author: FORMAN, Circuit Judge.

text:
    TRAVELERS INSURANCE COMPANY, Appellant, v. Marjorie DAVIS et al., Appellees.
    No. 72-1373.
    United States Court of Appeals, Third Circuit.
    Argued March 8, 1973.
    Decided Jan. 3, 1974.

      Joseph J. Murphy, Robert J. Murphy, Thomas W. Murphy, Murphy, Murphy & Murphy, Philadelphia, Pa., for appellants.
    Marshall A. Bernstein, Marlene F. Lachman, Bernstein, Bernstein, Harrison & Kessler, Philadelphia, Pa., for ap-pellees.
    Before FORMAN, VAN DUSEN and GIBBONS, Circuit Judges.
   OPINION OF THE COURT

FORMAN, Circuit Judge.

This is an appeal from an order of the United States District Court for the Eastern District of Pennsylvania dismissing with prejudice under Federal Rules of Civil Procedure 12(b)(1) and 12(b) (6) a complaint under the Declaratory Judgment Act, 28 U.S.C. §§ 2201-2202, by Travelers Insurance Company (“Travelers”) against Marjorie Davis, Paul Davis and Morris Solomon, the Executors of the Estate of Edward P. Goldburgh (the “insured”), the American Arbitration Association (the “Association”), and Arbitrators Guy T. Matthews, Arthur G. Raynes, and Richard M. Rosenbleeth.

The relevant facts, substance of the complaint, and procedural history of the case are set forth below.

On October 30, 1967, the appellant, Travelers, a Connecticut corporation, issued in Massachusetts a comprehensive automobile liability policy to American Biltrite Rubber Co., Inc. (“Biltrite”), a Delaware corporation whose principal place of business was Massachusetts. The policy covered forty-three vehicles located throughout the United States. Each vehicle was listed in the policy for uninsured motorists coverage of $10,000 per person and $20,000 per vehicle.

On November 21, 1967, Edward P. Goldburgh, a Pennsylvania citizen and employee of Biltrite, was killed in the course of his employment in Texas while a passenger in vehicle number forty, when struck by a piece of lumber which fell from a passing truck. Since the alleged tortfeasor was not protected by liability insurance, claim was made by the Executors (all of whom were Pennsylvania citizens) of the Estate against Travelers under the arbitration clause of the uninsured motorists provision of the policy. Travelers and the Executors were unable to reach agreement upon the extent of coverage or the amount of payment due. Travelers contended that the limit was $10,000. The Executors contended that the limit was $430,000. The Executors sought arbitration as provided for in the insurance contract. Travelers agreed. The three Arbitrators named above were appointed by the American Arbitration Association. Both parties entered into a written stipulation that the Arbitrators initially should make a preliminary determination of the extent of coverage.

The first hearing was on September 21, 1970 with oral argument and the submission of written briefs. Supplemental briefs were received by the Association on October 13, 1970, and mailed to the Arbitrators. On November 30, 1970, the Association notified counsel for the parties that it had received a letter dated November 25 from Arthur C. Raynes, one of the Arbitrators, that they had unanimously ruled for the ap-pellees. There was no written opinion by the Arbitrators. A second hearing on negligence and damages has not been held because of the ensuing legal proceedings.

Travelers petitioned the Court of Common Pleas of Philadelphia County to “Vacate [the] Award of the Arbitrators . Strike the Panel . . . [and] Direct the Arbitrators to File an Opinion in Support of its Award” on December 14, 1970. The petition to vacate the award of the Arbitrators alleged that a more than thirty-day delay from the closing of the hearing to the “Award” divested the Arbitrators of jurisdiction because it represented a violation of the rules of the Association. The petition also alleged that the Arbitrators did not rule on whether any “award” could be reduced by amounts paid and payable under Workmen’s Compensation laws. The petition to strike the panel of Arbitrators alleged various violations and irregularities in the selection thereof. The petition to direct the Arbitrators to file an opinion alleged a disregard of the insurance contract and the intent of the parties. The petitions were denied on February 16, 1971. No copy of the opinion of the Court of Common Pleas appears in the record of the instant case. Travelers appealed to the Superi- or Court of Pennsylvania on March 1, 1971. This appeal was quashed on June 25, 1971. No copy of the opinion of the Superior Court appears in the record herein.

Travelers resorted to the District Court on October 22, 1971 by filing suit under the Declaratory Judgment Act. The complaint comprised some twenty-seven numbered paragraphs and a prayer for relief. Paragraphs 1-4 alleged diversity, jurisdictional amount, and the presence of federal questions. Paragraphs 5-7 repeated the facts out of which this dispute arose. Paragraph 8 alleged that the widow of the decedent was entitled to some $36,000 as Workmen’s Compensation benefits. Paragraphs 9-12 detailed the claims of the Executors which led to arbitration, asserting among other things that the stipulation between counsel specified the extent of coverage as the initial issue to be resolved by the Arbitrators, but that Travelers never conceded that the Arbitrators had “jurisdiction over the person or the subject matter . . .” and had “never waived its right to challenge the propriety of such an adjudication, the application of Pennsylvania law or, the denial of the right of Appeal.” Travelers further alleged in paragraph 12 that it never waived “its right to challenge the right of the Arbitrators to determine the construction of the insuring agreement, with particular reference to the extent of the coverage, nor to determine the extent of their own jurisdiction.”

Paragraphs 13-15 refer to the Arbitrators’ “decision” and challenge it as a violation of Association rules. Paragraph 16 challenges the Arbitrators’ jurisdiction “ab initio” because the interpretation of the insurance agreement was not the Arbitrators’ function. In paragraph 17 Travelers avers that “ . . .if there be a dispute, the issue is restricted to the damages suffered by the claimant and to no other facet of the litigation.” Paragraph 18 alleges that “an adjudication which includes the stacking of coverage” violates the due process and equal protection clauses of the Fourteenth Amendment. Paragraph 19 alleges that by “stacking the coverage” the Arbitrators burden its interstate business and “may not be tolerated whether” caused by Pennsylvania statutes, Insurance Commission directives, or Association rules. Paragraph 20 avers that plaintiff cannot “obtain relief, either from the arbitrators or by appeal to the courts of this Commonwealth, in the absence of fraud or misconduct of the arbitrators not present herein.” Therefore, Travelers urges, it is entitled to relief under the Declaratory Judgment Act “as otherwise it will suffer great damage and prejudice t>

Paragraph 21 avers that a declaratory judgment is proper because there are only issues of law in dispute. Paragraph 22 avers that “immediate and irreparable injury” will result unless the District Court issues “a temporary restraining order and/or a preliminary injunction to be followed by a permanent injunction . . . . ” Paragraph 23 asserts that the Executors propose to conduct discovery proceedings in Beaumont, Texas “on or about November 8, 1971 or at such time prior to the time in which [Travelers] . . . may give the requisite notice for an injunction . .” Paragraph 24 urges that if the Executors are not restrained irreparable harm will ensue. Paragraph 25 asserts other reasons for invalidating the discovery proceedings. Paragraph 26 requests that the court declare the law of Pennsylvania not applicable to the case. Paragraph 27 requests that the “award or order of the arbitrators . be vacated, dissolved and set aside and the panel of arbitrators discharged.”

Other relief sought includes:

1) A declaration that the limit of liability is $10,000 providing that claimants establish liability and entitlement thereto;
2) A declaration that adjudication under Pennsylvania law represents deprivation of due process and equal protection;
3) A declaration that use of Pennsylvania law burdens interstate commerce ;
4) A declaration that the Arbitrators’ initial jurisdiction was divested by failure to make a timely award;
5) A restraining order to prevent the Executors from proceeding with discovery in Texas.

The Executors’ answer denied the presence of a federal question; relied upon the stipulation as their second defense; urged that Travelers had failed to state a claim upon which relief may be granted; that it was estopped from making the claim contained in the Complaint; that the court lacked subject matter jurisdiction and that the policy provided for arbitration.

In the motion to dismiss under Rule 12(b), the Executors reiterated the defenses in their answer and added that the Arbitrators had made a “preliminary finding” and not a final award, and that plaintiff had petitioned and lost in the two state courts.

In a memorandum opinion on March 1, 1972, the District Court dismissed Travelers’ complaint with prejudice. In its brief opinion, the court first reviewed the factual and procedural history. The court accepted as fact the stipulation by counsel “that the issue of the amount of coverage available under the policy would be the first issue to be settled by arbitration.” The court then considered the instant case in the light of the decision of its colleague, Judge Luongo, in Gulf Insurance Co. v. American Arbitration Association, and stated that Gulf held “that Pennsylvania rule in common law arbitration is that the arbitrator is the final judge of both law and facts in any dispute before him.” The court noted that in Gulf there was also a question of the extent of liability of an insured motorists provision and that the arbitration provision was “exactly the same provision [as] in the case before me.” In Gulf, an injunction against arbitration was denied. Under the precedent of Gulf, the court granted the defendants’ Rule 12(b) motion to dismiss.

Travelers then appealed to this court.

The initial question is whether the District Court was confronted with a complaint based upon a preliminary ruling of the Arbitrators. Paragraph 7 of the stipulation provides “That the issue of ‘stacking’ be heard by the panel of Arbitrators preliminary to consideration of any other issue in the case.” That the issue of stacking was a preliminary question for the Arbitrators rather than a final award cannot be controverted. Nor can the striking of the clause, “and that the decision rendered be dispositive of this issue in the case,” from paragraph 7 have any binding effect. That would have made the ruling of the Arbitrators merely an advisory action which is not within their province. Moreover, the letter from the Association refers to a ruling, not an award, and looks to the parties to go on with the arbitration proceedings. It is apparent that the ruling in question by the Arbitrators was simply preliminary to the subsequent procedure of determining liability and making an award if the Arbitrators determined that such was warranted.

