author: GARTH, Circuit Judge.

text:
    TWENTIETH CENTURY MUSIC CORPORATION and Mary M. Bourne, Appellees, v. George AIKEN, Appellant.
    No. 73-1469.
    United States Court of Appeals, Third Circuit.
    Argued Nov. 6, 1973.
    Decided June 21, 1974.
    William M. Wycoff, Thorp, Reed & Armstrong, Pittsburgh, Pa., Herman Finkelstein, Gen. Counsel, Bernard Herman, New York City, for appellees.
    Thomas N. Dowd, William S. D’Amico, Washington, D. C., Stephen Israel, Pittsburgh, Pa., for appellant.

      Melville B. Nimmer, Kaplan, Livingston, Goodwin, Berkowitz & Selvin, Beverly Hills, Cal., for amicus curiae Muzak Corp.
    Before VAN DUSEN, HUNTER and GARTH, Circuit Judges.
   OPINION OF THE COURT

GARTH, Circuit Judge.

We are concerned here with an interpretation of the Copyright Act, 17 U.S. C. § l. The District Court for the Western District of Pennsylvania held that defendant infringed two copyrighted musical compositions by performing them at defendant’s restaurant publicly for profit.

The question presented for determination may be stated as: has defendant “performed” the plaintiffs’ copyrighted musical compositions within the meaning of the Copyright Act, 17 U.S.C. § 1, when these compositions were made available to the defendant’s patrons at his restaurant by the instrumentality of a radio and loud speakers ?

I.

The defendant George Aiken owns and operates a fast service food establishment in downtown Pittsburgh. Food is sold at retail for both consumption on the premises and for “take-out” purposes. The premises can accommodate about 40 patrons at its counters and in its booths. A single radio connection to four separate loud speakers furnishes background music through normal radio programming. The speakers are located in the ceiling of the public and non-public areas of the establishment and the defendant’s practice (in order to have normal radio broadcasts heard throughout the restaurant during business hours) is to switch the radio on at the opening of each business day. Whatever is broadcast over the radio, therefore, becomes audible in the restaurant, as no effort is made to exclude any portion of the broadcasts, i. e., news, music, commercials, etc.

In accordance with the practice noted above, on March 11, 1972, the radio in the defendant’s premises having been turned on, two copyrighted musical compositions were heard by at least six patrons in the restaurant. On that date, radio station WKJF-FM broadcast the two musical selections which were heard at defendant’s premises. WKJF-FM at that time was a licensee of The American Society of Composers, Authors and Publishers, (ASCAP) and therefore licensed to broadcast the two songs which formed the basis of the asserted copyright violation. The ASCAP license contained the following provision:

“Nothing herein contained shall be construed as authorizing Licensee [WKJF-FM] to grant to others any right to reproduce or perform publicly for profit by any means, method or process whatsoever of the musical compositions licensed hereunder or as authorizing any receiver of any radio broadcast to perform publicly or reproduce the same for profit, by any means, method or process whatsoever.”

Over the years ASCAP has licensed commercial establishments similar to George Aiken’s when the establishment utilizes a radio and more than one speaker. As a matter of policy, however, ASCAP has not required a license where the commercial establishment has limited itself to a radio and one speaker. Presently ASCAP has license agreements with 5,150 businesses. These agreements result in annual royalty payments of $246,000.

Muzak Corporation filed a brief ami-cus curiae in this appeal. Muzak, in its brief, adopted that portion of the District Court’s opinion which sets forth Muzak’s interest as follows: “The Muzak franchisers sell to business firms ‘background’ music which is transmitted by wire from a single location within a given geographical area. Muzak is licensed by ASCAP at rates negotiated by the parties or if they are unable to agree, at levels set by the United States District Court for the Southern District of New York in accordance with the consent judgment entered on March 14, 1950 . The Muzak organizations compete with FM radio stations for the background music market. A decision adverse to the plaintiff in the case at bar might have an effect on a pending request for reduction of licensing fees which has been filed by Muzak affiliates in the Southern District of New York.” Muzak emphasizes that the decision here will “in significant measure influence the price the public pays for background music whatever the source.”

The present plaintiffs complain that when George Aiken tuned his restaurant radio to WKJF-FM which was broadcasting plaintiffs’ musical compositions, Aiken by that means had publicly performed these compositions for profit within the meaning of the Copyright Act 17 U.S.C. § 1 et seq. The District Court agreed with the plaintiffs’ contentions, and although it did not grant the injunction sought, it did enter judgment on March 26, 1973 in favor of each plaintiff for $250. It is that order from which the defendant appeals.

II.

Our task here is to give content and meaning to the term “perform” within the context of the Copyright Act. As Mr. Justice Stewart wrote in Fortnightly Corp. v. United Artists Television, Inc., 392 U.S. 390, 88 S.Ct. 2084, 20 L.Ed.2d 1176 (1968):

“The Copyright Act does not give a copyright holder control over all uses of his copyrighted work. Instead, § 1 of the Act enumerates several ‘rights’ that are made ‘exclusive’ to the holder of the copyright. If a person, without authorization from the copyright holder, puts a copyrighted work to a use within the scope of one of these ‘exclusive rights’, he infringes the copyright. If he puts the work to a use not enumerated in § 1, he does not infringe.”

392 U.S. at 393-395, 88 S.Ct. at 2086.

In each instance, the answer to the question as to whether an infringement occurred depends on whether or not there was a “performance” within the meaning of the Act, since without a “performance” there can be no infringement. The issue was joined here by the plaintiffs asserting that Aiken “performed” the two musical pieces when he switched on his radio (with four loud speakers attached) and tuned to the station which was playing these compositions. If that act constituted a “performance”, then the defendant Aiken infringed the two copyrights and we would then be obliged to affirm the judgment of the District Court. On the other hand, if by the act of tuning to WKJF-FM George Aiken did not “perform”, then no infringement occurred and the District Court erred in its opinion and judgment.

The District Court recognized, as do we, that the Act itself does not define “performance”. In construing that term the District Court looked primarily to the conflicting tests articulated by the Supreme Court in Buck v. Jewell-LaSalle Realty Co., 283 U.S. 191, 51 S.Ct. 410, 75 L.Ed. 971 (1931) (upon which the plaintiffs rely) and to Fortnightly Corp. v. United Artists Television, Inc., 392 U.S. 390, 88 S.Ct. 2084, 20 L.Ed.2d 1176 (1968), invoked by the defendant.

Our analysis similarly begins with an examination of Jewell-LaSalle and Fortnightly. However, we need not halt our discussion with Fortnightly as the District Court was obliged to do. (See fn. 8 supra), as we can now draw upon the teaching of Teleprompter Corp. et al. v. Columbia Broadcasting System, Inc., supra, as it affects the issue before us.

III.

THE PRECEDENTS LEADING TO JEWELU-LaSALLE

Although Herbert v. Shanley Co., 242 U.S. 591, 37 S.Ct. 232, 61 L.Ed. 511 (1917) did not involve a radiocast and obviously not a telecast, it did set the stage for the later copyright cases concerned with “performance”. The defendant hotel in Herbert employed an orchestra for the entertainment of its guests. During dinner, a copyrighted composition was played. It was held that this was a performance for profit within the meaning of the Copyright Act.

Thereafter in 1925 the unauthorized broadcasting of a copyrighted musical composition by a radio station was held to constitute an infringement of the statutory copyright. Jerome H. Remick & Co. v. American Automobile Accessories Co., 5 F.2d 411 (6th Cir. 1925)

In the following year (1926), the concept of “performance” was further refined in Jerome H. Remick & Co. v. General Electric Co., S.D.N.Y., 16 F.2d 829. The District Court in that case posed the question as follows:

“ . . . [W]hether one who by means of the microphones ‘picks up’ another’s unauthorized performance of a copyrighted musical composition and transmits it by radio from a broadcasting station maintained and operated to stimulate the sale of radio product is liable for infringement of copyright.”

The District Court found that the only distinction between the defendant’s position in General Electric and the defendant’s position in American Automobile Accessories was the fact that the General Electric Co. did not participate in the rendition of the musical production except by affording to others the opportunity to hear it. The Court held that the defendant had infringed the plaintiff’s copyright stating:

“ . . . [I]f he [the defendant] broadcasts without authority from the owner of the copyright a private rehearsal of a copyrighted production, thus converting the private rendition into a public performance for profit, he contributes to the resultant infringement.”

Buck v. Debaum, 40 F.2d 734 (S.D.Cal.1929) followed the second Remick case. Debaum owned a cafe in Los Angeles. He had installed a radio receiving set through which he received various programs from broadcasting radio stations for the benefit of his patrons. He “tuned in” the cafe radio and in so doing, the copyrighted musical composition “Indian Love Call” was heard in the restaurant. The question there, was whether Debaum had been guilty of infringement of the copyrighted composition. The answer to that question focused (as it does here) on whether Debaum “performed” within the meaning of the Copyright Act. Holding that there had been no “performance” by Debaum, the Court said:

“One who manually or by human agency merely actuates electrical in-strumentalities, whereby inaudible elements that are omnipresent in the air are made audible to persons who are within hearing, does not ‘perform’ within the meaning of the Copyright Law. The performance in such case takes place in the studio of the broadcasting station, and the operator of the receiving set in effect does nothing more than one would do who opened a window and permitted the strains of music of a passing band to come within the inclosure in which he was located. It is true that it is the voluntary act of the person turning the dial on the receiving set that enables electricity to animate the mechanism so as to make audible within hearing distance of the receiving set that which is disseminated from the broadcasting station and which is ‘on the air’ by reason of the broadcast, but such voluntary action in my opinion is far from ‘performing’ the copyrighted work. The performance which is licensed as just stated, occurs entirely in the studio of the broadcasting station where the copyrighted musical composition is lawfully used, and the action occurring at the receiving set is simultaneous therewith, and is in no sense a reproduction of the musical composition that is being lawfully performed at the broadcasting studio. The action, play, and use of the copyrighted composition has been completed within the studio.”

