author: TIMBERS, Circuit Judge:

text:
    Alois RUPP, Plaintiff-Appellant, v. INTERNATIONAL TERMINAL OPERATING CO., INC., Defendant-Appellee, and S.S. “MORMACSTAR”, her engines, boilers, etc., Moore-McCormack Lines, Inc., and American Scantic Line, Defendants.
    No. 443, Docket 72-3130.
    United States Court of Appeals, Second Circuit.
    Argued Feb. 22, 1973.
    Decided May 7, 1973.

      F. Herbert Prem, New York City (Bigham Englar Jones & Houston, New York City, on the brief), for plaintiff-appellant.
    Robert H. Peterson, New York City (Frank H. Loomis, and Hill, Betts & Nash, New York City, on the brief), for defendant-appellee International Terminal Operating Co., Inc.
    Before FEINBERG, MULLIGAN and TIMBERS, Circuit Judges.
   TIMBERS, Circuit Judge:

The sole issue on this appeal by a shipper from a judgment for cargo damage entered in his favor in the Southern District of New York, Milton Pollack, District Judge, to the extent the judgment limited the shipper’s recovery against a stevedore to $500 per package pursuant to a limitation of liability clause in the ocean carriers’ bill of lading, is whether the stevedore whose negligence caused the damage is entitled to the benefit of the limitation on the carriers’ liability provided for in the bill of lading. The district court held that the stevedore was. We hold that the stevedore was not, since it was neither an express beneficiary under the limitation clause nor a beneficiary by operation of law. Accordingly, we reverse and remand for entry of a new judgment in favor of the shipper against the stevedore without regard to thé limitation clause in the bill of lading.

I.

In May 1970, nine eases of automatic punch presses consigned to plaintiff Alois Rupp were delivered to the S.S. Mormaestar at Rotterdam for shipment to New York under a joint bill of lading issued by defendants Moore-McCormack Lines, Inc. (Mormac) and American Scantic Line (Seantic). The Mormac-star arrived at the port of New York the following month.

On June 10, she was discharging her cargo at Berth 70, Port Elizabeth, New Jersey. The Mormaestar was a roll-on, roll-off (“ro/ro”) type vessel. She carried her cargo on flatbed trailers and on mounted containers. The discharge was performed by defendant International Terminal Operating Co. (ITO) pursuant to its written agreement to render steve-doring and terminal services which it had entered into with Mormac on April 1, 1968. During the discharge operation, an ITO hustler driver removed from the vessel to the stringpiece alongside the vessel a flatbed trailer loaded with the cases of punch presses consigned to Rupp. Another ITO hustler driver then backed up to engage the yard hustler to the flatbed trailer for removal to a storage area to await delivery to Rupp. When the yard hustler made contact, the left front landing gear of the flatbed collapsed, causing six of the cases to fall to the stringpiece. They were damaged to the extent of approximately $15,000.

On June 2, 1971, Rupp, invoking the admiralty and maritime jurisdiction of the district court, commenced this contract and cargo damage action. He alleged that Mormac and Scantic had failed to deliver the punch presses in good condition as required by the bill of lading and that ITO had caused damage to the goods through its negligence in discharging the cargo. In due course the pleadings were closed and discovery was completed.

On July 27, 1972, the parties filed a stipulation with the court that the sole issue to be determined was whether, as a matter of law, ITO was entitled to limit its liability to $500 per package, pursuant to the pertinent provisions of the ocean bill of lading issued by Mormac and Scantic. There being no issue of fact, the court took upon submission defendants’ motion for a determination that their liability was limited by the bill of lading.

On September 15, 1972, the court filed a memorandum of decision holding that ITO was entitled to the benefit of the package limitation and directing the entry of judgment in favor of Rupp and against Mormac, Scantic, and ITO jointly and severally for the total sum of $3,000 ($500 for each of six packages), plus interest and costs.

Rupp appeals only to the extent that the judgment limits his recovery against ITO to $500 per package.

II.

We must first decide whether the language of the bill of lading clearly indicates that ITO was an intended beneficiary of the limitation of liability clause.

Only two provisions of the bill of lading are pertinent. Clause 13, the basic limitation of liability clause, provides in relevant part:

“13. In case of any loss or damage to or in connection with goods exceeding in actual value $500, . . . per package, . . . the value of the goods shall be deemed to be $500 per package . . . and the carrier’s liability in any capacity, if any, shall be determined on a value of $500 per package. . . .”

Clause 2 defines “carrier” as follows:

“2. . . . [T]he word‘carrier’shall include the ship, her owner, operator, demise charterer, time charterer, master and any substituted carrier, whether acting as carrier or bailee, and all persons rendering services in connection with performance of this contract. . . .” (emphasis added).

The district court held that ITO was a person “rendering services in connection with performance of this contract” because it was acting on behalf of the carrier in the final phase of the delivery and deposit of the shipment in a storage area. We disagree. We hold that our decision in Cabot Corp. v. S. S. Mormacscan, 441 F.2d 476 (2 Cir.), cert. denied sub nom. John W. McGrath Corp. v. Cabot Corp., 404 U.S. 855 (1971), forecloses the result reached by the district court here.

In Cabot, we held that a stevedore was not an express third party beneficiary under a limitation of liability clause identical to the clause involved in the instant case. There the stevedore, after safely stowing the plaintiff’s goods in a lower hold of the vessel, caused damage to such goods while loading into the same hold heavy steel plates belonging to another shipper. The district court in Cabot held that the limitation clause in the bill of lading did not shield the stevedore because he was not “rendering services in connection with Cabot’s contract, but [was] instead rendering services in connection with another shipper not a party in this action.” Cabot Corp. v. S. S. Mormacscan, 298 F.Supp. 1171, 1174 (S.D.N.Y.1969). We affirmed but on another ground, namely, that the language of the limitation clause did not include the stevedore among those to be benefited by the $500 limitation:

“The language in the instant bill of lading does not exhibit the clarity required to extend the limitation of liability to the appellant-stevedore. . One can only guess whether clause 13 which speaks in terms of the ‘carrier’s liability in any capacity’ is intended to incorporate the phrase ‘all persons rendering services in connection with performance of this contract’ from clause 2, and, indeed, initially, whether ‘all persons rendering services’ is designed to include stevedores loading the goods of another shipper.
While there is no doubt that the parties to a bill of lading may extend a contractual benefit to a third party by clearly expressing their intent to do so, . . . an intention to extend benefits of the limitation in the present bill to the stevedore would most naturally have been expressed by the addition of the term ‘stevedore’ to the long list of various persons included under the definition of ‘carrier’ in clause 2. . . .” 441 F.2d at 478-79.

We find our decision in Cabot— so far as the intended beneficiaries of the limitation of liability clause are concerned — to be indistinguishable from the instant case involving the identical limitation clause. We hold that ITO was not one of those intended to be protected by the limitation of liability clause in the bill of lading.