The next question is whether the District Court could properly hear a complaint based upon a preliminary ruling. If this controversy were under the United States Arbitration Act, then the little available precedent and a plain reading of the statutory language would require immediate dismissal. The same result would obtain under the Pennsylvania Act if that Act were applicable, for both federal and state public policy as fashioned by the respective arbitration acts are, in effect, identical.

Gulfj upon which the District Court relied in granting the Executors’ motion to dismiss under Fed.R.Civ.P. 12, held that when the parties have agreed to arbitration “as expressed in the policy,” the arbitrators’ decision is binding on matters of fact and law. Since all matters were within the jurisdiction of the arbitrators in Gulf, it was held that there were no claims upon which the District Court could grant relief.

The District Court herein thought Gulf and the instant case almost identical and that Pennsylvania law controlled. In Gulf, however, the parties acknowledged that Pennsylvania law applied. In the instant case, Travelers challenges the application of that law. Also, in Gulf, the plaintiff sought an injunction to prevent arbitration, but here Travelers has attacked an arbitrators’ ruling after losing two decisions in the Pennsylvania court system. Whether these two distinctions — the lack of agreement on the applicable law and the presence of state court decisions on issues presented to the District Court — affect the outcome of the instant case is in question.

The District Court was correct in assuming that Pennsylvania law applies. Under Klaxon Co. v. Stentor Electric Manufacturing Company, Inc., a federal court must apply the conflicts of law rule of the forum state. The Pennsylvania conflicts of law rule is stated in Griffith v. United Air Lines, Inc. There, a Pennsylvania domiciliary was killed in an airplane crash in Colorado. Decedent’s executors sued the airline for negligence and breach of contract. The Court of Common Pleas of Philadelphia County held that the law of the place of injury controlled on the matter of damages. The Pennsylvania Supreme Court reversed the Court of Common Pleas. After a review of federal and state decisions, it held that the choice of law requires an analysis of the substantiality of the various interests of the states having contact with the case.

Applying Griffith to the facts of the instant case, Texas “has relatively little interest in the measure of damages to be recovered unless it can be said with certainty that defendant acted in reliance .on that state’s rule.” Massachusetts’ interest is somewhat greater because the contract was made there. But Pennsylvania’s interest is the greatest because decedent and his executors are citizens of that state. Pennsylvania “is vitally concerned with the administration of decedent’s estate and the well-being of the surviving dependents . . . . ”

. The choice of Pennsylvania law is further supported by Clay v. Sun Insurance Office, Ltd., which held that the use of the law of the forum state is consistent with due process when there is an ambulatory contract and the parties thereto have sufficient activities within the forum state. In the instant case Travelers is an insurer actively conducting business within the State of Pennsylvania, and subject to the jurisdiction of the Insurance Department of that state.

In Pennsylvania, the common-law arbitrator is the final judge of both the law and the facts on the matters presented to him. Authority is provided by National Grange Mutual Insurance Co. v. Kuhn, in which the Pennsylvania Supreme Court held that the “matter or matters” provision of the arbitration clause of uninsured motorists coverage provides for the resolution by arbitration of all disputes. Therefore, the District Court in the instant case correctly applied Pennsylvania law when it dismissed the claim that the court should determine the extent of coverage, since the subject matter was solely within the jurisdiction of the Arbitrators.

Whether the District Court properly dismissed the complaint requires a prefatory discussion of the use of the declaratory judgment.

The objectives of the Federal Declaratory Judgment Act are:

“ . . .to avoid accrual of avoidable damages (footnote omitted) to one not certain of his rights and to afford him an early adjudication without waiting until his adversary should see fit to begin suit, after damage had accrued.”

An additional purpose is to clarify legal relationships before they have been disturbed or a party’s rights violated. The granting of a declaratory judgment is discretionary and not mandatory. “Said discretion is to be exercised in accordance with sound judicial principles and the purposes of the Declaratory Judgment Act.” One such judicial principle is the avoidance of needless conflict with a state’s administration of its own affairs. A second is that litigation belongs in the court which is best suited to determine the controversy. “The object of the statute [the Federal Declaratory Judgment Act] is to afford a new form of relief where needed, not to furnish a new choice of tribunals or to draw into the federal courts the adjudication of causes properly cognizable by courts of the states.”

“The . . . statute should not be used to secure a judgment which would impinge on a state proceeding and which might result in a conflict between the decisions of state and federal courts.” The Act is not a substitute for an appeal from a state judgment, nor does it convey to a federal court the power to review a state court decision. In the appropriate exercise of its discretion, a federal court should deny declaratory relief under the same conditions wherein injunctive relief would be impermissible, e.g., where the result would be interference with and disruption of state court proceedings. “The statute should not be used to try a case piecemeal.” A final factor is whether the granting of a declaratory judgment would result in increased congestion of the federal courts.

However, the District Court was well within the exercise of its discretion in considering that Travelers chose to petition the Court of Common Pleas of Philadelphia County to vacate the award, strike the panel, and direct the panel to file an opinion in support of its award long before it initiated the federal declaratory judgment action. The Court of Common Pleas denied the petition. Travelers’ appeal to the Superior Court was quashed. Travelers then asked in effect that the District Court review the decision of the state courts. The District Court could not do this because comity between the federal and state court systems would be disrupted should there be a conflicting result. The defendants would not be able to determine which court to obey. Additionally, Travelers has prevented an early adjudication by its resort to the federal courts for a declaratory judgment. Furthermore, such relief would not clarify but would confuse the legal relations of the parties. Piecemeal litigation would result.

For all the policy reasons given, the District Court was correct in the exercise of its discretionary right to refuse to hear plaintiff’s complaint demanding declaratory judgment.

Basically the holding of the impropriety of the declaratory judgment action is dispositive of this case and makes unnecessary a discussion of the other subsidiary issues, many of which are obviously raised for the first time on this appeal.

In summation, the Pennsylvania rule is that in common-law arbitration, which the District Court correctly held was present here, both matters of fact and of law are finally adjudicated, absent a showing of fraud or misconduct, neither of which has been alleged by the plaintiff-appellant. Accordingly, the District Court properly declined to grant a declaratory judgment on an issue which had been submitted to arbitration. Hence, the order of the District Court of March 1, 1972 will be affirmed.

      . Rules 12(b) (1) and 12(b) (6) state:
      “(b) How Presented. Every defense, in law or fact, to a claim for relief in any pleading, whether a claim, counterclaim, cross-claim, or a third-party claim, shall be asserted in the responsive pleading thereto if one is required, except that the following defenses may at the option of the pleader be made by motion: (1) lack of jurisdiction over the subject matter, . . . (6) failure to state a claim upon which relief can be granted,

      . Clause VI F of the contract states :
      “F. Arbitration. If any person making claim hereunder and the company do not agree that such person is legally entitled to recover damages from the owner or operator of an uninsured, highway vehicle because of bodily injury to the insured, oí-do not agree as to the amount of payment which may be owing under this insurance, then, upon written demand of either, the matter or matters upon which such person and the company do not agree shall be settled by arbitration, which shall be conducted in accordance with the rules of the American Arbitration Association unless other means of conducting the arbitration are agreed to between the insured and the company, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Such person and the company each agree to consider itself bound and to be bound by any award made by the arbitrators pursuant to this insurance.”

      . The Executors asserted that their claim fell under the doctrine of “stacking” which means multiplying the total number of cars covered under the policy (43) by the coverage per car ($10,000).

      . The stipulation states :
      “Stipulation
      “AND NOW, to wit, this 16th day of June, 1970 in an effort to clarify the facts and issues in the above captioned action, it is hereby Stipulated and Agreed by and between counsel for Claimant and counsel for Respondent, The Travelers Insurance Company as follows:
      “1. That on November 21, 1967, Edward P. Goldburgh, deceased, was a passenger in a motor vehicle (1968 Chevrolet Bel Air, Texas License number NFL 913) covered under the terms of an automobile liability insurance policy issued to the American Biltrite Rubber Company, Inc., in the State of Massachusetts by the Travelers Insurance Company;
      “2. That the policy of insurance referred to above, is identified by policy number SLA-7736251, with the effective dates of October 30,1967 to October 30, 1968 ;

        “3. That the policy of insurance referred to above contained Uninsured Motorist Coverage; '

        “4. That the Uninsured Motorist provisions of the said policy applies forty-three (43) MOB JFD
      to twenty-Bevea -(27) separately described motor vehicles in an amount of $10,000.00 per vehicle;
      “5. That Edward P. Goldburgh, deceased, as a passenger, in the aforesaid 1968 Chevrolet motor vehicle, met the qualifications of an insured under the Uninsured Motorist provisions of the above stated policy;
      “6. That an issue involved herein is whether or not the coverage afforded an insured under the above policy is subject to ‘stacking’; i. e. whether coverage extended to deceased was applicable only for the car in which he was riding or as multiplied by the number of cars covered under the policy;
      “7. That the issue of ‘stacking’- he heard by the panel of Arbitrators preliminary to consideration of any other issue in the case.
      MOB JFD
      end that the decision- tendered be dispesi--Kh i Cl •? aatt /\ in J-Tq o /in Li i U vT Lililí lL;i) Uv HI LÜL.
      “Bernstein, Bernstein, Harrison and Kessler By:
      /s/ Marshal A. Bernstein “Murphy, Yeldorale, Weisboed and Dougherty By:
      /s/ John F. Dougherty, Jr.”