40 F.2d at 735. The District Court in Debaum cited the District Court decision in Buck v. Jewell-LaSalle Realty Co., 32 F.2d 366 (W.D.Mo.1929), as authority for its decision.

It was in this setting and with this background that Buck v. Jewell-LaSalle was decided by the Supreme Court in 1931. The question certified by the Court of Appeals and answered “yes” by the Supreme Court was:

“Do the acts of a hotel proprietor, in making available to his guests, through the instrumentality of a radio receiving set and loud speakers installed in his hotel and under his control and for the entertainment of his guests, the hearing of a copyrighted musical composition which has been broadcast from a radio transmitting station constitute a performance of such composition within the meaning of 17 U.S.C. Sec. 1(e) ?”

283 U.S. at 195-196, 51 S.Ct. at 410. The argument was advanced that the .mere act of “receiving” is not an act of “performance” by the one operating the receiving set. However, the Court found:

“There is no difference in substance between the case where a hotel engages an orchestra to furnish the music and that where, by means of the radio set and loudspeakers here employed, it furnishes the same music for the same purpose. In each the music is produced by instrumentalities under its control.”

283 U.S. at 201, 51 S.Ct. at 412.

Society of European Stage Authors and Composers, Inc. v. New York Hotel Statler Co., Inc., 19 F.Supp. 1 (S.D.N.Y.1937) followed Jewell-LaSalle both in time and in content. It was held there that the hotel had infringed a copyright when it “piped” to its guests’ rooms a musical composition broadcast by a commercial radio station. The differences between Jewell-LaSalle and Society were in the physical arrangements for the receiving of the broadcast. In Jewell the programs were reproduced in the public rooms of the hotel as well as in the private guest rooms. In Society the master receiving sets of the hotel were connected only with the bedrooms and a guest in a particular room of the Hotel Pennsylvania could turn on the loud speaker and could select either of the two programs received by the two master receiving sets of the hotel. Significantly, in Society the broadcast was authorized, but the Court nevertheless held the plaintiffs’ copyright to be infringed, stating:

“[T]he reproduction by the hotel’s master receiving sets of the electric impulses of the broadcast, and their distribution among its rooms so that all who wish may, by turning a knob, listen to the broadcast, is a public performance for profit of the broadcast program,' and is made at the hotel’s risk insofar as copyrighted musical compositions are concerned.”

19 F.Supp. at 5-6.

IV.

FORTNIGHTLY CORP. v. UNITED ARTISTS TELEVISION, INC.

The J ewell-LaSalle quantitative test to determine “performance”’ was thereafter rejected in favor of a “functional” test in Fortnightly, at least as regards cable television.

The Fortnightly Corp. owns and operates community antenna television (CATV) systems in two localities in West Virginia. Prior to 1957 there were no local television broadcasting stations in that area. After 1957, when two television stations were established, many residents of the area could still not receive broadcasts with ordinary rooftop antennas. This problem was solved by a number of the householders through utilization of Fortnightly’s CATV service, purchased at a flat monthly rate.

United Artists Television, Inc. is the copyright owner of several motion pictures. It granted licenses to the television stations in the West Virginia area to broadcast the motion pictures. Broadcasts were received by Fortnightly’s CATV system and thence carried to its customers, despite the lack of authorization for such broadcast by United Artists. Fortnightly was thereupon sued for copyright infringement. United Artists contended and Fortnightly denied that the CATV systems “performed” the copyrighted motion pictures. The Court agreed with Fortnightly that no “performance” resulted from the CATV activities stating:

“Television viewing results from combined activity by broadcasters and viewers. Both play active and indispensable roles in the process; neither is wholly passive. The broadcaster selects and procures the program to be viewed. He may produce it himself, whether ‘live’ or with film or tape, or he may obtain it from a network or some other source. He then converts the visible images and audible sounds of the program into electronic signals, and broadcasts the signals at radio frequency for public reception. Members of the public, by means of television sets and antennas that they themselves provide, receive the broadcaster’s signals and reconvert them into the visible images and audible sounds of the program. The effective range of the broadcast is determined by the combined contribution of the equipment employed by the broadcaster and that supplied by the viewer.
The television broadcaster in one sense does less than the exhibitor of a motion picture or stage play;' he supplies his audience not with visible images but only with electronic signals. The viewer conversely does more than a member of a theater audience; he provides the equipment to convert electronic signals into audible sound and visible images. Despite these deviations from the conventional situation contemplated by the framers of the Copyright Act, broadcasters have been judicially treated as exhibitors, and viewers as members of a theater audience. Broadcasters perform. Viewers do not perform. Thus, while both broadcaster and viewer play crucial roles in the total television process, a line is drawn between them. One is treated as active performer; the other, as passive beneficiary.
When CATV is considered in this framework, we conclude that it falls on the viewer's side of the line. Essentially, a CATV system no more than enhances the viewer’s capacity to receive the broadcaster’s signals; it provides a well-located antenna with an efficient connection to the viewer’s television set. It is true that a CATV system plays an ‘active’ role in making reception possible in a given area, but so do ordinary television sets and antennas. CATV equipment is powerful and sophisticated, but the basic function the equipment serves is little different from that served by the equipment generally furnished by a television viewer. If an individual erected an-antenna on a hill, strung a cable to his house, and installed the necessary amplifying equipment, he would not be ‘performing’ the programs he received on his television set. The result would be no different if several people combined to erect a cooperative antenna for the same purpose. The only difference in the case of CATV is that the antenna system is erected and owned not by its users but by an entrepreneur.” (footnotes omitted).

392 U.S. at 397-400, 88 S.Ct. at 2088.

In analyzing “performance,” the majority (per Justice Stewart) stated that: “ . . . mere quantitative contribution cannot be the proper test . ” Instead, the resolution of the issue [of performance in the context of television broadcasting] depends upon a determination of the function that is played by CATV in the overall process of telecasting and reception. Justice Fortas, writing in dissent, took the view that the majority had overruled JewellLaSalle, swpra and Society of European Stage Authors and Composers, supra. The majority opinion on the other hand states that “. . . [t]he JewellLaSalle decision must be understood as limited to its own facts.” 392 U.S. at 397 n.18, 88 S.Ct. at 2088. (See n.11, supra).

V.

TELEPROMPTER IN THE SECOND CIRCUIT

Following Fortnightly, the Second Circuit in 1973 held that the importation of “distant signals” and their rebroadcast by CATV infringed the copyrighted material broadcasted. Columbia Broadcasting System, Inc. v. Teleprompter Corp., 476 F.2d 338 (2d Cir. 1973). For our purposes, the significance of this decision is the application of the Fortnightly functional test in determining whether this rebroadcasting of “distant signals” constituted a “performance”. Applying this test, the Court of Appeals held that no “performance” resulted when CATV systems merely retransmitted signals which were present in the air and within the range of ordinary (local) antennas. It concluded that no copyright liability could be imposed, even though the same programs could not have been received without the aid of CATV. The Teleprompter question that was not answered by Fortnightly was the question of whether a “performance” resulted when the CATV system distributed signals that originated beyond the range of ordinary (local) antennas. In that situation the Second Circuit held that this activity was functionally equivalent to that of a “broadcast” and hence must be deemed to constitute “performance” within the meaning of the Copyright Act. In essence, therefore, Teleprompter found no “performance” within the original CATV range but found “performance” where relays were required.

It was in that setting that the District Court here was called upon to determine the instant controversy. On the one hand it was faced with an “all fours” decision in Buck v. Jewell-LaSalle, supra. On the other hand, it was faced with a CATV decision (Fortnightly, supra) which for all practical purposes rejected the quantitative test of Jewell-LaSalle and substituted in its place a functional test. The District Court opted to follow Jewell-LaSalle, holding that Aiken had “performed” within the meaning of the Copyright Act. In applying the quantitative test rather than the functional test, the District Court reasoned that had the Supreme Court intended to overrule Jewell-LaSalle, it would have done so expressly. 356 F.Supp. at 274.

VI.

TELEPROMPTER IN THE SUPREME COURT

Much, if not all, of the force of the District Court’s reasoning is dissipated by the Supreme Court’s decision in Teleprompter Corp. v. Columbia Broadcasting System, Inc., 415 U.S. 394. 94 S.Ct. 1129, 39 L.Ed.2d 415 (1974). , The Supreme Court held, among other things that the relay importation of distant signals does not constitute “performance” under the Copyright Act. It thereby reversed that portion of Columbia Broadcasting System, Inc. v. Teleprompter Corp., supra which defined “performance” in terms of “local” and “distant” signals. The Supreme Court also held that “performance” did not result from program origination, sale of commercials or interconnection of CATV systems.

Teleprompter’s significance in the resolution of the issue before us is fourfold.

First: Teleprompter reaffirms the Fortnightly functional test.

Second: Teleprompter, as did Fortnightly, rejects unequivocally the quantitative test of Buck v. Jewell-LaSalle.

Third: Despite the arguments advanced respecting (a) program origination; (b) sale of commercials; and (c) interconnection, (see n.20 supra), CATV systems were nevertheless committed to the “viewer” (as distinct from the “broadcaster”) side of the line.

Fourth: Despite the advanced technology required for “local” signals (and even more so) for “distant” signals, the Supreme Court nevertheless held the reception and rechannelling of these signals a “viewer” function.

The Supreme Court stated:

“In Fortnightly the Court reasoned that ‘[i]f an individual erected an antenna on a hill, strung a cable to his house, and installed the necessary amplifying equipment, he would not be “performing” the programs he received on his television set,’ 392 U.S., at 400, and concluded that ‘[t]he only difference in the ease of CATV is that the antenna system is erected and owned not by its users but by an entrepreneur.’ Ibid. In the case of importation of ‘distant signals,’ the function is essentially the same. While the ability or inclination of an individual to erect his own antenna might decrease with respect to distant signals because of the increased cost of bringing the signal to his home, his status as a ‘non-performer’ would remain unchanged. Similarly, a CATV system does not lose its status as a non-broadcaster, and thus a non-‘performer’ for copyright purposes, when the signals it carries are those from distant rather than local sources.”
* •» -X- * * -X-
“Moreover, a CATV system importing ‘distant’ signals does not procure programs and propagate them to the public, since it is not engaged in converting the sights and sounds of an event or a program into electronic signals available to the public. The electronic signals it receives and rechannels have already been ‘released to the public’ even though they may not be normally available to the specific segment of the public served by the CATV system.” '

[ 94 S.Ct. at 1138].