Contrary to the assertion of ITO and the view of the district court below, we hold that our decision in Bernard Screen Printing Corp. v. Meyer Line, 464 F.2d 934 (2 Cir. 1972), does not require a different result. In Bernard Screen, the bill of lading gave to all “legal entities” reasonably comprehended within its language, and specifically to “independent contractors”, the benefit of a limitation of liability. We held that a negligent stevedore was entitled to the benefit of the $500 limitation of liability since he could be readily characterized as an “independent contractor.”

Decisions such as Bernard Screen turn on the language of the particular limitation of liability clause. The clause involved in Bernard Screen was substantially different from the ones involved in Cabot and in the instant case. Our decision here is consistent with the results reached there.

III.

ITO further contends that, even if the bill of lading did not expressly extend the protection of the limitation of liability clause to stevedores, ITO nevertheless is entitled to the benefit of any contractual limits upon the liability of Mor-mac and Scantic because it was acting as their agent when the accident occurred. The New York courts have held that under some circumstances an agent of a carrier who performs any part of the work undertaken by the carrier, as provided in the contract of carriage, by reason of that fact alone is protected by the provisions of the contract limiting the liability of the carrier. Berger v. 34th Street Garage, Ine., 3 N.Y.2d 701, 148 N.E.2d 883, 171 N.Y.S.2d 824 (1958) (garageman who stored overnight goods being shipped by a carrier); Howard v. Finnegan’s Warehouse Corp., 33 App.Div.2d 1090, 307 N.Y.S.2d 1022 (3d Dept. 1970) (employee of common carrier); Schoeffer v. United Parcel Service, 277 App.Div. 569, 101 N.Y.S.2d 451 (1st Dept. 1950) (delivery company hired by storage company to deliver goods from storage).

The Supreme Court, however, has rejected this agency principle as applied to stevedores and other agents of an ocean carrier. Herd & Co. v. Krawill Machinery Corp., supra note 1. In Herd, the stevedore contended that he was protected by the carrier’s limitation on liability under the holding in A. M. Collins & Co. v. Panama R. Co., 197 F.2d 893 (5 Cir.), cert. denied, 344 U.S. 875 (1952). The court in Collins had extended the benefit of a limitation of liability clause to a stevedore on the same agency principle relied on in Berger and Howard. The Supreme Court in Herd, however, was unable to accept the reasoning of Collins because it was contrary to-a long-settled line of its decisions:

“The holding of the majority in Collins that the liability of a negligent agent of a carrier, though not limited by any statute or contract, is nevertheless limited by and to the extent of the limitation granted by the shipper to the carrier in the bill of lading, simply because the agent is performing some part of the work thereby undertaken by the carrier, is clearly contrary to the above-cited decisions of this Court.” 359 U.S. at 305.

The Court in Herd held in effect that a stevedore or other third party is entitled to the benefit of a limitation of liability clause in a contract of carriage only if the clause expressly extends its benefits to such party.

We held in Cabot that a limitation of liability clause identical to the one involved here did not expressly extend its benefits to a stevedore. We hold here that ITO cannot claim the protection of the limitation of liability clause in the Mormac-Scantic bill of lading.

Reversed and remanded.

      . Our holding accords with the principles of construction expressed by the Supreme Court in Herd & Co. v. Krawill Machinery Corp., 359 U.S. 297, 305 (1959), where the Court dealt with a limitation of liability clause similar to that here involved :
      ". . [C]ontracts purporting to grant immunity from, or limitation of, liability must be strictly construed and limited to intended beneficiaries, for they ‘are not to be applied to alter familiar rules visiting liability upon a tortfeasor for the consequences of his negligence, unless the clarity of the language used expresses such to be the understanding of the contracting parties.’ ”

      . See also Carle & Montanari, Inc. v. American Export Isbrandtsen Lines, Inc., 275 F.Supp. 76 (S.D.N.Y.1967), aff’d, 386 F.2d 839 (2 Cir. 1967), cert. denied, 390 U.S. 1013 (1968) (stevedore entitled to benefit of limitation where clause included “all agents and all stevedores and other independent contractors whatsoever”) .

      . The New York courts have relied almost exclusively on Restatement (Second) of Agency § 347 (1958) which provides:
      “An agent who is acting in pursuance of his authority has such immunities of the principal as are not personal to the principal.”

      . In Leathers Best, Inc. v. S.S. Mormaclynx, 451 F.2d 800, 817 (2 Cir. 1971), we noted with interest this “apparent New York rule”, but we were careful to “express no views at this juncture as to the precise effect of that rule in the context of this case.”


source: Caselaw Access Project

author: STALEY, Circuit Judge.

license: Public Domain

text:
    C. F. MUELLER COMPANY, Appellant, v. COMMISSIONER OF INTERNAL REVENUE.
    Nos. 71-1860, 71-1861.
    United States Court of Appeals, Third Circuit.
    Argued Sept. 28, 1972.
    Decided May 18, 1973.

      Robert E. Frisch, Charles A. Simmons, David M. Stigler, Royall, Koegal & Wells, New York City, for appellant.
    Scott P. Crampton, Asst. Atty. Gen., Fred B. Ugast, Acting Asst. Atty., Meyer Rothwacks, Thomas L. Stapleton, Wesley J. Filer, Attys., Tax Division, Department of Justice, Washington, D. C., for appellee.
    Before STALEY, VAN DUSEN and ROSENN, Circuit Judges.
   OPINION OF THE COURT

STALEY, Circuit Judge.

These are appeals from decisions of the Tax Court that certain payments made by' appellant C. F. Mueller Company (“Mueller”) in the years 1959 through 1963 to the Law Center Foundation (“Foundation”) were in substance nondeductible dividend distributions rather than charitable contributions. In order to resolve the questions presented on appeal, we must examine the relationship between Mueller and the Foundation. The following is a summary of the Tax Court’s detailed findings in that regard.

On August 21, 1947, Mueller was incorporated under the laws of Delaware for the purpose of benefiting the School of Law of New York University (“law school”). On August 28, 1947, Mueller acquired all of the outstanding stock of a successful business corporation (“old company”) which was engaged in the manufacture and sale of macaroni and similar products. The incorporation of Mueller and the acquisition of the old company were conducted by a group of individuals interested in the law school, including a representative of Arthur T. Vanderbilt who was then dean of the law school. It was thought that Mueller would provide the law school with a steady source of income.

Mueller’s certificate of incorporation provides:

“No stockholder shall at any time be entitled to dividends on his shares; nor shall he at any time be entitled to any of the profits or assets of [Mueller] .”

The sole distributee of the profits and assets of Mueller was New York University (“university”) for the exclusive benefit of its law school. The law school was not a separate corporate entity. It was established as a part of the university, then an exempt organization under the Internal Revenue Code of 1939, § 101(6). The university’s interest in Mueller was limited to the extent that it could not compel a distribution since it was not a stockholder.