      . Appendix at 88-89a.

      . 811 F.Supp. 989 (E.D.Pa.1970).

      . Appendix at 88a.

      . See note 4.

      . Appendix at 39a.

      . In Dunn v. Lewis, 11 Ches.Co.Rep. 370 (1964), a common-law arbitration case, the court held that an action could not be brought for the recovery of an “award” until it was final and definite.

      . 9 U.S.C. § 1 et seq.

      . Luff v. Ryan, 128 F.Supp. 105 (D.C.D.C. 1955), a United States Arbitration Act case, held that the preliminary rulings of an arbitration board prior to the making of its award are not justiciable, and a motion for declaratory judgment and an injunction was denied.

      . The wording of 9 U.S.C. § 10 is :
      “In either of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration—
      “(a) Where the award was procured by corruption, fraud, or undue means.
      “(b) Where there was evident partiality or corruption in the arbitrators, or either of them.
      “(c) Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced.
      “(d) Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.
      “(e) Where an award is vacated and the time within which the agreement required the award to be made has not expired the court may, in its discretion, direct a rehearing by the arbitrators.”

        9 U.S.C. § 11 provides:
      “In either of the following cases the United States Court in and for the district wherein the award was made may make an order modifying or correcting the award upon the application of any party to the arbitration—
      “(a) Where there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award.
      “(b) Where the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted.
      “(c) Where the award is imperfect in matter of form not affecting the merits of the controversy.
      “The order may modify and correct the award, so as to effect the intent thereof and promote justice between the parties.”

      . 5 Purdon’s Pa.Stat.Ann. ch. 4 § 161 et seq.

      . “The rule has been reiterated in many recent decisions that the provisions of the Act of 1927 [the Pennsylvania Arbitration Act] are applicable only if the agreement specifically refers to the Act or there is other evidence justifying the conclusion that both parties agreed either expressly or impliedly that the provisions of the Act should apply.” (Citations omitted.) La Vale Plaza, Inc. v. R. S. Noonan, Inc., 378 F.2d 569, 571 (3d Cir. 1967).

      . The language of the Pennsylvania Act is almost identical to that of the United States Act.

      . 311 F.Supp. 989 (E.D.Pa.1970).

      . See text at pp. 4 and 5.

      . 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941).

      . 416 Pa. 1, 203 A.2d 796 (1964).

      . 416 Pa. at 23, 203 A.2d at 806. No such reliance was pleaded.

      . Id. at 25, 203 A.2d at 807. See also Grant v. McAuliffe, 41 Cal.2d 859, 264 P.2d 944 (1953) (where, in automobile accident inArizona between California cars and California residents, the California Supreme Court avoided the lex loci delicti rule by viewing the problem as of the administration of decedents’ estate and within the law of the forum).

      . 377 U.S. 179, 84 S.Ct. 1197, 12 L.Ed.2d 229 (1964).

      . 311 F.Supp. at 990.

      . 428 Pa. 179, 236 A.2d 758 (1968). _

      . See also Preferred Risk Mutual Insurance Company v. Martin, 436 Pa. 374, 260 A.2d 804 (1970). (Arbitration of issue of coverage under uninsured motorists clause required by court. Kuhn cited as authority.)

      . E. Edelmann & Co. v. Triple-A Specialty Co., 88 F.2d 852, 854 (7th Cir. 1937) quoted in 6A Moore’s Federal Practice 57-26.

      . Brillhart v. Excess Insurance Co., 316 U. S. 491, 62 S.Ct. 1173, 86 L.Ed. 1620 (1942).

      . Shell Oil Company v. Frusetta, 290 F.2d 689 (9th Cir. 1961).

      . Id. at 693.

      . Aetna Cas. & Sur. Co. v. Quarles, 92 F.2d 321, 324 (4th Cir. 1937) cited in Home Indemnity Co., N.Y. v. Lechner, 191 F.Supp. 116, 119 (S.D.Cal.1961).

      . Home at 119, citing H. J. Heinz Co. v. Owens, 189 F.2d 505, 508 (9th Cir. 1951).
      “This discretion should be exercised with proper regard for orderly federal-state judicial relationships . . . It is well settled that the use of the declaratory judgment procedure, merely as a means to review decisions already made by the state courts, is improper .... ‘ * * * even though it were authorized to render a declaratory judgment, which we leave undecided, such a court would not exercise such power to overturn a prior judgment of a state court of concurrent and competent jurisdiction between the same parties and involving the same ’ questions. No litigant is entitled to two declarations of the same right’ (Mc-Lain v. Lance, 146 F.2d 341, 346 (5th Cir. 1944)).” Savini v. Sheriff of Nassau County, 209 F.Supp. 946, 950-951 (E.D. N.Y.1962). (Citations omitted.)

      . Ruip v. Commonwealth of Kentucky, 400 F.2d 871 (6th Cir. 1968).

      . United States ex rel. Roberts v. Commonwealth of Pennsylvania, 312 F.Supp. 1 (E. D.Pa.1970). “It is well settled that a declaratory judgment action cannot be used as a substitute for the prosecution of an appeal or a motion for a new trial in the trial court .... [Citations omitted.] This is especially true in a situation where an attempt is made to substitute the federal declaratory judgment action for the normal pattern of review in a state court. In such a situation, comity between federal and state judicial systems is severely jeopardized.” See also United States ex rel. Bennett v. Illinois, 356 F.2d 878 (7th Cir. 1966) (attempt to void a state criminal indictment).

      . Samuels v. Mackell, 401 U.S. 66, 72-73, 91 S.Ct. 764, 27 L.Ed.2d 688 (1970) (injunctive relief denied because there was no showing of great and irreparable harm through state court proceedings; declaratory relief denied on same basis, citing Great Lakes Co. v. Huffman, 319 U.S. 293, 63 S.Ct. 1070, 87 L. Ed. 1407 (1943)).

      . Home, note 31 supra, 191 F.Supp. at 119, citing Doby v. Brown, 232 F.2d 504, 506 (4th Cir. 1956).

      . The word “award” is used advisedly. Travelers’ complaint in the Court of Common Pleas was similar to its complaint in the District Court with the exception that in the latter it added constitutional claims and a request 'for injunctive relief against Texas discovery proceedings.

      . See Home Indemnity Co. v. Lechner, 191 F.Supp. 116 (S.D.Cal.1961) (insurer denied declaratory judgment on question of duty to defend pending action in state court for policy reasons cited in preceding text).

      . Appellee has argued that appellant was estopped from bringing suit in federal court apparently because of the state court proceedings. Appellee did not, however, affirmatively raise the defense- of res judicata as required under Fed.R.Civ.P. 8(c) and, accordingly, this decision does not rest upon that doctrine.


source: Caselaw Access Project

author: PICKETT, Circuit Judge.

license: Public Domain

text:
    MISCO LEASING, INC., formerly Intercontinental Leasing, Inc., Plaintiff-Appellant, v. L. L. KELLER, Defendant-Appellee.
    No. 73-1227.
    United States Court of Appeals, Tenth Circuit.
    Argued and Submitted Sept. 12, 1973.
    Decided Jan. 30, 1974.

      Richard W. Stavely, Wichita, Kan. (George L. Verity, Brown, Verity, Brown & Baker, Oklahoma City, Okl., with him on the brief), for plaintiff-appellant.
    Timothy E. McKee, Jochems, Sargent & Blaes, Wichita, Kan. (Robert H. Sherman, Sherman & Gay, Oklahoma City, Okl., with him on the brief), for defendant-appellee.
    Before PICKETT, HOLLOWAY and BARRETT, Circuit Judges.
   PICKETT, Circuit Judge.

Misco Leasing, Inc. brought this diversity suit against appellee Keller for the recovery of moneys allegedly due on a lease agreement entered into between Misco and a third party that Keller and his associates had guaranteed. Keller denied liability on the guaranty. He contends that it fails for lack of consideration from Misco and that his execution thereof was coerced. Keller counterclaimed for damages arising out of a quiet title action on real property, the title to which was clouded by a void judgment obtained by Misco in a Kansas federal court. The trial court denied recovery to Misco and awarded actual damages to Keller in the sum of $6,572.-13, and punitive damages in the sum of $10,000.00.

Keller, through “Mr. Ice Inc.,” an Oklahoma corporation, was in the business of selling ice-making machines. For customers who preferred to lease the machines, Keller had an arrangement with Misco, whose principal place of business was in Wichita, Kansas, whereby Misco would purchase the machines from Keller and lease them to qualified applicants. When applications for leases were approved by Misco, Keller would install the machines and submit to Misco a certificate of completion whereupon the purchase price would be paid by Misco. According to the terms of the lease, payments due thereon were to be made directly to Misco and Keller had no further interest therein.

In June of 1966 Oklahoma Resorts, Inc. desired to lease three ice-making machines and submitted an application to Misco which, after a credit investigation, advised Keller in writing that the application had been approved, and “your proceeds will be forwarded to you upon receipt of the signed installation certificate, immediately.” Relying upon this notice, Keller negotiated a thirty-day bank loan for the amount of the purchase price and bought the machines. The installation was fully completed on July 3, 1966, and the required certificate of installation was delivered to Misco. The following day Resorts executed the Misco lease. Mr. Ice Inc. and Keller had performed all of their obligations under the arrangement with Misco. On July 7 a representative of Misco appeared at Keller’s place of business and stated that the Misco officials had advised him that the purchase price would not be forthcoming unless Keller and his associates personally guaranteed the lease. In substance, the advice was, “No guaranty, no money.” Under these circumstances, Keller and his associates determined that there was no alternative to the execution of the guaranty.