In rejecting still another contention that the importation of “distant” signals should entail copyright infringement liability because of the deleterious impact of such retransmission upon the economics and market structure of copyright licensing, the Court said:

“By extending the range of viewa-bility of a broadcast program, CATV systems thus do not interfere in any traditional sense with the copyright holders’ means of extracting recompense for their creativity or labor. When a broadcaster transmits a program under license from the copyright holder it has no control over the segment of the population which may view the program — the broadcaster cannot beam the program exclusively to the young or to the old, only to women or only to men — but rather he gets paid by advertisers on the basis of all viewers who watch the program. The use of CATV does not significantly alter this situation. Instead of basing advertising fees on the number of viewers within the range of direct transmission plus those who may receive ‘local signals’ via a CATV system, broadcasters whose reception ranges have been extended by means of ‘distant signal’ CATV rechanelling will merely have a different and larger viewer market. From the point of view of the broadcasters, such market extension may mark a reallocation of the potential number of viewers each station may reach, a fact of no direct concern under the Copyright Act. From the point of view of the copyright holders, such market changes will mean that the compensation a broadcaster will be willing to pay for the use of copyrighted material will be calculated on the basis of the size of the direct broadcast market augmented by the size of the CATV market.
These shifts in current business and commercial relationships, while of significance with respect to the organization and growth of the communications industry, simply cannot be controlled by means of litigation based on copyright legislation enacted more than half a century ago, when neither broadcast television nor CATV was yet conceived. Detailed regulation of these relationships, and any ultimate resolution of the many sensitive and important problems in this field, must be left to Congress.” (footnotes omitted).

[ 94 S.Ct. at 1140].

Hence not only did the Supreme Court reemphasize the functional test announced in Fortnightly, but to the extent that it applied that test to “distant signals” and held that even these did not constitute “performance”, it supports the position taken by the appellant here. If Fortnightly, with its elaborate CATV plant and Teleprompter with its even more sophisticated and extended technological and programming facilities were not “performing”, then logic dictates that no “performance” resulted when the defendant Aiken merely activated his restaurant radio.

We hold, therefore, that mere extension of the range of audibility of a broadcast program as “extended” here by the appellant Aiken, cannot be said to constitute “performance”. The question asked at the outset of this opinion must therefore be answered “no”.

The judgment of the District Court will be reversed and the District Court directed to enter judgment for the defendant.

      . “Any person entitled thereto, upon complying with the provisions of this title, shall have the exclusive right:
      (a) To print, reprint, publish, copy, and vend the copyrighted work;
      (b) To translate the copyrighted work into other languages or dialects, or make any other version thereof, if it be a literary work; to dramatize it if it be a nondramatic work; to convert it into a novel or other nondramatic work if it be a drama ; to arrange or adapt it if it be a musical work; to complete, execute, and finish it if it be a model or design for a work of art;
      (c) To deliver, authorize the delivery of, read, or present the copyrighted work in public for profit if it be a lecture, sermon, address or similar production, or other nondramatic literary work; to make or procure the making of any transcription or record thereof by or from which, in whole or in part, it may in any manner or by any method be exhibited, delivered, presented, produced, or reproduced; and to play or perform it in public for profit, and to exhibit, represent, produce, or reproduce it in any manner or by any method whatsoever. The damages for the infringement by broadcast of any work referred to in this subsection shall not exceed the sum of $100 where the infringing broadcaster shows that he was not aware that he was infringing and that such infringement could not have been reasonably foreseen; and
      (d) To perform or represent the copyrighted work publicly if it be a drama or, if it be a dramatic work and not reproduced in copies for sale, to vend any manuscript or any record whatsoever thereof; to make or to procure the making of any transcription or record thereof by or from which, in whole or in part, it may in any manner or by any method be exhibited, performed, represented, produced, or reproduced ; and to exhibit, perform, represent, produce, or reproduce it in any manner or by any method whatsoever ; and
      (e) To perform the copyrighted work publicly for profit if it be a musical composition ; and for the purpose of public performance for profit, and for the purposes set forth in subsection (a) hereof, to make any arrangement or setting of it or of the melody of it in any system of notation or any form of record in which the thought of an author may be recorded and from which it may be read or reproduced. ...”

      . 356 F.Supp. 271 (W.D.Pa.1973); Judgment entered March 26, 1973.

      . Tlie two copyrighted musical compositions were: “The More I See You” and “Me and My Shadow”. The copyright projirietor of “The More I See You” is the plaintiff-appel-lee Twentieth Century Music Corporation (hereinafter “Twentieth”) ; the copyright proprietor of Me and My Shadow is tlie plaintiff-appellee Bourne. Both Twentieth and Bourne are members of the American Society of Composers, Authors and Bub-lishers (ASCAP), an association authorized to license the right of public performance of the copyrighted musical works in question.
      While not directly relevant to the issues discussed in the text of this opinion, as a matter of general nostalgic interest the complaint recites that Mack Gordon and Harry Warren created and wrote “The More I See You”, while Billy Rose (lyrics), Al Joelson and Dave Dreyer (music) created and wrote “Me and My Shadow”.

       Included in these businesses are firms wMch use radio as the source of musiCj as well ag fimg wMch employ on premises gourceg for mugic guch ag tape reoorders and live entertainment,

      . Tlie March 14, 1950 consent judgment amended an order dated February 26, 1941, in the case of United States v. American Society of Composers, Authors and Publishers, Civil Action No. 13-95.

      . “The primary policy of the Copyright Act is to give the public maximum access to the author’s work; a secondary purpose is to remunerate the copyright owner.” Note, Cable Television and Copyright Royalties, 83 Yale L.J. 554, 557 (1974).

      . Neither the plaintiffs nor the defendant argue with any conviction that the “tuning in” of the radio by the defendant so that it could be heard by patrons in the defendant’s restaurant constituted a private as distinct from a public “performance”. Nor do they contend seriously that if such be the case that the “performance” was not for profit.

      . At the time the District Court had this issue before it for resolution, the Supreme Court had not as yet announced its decision in Teleprompter Corp. et al. v. Columbia Broadcasting System, Inc., et al., decided March 4, 1974 and which we discuss at greater length in the latter portions of this opinion. Nos. 72-1628 and 72-1633, 415 U.S. 394, 94 S.Ct. 1129, 39 L.Ed.2d 415.

      . The Court specifically held that the mere fact that radio had not been developed at the time the Copyright Act was enacted, did not exclude radio broadcasts from the scope of the statute.

      . Interestingly, dictum in General Electric Go. suggests and anticipates the functional test adopted years later in Eortmghtly: “. . . Certainly those who listen do not perform, and therefore do not infringe. ...” 16 F.2d at 829.

      . The authority of Debaum was therefore undercut when the Supreme Court in Jewell-LaSalle held that the defendant hotel had infringed the copyright by a “performance”. Despite criticism by the dissent in Fortnightly (392 U.S. at 407, n. 5, 88 S.Ct. 2084), apparently some viability remains in the “authorized vs. unauthorized” broadcast distinction drawn in Debaum and referred to in limiting fashion in the Fortnightly majority opinion (392 U.S. at 396 n. 18, 88 S.Ct. 2084). But see Society of European Stage Authors and Composers v. New York Hotel Statler Co., 19 F.Supp. 1 (S.D.N.Y.1937) discussed in the text of this opinion.

      . 283 U.S. at 202, 51 S.Ct. 410.

      . The defendant Jewell-LaSalle operated the LaSalle Hotel which maintained a master radio receiving set wired to each of the public and private rooms. Loud speakers or head phones were provided to the hotel’s guests so that a program received on the master set could be simultaneously heard throughout the building. The plaintiff’s copyrighted musical composition was broadcast by a radio station, received by the hotel and made available to its guests. The radio station was not licensed to broadcast the copyrighted work.

      . The “quantitative” label stemmed from the quantitative performance standard employed by Jewell-LaSalle and the cases which followed it, and can be defined as: “[H]ow much did the [infringer] do to bring about the viewing and hearing of a copyrighted work?” See Fortnightly Corp. v. United Artists Television, Inc., 392 U.S. at 396, 88 S.Ct. 2084. See also 392 U.S. at 396-397, n. 18, 88 S.Ct. 2084.

      . Fortnightly is the first case to apply the Copyright Act to cable television (CATV). A discussion of CATV operations and systems can be found in United States v. Southwestern Cable Co., 392 U.S. 157, 161, 88 S.Ct. 1994, 20 L.Ed.2d 1001 et seq. (1968).

      . The Fortnightly system is described in the opinion as consisting of “antennas located on hills above each city, with connecting coaxial* cables, strung op. utility poles, to carry the signals received by the antennas to the home television sets of individual subscribers. The systems contain equipment to amplify and modulate the signals received, and to convert them to different frequencies, in order to transmit the signals efficiently while maintaining and improving their strength.” 392 U.S. at 392, 88 S.Ct. at 2085. It is also noted in the opinion that some 10% of the CATV systems originate their own programs, but that type of programming was not dealt with by the Court.

      . By means of a high powered antenna, CATV systems pick up radio signals present in the air and through various mechanical means, see fn. 16, supra, transform them into television pictures and sound. These signals are of two varieties. They may be able to be received within the range of ordinary (local) antennas or they may be “distant signals”. “Distant signals” are signals which originate outside of the effective range of ordinary (local) antennas and are only available to the community through the use of CATV systems.

      . Teleprompter Corp. v. Columbia Broadcasting System, No. 72-1628 was decided together with Columbia Broadcasting System, Inc. v. Teleprompter Corp., No. 72-1633, both on certiorari to the Second Circuit.