From the time he became dean, Arthur Vanderbilt sought to improve the law school’s physical plant and to widen the scope of legal education at New York University through the establishment of what he termed a “Law Center.” Excerpts from administration reports which were cited by the Tax Court succinctly summarize the relationship between the Law Center and the law school.

“The School of Law is the core of the Law Center and the only accredited educational entity; it alone is charged to offer courses leading to professional and graduate degrees. The Law Center program is broader: it is concerned with the whole legal profession, with the administration of justice, with legislation, with the reform and simplification of the law — in short with whatever can be done through law in the public interest.
“The School of Law is the axis and around it revolve, in separate orbits but as part of a system, many subsidiary organizations and vortices of activity. * * *
“The Law Center is a place, a building, a forum; the Law Center program is the master plan for a complex of activities — activities of organizations which are more or less autonomous although not usually separate corporate entities. * * *
“The functions of a Law Center are basically educational, but not within traditional limits. One of the principal objectives is the continuing education of the bar. The methods employed include graduate and advanced professional courses, leading to graduate and specialized degrees, and also intensive courses, institutes, and lectures.”
“Many of the activities of the Law Center have a measure of autonomy and, indeed, some are independently incorporated, but all of them are physically located in Vanderbilt Hall, all of them are staffed by members of the School of Law faculty, and all of them have at least an indirect impact on the undergraduate and graduate students in the School of Law. * * * ” C. F. Mueller Co. v. CIR, 55 T.C. 275, 290 (1970).

In order to provide funds for the expanding legal role of New York University, Law Center, Inc., was organized It was to serve as a vehicle to obtain financing for the construction of buildings to house law school and Law Center activities without pledging the university’s long term credit. The university subscribed for all of the stock in the new corporation and transferred to it a contract for the purchase of land. On October 25, 1948, Law Center, Inc., transferred all of its assets to Law Center Foundation, a tax exempt, nonstock corporation. Shortly thereafter Law Center, Inc., was dissolved.

Law Center Foundation had been granted an absolute charter on October 15, 1948, by the Regents of the University of the State of New York. The Foundation’s charter stated that its purpose was to conduct a variety of activities related to legal education at New York University. See C.F. Mueller Co. v. CIR, 55 T.C. 275, 283 (1970). In the event of dissolution, all of its property was to be transferred to the university. The Foundation was intimately involved with the acquisition and construction of Law Center buildings which when ready for use were turned over to the law school for operation. It solicited funds and granted them to the law school in support of various programs of legal education.

Mueller made payments to the Foundation and to New York University during the years 1959 through 1963. The amounts distributed to the Foundation were deducted by Mueller as charitable contributions under § 170 of the Internal Revenue Code of 1954 (I.R.C.1954). The Commissioner disallowed the deductions, determining that they were in substance nondeductible dividend distributions to the university. The Tax Court agreed.

On appeal two determinations must be made in order to resolve the question whether Mueller’s distributions to the Foundation were charitable contributions or dividends. First, it must be decided whether transfers to the university, which possesses the real beneficial interest in Mueller but not legal ownership, may be considered charitable contributions under § 170. If this is answered in the negative, we must decide whether transfers to the Foundation for purposes of this case are transfers to the university and therefore not charitable contributions.

DISTRIBUTIONS TO NEW YORK UNIVERSITY

Distributions by a corporation to a charitable organization which is its sole stockholder fall within the literal meaning of “charitable contributions” under § 170 and of “dividends” under § 316(a) of the Internal Revenue Code of 1954. An examination of the legislative history of the sections of the code that provide for taxation of the unrelated business income of charitable organizations help to define the nature of the payments in the instant case.

Prior to January 1, 1951, a corporation whose income was destined to be paid to a charitable organization was exempt from Federal income tax. Internal Revenue Code of 1939, ch. 1, § 101(6), 53 Stat. 33; see C. F. Mueller Co. v. CIR, 190 F.2d 120 (C.A.3, 1951). Congressional concern with the effect these tax-free enterprises had on their competitors resulted in the passage of what are now §§ 502, and 511-515 of the Internal Revenue Code of 1954. Section 502 provides that an organization is not exempt merely because all of its profits are payable to an exempt organization. Section 511 imposes a tax on the unrelated business income of charitable organizations.

The charitably-run business does have available to it a charitable deduction just as any other business. See I.R.C. of 1954, 26 U.S.C. § 512(b) (10). And no statute specifically prohibits the charitable organization from retaining the income itself and claiming the § 170 deduction. However, the Senate Report on the Revenue Act of 1950 clearly states that “[t]he contribution, whether made by a trust or other exempt organization, must be paid to another organization to be allowable.” U.S.Code Congressional & Admin.News 1950, p. 3168. This position has been adopted by the Commissioner. 26 C.F.R. § 1.512(b)-l(g) (3); see Rev.Rul. 68-296. We believe the Commissioner’s position in this regard is the correct one.

Although the report refers to a directly held business, courts have reasoned that the same rule applies to separately incorporated feeder organizations. See Crosby Valve & Gage Co. v. CIR, 380 F. 2d 146 (C.A.l), cert. denied, 389 U.S. 976, 88 S.Ct. 477, 19 L.Ed.2d 468 (1967); Dave Investment Co. v. CIR, 462 F.2d 1373 (C.A.9, 1972); Sid Richardson Carbon & Gasoline Co. v. United States, 416 F.2d 867 (C.A.5, 1969). According to the Senate Report, the tax treatment of income should not differ merely because income is earned directly rather than by a subsidiary. The Crosby court applied this reasoning to the tax treatment of charitable contributions.

“Whether the charity operates the business directly or through a subsidiary, the economic and competitive, implications of allowing a deduction for income that in fact is retained by the charity would be the same.” Crosby, supra, 380 F.2d at 149.

Appellant Mueller disagrees with the Crosby analysis. It contends that the Crosby court erred in extending the limitation on charitable contributions applicable to § 511 organizations to § 502 feeder organizations. Mueller maintains that had Congress intended to achieve this result it would have enacted a separate provision relating to charitable contributions of feeder organizations. Appellant Mueller urges that the failure of Congress to deal with this matter in the Tax Reform Act of 1969 bolsters this position. We are not persuaded by this reasoning. The Crosby decision, as well as Knapp, infra, and Richardson, had been decided at the time Congress passed the 1969 Act. Silence of Congress under these circumstances does not express a congressional displeasure with Crosby.

Mueller cites SICO Foundation v. United States, 295 F.2d 924, 155 Ct.Cl. 554 (Ct.Claims 1961), reh. den., 297 F. 2d 557 (1962), as determinative of the issue in this case. We disagree. It is distinguishable from the instant case and Crosby in that the income of the feeder corporation considered there was “for the exclusive benefit of public schools in any state or states of the United States of America,” rather than a single beneficiary.