A few months later Resorts defaulted in its lease payments and Misco instructed Keller to repossess the machines. Thereafter Misco took possession of the machines from Mr. Ice for the purpose of resale, which was never consummated, and Keller later learned that the machines had been transferred by Misco to satisfy a storage claim.

When Keller refused to make the lease payments, Misco brought suit in the United States District Court for the District of Kansas to recover on the guaranty. Upon advice of counsel, Keller did not appear in that action and a default judgment was entered against him. In order to obtain a personam jurisdiction over Keller, Misco alleged that the guaranty was executed in Kansas and that Keller did business in Kansas, both of which are false statements. A transcript of the judgment was then recorded in Oklahoma and became a cloud upon real estate owned by Keller. Upon suit by Keller, the Kansas judgment was vacated for lack of jurisdiction, which action was affirmed. Misco Leasing, Inc. v. Vaughn, 450 F.2d 257 (10th Cir. 1971). This action on the guaranty was then initiated in Oklahoma, to which Keller filed his counterclaim. Keller denied liability on the guaranty for these reasons: (1) A total lack of consideration, and (2) the execution of the guaranty resulted from unlawful economic duress and coercion. Misco refused to release the Kansas judgment appearing as a cloud on Keller’s real property, resulting in a suit to quiet title brought by Keller in the Oklahoma state court necessitating the expenditure of substantial attorney fees and other costs. Keller sought and the trial court awarded him actual damages representing attorneys fees he had incurred in vacating the void judgment, the appeal taken thereupon by Misco and the state quiet title action.

The trial court found that Mr. Ice Inc. had fully performed on its agreement with Misco before the demand was made for the execution of the guaranty and that the guaranty was not part of or within the contemplation of the parties when the lease agreement was consummated. This finding is supported by the evidence. The court also found that in obtaining the execution of the guaranty Misco “did knowingly, willfully, mali-eiously and with intent to deceive, misrepresent, and threaten the Defendant . to induce him to enter into a void guaranty agreement which resulted in a grave injury to the Defendant; We think the record as a whole supports this finding. The court concluded that “due to the aggravated circumstances of the fraud, deceit, threat, duress and oppression herein,” Keller was entitled to recover certain costs he had incurred together with $10,000 in exemplary damages.

It is true that a guaranty executed contemporaneously with the principal obligation or as a part of the same general transaction does not require separate consideration. 15 Okla.Stat.Ann. § 323 (1966); McMillan v. Lane Wood & Co., 361 P.2d 487 (Okl.1961). Where, as here, the guaranty is found not to be a part of the original transaction and not executed contemporaneously with the principal lease obligation, “there must be a consideration distinct from that of the original obligation.” 15 Okla.Stat. Ann. § 323 (1966). And when a guaranty is executed only to avoid a threatened breach of contract, it is voidable. Kizziar v. Pierce, 204 Okl. 51, 226 P.2d 941 (1951); Pacific Industries, Inc. v. Mountain Inn, Inc., 232 F.Supp. 801 (W.D.Ark.1964); 17 C.J.S. Contracts § 177 b. (1963); 13 Williston on Contracts § 1617 (3d ed. 1970).

Misco argues that Keller did not sustain an actionable injury. Keller contends that Misco’s conduct in breaching the original agreement and in clouding the title to real property owned by him in Oklahoma by the recordation there of the void Kansas federal court judgment constitutes a valid cause of action. The actual damage recovered in the amount of $6,572.13 represents attorney fees and costs incurred by Keller in prosecuting the Kansas proceeding to void the judgment, the appeal taken by Misco therefrom and the state quiet title action. Accordingly, the action is one of slander or disparagement of title, which, in Oklahoma, requires a maliciously false publication disparaging property owned by the plaintiff, resulting in damage thereto. Prudential Insurance Co. of America v. Bonney, 299 F.Supp. 790 (W.D.Okl.1969); Local Federal Savings & Loan Association of Oklahoma City v. Sickles, 196 Okl. 395, 165 P.2d 328 (1946). We are cognizant that Keller did not denote his claim as one of “slander of title.” The substance of his claim and the facts presented established, however, that the action is anchored to the law of slander of title. Rule 8(a), Fed.R.Civ.P. provides that pleadings are to be construed liberally. The purpose of the rule is to eliminate prolixity in pleading and to achieve brevity, simplicity, and clarity. Knox v. First Security Bank of Utah, 196 F.2d 112 (10th Cir. 1952). The dimensions of a suit are not determined by the pleadihgs, Dearman v. Woodson, 429 F. 2d 1288 (10th Cir. 1970); and it is not necessary to allege the particular law or theory under which recovery is sought. United States v. Missouri-Kansas-Texas Ry. Co., 273 F.2d 474r(10th Cir. 1960).

Malice, the principal element of the cause of action here and the one most difficult to prove, consists of lack of good faith or probable cause in a title disparagement suit under Oklahoma law. Noble v. Johnson, 180 Okl. 169, 68 P.2d 838 (1937); Keiser v. Kile, 166 Okl. 41, 26 P.2d 194 (1933) ; Ward v. Mid-West & Gulf Co., 97 Okl. 252, 223 P. 170 (1924). The term, in this context, does not signify hatred or ill will. New England Oil & Pipe Line Co. v. Rogers, 154 Okl. 285, 7 P.2d 638 (1932). The act of filing or recording an unfounded claim against the property of another is sufficient publication to be actionable. 16 Okla.Stat.Ann. § 79 (Supp.1973); Kingkade v. Plummer, 111 Okl. 197, 239 P. 628 (1925). The trial court, in several of its fact findings, referred to the malicious nature of the acts of Misco in dealing with Keller and Mr. Ice. From our review of the record in the light most favorable to Keller, we hold that there is sufficient evidence of malicious and fraudulent conduct to support the verdict.

The measure of damages to be awarded is the amount necessary to make the damaged party whole and to compensate him for all expenses necessitated by the tortious acts of the wrongdoer. Denco Bus Lines v. Hargis, 204 Okl. 339, 229 P.2d 560 (1951); Midland Valley Ry. Co. v. Barton, 191 Okl. 359, 129 P.2d 1007 (1942).

Normally, under Oklahoma law, attorneys fees are not a proper element of damages. Security Insurance Co. of New Haven v. White, 236 F.2d 215 (10th Cir. 1956) ; Joy v. Giglio, 208 Okl. 50, 254 P.2d 351 (1953). Here, however, the attorneys fees recovered were not those attributable to the ease in chief, but were for the necessary expenses incurred to protect valuable property rights. In addition to attorneys fees and costs that Keller incurred in vacating the void Kansas judgment, the appeal taken therefrom and the state quiet title suit, Keller testified that he could not fulfill a contract because of damage to his credit standing. Under these circumstances, the award of attorneys fees and costs for the prior proceeding is proper. Wilshire Oil Co. of Texas v. Riffe, 409 F.2d 1277 (10th Cir. 1969); Safway Rental & Sales Co. v. Albina Engine & Machine Works, Inc., 343 F.2d 129 (10th Cir. 1965); Security State Bank of Comanche, Oklahoma v. W. R. Johnston & Co., 204 Okl. 160, 228 P.2d 169 (1951).

Misco further contends that the award of $10,000.00 in punitive damages was improper. Under Oklahoma law “[a]n injurious publication is presumed to have been malicious [in bad faith] if no justifiable motive for making it is shown.” 12 Okla.Stat.Ann. § 1445 (1961). Furthermore, when there is a reckless and wanton disregard of another’s rights, malice and evil intent may be inferred and punitive damages may be awarded. Garland Coal & Mining Co. v. Few, 267 F.2d 785 (10th Cir. 1959); Sunray DX Oil Co. v. Brown, 477 P.2d 67 (Okl.1970); Pennsylvania Glass Sand Corp. of Oklahoma v. Ozment, 434 P.2d 893 (Okl.1967); Tomlinson v. Bailey, 289 P.2d 384 (Okl.1955). When we consider the evidence in the light most favorable to Keller, it clearly supports the trial court’s findings of Misco’s malicious and fraudulent conduct. Under all of the circumstances evidenced by this record involving the three ice machines, we hold that the trial court did not err in awarding punitive damages. 23 Okla.Stat.Ann. § 9 (1955); Oller v. Hicks, 441 P.2d 356 (Okl.1967); Lenn v. Miller, 403 P.2d 458 (Okl.1965). It is not improper, under Oklahoma law, for punitive damages to exceed actual damages as long as the amount awarded is reasonable and bears some relation to the injury inflicted. Garland Coal & Mining Co. v. Few, supra, Walton v. Bennett, 376 P.2d 240 (Okl.1962).

Affirmed.

      . The leases were on printed forms prepared for Misco.


author: RENFREW, District Judge: EUGENE A. WRIGHT, Circuit Judge

text:
    Ray D. BATEMAN and Helen C. Bateman, Plaintiff-Appellees, v. UNITED STATES of America, Defendant-Appellant. Dow R. BATEMAN and Elaine C. Bateman, Plaintiff-Appellees, v. UNITED STATES of America, Defendant-Appellant.
    Nos. 71-2894, 71-2895.
    United States Court of Appeals, Ninth Circuit.
    Dec. 4, 1973.