      . Program origination was expressly excluded from consideration in Fortnightly, 392 U.S. 392 n. 6, 88 S.Ct. 2084.

      . It was argued in Teleprompter that many CATV systems originated programs as contrasted with those programs received from broadcasters and rechannelled to subscribers. It was contended that such “original programming” results in a broadcast function and hence a “performance”. Additionally it was argued that Teleprompter sells advertising time — a function normally attributed to broadcasters. Finally it was argued that the originating of a program by one CATV system and the sale of the right for redistribution of that program to another CATV system would constitute copyright infringement. These arguments were all rejected by the Supreme Court “. . . in none of these operations is there any nexus with the defendants’ reception and rechannelling of the broadcasters’ copyrighted materials.” [94 S.Ct. at 1136].

      . Both apxxellant and appellees take heart from the fact that Teleprompter’s majority oxnnion makes no mention of Jewell-LaSalle. The axxpellant regards this omission as further proof of its contention that Jewell-La-Salle has been overruled by Fortnightly and hence is no longer a “test”, theory or case with which to be concerned. On the other hand, the appellees regard this lack of reference as a sign of continued validity of Jewell-LaSalle albeit in a restricted and narrow area. Realizing that we are anticipating our conclusion we nevertheless are obliged to agree with the appellant, that if Buck v. Jewell-LaSalle had retained any viability after Fortnightly, that viability no longer exists after the Supreme Court’s decision in Teleprompter. As Justice Blackmun dissenting in part, stated: “I was not on the Court when Fortnightly Corp. v. United Artists Television, Inc., 392 U.S. 390, 88 S.Ct. 2084, 20 L.Ed.2d 1176 (1968), was decided. Were that case presented for the first time today, I would be in full agreement with what Mr. Justice Fortas said in dissent. I would join his unanswered — and, for me, unanswerable — reliance on Mr. Justice Brandeis’ unanimous opinion in Buck v. Jewell-LaSalle Realty Corp., 283 U.S. 191, 51 S.Ct. 410, 75 L.Ed. 971 (1931). But Fortnightly has been decided, and today the Court adheres to the princixdes it enunciated and to the simplistic basis * on which it rests.” (* “Broadcasters perform. Viewers do not perform.” 392 U.S., at 398 (footnotes omitted).) [94 S.Ct. at 1141].

      . We find no distinction between the two technologies of radio and CATV which would require us to reach a different result than that reached in Fortnightly or Teleprompter. Neither of those opinions are limited to television or CATV. Indeed as we -have previously noted, Fortnightly cited with approval Buck v. Debaum, supra, and Debaum was a “radio” case.

      . See Teleprompter Corp. v. Columbia Broadcasting System, Inc., 415 U.S. 394, 94 S.Ct. 1129.


source: Caselaw Access Project

author: STEPHENSON, Circuit Judge.

license: Public Domain

text:
    Clarence J. BASSLER, Jr., et al., Appellants, v. Herschel S. ARROWOOD, Individually and as a Co-Executor under the Last Will and Testament of Archibald G. Bush, Deceased, and as a former director of the Bush Foundation, et al., Appellees, and Thomas Malone, as Clerk of the Probate Court, Ramsey County, Minnesota, et al., Nominal Appellees.
    No. 73-1378.
    United States Court of Appeals, Eighth Circuit.
    Submitted Feb. 15, 1974.
    Decided July 8, 1974.
    Rehearing and Rehearing En Banc Denied Aug. 13, 1974.

      Thomas V. Koykka, Cleveland, Ohio, for appellants.
    Richard G. Mark, Sp. Asst. A tty. Gen., Richard H. Kyle, and Neil P. Con very, St. Paul, Minn., for appellees.
    Before GIBSON, STEPHENSON and WEBSTER, Circuit Judges.
   STEPHENSON, Circuit Judge.

This diversity suit was brought by the executors of the estate of Mrs. A. G. Bush. The suit is against the executors .of the estate of Mrs. Bush’s husband, the Bush Foundation, and the foundation’s directors and former directors, two of whom are the executors of the A. G. Bush estate. The cause of action is basically for fraud in the distribution of the husband’s estate and in the operation of the Bush Foundation, The district court dismissed the complaint on the merits citing the alternative bases of res judicata, collateral estoppel and abstention. We affirm but remand with instructions.

This is a complicated case which began in 1966 with the death of A. G. Bush. We set out the facts that are essential to an understanding of the issues.

A. G. Bush was one of the founders of Minnesota Mining and Manufacturing Company and had thereby amassed a sizeable fortune. In his will, to which Mrs. Bush consented, A. G. Bush left the bulk of his estate to the Bush Foundation, a nonprofit Minnesota corporation that he had established in 1953. Shortly following Mr. Bush’s death in 1966, a controversy arose among Mrs. Bush, the executors of the husband’s estate, and the directors of the Bush Foundation. The conflict arose due to delays in making the estate distributions to the foundation. Mrs. Bush feared that the executors and directors were not carrying out her husband’s wishes (at that time the foundation directors included executors Arrowood and Dickman).

Mrs. Bush, in order to get the administration back on what she thought was the right track, threatened to renounce her consent to her husband’s will which would have substantially reduced the residuary bequest to the foundation. However, a compromise settlement was reached between Mrs. Bush and the executors and directors. Under the settlement agreement Mrs. Bush agreed to give up her right to renounce the will. The Bush Foundation and its directors agreed to amend the Articles and ByLaws setting up a bicameral board of directors. There were established four class A directors and three class B directors. Mrs. Bush and two persons acceptable to her formed the class B group. In order for the foundation to perform any of its charitable activities, a majority vote of each group was required. The effect was to give Mrs. Bush a veto power over the operation of the foundation.

The settlement agreement was submitted to and approved by order of the Minnesota Probate Court on August 30, 1966. The settlement was also approved by the state court in Florida since ancillary administration of the estate had been filed there.

The compromise and settlement did not last. The executors and directors engaged in activity which Mrs. Bush and the class B directors deemed improper. In January 1968 Mrs. Bush and the other class B directors brought an action in Ramsey County, Minnesota District Court. The complaint alleged that the case was brought by the class B directors in their representative capacity. A review of the complaint in the state court suit demonstrates that appellants fairly represent the prayer for relief when they state in their brief to this court:

The court was asked in the [state court] Complaint to adjudge that The Bush Foundation is the residuary legatee, to enjoin acts of defendants designed to defeat distribution to The Bush Foundation, to remove the Class A Directors for their breaches of duty, and to remove the Executors of the husband’s estate for their breaches of duty.

After three days of trial in September 1969, the state court suit was settled. Primarily, the settlement did away with the bicameral board of directors and replaced it with a unicameral board of 16 members, including Mrs. Bush. The settlement was approved by the Ramsey County, Minnesota court and final judgment was entered on April 10,1970.

On November 3, 1970, Mrs. Bush was adjudged incompetent by the Florida court. On December 2, 1971, the Florida court ordered that Mrs. Bush’s executors continue to pursue those remedies which would vindicate Mrs. Bush’s rights. Hence, the instant law suit.

The complaint in the instant case sets out the facts and background leading up to this court action. Thereafter, decree is prayed for as follows:

1. That the Consent of Edyth D. Bush to the Last Will and Testament of Archibald G. Bush under date of April 21, 1965, was not fairly and reasonably obtained and is null and void and without force or effect.
2. Rescinding the agreement of settlement entered into on or about August 27, 1966, between Edyth D. Bush, as surviving spouse of Archibald G. Bush, the defendants Herschel S. Arrowood and Mary Jane Dickman, as Co-Executors of the Estate of Archibald G. Bush, and the defendant The Bush Foundation and determining that the plaintiff is entitled to renounce the Last Will and Testament of Archibald G. Bush.
3. Vacating and declaring void the Stipulation dated September 17, 1969, and the Judgment and Decree entered thereon on the 10th day of April, 1970, in the District Court of Ramsey County, Minnesota, in that certain action entitled Edyth Bush, etc., et al, Plaintiffs, vs. Herschel S. Arrowood, etc., et al, being File No. 356691, and requiring the defendant The Bush Foundation and the members of its Board of Directors named as defendants herein to amend its Articles of Incorporation and its By-Laws so as to restore the bicameral principle of its Board of Directors.
4. Vacating and setting aside the Interlocutory Decree Relative to Purported Renunciation of Will entered in the Probate Court of Ramsey County, Minnesota, on the 1st day of March, 1972, and requiring said Court to enter its Decree in accordance with the determination of this Court in the premises.
5. For an award of damages against such defendants, jointly and severally, in the sum of one hundred million dollars ($100,000,000.00), or such other amount as the Court and jury may determine.

We begin our analysis of this case with the observation that persuasive argument can be made that the federal court lacks jurisdiction in this matter.

Federal courts have no probate powers per se. This is true even when the requisite diversity of citizenship has been shown. Kausch v. First Wichita National Bank of Wichita Falls, Texas, 470 F.2d 1068, 1069 (CA5 1973). The federal courts do have jurisdiction

* * * to entertain suits “in favor of creditors, legatees and heirs” and other claimants against a decedent’s estate “to establish their claims” so long as the federal court does not interfere with the probate proceedings or assume general jurisdiction of the probate or control of the property in the custody of the state court. Markham v. Allen, 326 U.S. 490, 494, 66 S.Ct. 296, 298, 90 L.Ed. 256 (1946).

See also Warner v. First National Bank of Minneapolis, 236 F.2d 853, 858 (CA8 1956). Where the action is clearly in personam, federal courts have the power to adjudicate the controversy. Princess Lida of Thurn and Taxis v. Thompson, 305 U.S. 456, 466-467, 59 S.Ct. 275, 83 L.Ed. 285 (1939); Harris v. Pollock, 480 F.2d 42, 44 (CA10 1973); Lamberg v. Callahan, 455 F.2d 1213, 1216 (CA2 1972); Starr v. Rupp, 421 F.2d 999, 1004 (CA6 1970); Wright, Federal Courts § 25 at 85 (1970). The test is easier to state than it is to apply. The differences are slight. As the court pointed out in Starr v. Rupp, supra:

The cases thus endeavor to distinguish between direct interferences with or control of the res and adjudication of the rights of individuals who have an interest in the res. This line of distinction is not always clear. 421 F.2d at 1005.