That Mueller is held in a voting trust does not make Crosby inapplicable to this case. Just such an argument was made and rejected in United States v. Knapp Brothers Shoe Mfg. Co., 384 F.2d 692 (C.A.1, 1967), cert. denied, 390 U.S. 989, 88 S.Ct. 1182, 19 L.Ed.2d 1293 (1968). There the court held that payments directed by voting trustees of a feeder organization to a university which was the sole distributee of all profits and assets were dividends rather than charitable contributions. We adopt the reasoning of the Knapp court.

DISTRIBUTIONS TO THE FOUNDATION '

The Tax Court held that Mueller’s contributions to the Foundation were to be treated as contributions to the university. The court stated:

“[W]e are fully satisfied on the entire record as indicated by our detailed findings in this respect that the foundation was merely an instrumentality of the university, organized and operated exclusively for the benefit of the law school in the light of its expanded and expanding role in legal education as reflected by the new label (Law Center) with which it was identified. The payments to the foundation were thus for the exclusive benefit of the university and must therefore be treated as though they were made directly to the university.” C. F. Mueller Co. v. CIR, 55 T.C. 275, 304 (1970).

This determination was based on the reasoning underlying taxation of constructive dividends.

A taxpayer who is a shareholder has been held to have received a constructive dividend when he receives an economic benefit through a diversion of corporate earnings and profits. CIR v. Riss, 374 F.2d 161 (C.A.8, 1967); CIR v. Makransky, 321 F.2d 598 (C.A.3, 1963); Holsey v. CIR, 258 F.2d 865 (C.A.3, 1958). Distributions to others as well as direct distributions have been held to be equivalent to dividends. Makransky, supra, 321 F.2d at 601; Holsey v. CIR, supra; Byers v. CIR, 199 F.2d 273 (C.A.8, 1952), cert. denied, 345 U.S. 907, 73 S. Ct. 646, 97 L.Ed. 1343 (1953); see Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75 (1940). That a formal dividend declaration was not made is not determinative of the dividend equivalency issue. Simon v. CIR, 248 F.2d 869 (C.A.8, 1957). The nomenclature used in a transaction may be considered, but it is not controlling. Estate of Taschler v. United States, 440 F.2d 72 (C.A.3, 1971). “The net effect of the transaction is at least an important consideration in determining dividend equivalency.” United States v. Carey, 289 F.2d 531, 537 (C.A.8, 1961).

The Tax Court’s treatment of Mueller’s contributions to the Foundation as being made to the university does not require a finding that the former was not a viable corporate entity as appellant contends. Indeed, all that is necessary is a finding that the payments were for the benefit of the School of Law. See Makransky, supra; see 1 Mertens § 9.08 (1973). The record amply supports the Tax Court’s finding that the Foundation operated for the benefit of the law school.

Appellant argues that because New York University was not one of Mueller’s shareholders, the latter’s distributions to the university tannot be considered constructive dividends. It is true, as appellant contends, that the constructive dividend cases brought to our attention involved situations where a shareholder caused its corporation to distribute its assets for the shareholder’s benefit. However, as we have already determined, the fact that Mueller’s stock is held in a voting trust does not prevent distributions made directly to the university from being considered dividends since the latter is the sole beneficial owner. It follows, therefore, that distributions made by Mueller for the university be considered constructive dividends.

Whether a corporate distribution is equivalent to a dividend is a question of fact to be determined by the Tax Court. Ferro v. CIRx, 242 F.2d 838 (C.A.3, 1957); Cleveland v. CIR, 335 F.2d 473 (C.A.3, 1964). We cannot say that the Tax Court was clearly erroneous. CIR v. Duberstein, 363 U.S. 278, 80 S. Ct. 1190, 4 L.Ed. 1218 (1960).

The judgment of the Tax Court will be affirmed.

      . C. F. Mueller Co. v. CIR, 55 T.C. 275 (1970). The cases were consolidated below and have been consolidated on appeal.

      . The name of the old company was C. F. Mueller Company, a taxable New Jersey business corporation. The purchase was financed by borrowing $3,550,000 from the Prudential Insurance Co. of America. The amount of capital with which Mueller commenced business was $1,000, an amount contributed by Arthur T. Vanderbilt.

      . Mueller’s stock was held by a voting trust.

      . The following amounts were distributed:
      To the University for the Benefit of
      the Law School To the Foundation
      1959 $220,000 $85,000
      1960 220,000 85,000
      1961 175,000 75,000
      1962 225,000 85,000
      1963 275,000 115,000

      . Section 170 provides :
      “(a) Allowance of Deduction.—
      (1) General Rule. — There shall be allowed as a deduction any charitable contribution (as defined in subsection (c)) payment of which is made within the taxable year. A charitable contribution shall be allowable as a deduction only if verified under regulations prescribed by the Secretary or his delegate.
      * sir * * s(:
      “ (b) Percentage limitations.—
      si: Si si:
      (2) Corporations. — In the case of a corporation, the total deductions under subsection (a) for any taxable year shall not exceed 5 percent of the taxpayer’s taxable income * *

      . Section 316 provides :
      “(a) General rule. — For purposes of this subtitle, the term ‘dividend’ means any distribution of property made by a corporation to its shareholders * *

      . “The problem at which the tax on unrelated business income is directed is primarily that of unfair competition. The tax-free status of section 101 organizations enables them to use their profits tax-free to expand operations, while their competitors can expand only with the profits remaining after taxes. Also, a number of examples have arisen where the organizations have, in effect, used their tax exemptions to buy an ordinary business.” U.S.Code Congressional Service, p. 3081 (1950). See Revenue Act of 1950, ch. 994, § 301, 64 Stat. 947 (now Int.Rev. Code of 1954, §§ 502, 511-515).

      . Internal Revenue Code of 1954, 26 U.S.C. § 502, provides:
      “§ 502. Feeder Organizations
      An organization operated for the primary purpose of carrying on a trade or business for profit shall not be exempt under section 501 on the ground that all of its profits are payable to one or more organizations exempt under section 501 from taxation. * * * ”

      . Internal Revenue Code of 1954, 26 U.S.C. § 511, provides:
      “§ 511. Imposition of tax on unrelated business income of charitable, etc., organizations
      (a) Charitable, etc., organizations taxable at corporation rates.—
      (1) Imposition of tax. — There is hereby imposed for each taxable year on the unrelated business taxable income (as defined in section 512) of every organization described in paragraph (2) a normal tax and a surtax computed as provided in section 11. * * * ”

      . “ [I] t is difficult to see why a difference in tax treatment should be allowed merely because in one case the income is earned directly by an educational or charitable organization, while in the other it is earned by a subsidiary of such an organization. In both cases the income is derived from the same type of activities and disposed of in the same manner.” U.S.Code Congressional Service, p. 3081 (1950).