      Michael L. Paup (argued), U. S. Dept, of Justice — Fred B. Ugast, Acting Asst. Atty. Gen., Tax Div., Scott P. Crampton, Asst. Atty. Gen., and Meyer Rothwacks, U. S. Dept, of Justice, Washington, D. C., Lawrence W. Brooks, Asst. U. S. Atty., Los Angeles, Cal., for defendant-appellant.
    C. E. Millikan, Jr. (argued), Millikan, Montgomery & Olafson, Pasadena, Cal., for plaintiffs-appellees.
    Before HUFSTEDLER and WRIGHT, Circuit Judges, and RENFREW, District Judge.

       The Honorable Charles B. Renfrew, United States District Judge, Northern District of California, sitting by designation.

   OPINION

RENFREW, District Judge:

The United States appeals from a decision permitting taxpayers recovery of additional taxes assessed and paid in two companion cases. The taxpayers transferred interests in a limited partnership to themselves as trustees for the benefit of their children and to a corporation owned solely by one of the taxpayers. The basic issue is whether income paid to the trusts and corporation may be taxed to these entities or should properly be considered income to the respective taxpayers. Having carefully considered the points raised by the government, we affirm.

Ray and Dow Bateman were general partners in Bateman Brokerage Company (BBC), a California limited partnership. BBC is a food broker, representing and distributing the products of food processors and manufacturers. In the tax years in question, 1963, 1964 and 1965, BBC employed between 38 and 40 persons, 10 of whom were general or limited partners, and had gross receipts averaging approximately $574,000 per year and annual income varying between $74,007 and $101,158. Both Ray and Dow Bateman were employees as well as partners, and the court found their salaries as employees to be reasonable.

Prior to the tax years in question, Ray and Dow Bateman both created trusts for the benefit of their children and Ray Bateman acquired, as sole owner, a corporate shell, Group Administrators, Inc. (GAI). The trusts and corporation were then assigned limited partnership interests in BBC and received partnership income. The government contends that the trusts were not real partners for tax purposes under the family partnership provisions of the Internal Revenue Code, 26 U.S.C. § 704(e), and further contends that the corporation was a sham and should be disregarded.

We first consider the trusts as partners. Section 704(e)(1), the family partnership .section of the Code (26 U. S.C. § 704(e) (1)), provides:

“A person shall be recognized as a partner for purposes of this subtitle if he owns a capital interest in a partnership in which capital is a material income-producing factor * * *.”

BBC maintained its books on the cash basis method of accounting which did not reflect accounts receivable and good will owned by the partnership. Based upon prices paid by unrelated third parties for the purchase of partnership interests, the court below found the good will of BBC to have a value of between $405,00.0 and $463,200 during the fiscal years ending 1963, 1964 and 1965. The court also found that the trusts and GAI were valid under California law, that each owned a capital interest in BBC during the relevant time period, and that capital was a material income-producing factor in BBC during that period.

The government challenges the court’s finding on two grounds. First, it urges that the good will was personal to the taxpayers and merely represented the present value of their future earnings. Thus the good will of BBC was not capital within the meaning of 26 U. S.C. § 704(e)(1), and therefore any transfer of a partnership interest in BBC would be an anticipatory assignment of income condemned under Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75.(1940). Second, it urges that the trusts were not partners since the taxpayers remained true owners of the partnership interests assigned to the trusts.

As to whether good will here belonged to BBC, we must accept the finding below unless we are persuaded that it was “clearly erroneous”. Rule 52(a) of Federal Rules of Civil Procedure. We have reviewed the record below, including the reporter’s transcript of the testimony of the witnesses, and are not so persuaded. Whether we would have reached the same conclusion were the matter tried to us is not the issue before us. It is not the function of an appellate court to review evidence de novo. Zenith Corp. v. Hazeltine, 395 U.S. 100, 123, 89 S.Ct. 1562, 23 L.Ed.2d 129 (1969). There was evidence of record to support the finding, and it is not clearly erroneous as a matter of law.

There is no question that for a non-family personal service partnership, good will may be treated as a capital asset. See 26 U.S.C. § 736(b)(2)(B); Rees v. United States, 187 F.Supp. 924 (D.Or.1960), affirmed per curiam, 295 F.2d 817 (9 Cir. 1961). The government urges, however, that good will should be treated differently in a personal service family partnership than in a personal service non-family partnership. Such a distinction has neither a basis in law nor in logic and we reject it. The government failed to point out any legislative history of the family partnership section (§ 704 (e)(1)), which supports its contention nor do we find any. Indeed, both § 704(e)(1) and the applicable regulations indicate that by reference to all the facts of each case a personal service family partnership may have capital which is a material income-producing factor. Here, there was evidence of the value of the good will of BBC based upon unrelated third party purchases of partnership interests. In addition, the donor-taxpayers’ salaries in the years in question were found to be reasonable, a factor emphasized in the regulations and § 704(e)(2). We agree with Judge Wright’s dissent to the extent that had the good will been personal to the Batemans, the transfers of interest to the trusts would not have received tax recognition. Under those circumstances, without the very substantial good will owned by BBC, the partnership would not have been one in which capital was a material income-producing factor. However, under the facts here, the court below found that BBC owned substantial good will which in effect constituted a capital asset. Based upon these facts, it appears that the Batemans were not transferring personal income to the trusts. There being no basis for treating good will differently in family partnerships than in non-family partnerships, we find no error as a matter of law in the findings of the court below.

The government next contends that the donors were the true owners of the trusts and should be taxed on the trust income. This challenge is based on the Batemans’ positions as donors, trustees, remaindermen and general partners. While the Batemans have gone to the brink of permissible control and ownership, they have not crossed it. Congress has established strict requirements for a valid limited duration trust. The Clifford Regulations (26 U.S.C. § 671 et seq.) provide a framework for proper trust procedure and the Bate-mans have stayed within it. The Bate-man trusts prohibited the trustees from exercising any of the powers enumerated in § 675, which would cause -them to be treated as owners. The trustees were directed to exercise their powers in a fiduciary manner, as indeed they were already obligated to do as general partners in dealing with their limited partners. Cal.Corp.Code § 15509(1); Wind v. Herbert, 186 Cal.App.2d 276, 8 Cal. Rptr. 817 (1960); Nelson v. Abraham, 29 Cal.2d 745, 177 P.2d 931 (1947). The trusts’ duration was longer than ten years. Not only were the trusts in question drafted within the permissible framework, but there was no evidence that in fact the Batemans acted outside it. The government contends that while there was no abuse here, there was potential, and therefore the trusts were invalid. However, in the absence of such abuse, the trusts must receive tax recognition.

Ray Bateman’s corporation, GAI, the owner of a 21 per cent limited partnership interest, presents a closer question than the trusts. The government contends that GAI was a sham. This is a very close question and were we a trial court, we would have been more sympathetic to the government’s view. However, we may not substitute our judgment for that of the court below. The question whether a corporation is genuine or a sham is one of fact. Noonan v. C.I.R., 451 F.2d 992, 993 (9 Cir. 1971), Shaw Construction Company v. C.I.R., 323 F.2d 316, 321 (9 Cir. 1963), and we are limited here by the “clearly erroneous” rule. Ray Bateman testified that GAI was used to build up a cash reserve fund to buy out retiring or deceased partnership interests, not to avoid taxes, and the trial court so found. Even though the parties stipulated that other than passive investments, GAI operated no businesses, and Bateman testified that he knew the tax bill would be smaller with the corporation, we are not left with a “definite and firm conviction that a mistake has been committed.” United States v. Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948).

Affirmed.

EUGENE A. WRIGHT, Circuit Judge

(dissenting):

I respectfully dissent. I would reverse the judgment of the district court and remand the case for further factual findings.

I.

The district court found that the trusts were valid partners under Int. Rev.Code § 704(e), since the trusts owned “a capital interest in a partnership [Bateman Brokerage Co.] in which capital is a material income-producing factor.” The district court relied in part on the partnership’s good will, in the form of established client relationships, to support its finding that capital was a material income-producing factor. I would hold that good will in the form of established client relationships is capital for the purposes of § 704(e) only to the extent that it is associated with the business itself and not merely with particular partners individually.

The test that should be applied is whether the good will would remain with the business or follow the individual partner if the partner withdrew from the business and competed with it. Since the district court did not apply this test or make findings of fact that would allow this court to do so, the case should be remanded for a further factual determination.

The majority relies on Rees v. United States, 187 F.Supp. 924 (D.Or.1960), aff’d per curiam, 295 F.2d 817 (9th Cir. 1961), in rejecting the distinction between good will associated with the business itself and good will associated with individual partners. In Rees, a dentist with profitable client relationships sold a partnership interest in his practice. The court permitted the dentist to treat proceeds from the sale of his good will as capital gain.

Good will would normally follow a dentist who withdrew from a partnership and competed in a nearby location. Under the test that I have proposed, a dentist’s good will would not normally be capital for the purposes of § 704(e), yet the Rees court held that the sale of a dentist’s good will was a sale of a capital asset. Therefore, it appears that the proposed test is inconsistent with our holding in Rees.

Rees, however, considered whether the proceeds from the sale of personal good will are capital gain or ordinary income. Section 704(e) deals with the ability of taxpayers to spread income and avoid progressive tax rates. These are very different problems, and the meaning of “capital interest” in this case must be determined with reference to the background and purpose of § 704(e).