The relief desired by the complaint in the instant case would in substantial part seem to require interference with the prior jurisdiction of the Minnesota Probate Court and would in fact conflict with that court’s decisions. Compare Starr v. Rupp, supra, 421 F.2d at 1006. Nevertheless, the allegations of the complaint are also grounded upon the fraud of the directors of the Bush Foundation in inducing Mrs. Bush to enter into the agreement of settlement in August 1966 and the stipulation dated September 17, 1969. These allegations would be cognizable outside the probate court and in fact were brought in the Ramsey County, Minnesota suit.

Where a claim is enforceable in a state court of general jurisdiction, the argument becomes more persuasive that federal diversity jurisdiction should be assumed. Lamberg v. Callahan, supra, 455 F.2d at 1216; compare Lathan v. Edwards, 121 F.2d 183, 184 (CA5 1941).

The jurisdiction issue in this case is close. The district court, relying on the Minnesota case of Bulau v. Bulau, 208 Minn. 529, 294 N.W. 845 (1940), determined that there were sufficient allegations to show the existence of jurisdiction. We agree that the Bulau case lends support to the proposition that where the cause of action is based upon fraud the district court has jurisdiction to entertain the claim even though it affects probate matters. Furthermore, because appellant relies heavily upon the allegation that the rights asserted in this suit are personal rights of Mrs. Bush, we think that jurisdiction lies in federal court under the authorities earlier cited.

Finding jurisdiction we turn to the question of whether the district court in the exercise of its discretion should have declined to entertain this suit. See Markham v. Allen, 326 U.S. 490, 495, 66 S.Ct. 296, 90 L.Ed. 256 (1945); Burford v. Sun Oil Company, 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943); State Farm Mutual Automobile Insurance Company v. Bonwell, 248 F.2d 862, 865 (CA8 1957).

Federal courts choose not to exercise their jurisdiction for numerous reasons. See cases cited in Wright, Federal Courts § 52 (1970). One of those instances is when the federal court action would needlessly interfere with the state’s administration of its own affairs. Alabama Public Service Commission v. Southern Railroad Company, 341 U.S. 341, 349, 71 S.Ct. 762, 95 L.Ed. 1002 (1951); Burford v. Sun Oil Company, supra; Tomiyasu v. Golden, 358 F.2d 651, 655 (CA9 1966). We believe that the instant case presents a situation fitting the mold for abstention.

The area of probate and decedents’ estates presents many varied problems. State courts deal with these problems daily and have developed an expertise which should discourage federal court intervention. These local > problems should be decided by state courts. Cf. Magaziner v. Montemurs, 468 F.2d 782, 787 (CA3 1972); Downie v. Pritchard, 309 F.2d 634, 636 (CA8 1962).

It would be improper for the federal courts to entertain a collateral attack on the judgments of the probate court or the district court in this case. As the district court recognized, the procedures for attacking these judgments are available to appellants in direct attacks upon those judgments for fraud or misrepresentation. Pangalos v. Halpern, 247 Minn. 80, 76 N.W.2d 702 (1956); Bulau v. Bulau, supra. In addition, the Minnesota Supreme Court has pending before it an appeal from the Ramsey County, Minnesota District Court which appeal may resolve the issues in the instant case. We should not interfere with that procedure. Reichman v. Pittsburg National Bank, 465 F.2d 16, 18 (CA3 1972); Dreyfus v. First National Bank of Chicago, 424 F.2d 1171, 1175 (CA7 1970).

We need not decide whether the personal rights of Mrs. Bush have been adjudicated and are therefore res judicata. The trial court felt that they were. The Minnesota district court in its memorandum and order, which is now on appeal to the Minnesota Supreme Court, indicates that the personal rights of Mrs. Bush have been adjudicated. The Judgment and Decree in the state court' settlement (April 10, 1970) also so indicates. See also Bush v. Arrowood, 293 Minn. 243, 198 N.W.2d 263, 265 (1972).

The Minnesota state courts are manifestly familiar with this litigation. The issues are intertwined with the probate and administration of the Bush estate. Whatever remedies appellants have can and should be pursued in the state courts. This case presents a situation where it is within the sound discretion of the federal district court to abstain.

Appellant argues that even if abstention is proper it was improper to dismiss. We disagree. Intervention of the federal courts is not necessary in this case for the protection of federal rights. Alabama Public Service Commission, supra, 341 U.S. at 349, 71 S.Ct. 762. Where, as here, the federal court abstains to avoid interference with state activities, and no federal interest requires retention of jurisdiction, dismissal is proper. If federal rights of any party are infringed, the normal state court review and certiorari to the United States Supreme Court are available. Tomiyasu v. Golden, supra, 358 F.2d at 655; Wright, Federal Courts § 52 at 200 (1970); see also Roy v. Jones, 484 F.2d 96, 101 (CA3 1973) (Aldisert, Circuit Judge, concurring).

There remains the question of whether the- district court’s final judgment was proper. The court’s memorandum and order clearly reflects that the dismissal was without prejudice to the bringing of the appropriate actions in state court. The judgment, however, dismissed the action on the merits. We have said that it is “inappropriate to make a determination on the merits while applying the abstention doctrine.” First American Bank & Trust Company v. Ellwein, 474 F.2d 933, 936 (CA8 1973).

Accordingly, we affirm the decision of the district court solely upon the basis of abstention. We remand the case to the district court for the single purpose of modifying the judgment to reflect abstention as the basis for dismissal rather than a decision on the merits. Ellwein, supra; Alabama Public Service Commission, supra.

      . The United States District Court for the District of Minnesota, the Honorable William G. Juergens, Eastern District of Illinois, sitting by designation.

      . The figures as to the original value of the estate range from $130-$150 million. The estate as now held by the executors, after three partial distributions to the Bush Foun-elation, is apparently worth approximately $85 million.

      . Among other things, the settlement agreement further provided that the executors, would pay Mrs. Bush $2,100,000 to settle a. dispute over a Florida property which the will had provided to Mrs. Bush as a residence for life “free of charge.”

      . The judgment concluded in part:
      * * * the above-entitled action, including all claims, counterclaims and cross-claims of or against the parties thereto (including but not limited to defendants Mary Jane Dickman and I-Ier-schel S. Arrowood) and against persons not parties hereto with respect to whom claims were asserted in or during the pen-dency of the action (including, but not limited to, David R. Roberts, Philip Stringer and Walter N. Trenerry) shall be and they are hereby dismissed with prejudice * * *. i

      . We think it useful to set out the relevant portions of the Florida court’s order:
      * * * it is ORDERED AND ADJUDGED :
      1. That the Co-Guardians of the Property of Edyth D. Bush, a/k/a Mrs. Archibald G. Bush, an Incompetent, are instructed, authorized and directed to commence, continue and pursue, by motions, complaints or other legal proceedings in the Probate and District Courts of the State of Minnesota or in any other appropriate tribunals or courts, such actions as may be appropriate and necessary to set aside and nullify the Decree and Judgment dated April 10, 1970 of the District Court,
      Second Judicial District, Minnesota, in Bush, et al v. Arrowood, et al, File No. 356691, and to set aside and nullify the Stipulation and Agreement dated September 17, 1969, and in connection therewith to secure an Order or Judgment that the said matter be again set down for trial so that the issues contained in the Complaint and pleadings therein, together with any amendments or supplements thereto, may be fully tried and the rights of Edyth D. Bush, individually, and as a Director of and on behalf of The Bush Foundation, be finally determined after a trial on the merits; and further to secure such declaratory orders, decrees, judgments or other relief as may be appropriate or necessary to adjudge and determine that the various agreements and promises made to the Ward on or about August 27, 1966, by the Co-Executors of the Estate of Archibald G. Bush, and also by The Bush Foundation, have been and are unperformed, violated, breached, ignored and rendered meaningless in major and material respects, so as to entitle the Ward to renounce the Last Will and Testament of her late husband Archibald G. Bush, and for such other relief as may be appropriate in connection with the foregoing matters and proceedings.

      . We refer primarily to paragraphs 1, 2 and 4 of the complaint set out above.

      . Since the Minnesota court held that the state district court had jurisdiction in a situation analogous to the instant case, the federal court here would have jurisdiction if diversity requisites are met.
      We, of course, give deference to the district court’s interpretation of local law. Highway Construction Company v. Moses, 483 F.2d 812, 814 n. 2 (CA8 1973); Owens v. Childrens Memorial Hosp., 480 F.2d 465, 467 (CA8 1973).

      . In March of 1972 the Ramsey County Probate Court entered an order denying permission to the co-guardians of Mrs. Bush to file renunciation of the husband’s will. The ruling was affirmed by the state district court. The case is now on appeal to the Minnesota Supreme Court. Appellants’ legal and factual claims are substantially similar to the claims made in the instant case.

      . See note 8 supra.

      . See note 4 supra.