      . The 1969 amendments removed certain discrepancies in the treatment of feeder organizations and directly run businesses. Appellant argues that Congress by failing to enact legislation dealing with the problem in the instant case manifested its intent that the charitable deductions claimed in this case were available. The Tax Court could find no such intent. We believe the Tax Court’s analysis with respect to this argument is correct. See C. F. Mueller Co. v. CIR, 55 T.C. 275, 301 (1970).


author: WEIS, Circuit Judge.

text:
    CHARNITA, INC., a corporation and Charles G. Rist, Individually and as an officer of said corporation, Petitioners, v. FEDERAL TRADE COMMISSION, Respondent.
    No. 72-1707.
    United States Court of Appeals, Third Circuit.
    Argued May 3, 1973.
    Decided May 31, 1973.
    As Amended June 25, 1973.

      Leroy W. Preston, John J. O’Connor, Jr., Baltimore, Md„ for petitioners.
    Ronald M. Dietrich, Gen. Counsel, Harold D. Rhynedanee, Jr., Asst. Gen. Counsel, Washington, D. C., Karl H. Buseh-mann, Federal Trade Commission, Washington, D. C., for respondent.
    Before JAMES HUNTER, III, and WEIS, Circuit Judges, and SCALERA, District Judge.
   OPINION OF THE COURT

WEIS, Circuit Judge.

The Federal Trade Commission has issued an order finding that there were violations of the Truth in Lending Act by petitioner Charnita, Inc. and requiring it to give notice to certain of its customers of an opportunity to rescind their transactions.

Charnita, Inc. is a Pennsylvania corporation engaged in the business of selling land for recreational and residential home sites in that state. Many of the sales are credit transactions and in the period from July 1, 1969 to March, 1970 involved the use of the “judgment note” which is permitted by the law of Pennsylvania. This type of promissory note enables the holder to enter judgment in the state court without notice or opportunity to be heard being extended to the maker. Filing of the note with the prothonotary of the court immediately creates a lien on all real estate in the county.

In the period after November, 1970, the promissory note was altered to state that real estate to be used as a principal residence of the maker was exempted from the lien of the confessed judgment, but Charnita then instituted the practice of retaining the deed to the lot in its possession until after the purchaser had made four or more payments.

The FTC found that various violations of the Truth in Lending Act had occurred which were not seriously questioned by appellant. The Commission further determined that the judgment notes given by the purchasers in the period from July 1, 1969 to March, 1970 and the withholding of the deeds by Charnita constituted “security interests” within the scope of the Act and interpretative regulations. The appellant was therefore required to take appropriate steps to advise eligible purchasers of the right to rescind granted by § 125 of the Act, 15 U.S.C. § 1635(a).

The principal issues to be decided on this appeal are whether the determinations of the existence of “security interests” were properly made.

The Act authorized the Board of Governors of the Federal Reserve System to enact appropriate regulations to carry out the purposes of the statute. The authorization was quite broad and provided, “These regulations may contain such classifications, differentiations, or other provisions, and may provide for such adjustments and exceptions for any class of transactions, as in the judgment of the Board are necessary or proper to effectuate the purposes of this subchap-ter, to prevent circumvention or evasion thereof, or to facilitate compliance therewith.”

The Supreme Court in Mourning v. Family Publications Service, Inc., 411 U.S. 356, 93 S.Ct. 1652, 36 L.Ed. 318 (1973), recognizing the wide scope of authority granted, noted that Congress was aware that there could be evasion of the requirements of the Act and that accordingly the Board was given the power to prevent noneompliance by the use of varied and ingenious subterfuges. The Court stated the standard to be “Given that some remedial measure was authorized, the question remaining is whether the measure chosen is reasonably related to its objectives.” (page 371, 93 S.Ct. page 1661).

The Act itself does not set out the meaning of “security interest” but the Board supplied the definition in its regulation, 12 CFR § 226.2(z), where we read the following:

“ ‘Security interest’ and ‘security’ means any interest in property which secures payment or performance of an obligation. The terms include, but are not limited to, security interest under the Uniform Commercial Code, real property mortgages, deeds of trust, and other consensual or confessed liens whether or not recorded, mechanic’s, materialmen’s, artisan’s, and other similar liens, vendor’s liens in both real and personal property, the interest of a seller in a contract for the sale of real property, any lien on property arising by operation of law, and any interest in a lease when used to secure payment or performance of an obligation.”

By way of further explanation, in 12 CFR § 226.202(a) the Board said:

“Under § 226.2 (z) ‘security interest’ is defined to include confessed liens whether or not recorded * * * (b) In some of the States, confession of judgment clauses or cognovit provisions are lawful and make it possible for the holder of an obligation containing such clause or provision to record a lien on property of the obligor simply by recordation entry of judgment; the obligor is afforded no opportunity to enter a defense against such action prior to entry of the judgment. (c) * * * such clauses and provisions in those States are security interests under § 226.2(z) and for the purposes of §§ 226 * * *.9.”

Section 226.9 sets forth the requirements for rescission granted by § 125.

Clearly then the regulations do cover the judgment note transactions in which Charnita participated.

We hold that the promulgation of the regulation was a reasonable exercise of the authority granted by the statute and is consonant with the discretion granted by Congress to effectuate the purposes of the Act. See Mourning v. Family Publication Service, Inc., supra; N. C. Freed Company, Inc. v. Board of Governors of Federal Reserve System and Federal Trade Commission, 473 F.2d 1210 (2nd Cir. 1973); Gardner and North Roofing and Siding Corp. v. Board of Governors of Federal Reserve System, 150 U.S.App.D.C. 329, 464 F.2d 838 (1972); cf. Douglas v. Beneficial Finance Co. of Anchorage, 469 F.2d 453 (9th Cir. 1972). As the Court said in the Freed case:

“The challenged regulation constitutes a clarification, and not an improper extension, of the statute and it therefore does not exceed the bounds of the mandate given the Board by Congress. Since the regulation is clearly consistent with the legislative purpose, it may not be overturned.” (473 F.2d page 1217)

We have little difficulty, also, in finding that the insistence of the seller that it keep possession of the deed until a certain number of payments have been made by the buyer constitutes a security interest within the meaning of the Act and the regulations. Retention of title or its indicia is one of the classic methods of protection, utilized by sellers for centuries to pressure purchasers to comply with their commitments. Charnita’s retention of the deed prevented its rec-ordation by the purchaser and thus deprived him of the very valuable rights of the holder of record title.

Additionally, however, petitioner posits the proposition that it is entitled to the exemption granted by 15 U.S.C. § 1635(e):

“This section does not apply to the creation or retention of a first lien against a dwelling to finance the acquisition of that dwelling.”

We do not accept Charnita’s position. The language in the statute obviously applies only to a “dwelling” and not to the mere sale of land. And as the legislative history reveals, this section was intended to apply to a first mortgage on the sale of a residence. See 114 Congressional Record 14388 (1968). We concur with the finding of the FTC that the practices here do not fall within the exemption.