Income spreading among family members to avoid progressive tax rates has received considerable judicial attention. In order to restrict the ability of taxpayers routinely to avoid progressive taxation through family income splitting without penalizing bona fide gifts, the Supreme Court developed the distinction between gifts of income itself and gifts of income-producing property. Although a gift of the right to receive income does not shift the tax burden from the person who earns the income, Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731 (1930); Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75 (1940), a gift of income-producing property does shift the tax burden to the donee, Blair v. Commissioner, 300 U.S. 5, 57 S.Ct. 330, 81 L.Ed. 465 (1937).

Since they are attractive devices for spreading income to family members, family partnerships were subjected to special scrutiny by the Supreme Court even where the donated partnership interests were clearly capital in nature. Following the Supreme Court’s decision in Commissioner v. Tower, 327 U.S. 280, 66 S.Ct. 532, 90 L.Ed. 670 (1946), it was widely believed “that one whose capital interest in a partnership was acquired as a gift, or as the result of the contribution of property acquired as a gift, from a relative who controlled the business would not, in the absence of a participation in the management and control of the business or the performance of other vital services, be recognized as a partner.” Mertens, Law of Federal Income Taxation, Code Commentary § 704.10, p. 33; see e. g., Edwin F. Sandberg, 8 T.C. 423 (1947). The implications of Toiver were mitigated somewhat by Commissioner v. Culbertson, 337 U.S. 733, 69 S.Ct. 1210, 93 L.Ed. 1659 (1949), which held that the “vital services” and “original capital” tests were merely indicative rather than conclusive. But even after Culbertson, gifts of capital partnership interests to family members were presumptively ineffective for tax purposes.

In the wake of Culbertson and Tower, Congress passed the predecessor of § 704(e). Its purpose was “to insure that the income properly attributable to a capital interest in a partnership acquired as a gift would be taxed to the donee if he were the real owner of such interest regardless of the motive prompting the transfer to him and regardless of whether or not the business benefited from his participation in its profits.” Mertens, Law of Federal Taxation, Code Commentary § 704.10, p. 33; see H.Rep.No.586, 82d Cong. 1st Sess., p. 34. Thus, § 704(e) overruled the “special services” and “original capital” rules that Tower and Culbertson had established for partnership interests, admittedly capital in nature, that were donated to family members.

Nothing in the history of § 704(e), however, indicates that the standards of Lucas v. Earl, Helvering v. Horst, and Commissioner v. Blair, were no longer applicable for determining, for the purposes of income spreading, whether a capital interest had in fact been transferred. Indeed, the principles of those cases were explicitly approved by the authors of § 704(e):

Two principles governing attribution of income have long been accepted as basic: (1) income from property is attributable to the owner of the property; (2) income from personal services is attributable to the person rendering the services. There is no reason for applying different principles to partnership income. H.Rep. No.586, 82d Cong., 1st Sess., 1951-2 C.B. 357 quoted in Harry L. Bialock, 35 T.C. 649, 657 n. 3 (1961). [Emphasis added.]

The two principles referred to in the House Report are derived from Lucas v. Earl, Helvering v. Horst, and Commissioner v. Blair. Thus, it is clear that the drafters of § 704(e) did not intend to overrule those cases, but rather that they merely intended to overrule Tower and Culbertson.

An examination of Lucas v. Earl reveals that income cannot be spread simply because it is generated in part by personal good will. In that case, an attorney attempted to spread half of his income to his wife through an agreement whereby each was to share equally in the income of the other. Certainly the attorney benefited from the same sort of personal good will and client relationships that were found to be a capital interest in Rees. Nevertheless, the taxpayer was prohibited from spreading the income to his wife. By extending Rees to the family income spreading situation and thereby holding that personal good will can be a “capital interest” under § 704(e), the majority permits the very type of income spreading that was condemned in Lucas v. Earl.

The conclusion that personal good will is not a “capital interest” under § 704(e) is also supported by two of the Commissioner’s regulations. Treas.Reg. § 1.704-l(e)(1)(iv) provides:

For purposes of § 704(e)(1), the determination as to whether capital is a material income-producing factor must be made by reference to all the facts of each case. Capital is a material income-producing factor if a substantial portion of the gross income of the business is attributable to the employment of capital in the business conducted by the partnership. In general, capital is not a material income-producing factor where the income of the business consists principally of fees, commissions, or other compensation for personal services performed by members or employees of the partnership. On the other hand, capital is ordinarily a material income-producing factor if the operation of the business requires substantial inventories or a principal investment in plant, machinery, or other equipment. [Emphasis added.]

The income of Bateman Brokerage Co. “consists principally of fees, commissions, or other compensation for personal services performed by members or employees of the partnership.” Under Treas.Reg. .§ 1.704-l(e)(1)(iv), therefore, Bateman Brokerage Co. is the type of business that, “in general,” does not have capital as a material income-producing factor under § 704(e). I would hold that good will excepts a personal service company from the “general” rule of Treas.Reg. § 1.704-l(e)(1)(iv) only when the personal service company has substantial good will that is associated with the company itself.

In addition, Treas.Reg. § 1.704-1 (e) (l)(v) provides:

For the purposes of § 704(e), a capital interest in a partnership means an interest in the assets of the partnership, which is distributable to the owner of the capital interest upon his withdrawal from the partnership or upon liquidation of the partnership. The mere right to participate in the earnings and profits of a partnership is not a capital interest in the partnership.

Good will associated with the company itself can be captured upon dissolution of the partnership, if the business remains intact, by any of the dissolving partners who choose to continue their participation in the business. Personal good will, however, can be captured only by the individual partners with whom it is associated.

Of course, it is desirable that terms of art are used with a uniform meaning throughout the Internal Revenue Code. That personal good will was held to be capital in Rees is a persuasive reason to hold that it is capital under other provisions of the Code. To hold that personal good will is capital for the purpose of § 704(e), however, would be inconsistent with Lucas v. Earl. We should define capital under § 704(e) in a way that is consistent with the Supreme Court’s decision in Lucas v. Earl rather than with our own decision in Rees.

Good will should be defined as a “capital interest” for the purposes of § 704(e) only to the extent that it is associated with the business itself rather than merely with individual partners. I would reverse the judgment of the district court and remand for a factual determination according to this standard.

II.

The district court also found that Group Administrators, Inc. was a valid partner of Bateman Brokerage Co. and that the income of the corporation’s partnership interest was attributable to the corporation rather than to the taxpayers.

Corporate ownership of partnership interests need not be recognized for tax purposes if the corporation is a sham created by the purpose of tax avoidance. Noonan v. Commissioner, 451 F.2d 992 (9th Cir. 1971); Shaw Construction Co. v. Commissioner, 323 F.2d 316 (9th Cir. 1963). Whether a corporation is created for a legitimate business purpose or is a sham is a finding of fact that may be reversed only if “clearly erroneous” under F.R.Civ.P. 52. Id.

The district court found that Group Administrators, Inc. was created for a legitimate business purpose: the creation of a reserve fund from which the partnership interests of withdrawing partners could be purchased to ensure continuity for the partnership. The creation of such a reserve fund is a legitimate business purpose, but the fund can easily be created within partnership funds or within the personal funds of one of the partners. The taxpayers offer no business purpose to explain why the fund was created under the shell of a separate corporation. Although the reserve fund had a legitimate business purpose, the use of a separate corporation to establish the fund had no purpose other than tax avoidance.

If the purpose of the reserve fund itself can serve as the legitimate business purpose for the use of the corporate form, a partnership can spread its income into as many corporations as it has reserve funds to create. I would require the taxpayers to provide a legitimate business purpose for creating the reserve fund under the shell of a separate corporation rather than creating the reserve fund within the partnership or within the personal funds of one of the partners. The taxpayers provided no such legitimate business purpose. Therefore, I would reverse, as “clearly erroneous,” the district court’s finding that Group Administrators, Inc. was a valid partner for tax purposes.

      . Reference to Ray Bateman and Dow Bate-man as taxpayers includes their respective spouses.

      . Dow Bateman sought a refund only for the calendar year 1965.

      . Trusts are “persons” for the purposes of § 704(e)(1). See 26 C.F.R. § 1.704-1 (e) (2) (vii).

      . BBC was a substantial business entity. During the years in question, it had 8 limited partners other than the Batemans as well as 28 to 30 additional employees. The salaries paid to the Batemans were reasonable and were less than one-third of the amount of the salaries paid to other employees. Finally, the purchase of partnership interests by unrelated third parties supports the finding that the good will of BBC was not personal to the Batemans.

      . The regulations for the family partnership section provide:
      “For purposes of section 704(e)(1), the determination as to whether capital is a material income-producing factor must be made by reference to all the facts of each case. Capital is a material income-producing factor if a substantial portion of the gross income of the business is attributable to the employment of capital in the business conducted by the i>artnership. In general, capital is not a material income-producing factor where the income of the business consists principally of fees, commissions, or other compensation for personal services performed by members or employees of the partnership. On the other hand, capital is ordinarily a material income-producing factor if the operation of the business requires substantial inventories or a substantial investment in plant, machinery, or other equipment.” 26 C.F.R. § 1.704-1 (e) (1) (iv). (emiphasis supplied)

      . § 704(e)(2) provides:
      “In the case of any partnership interest created by gift, the distributive share of the donee under the partnership agreement shall be includible in his gross income, except to the extent that such share is determined without allowance of reasonable compensation for services rendered to the partnership by the donor, and except to the extent that the portion of such share attributable to donated capital is proportionately greater than the share of the donor attributable to the donor’s capital. The distributive share of a partner in the earnings of the partnership shall not be diminished because of absence due to military service.”