      . That the Co-Guardians of the Property herein are instructed, authorized and directed to litigate and defend in the Probate Court of Ramsey County, Minnesota, or in the District Courts of the State of Minnesota, or in any other appropriate courts or tribunals, any and all interests of the Ward as may be or become involved in the proceedings now pending or hereafter filed in the said Probate Court or in any other courts or tribunals to adjudge or declare that there has been no effective renunciation by the Ward of the Will of her late husband Archibald G. Bush and that she and her guardians have no further interest in the estate or its assets, with the purpose of sustaining and validating the renunciations heretofore filed by her or on her behalf on August 30, 1966 and on November 23, 1971 in the Probate Court of Ramsey County, Minnesota.


author: COFFIN, Chief Judge.

text:
    Jane DOE et al., Plaintiffs, Appellees, v. HALE HOSPITAL et al., Defendants, Appellants.
    No. 74-1078.
    United States Court of Appeals, First Circuit.
    Argued June 4, 1974.
    Decided July 12, 1974.
    Robert D. City, Boston, Mass., with whom A. David Mazzone and Moulton, Looney, Mazzone, Falk & Markham, Boston, Mass., were on brief, for appellants.
    Nancy C. Gertner, Boston, Mass., with whom Silverglate, Shapiro & Gertner, John Reinstein, James C. Hamilton, and Hamilton & Lamson, Boston, Mass., were on brief, for appellees.
    Before COFFIN, Chief Judge, Mc-ENTEE and CAMPBELL, Circuit Judges.
   COFFIN, Chief Judge.

Once again this court is faced with a legal repercussion of the landmark Supreme Court decisions in Roe v. Wade, 410 U.S. 113, 93 S.Ct. 705, 35 L.Ed.2d 147 (1973) and Doe v. Bolton, 410 U.S. 179, 93 S.Ct. 755, 35 L.Ed.2d 147 (1973). This time, as in Hathaway v. Worcester City Hospital, 475 F.2d 701 (1st Cir. 1973), we face the question of the obligation of a public hospital to make its facilities available to women seeking abortions.

The pseudonymous plaintiffs, Jane Doe and Rebecca Doe, and plaintiff-in-tervenors, Jane Doe II, III, IV, and V, at the time they became plaintiffs, were pregnant and had consulted a licensed physician who had found an abortion in their best interest. Although class action status was sought on behalf of a class consisting of women in both first and second trimesters, the district court ruled that since all of the original and intervening plaintiffs were in their first trimesters, class action would be allowed, but restricted to those in their first trimester. The suit is a civil rights action seeking declaratory and injunctive relief against rules, policies and practices of defendants restricting use of the facilities of the Hale Hospital for the performance of abortions, which rules, practices and policies are alleged to infringe rights of privacy associated with the decision of a woman to terminate her pregnancy, and are also alleged to deny equal protection of the laws, all in violation of the United States Constitution.

Defendants are the Hale Hospital, a public hospital owned by the city of Haverhill, Massachusetts, and operated by a Board of Trustees (appointed by the mayor of the city), the Director of the Hospital, and the members of its Board of Trustees. For some time Hospital rules have permitted the performance of “therapeutic” abortions, but have forbidden “elective” ones. After the Supreme Court had handed down its abortion decisions the Executive Committee of the Hale Hospital Medical Staff, on February 22, 1973, issued a report to the Hospital Trustees informing the trustees that the hospital possessed adequate medical staff expertise, adequate physical facilities, and adequate supportive personnel for the performance of elective abortions, and that the pertinent guidelines promulgated by the state Department of Public Health would be met by existing hospital regulations and practices. After approval of the report by vote of the medical staff it was submitted to the Board. On March 29, 1973 the Trustees voted first to allow elective abortions to be performed at the Hospital, but second that implementation of the new policy be deferred until certain matters could be clarified. The City Council of Haverhill then asked the Hospital Trustees to reconsider their decision concerning abortions and on April 9, 1973 the trustees voted to table implementation of the abortion policy approved on March 29 until answers to questions concerning the matter could be received from the state Attorney General and from the leaders of the state Senate and House of Representatives.

On May 21, 1973, Dr. Baratt, a specialist in obstetrics and gynecology and a member of the staff of the Hale Hospital, scheduled the performance of elective abortions upon the two original plaintiffs at the Hospital. On the same day the Hospital Director cancelled the scheduled abortions on the grounds that the Trustees of the Hale Hospital did not permit elective abortions to be performed. Thereafter, on June 26, 1973, the Trustees clarified matters by voting unequivocally to bar the performance of elective abortions at the Hospital.

The district court granted temporary restraining orders in favor of each of the plaintiffs pursuant to which each had an abortion performed at the Hale Hospital. Thereafter the court issued a permanent injunction barring the individual defendants, individually or collectively, from enforcing rules and policies forbidding the use of the Hospital’s facilities for elective abortions. Although the court’s order is worded broadly its opinion is confined to consideration of first trimester pregnancies only. “The outcome”, in the words of the court, was “inexorably indicated on the basis of a syllogism whose major premise is the opinion of the Supreme Court of the United States in Roe v. Wade [supra] and whose minor premise is the opinion of the United States Court of Appeals for the First Circuit construing Roe v. Wade in the context of a publicly-supported municipal hospital .... [I]n Hathaway v. Worcester City Hospital [su/pra] . . .”. We agree.

It is undisputed that the Hospital permits use of its facilities for the performance of medical procedures which are in the same general area of medical practice as are abortions, some of which expose the patient to greater risk and impose a greater demand upon the resources of the Hospital, and at least one of which is practically identical to the procedures used to perform a first trimester abortion. Indeed, at the time that the performance of the kinds of abortions sought by plaintiffs was barred, the Hospital, as we have noted, permitted therapeutic abortions to be performed. Thus, it is clear that on a medical basis elective abortions are indistinguishable from procedures permitted and performed at the Hale Hospital, and that what we said in Hathaway v. Worcester City Hospital, supra, is fully relevant here:

“[Ojnce the state has undertaken to provide general short-term hospital care, as here, it may not constitutionally draw the line at medically indistinguishable surgical procedures that impinge on fundamental rights.” 475 F.2d at 706.

See also Nyberg v. City of Virginia, 495 F.2d 1342 (8th Cir. 1974).

Defendants seek to distinguish Hathaway on two grounds which were not explicitly presented in that case. *****8 First, defendants assert that plaintiffs do not present here a substantial enough deprivation of their rights to justify relief. They claim that elective abortions are available to plaintiffs in clinics or hospitals in Boston, and that the effect of Hale Hospital’s ban on such abortions is merely to “require . . . some extra travel.” We need not determine whether there may exist situations where the practical impact of a restriction upon abortions would be so insignificant that constitutional scrutiny would not be triggered. That is certainly not the situation here. No other hospital or clinic exists in the city of Haverhill for the performance of elective abortions and the record reveals that other hospitals in the Hale Hospital primary service area also do not permit such abortions. In addition, plaintiffs’ physicians are members of the staff of the Hospital, and there is therefore clear advantage in the use of its facilities. As the Supreme Court made clear in Doe v. Bolton, it is not only complete proscription of abortion which is unconstitutional, but barriers which “unduly restrict” the rights of the woman, see 410 U.S. at 198, 93 S.Ct. 755. That there has been restriction of the rights of women who seek elective abortions in Hale Hospital is clear. Whether these restrictions are undue requires consideration of defendants’ second ground of defense.

While not denying that the Hospital possesses the staff and facilities to perform elective abortions, defendants argue that the addition of this kind of procedure to those already performed at the Hospital would severely tax already strained resources. In particular, the physical facilities are said to be unable to bear any major additional load without causing significant problems. However, other than the fact that they have not been allowed before, no reason is given why elective abortions are, on a medical basis, the most appropriate class of procedure to be sacrificed as a result of overcrowding of hospital facilities. And it cannot be argued that, by permitting elective abortions, patients whose conditions are more serious from a medical standpoint will be disadvantaged, since plaintiffs do not seek to displace such patients. All that is sought is that elective abortions be accorded the same standing as other procedures of a similar medical nature.

Under these circumstances the impact upon the Hospital and its patients will at worst be some increment in the delay in scheduling elective medical procedures, and perhaps an increase in the incidence of schedule cancellations of such procedures with the inconvenience of having to reschedule them. This is a matter of valid concern to hospital administrators, but it is far from the kind of compelling interest that must be demonstrated when rights are at stake which are “ ‘fundamental’ or ‘implicit in the concept of ordered liberty’ ”, Roe v. Wade, supra, 410 U.S. at 152, 93 S.Ct. at 726. Therefore, the restrictions placed by the Trustees of the Hale Hospital upon the rights of women to determine whether or not to have an abortion are “undue” in the sense that they are well beyond those needed to preserve a compelling state interest, with the consequence that constitutionally protected rights have been denied.

We wish to reaffirm what the district court was careful to point out, that its order “in no way impinges upon the authority of the hospital Trustees and the Director of the hospital to make hospital facilities available to persons seeking elective abortions only on the same terms and subject to the same conditions as those imposed upon other would-be users of the hospital facilities. Nor does this order require that any individual member of the staff of Hale Hospital, or any employee of Hale Hospital, participate or assist in any way in the performance of these abortions if that person as a matter of conscience objects to so doing.” Moreover, as we said in Hathaway v. Worcester City Hospital, “we are not mandating the city or state to maintain this hospital, or to retain its present size, staff, or facilities. The hospital is not required to perform all kinds of nontherapeutic or even all therapeutic surgical procedures,” 475 F.2d at 706. Although thus limited, our holding is not to any degree diminished in force or in importance. A public medical facility, like the Hale Hospital, may not forbid elective abortions so long as it offers medically indistinguishable procedures, without violating the fundamental rights associated with the decision to terminate pregnancy set out in Roe v. Wade and Doe v. Bolton.

Affirmed.

      . Under the Hospital’s rules an abortion will be permitted if, in.the judgment of the Hospital’s Therapeutic Abortion Committee, “continued pregnancy in the presence of serious disease constitutes a significant threat to the life or health of the mother.” Such we shall refer to as a “therapeutic abortion,” using “elective abortion” to describe an abortion which would not be approved by the hospital rules. Defendants do not claim that, if Roe v. Wade and Doe v. Bolton require that Hale Hospital allow performance of abortions, its Therapeutic Abortion policy would be in compliance with the requirements of those eases.

      . Defendants also point to Chapter 521 of the Massachusetts Acts of 1973 which was passed subsequent to our decision in Hathaway. However, that law refers only to the rights of “privately controlled” hospitals or other health facilities and thus has little relevance here. While the Massachusetts law also permits individuals associated with any hospital to decline to participate in the performance of an abortion on moral or religious grounds, there is no evidence that severe disruption of hospital routine leading to endangerment of the safety of patients will result from the possible need to accommodate the moral or religious convictions of hospital staff.