The Commission ordered Charnita to offer the right of rescission by a two-step process which was designed to, first identify those parties who had acquired the real estate for use or expectation of use as the principal place of residence and are thus covered by § 125, and then, extend to only those eligible persons the opportunity to rescind.

Since this provision of the Act grants the purchaser the right to rescind until midnight of the third business day following the consummation of the transaction or until the required disclosures are made to the buyer, the Board reasoned that until such time as the seller complies with the requirement of furnishing information to its customer, the violation is a continuing one.

Charnita contends that the order is in effect punishment for past misdeeds and hence beyond the authority of the FTC. However, in oup view, the construction of the statute by the Board and the remedial action prescribed are not unreasonable and enforcement is required. We find that the corrective measures devised meet the test set out in Windsor Distributing Co. v. Federal Trade Commission, 437 F.2d 443 (3rd Cir. 1971), as being within the area of the Commission’s discretion in framing relief appropriate to the practices found to exist. We do not think the notification requirements imposed upon Charnita are unduly burdensome but conclude that they represent a reasonable exercise of the Commission’s authority to redress continuing violations.

The order of the Commission will be affirmed and will be enforced in its entirety.

      . 15 U.S.C. § 1601 et seq.

      . “(a) Except as otherwise provided in this section, in the case of any consumer credit transaction in which a security interest is retained or acquired in any real property which is used or is expected to be used as the residence of the person to whom credit is extended, the obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of the disclosures required under this section and all other material disclosures required under this part, whichever is later by notifying the creditor, in accordance with regulations of the Board of his intention to do so. The creditor shall clearly and conspicuously disclose, in accordance with regulations of the Board, to any obligor in a transaction subject to this section the rights of the obligor under this section. The creditor shall also provide, in accordance with regulations of the Board, an adequate opportunity to the obligor to exercise his right to rescind any transaction subject to this section.”

      . 15 U.S.C. § 1604.

      . 15 U.S.C. § 1635(a).

      . In Wachtel v. West, 476 F.2d 1062 (6th Cir. 1973), the Court said, “The provisions with respect to the right of rescission seem to contemplate a continuing violation when the disclosures are not made, but such is not the case when damages are sought.”


author: WATERMAN, Circuit Judge:

text:
    UNITED STATES of America, Appellee, v. Ralph CUOMO and John Rizzo, Jr., Appellants.
    Nos. 810, 811, Dockets 73-1063, 73-1072.
    United States Court of Appeals, Second Circuit.
    Argued April 19, 1973.
    Decided May 31, 1973.

      Franklin B. Velie, John W. Nields, Jr., Asst. U. S. Attys., Whitney North Seymour, Jr., U. S. Atty., for appellee.
    Albert J. Krieger, Ivan S. Fisher, Alan Scribner, New York City, for appellant Cuomo.
    Maurice Edelbaum, Henry J. Boitel, New York City, for appellant Rizzo.
    Before CLARK, Associate Justice, and WATERMAN and FEINBERG, Circuit Judges.

       Retired Associate Justice of the United States Supreme Court, sitting by designation.

   WATERMAN, Circuit Judge:

The defendants, Ralph Cuomo and John Rizzo, Jr., were convicted, following a three week jury trial in the United States District Court for the Southern District of New York, of receiving, concealing, selling and facilitating the transportation and sale of heroin in violation of Sections 173 and 174 of Title 21, United States Code and were sentenced to ten years imprisonment and eight years imprisonment respectively. In view of the nature of the claims made by the defendants on this appeal we deem it necessary to describe in some detail the underlying activities which led to the indictment against them. We note at the outset that from our review of the trial record we are amply convinced that the judgment below should be affirmed.

Viewing the evidence in the light most favorable to the Government, as we must after a conviction (see United States v. Smalls, 363 F.2d 417 (2 Cir. 1966), cert. denied, 385 U.S. 1027, 87 S.Ct. 755, 17 L.Ed.2d 675 (1967) the evidence adduced at the trial revealed the following facts. Leonard Vecchione, a Group Supervisor of the Bureau of Narcotics and Dangerous Drugs (BNDD) met with Senior Investigator Edward Kayner of the New York Police and Michael Feinberg, a paid registered informant employed as a special employee of the BNDD, at the Sakele Restaurant in lower Manhattan at approximately 1 P.M. on October 14, 1970. After visiting with each other for about twenty minutes, they left the restaurant together and when outside Vecchione and Kayner conducted a relatively thorough search of Feinberg’s car. The agents satisfied themselves that the car was clean of narcotics, and then, after this search, Feinberg left the agents and drove alone to the area of Houston and Ridge Streets in lower Manhattan. He was followed and was watched by another government agent, Mahoney. In the meantime agents Kayner and Vec-chione returned to the Sakele restaurant and, at approximately 1:30 P.M., they there met agent King of the BNDD who was carrying a brown paper bag containing $20,000 in cash. This money was to be delivered to Feinberg and was to be used by Feinberg to purchase heroin from a contact with whom Feinberg had previously arranged to make a buy. After receiving the money from King, agents Vecchione, Kayner, and a third undercover agent, Gross, left the Sakele and drove in a police undercover taxicab to the area of Houston and Ridge Streets where Feinberg was awaiting them. The agents pulled the undercover taxicab to the curb and Vecchione, carrying the brown paper bag, left the vehicle and approached Feinberg who was standing on the corner. When he reached the place where Feinberg was standing the two of them walked together a short distance down Ridge Street into a hallway at 167 Ridge Street, the building in which Feinberg resided. Agent Vecchione then searched Feinberg fairly closely, and, after finding that Feinberg was clean of narcotics, he handed to him the paper bag containing the money. Vecchione then returned to the police taxicab and from that spot he maintained a close and continual watch. In addition to this taxicab a number of other undercover vehicles were stationed in the vicinity and a number of undercover agents were stationed on the street to assist in the surveillance of Feinberg. From then on Feinberg was under continual watch by the agents.

At approximately 2 P.M. the defendant John Rizzo drove up to Ridge and Houston Streets in his Cadillac automobile and parked it on the north side of Houston Street facing west. He immediately left his car and walked across the street to the spot where Feinberg was standing holding the money. Rizzo met briefly with Feinberg and during the course of a short conversation Fein-berg handed the brown paper bag to Rizzo. Rizzo opened the bag, reached inside, and handed $500 back to Fein-berg.

