have been de>-livered by hand. Personal delivery of the Hartford letter is most improbable. The receiving stamp reads “mailing division,” with the date of receipt. Witness Hale, although not the clerk who received it, says that the receiving stamp indicates that the letter came by mail. There was enough to permit the jury to infer a use of the mails as' to this letter, and the conviction on count 5 should be affirmed.