      . In Doe v. Wohlgemuth, 376 F.Supp. 174 (W.D.Pa.1974) (three judge court), Pennsylvania’s failure to include “elective” abortions in the coverage of the state’s medical assistance program (providing reimbursement for certain medical costs of indigents) was found unconstitutional, despite the state’s claim that its exclusion of such abortions conserved hospital space and state funds.


author: VAN OOSTERHOUT, Senior Circuit Judge.

text:
    CHARLES SCHNEIDER & CO., INC., Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. FUTURE FOAM, INC., Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. CHARLES, INC., Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. CENTRAL WOODWORKING CO. INC., Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
    Nos. 73-1798 to 73-1802.
    United States Court of Appeals, Eighth Circuit.
    Submitted May 13, 1974.
    Decided July 10, 1974.
    Rehearing Denied Aug. 19, 1974.

      Joel Davis, Omaha, Neb., for appellants.
    Louis A. Bradbury, Atty. Tax Div., Dept, of Justice, Washington D. C., for appellee.
    Before JOHNSEN and VAN OOSTERHOUT, Senior Circuit Judges, and TALBOT SMITH, Senior District Judge.

       TALBOT SMITH, Senior District Judge, E¡ tion. ¡tern District of Michigan, sitting by designa-

   VAN OOSTERHOUT, Senior Circuit Judge.

The taxpayer corporations in the above-entitled cases, which were consolidated in the Tax Court and here, have taken timely appeals from the decision of the Tax Court determining deficiency income tax liability against Charles Schneider & Co., Inc. (C. S. & Co.), for the taxable years ending June 30, 1966, 1967 and 1968, in the amounts of $23,512.40, $15,333.42 and $21,721.05 respectively, and determining income tax deficiency against Future Foam, Inc., for the taxable years ending August 31, 1966, 1967 and 1968, in the amounts of $18,130.17, $3,475.46 and $7,365.58 respectively. The Tax Court’s opinion filed June 18, 1973 is reported at 32 TCM 553 (1973). Decision was entered in accordance with the opinion on August 22,1973. This appeal followed.

Many issues involved in this litigation have been resolved and are no longer in controversy. Taxpayers in their brief challenge the Tax Court’s determination that under the facts of this case Charles, Inc., was not entitled to file a consolidated return with its subsidiary Chemical Corporation of America. Such issue was specifically abandoned by taxpayers on oral argument. In any event, the decision of the Tax Court on the issue is entitled to be affirmed on the basis of the Tax Court’s opinion.

The issue before us is whether taxpayers C. S. & Co. and Future Foam, Inc. , are entitled to ordinary and necessary business expense deductions under § 162(a)(1) I.R.C.1954 for the compensation paid their chief executive officers for the years ending in 1966, 1967 and 1968, in excess of the amount which the Tax Court found to be reasonable compensation for services rendered to the corporations. ****More specifically, the issue is whether the Tax Court’s determination of the amount of executive compensation paid by C. S. & Co. and Future Foam, Inc., which is deductible as a reasonable expense, is clearly erroneous. We hold, that the Tax Court’s decision is supported by substantial evidence and is not clearly erroneous and affirm the judgment.

The record in this case is long. Much of the evidence is stipulated. Evidence was offered in the Tax Court by both parties. Many exhibits were received in evidence. The pertinent evidence is fairly set out in considerable detail in the Tax Court’s opinion. An attempt to set out all of the facts would unduly prolong this opinion. We shall briefly summarize the basic facts. Taxpayers C. S. & Co., Future Foam, Inc., Charles, Inc., and Central Woodworking Co., Inc., are all active in various aspects of the furniture and upholstering manufacturing business at Council Bluffs, Iowa. Charles Schneider played the principal part in organizing and developing such corporations. His efforts contributed significantly to the successful operation of the corporations. During the tax years here in controversy all of the stock in C. S. & Co., 60% of the stock in Future Foam, Inc., 50% of the stock in Central Woodworking Co., Inc., and possibly all of the stock in Charles, Inc. was owned by Charles Schneider. Schneider, after substantially completing a law school course and serving in World War II, started a furniture and upholstery business about 1946. In 1954 this business was incorporated as C. S. & Co. with Schneider as president and his brother-in-law, Leon Summer, as vice-president. Summer became president in 1963 and assumed active management. Summer had an option to purchase C. S. & Co. stock which he never exercised. Schneider at all times owned all of the corporate stock and maintained an active role in the company’s affairs. In 1963 an agreement was entered into providing a basic salary of $351.00 per week for Summer and $230.00 per week for Schneider, plus bonuses to be computed as follows:

Bonus No. 1.

If there was sufficient net income Three-fourths of 1% of annual net sales divided equally between Schneider and Summer.

Bonus No. 2.

After deductions from net profits for:

(a) Schneider’s and Summer’s salaries and No. 1 bonuses.
(b) 2% of net sales for retained earnings;
(c) federal income taxes;
(d) state income taxes;

remainder to be divided equally between Schneider and Summer.

The amount of compensation paid by C. S. & Co. based on basic salaries and bonuses No. 1 and No. 2 for the fiscal years ending in 1966, 1967 and 1968 was $65,104.94, $59,052.98 and $65,000.00 to Schneider and $74,414.50, $66,357.95 and $74,089.36 to Summer. Bonus No. 2 provided the major portion of the compensation paid to the executives. It is undisputed that C. S. & Co. has never paid a dividend. With respect to each of the taxable years here involved, the Commissioner disallowed deductions to C. S. & Co. for compensation paid Schneider in excess of $35,000 and for compensation paid Summer in excess of $50,000. The Tax Court found and determined that for each of the years involved salaries paid by C. S. & Co. to Schneider in excess of $40,000 and to Summer in excess of $60,000 would be unreasonable and hence not allowable as a business expense deduction.

Future Foam, was organized by Schneider who held all of its stock until 1965 when he sold 20% of the stock to Grassman and a similar amount to Friedman, all pursuant to a stock option. Grassman and Friedman had been with Future Foam since about 1960 and had put in long hours and capable services in building up the company. Grassman played a major part in developing a successful foam which the company manufactured and sold. Friedman was president of the company and Grassman was vice-president. In 1963 an agreement was entered into to pay Schneider a basic salary of $150.00 per week and Grassman and Friedman each $175.00 per week. Additionally, under Bonus No. 1 Friedman and Grassman were to divide % of 1% of net sales. Bonus No. 2 was in substance the same as the C. S. & Co. Bonus No. 2 with division to be made equally among Schneider, Friedman and Grassman.

Pursuant to this arrangement for the fiscal year ending August 31, 1966, Friedman and Grassman each received compensation of $80,176.00 ($61,807.00 of which was based on Bonus No. 2), and Schneider received $45,000.00. Schneider received $45,780.00 in the fiscal year 1967. The Commissioner disallowed Future Foam a deduction for compensation paid Grassman and Friedman in excess of $50,000 during the fiscal year ending August 31, 1966, and compensation paid Schneider for the fiscal years 1966 and 1967 in excess of $35,000.00 per- year. The Tax Court raised the allowable deduction for compensation paid Grassman and Friedman to $65,000.00 and raised the allowable deduction for salary paid Schneider to $40,000.00 for the years 1966 and 1967.

Section 162(a)(1) of the Internal Revenue Code of 1954 permits a taxpayer to deduct “a reasonable allowance for salaries or other compensation for personal services actually rendered” as ordinary and necessary business expenses. The determination of what is reasonable compensation is a factual one to be ascertained from all the facts and circumstances of a case, to which the clearly erroneous standard applies. Charles McCandless Tile Serv. v. United States, 191 Ct.Cl. 108, 422 F.2d 1336, 1338 (1970); Pacific Grains, Inc. v. Commissioner, 399 F.2d 603, 605 (9th Cir. 1968). Decisions of the Tax Court are reviewable in the same manner and to the same extent as decisions of the district courts sitting in civil actions without a jury. This court is bound by the factual determinations of the Tax Court unless they are found to be clearly erroneous or are unsupported by substantial evidence upon the record as a whole. 26 U.S.C. § 7482(a); Commissioner v. Duberstein, 363 U.S. 278, 290-291, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960); Byrne v. Commissioner, 449 F.2d 759, 760 (8th Cir. 1971); Commissioner v. Riss, 374 F.2d 161, 166 (8th Cir. 1967).

Several factors to be considered in determining reasonableness of compensation have been mentioned by the courts.

Such factors include the employee’s qualifications; the nature, extent and scope of the employee’s work; the size and complexities of the business; a comparison of salaries paid with the gross income and the net income; the prevailing general economic conditions ; comparison of salaries with distributions to stockholders; the prevailing rates of compensation for comparable positions in comparable concerns; the salary policy of the taxpayer as to all employees; and in the case of small corporations with a limited number of officers the amount of compensation paid to the particular employee in previous years. Mayson Mfg. Co. v. Commissioner, 178 F.2d 115, 119 (6th Cir. 1949).

See also Hammond Lead Products, Inc. v. Commissioner, 425 F.2d 31, 33 (7th Cir. 1970), quoting 4A Mertens, Law of Federal Income Taxation, § 25.69 at 282 (1966); Irby Constr. Co. v. United States, 154 Ct.Cl. 342, 290 F.2d 824, 826 (1961).

In the instant case, the petitioners strenuously advocate that because the compensation paid to their employees was paid pursuant to contingent compensation agreements, the reasonableness of which must be measured by conditions existing at the time of their execution, the compensation must necessarily have been reasonable. Such agreements were incentives to the officers to increase the profits, as shown by the later success of these companies. Thus, the payments were reasonable compensation to reward these executives for the successful operation of their respective companies. Support for their position may be found in the language of the regulations. Treasury Regulation § 1.162-7(a) provides:

•* * * -X- * *-

(2) The form or method of fixing compensation is not decisive as to de-ductibility. . . . Generally speaking, if contingent compensation is paid pursuant to a free bargain between the employer and the individual made before the services are rendered, not influenced by any consideration on the part of the employer other than that of securing on fair and advantageous terms the services of the individual, it should be allowed as a deduction even though in the actual working out of the contract it may prove to be greater than the amount which would ordinarily be paid.
(3) . . . The circumstances to be taken into consideration are those existing at the date when the contract for services was made, not those existing at the date when the contract is questioned.