Leaving his Cadillac, Rizzo then left the area in Feinberg’s car and drove down Houston Street in the direction of Mott Street where he made a left turn. In the meantime Feinberg remained on the corner of Ridge and Houston Streets under the surveillance of several agents. Other agents followed Rizzo who, having turned left onto Mott Street, stopped the car almost immediately and engaged in a brief conversation with a third person who was identified at trial as “John Doe’’ and was there described as a man of about five feet eight inches in height, 180 pounds, black hair, wearing a blue suit and a blue shirt. Following their brief conversation John Doe left Rizzo and walked up Mott Street in the direction of Prince Street. At the same time Rizzo drove around the corner and parked Feinberg’s car a short block away at the other end of Prince Street. Rizzo then left the car, walked into Prince Street empty handed, and emerged, minutes later, carrying a brown paper bag containing heroin. He then placed the bag in the trunk of Feinberg’s car and walked off in the direction of Ridge and Houston Streets where Feinberg was awaiting his return. About ten or fifteen minutes later the defendant Cuomo was seen speaking with John Doe on Prince Street near the spot where Rizzo had obtained the bag containing the heroin.

When Rizzo reached Ridge and Houston Streets he met Feinberg and, taking Feinberg in Rizzo’s Cadillac, the two men drove to Feinberg’s car, the car which now contained the heroin. Rizzo dropped off Feinberg and drove away. Feinberg then, with agents following, drove to a parking lot beneath the East River Drive at 23rd Street where he and his car were searched again. The brown paper bag and the $500 that Rizzo had returned to Feinberg were recovered by the agents. Inside the paper bag were three clear plastic bags, one inside the other. The innermost plastic bag contained 977.8 grams (approximately two pounds or one kilo) of 88.6% pure heroin. On the sealing flap of the innermost plastic bag was the left thumb print of the defendant Ralph Cuomo. The Government’s fingerprint expert testified at the trial that this discovery showed that Cuomo had left the print either by applying pressure to the flap as he would in the process of closing the bag, or by holding the bag at a time when some considerable weight was inside it.

On this appeal both defendants argue that their convictions should be overturned because their rights were violated by the conduct of the Government in obtaining the inculpatory evidence and in prosecuting them, and by the manner in which the trial judge conducted the trial. In particular, the defendants claim that: (1) The conduct of the law enforcement authorities in employing a paid informer and in providing him funds so that he could set up a narcotics buy from the defendants was so outrageous that it reached the proportion of a constitutional violation; (2) The Government misled the trial judge by giving false reasons for its motion when it attempted to support a government motion for a 90 day continuance, and that as a result of this government “fraud” the defense was unconstitutionally hampered in preparing its defense and the Government violated this circuit’s six month speedy trial rules; (3) The Government failed to establish either defendant’s guilt beyond a reasonable doubt; and (4) The defendants were deprived of a fair trial by allegedly inflammatory remarks made during the course of the trial. We find that none of these contentions have any merit, and that the proceedings below, conducted under somewhat difficult circumstances, because, only a few days before the start of the trial, Feinberg came forward with a story that he had really “framed” the defendants, were eminently fair.

THE USE OF THE INFORMER

The defendants’ first argument is that their constitutional rights to fair play have been violated through what they allege to be “reprehensible” conduct on the part of the prosecution in employing as the purchaser of the narcotics an actively participating stool pigeon who was a man with a serious criminal record and who received in return for his connivance a monetary reward and, as he was awaiting sentence after a state narcotics conviction, promises of federal assistance in obtaining for him a sentence less severe then likely. Alternatively, they suggest that this court should, in the exercise of its supervisory authority, hold that such an arrangement amounts to entrapment as a matter of law. These arguments raise an issue akin to the issue raised by the defense of entrapment, but it differs from the entrapment defense issue in that it focuses only upon the propriety of the Government’s conduct and does not involve factual issues relating to the predisposition of the defendants to commit crime. See United States v. Russell, 411 U.S. 423, 93 S.Ct. 1637, 36 L.Ed.2d 366 (1973); United States v. Smalls, 363 F.2d 417, 420 (2 Cir. 1966), cert. denied, 385 U.S. 1027, 87 S.Ct. 755, 17 L.Ed.2d 675 (1967); Williamson v. United States, 311 F.2d 441 (5 Cir. 1962). The entrapment defense, because it rests on the factual questions of the Government’s involvement in setting up the crime, and the defendants’ predisposition to commit the crime without the Government’s involvement, must be raised at the trial and submitted to the jury. See United States v. Bishop, 367 F.2d 806, 809-810 (2 Cir. 1966); United States v. Jacobs, 431 F.2d 754, 762 (2 Cir. 1970), cert. denied, 402 U.S. 950, 91 S.Ct. 1613, 29 L.Ed.2d 120 (1971). However, inasmuch as the constitutional argument raised in this case depends solely on a question of law, that is, whether the prosecution’s conduct is so “shocking” as to constitute a violation of the defendants’ right to due process, we discuss it even though the issue was not raised in the first instance in the court below. Having said this, we conclude that here, in this case, the prosecutor’s conduct in employing an informant and in using him to set up the narcotics buy, is within the permissible limits to which the Government may go. The defendants do not dispute that artifice and stratagem, including the use of paid informants whose employment is made necessary by the clandestine nature of the criminal activities under investigation, may be constitutionally resorted to to uncover and identify those engaged in criminal enterprises. Sorrells v. United States, 287 U.S. 435, 53 S.Ct. 210, 77 L. Ed. 413 (1932); Sherman v. United States, 356 U.S. 369, 78 S.Ct. 819, 2 L.Ed.2d 848 (1958). This case in this area of law enforcement is perhaps typical of the kind of ease in which a paid informant may be used, and to declare that the Government exceeded permissible limits here would be tantamount to a declaration that paid informants may no longer be used in the enforcement of the laws designed to prevent the clandestine sale of “hard narcotics.” Defendants’ reliance on the Fifth Circuit decision of Williamson v. United States, supra, in which a conviction was set aside because an unconscionable relationship existed between the Government and its informant, is clearly misplaced. As noted by our court in United States v. Smalls, supra, in Williamson there was a unique situation in which the evidence was clear that the Government agents offered a “specific sum of money to convict a specified suspect.” United States v. Smalls, 363 F.2d at 420, quoting Williamson v. United States, 311 F.2d at 445. In this case Feinberg was employed by the BNDD to engage in narcotics transactions generally and not to deal with Cuomo and Rizzo, these defendants, specifically. Also, although the payment arrangement between the Government and Feinberg was not clearly established at the trial, the evidence in the record indicated that it could not be characterized as a contingent fee arrangement in the sense that Feinberg would be given a special sum for bringing about a prosecution and for obtaining convictions of Cuomo and Rizzo. Here the Government provided the funds from which the buy was made; but the Supreme Court, in its most recent pronouncement on the general issue of entrapment, approved a situation in which the government agents provided an element much more essential to the commission of the crime than funds with which to make the purchase of heroin. See United States v. Russell, supra. Although in that case the Court conceded that “some day” it might “be presented with a situation in which the conduct of law enforcement agents is so outrageous that due process principles would absolutely bar the government from invoking judicial processes to obtain a conviction,” we hold, as the Supreme Court held in Russell, 411 U.S. at 432, 93 S.Ct. at 1643 that our case “is distinctly not of that breed.”