      . The Dow Bateman trusts further prohibited the trustee from exercising any of the powers enumerated in Subpart E, Subehapter J (§ 071 et seq.) of the Code.

      . When such abuse is shown, a family trust loses its tax recognition. See Kuney v. Frank, 308 F.2d 719 (9 Cir. 1962).

      . The general rule is that to be a separate, taxable entity, a corporation must engage in some substantial business activity. Noonan v. C.I.R., 451 F.2d 992 (9 Cir. 1971) ; National Investors Corporation v. Hoey, 144 F. 2d 466 (2 Cir. 1944) ; Moline Properties v. Coram’r, 319 U.S. 436, 63 S.Ct. 1132, 87 L.Ed. 1499 (1943).


author: LAY, Circuit Judge.

text:
    UNITED STATES of America, Appellee, v. Thomas J. RUFFIN, Appellant. UNITED STATES of America, Appellee, v. Ralph S. RUFFIN, Appellant.
    Nos. 73-1379, 73-1380.
    United States Co-urt of Appeals, Eighth Circuit.
    Submitted Nov. 14, 1973.
    Decided Jan. 16, 1974.

      James A. Bell, St. Louis, Mo., for appellant.
    Richard S. Stolker, Atty., Dept, of Justice, Washington, D.C., for appellee.
    Before VAN OOSTERHOUT, Senior Circuit Judge, and LAY and HEANEY, Circuit Judges.
   LAY, Circuit Judge.

Defendants T. J. Ruffin and Ralph Ruffin were convicted on separate counts of receiving and concealing firearms in violation of 18 U.S.C. §§ 922(h) and (j). Ralph Ruffin received concurrent terms of three years’ imprisonment on each count. T. J. Ruffin was sentenced to concurrent terms of four years’ imprisonment on each count.

Defendants on appeal contend that the evidence failed to establish the necessary-nexus with interstate commerce. We agree and reverse the convictions.

On February 23, 1972, defendants were stopped by police officers in St. Louis, Missouri, driving a 1968 black Ford LTD, after the car had been observed running a stop sign. According to the government’s evidence, T. J. Ruf-fin was sitting on the passenger’s side, Ralph Ruffin was driving and Frank Cooley Hearing, now deceased, was in the back seat. Officers testified at trial that T. J. Ruffin reached into his overcoat and withdrew a revolver with his left hand and a large automatic with his right hand. He passed both of these guns to the driver, Ralph Ruffin, who was observed taking them with his right hand and dropping them down on the floorboard. Thereafter, Ralph reached into his own waistband and withdrew a nickel plated revolver and also placed that on the floorboard. Upon a search the officers found three guns underneath the front seat.

It was stipulated that both defendants had been previously convicted of crimes punishable by a term of imprisonment exceeding one year. T. J. Ruffin was charged in Count One with receiving a .357 caliber magnum revolver, model security six, Serial No. 150-04758, and Ralph Ruffin in Count Two with receiving the same gun. It was stipulated that this gun was shipped on July 6, 1971, from the manufacturer in South Port, Connecticut, to a destination in LaMesa, Texas, by common carrier, and had been stolen from the carrier between July 9, 1971, and July 23, 1971, in Centreville, Illinois. Under Count Three, the concealment charge under which both defendants were found guilty, the gun involved was a Colt .45 caliber automatic pistol, government model, Serial No. 333933-C, which was stipulated as having been stolen from the trunk of an automobile belonging to an East St. Louis police officer in Col-linsville, Illinois, on January 12, 1972.

THE RECEIVING COUNTS

Section 922(h) is part of Title IV of the Omnibus Crime Control and Safe Streets Act of 1968, Pub.L.No.90-351. This section makes it unlawful for certain classes of persons to receive a firearm “which has been shipped or transported in interstate or foreign commerce.” The government’s proof showed only that the revolver had been previously shipped from Connecticut to Texas and stolen in Illinois some seven months prior to the time the weapon was found in the defendants’ possession. In construing Title VII of the same Act, the Supreme Court in United States v. Bass, 404 U.S. 336, 92 S.Ct. 515, 30 L. Ed.2d 488 (1971), rejected the argument that Title IV and Title VII are redundant. Instead, the Court found significant differences between the two, both as to classes of people covered and, most relevant here, classes of behavior reached. Although the Court left open the exact reach of Title IV (Bass, supra at 343 n. 10, 92 S.Ct. at 520), it noted that “Title IV apparently does not reach possessions or intrastate transactions at all, even those with an interstate commerce nexus, but is limited to the sending or receiving of firearms as part of an interstate transportation.” Id. at 342-343, 92 S.Ct. at 520 (emphasis added).

In construing 18 U.S.C. § 1202(a) (part of Title VII), the Supreme Court was faced with the requirement that the receipt, possession, or transportation be-“in commerce or affecting commerce.” The Court concluded that this requirement was satisfied if the government “demonstrates that the firearm received has previously traveled in interstate commerce.” Id. at 350, 92 S.Ct. at 524 (emphasis added). And, of significance to the present case, the Court noted that “[t]his reading [of Title VII] preserves a significant difference between the ‘receipt’ offenses under Title IV and Title VII.” Id. at 350 n. 18, 92 S.Ct. at 524.

Thus, we conclude that it is not sufficient under § 922(h) for the government to prove that the firearm had at some remote time previously-traveled in interstate commerce. As pointed out in Bass, Title IV is primarily concerned with the transportation of firearms. Accordingly, for a receipt to be cognizable under § 922(h), the government must show that at the time the gun was received it was part of an interstate transportation. The proof in this case, as well as the count’s instruction, was inadequate to meet this test. Accord, United States v. Craven, 478 F.2d 1329, 1336 (6th Cir. 1973). The government showed only that the gun had been stolen in Illinois from an interstate carrier and that it was found some seven months later in defendants’ possession in Missouri.

As recognized in Bass, this construction comports with the interpretation given the predecessor of § 922(h), 15 U.S.C. § 902(f). The statutory language of § 902(f) relating to the interstate commerce requirement remained unchanged in § 922(h). In Tot v. United States, 319 U.S. 463, 63 S.Ct. 1241, 87 L.Ed. 1519 (1943), where the Court held unconstitutional the statutory presumption in § 902(f), it was stated:

Both courts below held that the offense created by the Act is confined to the receipt of firearms or ammunition as a part of interstate transportation and does not extent to the receipt, in an intrastate transaction, of such articles which, at some prior time, have been transported interstate. The Government agrees that this construction is correct.

Id. at 466, 63 S.Ct. at 1244.

THE CONCEALMENT COUNT

Count III, charging each defendant with concealing the automatic, arises under § 922(j) of Title IV. That section applies to a firearm “which is moving as, which is a part of, or which constitutes, interstate or foreign commerce.” At trial, the government’s evidence showed that the gun had been stolen in Illinois on January 12, 1972, and was found in defendants’ possession in Missouri on February 23, 1972.

We are unable to find any court decision which has construed the interstate commerce language of § 922(j). However, we find the only reasonable construction of § 922(j), like § 922(h), requires proof of transactions that are a part, of an interstate transaction. The statutory language clearly requires a continuing relationship with interstate commerce at the time of the alleged concealment. The fundamental issue is whether the government has carried its burden of proof that the gun was still moving or was still part of interstate commerce at the time defendants concealed it. If the gun had come to rest in Missouri, after it was stolen in Illinois on January 12, 1972, the interstate character of the transaction would be over, and defendants could not be found guilty of any federal crime. Cf. United States v. Bass, 404 U.S. 336, 349-350, 92 S.Ct. 515, 30 L.Ed.2d 488 (1971); Bollenbach v. United States, 326 U.S. 607, 66 S.Ct. 402, 90 L.Ed. 350 (1946).

The language relating to interstate commerce under § 922 (j) is virtually identical to the earlier language of the National Stolen Property Act, and its successor statutes, 18 U.S.C. §§ 2313 and 2315. We look to the judicial construction of these acts for guidance.

In Booth v. United States, 154 F.2d 73 (9th Cir. 1946), the defendant was charged under the National Stolen Property Act with conspiracy to receive, conceal and store stolen stock certificates. The evidence established that the stock had been stolen from Seattle, Washington, and transported to California, where the defendant came into possession.

The court reversed the conviction, on the basis of the following instruction which it found erroneous:

If you believe beyond a reasonable doubt that the defendants or any of them had unexplained possession in California of the securities involved, recently after their theft in Washington, you may infer from their possession that these securities were still a part of interstate commerce.
That is to say, if the jury believes the securities were stolen and entered into the flow of interstate commerce as such, and there being no evidence of an intermediate sale to a purchaser and that said securities came into the unexplained possession of the defendants, knowing said securities to be stolen property, you may infer .that the securities at the time they came into possession of the defendants were still in interstate commerce.

Booth, supra at 75.

The Ninth Circuit found no logical basis upon which the inference could be supported.