However, Treasury Regulation § 1.162-7(a) (3) limits this by providing that “[i]n any event the allowance for the compensation paid may not exceed what is reasonable under all the circumstances. It is, in general, just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises under like circumstances.” Thus, even if the conditions of § 1.162-7(a) (2) are met, a fact finder could still find a contingent compensation • agreement to be unreasonable under all the facts and circumstances of a particular case; compensation paid pursuant to such an agreement is not inherently reasonable.

Generally speaking, the fact that compensation is based on a contingent compensation agreement, if fixed pursuant to a free bargain, is an element tending to show reasonableness. Bank of Palm Beach v. United States, 476 F.2d 1343, 1348 (Ct.Cl.1973); Irby Constr., supra, at 827. However, where the corporation is controlled by the very employees to whom the compensation is paid, special scrutiny must be given to such salaries, for there is a lack of arm’s length bargaining as required by Treasury Regulation § 1.162-7(a) (2). Hammond Products, supra, at 33; Heil Beauty Supplies, Inc. v. Commissioner, 199 F.2d 193, 194 (8th Cir. 1952); Hampton Co., T. C. Memo 1964-150, 23 CCH Tax Ct. Mem. 899, 902 (June 1, 1964). Cf. Miller Box Co. v. United States, 488 F.2d 695, 707 (5th Cir. 1974). In these circumstances payments under these arrangements may be distributions of earnings rather than payments of compensation for services rendered; even if they are reasonable, they would not be deductible. Irby Constr., supra, at 827. A bonus-type contract which is reasonable with a non-stockholder employee may be unreasonable if made with a large stockholder, since the incentive of the bonus would presumably not be needed to call forth the stockholder’s best efforts. Id.; Northlich, Stolley, Inc. v. United States, 177 Ct.Cl. 435, 368 F.2d 272, 278 (Ct.Cl.1966). See Hampton Corp., supra, at 902.

In the instant eases, at the time these agreements were entered into, Schneider was the sole shareholder of C. S. & Co. and Future Foam. No special incentive was necessary to ensure his best efforts, for he would receive the fruits of success through his status as the majority shareholder of each of these companies. As the controlling shareholder and director, any agreement between one of these corporations and him in his status as an employee could not be at arm’s length. Summer, while owning no stock, was a member of the board of directors of C. S. & Co., and was a close relative of Schneider, factors tending to show a lack of arm’s length bargaining. He held a stock option at the time these agreements were fashioned and throughout the years in question. The ability to exercise this option at anytime would enable Summer to share in the fruits of success of C. S. & Co. as a shareholder at his will, and the agreement in question was similarly not necessary to ensure his continued best efforts. Moreover, it is reasonable to infer that Summer as chief executive officer was awarded generous compensation to make Schneider’s compensation appear reasonable. Friedman and Grassman each had the option to purchase 20% of the shares of Future Foam, which options they exercised in 1965. Thus, they too knew they could share in any profits as shareholders, and the contingent compensation plans were not necessary to ensure their best efforts on behalf of the corporation. These individuals with Schneider have been members of the board of directors of Future Foam since prior to the date their compensation agreements were effective, which fact would tend to negate an arm’s length bargaining situation. In short, even though the compensation paid to each of these insiders was based on the contingency of profits, this fact alone does not necessarily require a finding under § 1.162-7(a) of reasonableness, especially when as here there is evidence of a lack of arm’s length bargaining for the agreements.

Other evidence exists which supports the Tax Court’s conclusion that these agreements were not the result of arm’s length bargaining but were in reality a mechanism for the distribution of profits “apparently without relation to the services performed.” Perhaps most important is the fact that no dividends were ever paid by any of these companies during this time, even though they enjoyed consistent profits and immense success in the industry. A substantial return of investment for the shareholders would be expected from such successful operations. McCandless, supra, at 1340. An absence of profits paid back to the shareholders as dividends justifies an inference that some of the purported compensation really represents a distribution of profits. Id.; Jones Bros. Bakery, Inc. v. United States, 188 Ct.Cl. 226, 411 F.2d 1282, 1293 (1969); Pacific Grains, supra, at 606.

The provisions of the agreements themselves tend to support the notion that they provided for a distribution of profits rather than compensation for services rendered. Under the agreements the officers of each of the companies would equally divide the net profits of the companies where they worked after setting aside but 2% of the net sales for retained earnings and necessary amounts for state and federal taxes. These arrangements necessarily left little or nothing to be paid as dividends, even if the companies should become profitable (as they did), and may be seen as vehicles for distributing future profits, even though they were entered into at a time when the companies were not in healthy financial situations. The petitioner Future Foam points to a $45,000 per annum limitation on Schneider’s salary to show reasonableness. However, an excess bonus of $24,600 in 1966 was simply paid the following year, negating the effect of the limitation.

Other evidence supporting the Tax Court’s determinations and conclusions include the fact that Schneider spent less time after 1963 working for each of these petitioners, although the salary paid him by each increased dramatically. During the tax years here involved, Schneider felt that he had developed competent management teams in C. S. & Co. and Future Foam and was devoting his principal attention to Charles, Inc., in building up a management team. Schneider’s total compensation from Charles, Inc., during the years here involved never exceeded $20,000. Summer also spent much time at Central Woodworking, of which he was one-half owner, detracting from thé time he devoted to C. S. & Co. The part-time nature of their work are elements which must be considered in determining the reasonableness of their compensation. As pointed out by the Tax Court, other members of the management team at C. S. & Co. and Future Foam did not have similar bonus arrangements to ensure their best efforts.

As pointed out by the Tax Court in its opinion, Schneider had received a total compensation from the four taxpayers aggregating $132,000, $127,000 and $108,000 in the fiscal years ending 1966, 1967 and 1968 respectively. In addition, the factory buildings used by the corporations were leased from Cynthia Realty, of which Schneider was the sole stockholder.

A most significant factor to be considered is a comparison of the compensation under consideration and the prevailing rates of compensation paid to those in similar positions in comparable companies within the same industry. Jones Bros., supra, at 1291. The Commissioner introduced evidence showing that the compensation paid by the petitioners was grossly disproportionate to the rates of compensation paid to executives in similar sized companies in the furniture industry, and approached the levels of compensation paid by much larger companies. The percentage of net profits paid by the petitioners in executive compensation during these years was two to three times the percentages paid in the rest of the industry. The Tax Court compared the compensation practices and levels of the petitioners to those of Charles, Inc., another company within the same controlled group but in direct competition with at least C. S. & Co. Charles, Inc., did not have a bonus No. 2 plan such as was in effect for C. S. & Co. and Future Foam; contingent compensation agreements at this company provided for executive bonuses of only 3.5 to 6.5% of sales, though it was run by Schneider under a similar management philosophy. The evidence showed much lower salaries paid to the executives at Charles in the absence of agreements like those at C. S. & Co. or Future Foam. The Tax Court in comparing C. S. & Co. with Charles, Inc., states:

[T]he percentages of net income which were paid as compensation for officers of Charles, Inc., were 22.61%, 28.10% and 33.55% for the fiscal years ended June 30, 1966, 1967 and 1968, respectively. By comparison C. S. & Co. paid 89.21%, 77.69% and 67.53% of its net income to officers as compensation for services during those same years. Because the two businesses were quite similar in operation, size, sales and net profits during the years in issue, we can only attribute the wide, discrepancy in compensation to a distribution of profits by C. S. & Co. in the guise of salaries

Taxpayers have introduced some evidence to support their contention that the compensation paid executive officers is reasonable. Such evidence is largely by way of conclusion. It is not disputed that all recipients of compensation here involved were competent and put in long hours of work and that the success of the taxpayer corporations was attributable to their efforts.

Taxpayers contend that the expert evidence they introduced to the effect that the compensation paid executives was reasonable is undisputed. We disagree. Internal Revenue Agent Johnson, who had served as a revenue agent since 1955 and had examined many corporate returns, testified that the compensation paid the executives here involved was excessive and set out in detail his reasons for such conclusion.

In any event, the Tax Court as a fact finder is the exclusive judge of the credibility of witnesses and the weight to be given their testimony. Riss, supra, at 166; Investers Diversified Services, Inc. v. Commissioner, 325 F.2d 341, 351 (8th Cir. 1963); Midland Ford Tractor Co. v. Commissioner, 277 F.2d 111, 115 (8th Cir. 1960).

An element reflecting on the intent of the parties as to the potential effect of these agreements is the fact that the bylaws of these corporations were amended shortly after the agreements were adopted to require the employees to repay to the companies amounts which they received under the agreements but which were later declared by a court not to be deductible expenses for tax purposes. See Article VIII, Amendment to Bylaws, Charles Schneider & Co., adopted June 22, 1963. This may reflect a pre-exist-ing knowledge on the part of the taxpayers that the payments would not be reasonable for tax purposes, and could lead to an inference as to their intent.

No purpose will be served in further detailing the extensive evidence. A careful examination of the record satisfies us that the Tax Court’s decision is based upon substantial evidence, that it is not induced by any erroneous view of the law, and that it is not clearly erroneous.

The decision of the Tax Court is affirmed.

      . The Tax Court determined as a deductible business expense all executive compensation paid by Charles, Inc., and Central Woodworking Co., Inc., and such determination is not here challenged.

      . Future Foam held legal title to all of the stock of Charles, Inc. Agreements between Schneider and the minority stockholders of Future Foam provided that the minority stockholders acquired no interest in Charles, Inc. No adjudication of ownership of Charles, Inc., stock is essential for the disposition of this case.