In Schwachter v. United States, 237 F.2d 640 (6th Cir. 1956), the defendant was convicted of selling an automobile moving in interstate commerce under 18 U.S.C. § 2313. The Sixth Circuit reversed, because of the trial court’s failure to submit the interstate commerce question to the jury. The court noted that:

It is recognized that the interstate movement of a car does not necessarily cease when the car stops and transportation of it into the other state ends. The sale thereafter may be an incident to the theft and transportation and so tied up with it as to constitute the final step of a continuous unlawful scheme. . . . But its character of being a part of interstate commerce does not continue indefinitely after its transportation ends. After a period of time and depending upon what is done with the car, it may no longer be correct to treat it as moving in interstate commerce. The acquisition of the car and later sale of it by a person who is in no way connected with the theft and transportation may be under such circumstances as to terminate its interstate character. It is a question of fact under the surrounding circumstances in each particular case. Being a question of fact it is for the jury to determine.

Schwachter, supra at 644.

Here the trial court left the commerce question to be decided by the jury. The trial court’s instruction only repeated the language of the statute as an element of the crime. However, the difficulty here is that the only fact bearing on whether the gun was concealed while still moving in interstate commerce is that it was stolen in another state some 41 days before defendants were found to have concealed it. The facts demon.strate only interstate movement at some earlier time. In order to convict, the jury necessarily had to infer that the gun was still moving in interstate commerce. In accord with the analogous decisions, we hold this inference does not rationally follow. Under the government’s proof the defendants could just as easily have been concealing the gun sometime after it came to rest in Missouri. In this regard, the case of Davidson v. United States, 61 F.2d 250 (8th Cir. 1932), is factually similar. In an early decision under 18 U.S.C. § 408, the facts disclosed that the car was stolen on March 23, 1931, in Hominy, Oklahoma, and transported to Kansas City, Missouri, on or about March 31, 1931. The charge was receiving and concealing a stolen auto which was moving in interstate commerce. The facts were undisputed, however, that the stolen car had come to rest in Missouri before the defendants came into possession of it. Nonetheless, this court observed:

The mere fact that the ear had theretofore been transported in interstate commerce is not sufficient. The act does not purport to exercise jurisdiction over individuals who receive or sell stolen cars after such cars cease to move in or be a part of interstate commerce.

Id. at 255.

The time period between the interstate theft and the defendants’ possession is, of course, a significant factor in determining the sufficiency of the evidence to substantiate a conviction. The time element, however, is only one factor, but essential to our holding here, there must also exist other corroborative facts to support the charge that the defendants’ possession of the stolen article was an intermediate or final step in the completion of an interstate scheme. See, e.g., United States v. Brady, 425 F. 2d 309 (8th Cir. 1970) (conviction affirmed; car stolen in Kansas October 8, 1968, defendant borrowed money to purchase a ear on October 2, bought car with Colorado license on October 21, immediately placed Missouri plates on car, obtained fictitious bill of sale from seller on November 28; defendant’s purchase was “final step” of interstate transportation); Babb v. United States, 351 F.2d 863 (8th Cir. 1965) (conviction affirmed; switching of license plates by the receiver-defendant after recent theft and interstate transportation and proof of an intended trip to California showed stolen car still part of interstate commerce) ; United States v. Browning, 439 F.2d 813 (1st Cir. 1971) (conviction affirmed; defendant’s sale in Rhode Island of auto stolen from Massachusetts “final link” in interstate chain); Pearson v. United States, 378 F.2d 555 (5th Cir. 1967) (conviction affirmed; jewel theft where the holding and delivery of the stolen ruby was part of the “integral scheme” so as to be connected with the interstate transportation of it).

This court in United States v. Briddle, 430 F.2d 1335 (8th Cir. 1970), discussed the sufficiency of proof required to show that the stolen property was still moving in interstate commerce at the time that it was feloniously received or concealed. Judge Vogel there wrote:

The test, therefore, is not the length of time the car is held or how often it was resold, but what was done with the car after it came into the defendant’s possession.

Briddle, supra at 1338-1339.

In the present case there is no evidence to suggest that either defendant stole the gun or had any connection with its theft. Under the circumstances we find that there was not sufficient proof by the government to justify a jury finding that the firearm was moving as, or was a part of, or constituted interstate or foreign commerce when the defendants, or either of them, obtained possession of it. Cf. United States v. Wyatt, 437 F.2d 1168 (7th Cir. 1971). See also Schwachter v. United States, 237 F.2d 640 (6th Cir. 1956) ; Grimsley v. United States, 50 F.2d 509 (5th Cir. 1931).

There are insufficient facts on the present record to justify either defendant’s conviction under § 922(j).

Judgments of convictions reversed.

      . 18 U.S.C. § 922—
      (h) It shall be unlawful for any person—
      (1) who is under indictment for, or who has been convicted in any court of, a crime punishable by imprisonment for a term exceeding one year;
      (2) who is a fugitive from justice;
      (3) who is an unlawful user of or addicted to marihuana or any depressant or stimulant drug (as defined in section 201 (v) of the Federal Food, Drug, and Cosmetic Act) or narcotic drug (as defined in section 4731(a) of the Internal Revenue Code of 1954) ; or
      (4) who has been adjudicated as a mental defective or who has. been committed to any mental institution; to receive any firearm or ammunition which has been shipped or transported in interstate or foreign commerce.
      (j) It shall be unlawful for any person to receive, conceal, store, barter, sell, or dispose of any stolen firearm or stolen ammunition, or pledge or accept as security for a loan any stolen firearm or stolen ammunition, which is moving as, which is a part of, or which constitutes, interstate or foreign commerce, knowing or having reasonable cause to believe that the firearm or ammunition was stolen.

      . Defendants raise other evidentiary issues which, in view of our holding on the interstate commerce question, we need not discuss.

      . The government did not file charges on the nickel plated revolver allegedly because there was no proof that it had moved in interstate commerce. Ralph pled guilty to a state charge of possession of this gun.

      . Although not objected to by the defendants, the trial court’s instruction inaccurately described the necessary proof: “In order to establish the defendant’s guilt under Counts 1 and 2 of the Indictment the Government need show that each of the defendants received a firearm which had previously traveled in interstate commerce.” (emphasis added).

      . United States v. Craven, 478 F.2d 1329 (6th Cir. 1973), is tiie only circuit court decision dealing with the proper construction of the interstate commerce language of § 922(h). Although the primary issue was whether an inference of receipt could be drawn from constructive possession, the court also discussed the interstate commerce requirement. The Court of Appeals, citing Bass and Tot, recognized that § 922(h) does not extend to firearms which have merely previously been transported interstate. However, the court stated that “[t]he interstate transportation element of § 922(h) was met by the prosecution’s evidence of the very recent Lexington, Kentucky, to Wood-lawn, Ohio, transportation of the weapon.” Graven, supra at 1336. The time period involved was only ten days. The court added:
      [R]eceipt under 18 U.S.C. § 922(h)(1) may be shown circumstantially by proving possession, at least where no significant passage of time has elapsed between the interstate transportation and proof of possession, and no intervening intrastate transactions have occurred.

        Id. at 1337.

      . The legislative history of the two acts is comprehensively set forth in United States v. Craven, 478 F.2d 1329 (6th Cir. 1973).

      . 18 U.S.C. § 2313 reads as follows:
      Whoever receives, conceals, stores, barters, sells, or disposes of any motor vehicle or aircraft, moving as, or which is a part of, or which constitutes interstate or foreign commerce, knowing the same to have been stolen, shall be fined not more than $5,000 or imprisoned not more than five years, or both, (emphasis added).
      18 U.S.C. § 2315 provides:
      Whoever receives, conceals, stores, barters, sells, or disposes of any goods, wares, or merchandise, securities, or money of the value of $5,000 or more, or pledges or accepts as security for a loan any goods, wares, or merchandise, or securities, of the value of $500 or more, moving as, or which are a part of, or which constitute interstate or foreign commerce, knowing the same to have been stolen, unlawfully converted, or taken ; or Whoever receives, conceals, stores, barters, sells, or disposes of any falsely made, forged, altered, or counterfeited securities or tax stamps, or pledges or accepts as security for a loan any falsely made, forged, altered, or counterfeited securities or tax stamps, moving as, or which are a part of, or which constitute interstate or foreign commerce, knowing the same to have been so falsely made, forged, altered, or counterfeited; or
      Whoever receives in interstate or foreign commerce, or conceals, stores, barters, sells, or disposes of, any tool, implement, or thing used or intended to be used in falsely making, forging, altering, or counterfeiting any security or tax stamp, or any part thereof, moving as, or which is a part of, or which constitutes interstate or foreign commerce, knowing that the same is fitted to be used, or has been used, in falsely making, forging, altering, or counterfeiting any security or tax stamp, or any part thereof—
      Shall be fined not more than $10,000 or imprisoned not more than ten years, or both.
      This section shall not apply to any falsely made, forged, altered, counterfeited, or spurious representation of an obligation or other security of the United States or of an obligation, bond, certificate, security, treasury note, bill, promise to pay, or bank note, issued by any foreign government or by a bank or corporation of any foreign country, (emphasis added).

      . In Booth, the court relied in part on Bol-lenbach v. United States, 326 U.S. 607, 66 S.Ct. 402, 90 L.Ed. 350 (1946). Bollen-bach’s facts are materially different than the case at bar. The charge in Bollenbach was transporting certificates in interstate commerce and conspiracy to transport. The defendant had merely sold the stocks after their travel to the second state. The Court held that it could not be presumed from this that he had any part in the transportation, which was the basis of the charge. Therefore, it struck down the trial court’s presumption that defendant’s possession proved that he had transported them. The case is relevant, however, for the proposition that an inference which “offends reason” cannot be allowed to stand.

      . Defendants were not charged under 18 U.l stolen gun. I.C. § 922 (i) for interstate transportation of a