VIOLATION OF THE SIX MONTH RULE

The next ground raised by the defendants in seeking a reversal of their convictions is that the prosecution misled the court and the defense when it stated in open court that it desired a 90 day continuance before commencing trial and the reason it was requesting a 90 day continuance of the trial was that a material witness was “unavailable.” The defense claims that as a result of not being informed of the real reason the Government was asking for the continuance it was deprived of valuable information that it would have used in preparing the defense. The defense also claims that because the Government made this misrepresentation to the court these 90 days should be charged against the Government in computing the time it took the prosecution to prepare for trial, and that when the 90 days are added to other time taken by the Government in preparing for trial the Government violated the Second Circuit’s so-called Six Months’ Speedy Trial Rule then in effect.

In order to resolve these contentions we must examine the procedural history of this case. The two defendants were arrested on February 24, 1971 and were immediately released on bail. The indictments were filed by the Government on April 28, 1971. On June 24, 1971, only four months after the arrest, the Government filed a formal notice of readiness. On May 17, 1971 and on July 8, 1971 pretrial motions relating to discovery and other issues were filed by the defendants. These motions were not decided by the court until November 5, 1971. In October, 1971, and again in February, 1972, counsel for defendant Rizzo moved for a postponement of the trial on the ground that he had prior commitments; the court, with the consent of counsel for the defendant, Cuomo, granted both of the motions. A trial date was finally set for May 1, 1972.

On April 28, 1972 the Government requested a ninety day adjournment. The district judge was apprised in a sealed affidavit filed on April 24, 1972 that the Government was requesting the adjournment because Feinberg was then engaged in important investigations the success of which depended on his name remaining secret. At the hearing on the motion in open court on April 28, the prosecutor stated publicly that the Government wished to have the continuance because “a material witness in these cases is unavailable at the present time.” The continuance was granted, and the trial finally commenced on October 3, 1972.

Limiting their presentation to the prosecutor’s assertion in open court on April 28, 1972 that a material witness was “unavailable,” the defendants maintain that the indictment should be dismissed. They argue that the Government committed a fraud on the court and a fraud on the defense which prejudiced the defense, and that, because of these misrepresentations, the Government violated the six month rule. There is a short answer to this argument. The contention is patently frivolous. The prosecution did not misrepresent to the court the real reason it wanted the continuance. The prosecution was completely justified in requesting the continuance so that Feinberg could retain his secret status as an undercover agent until other pending investigations in which he was involved were completed. Therefore the ninety days should be excluded from the computation of the pretrial time chargeable to the prosecution. See Rule 5(e)(ii), Second Circuit Rules Regarding Prompt Disposition of Criminal Cases. Also, there is no merit to defendants’ argument that they were prejudiced by the prosecutor’s failure to reveal that the “material witness” was Feinberg. Although Feinberg later came forward with a story that he had framed the defendants, he was working for the prosecution on April 28. Therefore the fact that Feinberg’s name was not revealed to the defense did not affect its efforts in any way. In short, we find that the defendants’ arguments in this area of the appeal are utterly without merit.

SUFFICIENCY OF THE PROOF

The defendants claim that their convictions should be reversed because as a matter of law the prosecution failed to prove guilt beyond a reasonable doubt. These contentions are shortly disposed of. Defendant Rizzo was observed by numerous surveillance agents receiving the purchase money from Feinberg at their meeting on October 14. He was observed carrying the bag of heroin along Mott Street after he obtained it from a Prince Street location, observed placing the bag in the trunk of Feinberg’s car, and observed driving Feinberg to that car in order for Feinberg to recover the heroin which Rizzo had placed in that car’s trunk.

As to the defendant Cuomo the question is somewhat closer, but still, on the basis • of two significant items of evidence presented to the jury, the evidence was sufficient. Of first importance was the fact that Cuomo’s fingerprint appeared on the sealing flap of the innermost transparent plastic bag containing the heroin. The Government’s expert witness testified that Cuomo had handled the bag either at a time when the bag was full of a weighty substance— presumably heroin — or in such a manner as to close the bag. Inasmuch as the bag was transparent Cuomo would have known of the nature of the substance in the bag when he handled it or closed the flap. Cuomo’s main argument is that the presence of his fingerprint on the flap does not tend to prove that he ever handled the bag when it contained heroin or, assuming he did touch the bag while it contained heroin, that he ever exercised the degree of control over the drug necessary to meet the statutory requisite of possession. Cuomo cites two cases from this circuit as authority for the proposition he advances. In United States v. Lefkowitz, 284 F.2d 310 (2 Cir. 1960) the court held that evidence that a person’s fingerprint appeared on a large container of contraband was not, by itself, sufficient evidence on which to base a finding that the person whose fingerprint was so found possessed the contraband inside the cartons. In United States v. Minieri, 303 F.2d 550 (2 Cir. 1962) the same conclusion was reached where the defendant’s fingerprint appeared on invoices which had been inside large boxes of contraband. However, the underlying rationale of each of these cases was that, inasmuch as large containers of ordinary merchandise may be touched by many hands in the ordinary course of loading and unloading the containers, it would be an unwarranted inference to infer, from the mere presence of a man’s fingerprint on such a box or on invoices of large shipments, that the man knew that the contents of the box were contraband or that he possessed the contraband. In Lefkowitz the court specifically excepted from the rule it established' in that ease the situation in which fingerprints are found on “glas-sine envelopes or small packages” of narcotics. United States v. Lefkowitz, 284 F.2d at 310. As the case now before us clearly falls within this exception the holding in Lefkowitz would not be dispositive here even if Cuomo’s fingerprint were the only incriminating evidence against him. However, it was not the only evidence. Cuomo was with John Doe in the vicinity of Prince Street only a few minutes after Rizzo had spoken with Doe and had obtained the heroin on Prince Street. Although perhaps neither of these facts, standing alone, would support a finding of Cuomo’s guilt, their collective weight is clearly sufficient to sustain Cuomo’s conviction. See United States v. Perillo, 164 F.2d 645, 646 (2 Cir. 1947); Stoppelli v. United States, 183 F.2d 391 (9 Cir. 1950), cert. denied, 340 U.S. 864, 71 S. Ct. 88, 95 L.Ed. 631 (1950); United States v. Pisano, 193 F.2d 361, 365 (7 Cir. 1951).

MISCELLANEOUS ISSUES

Additionally, the defendants argue that the jury that convicted them was exposed to prejudicial information about the defendants and that the exposure of this information prevented them from having a fair trial. They state that at one point during the trial the jury saw a fingerprint card which was held by the prosecutor and that an imprint of Cuomo’s fingerprint was on the card. This, they say, prejudiced Cuomo for it indicated to the jury that he had had prior dealings with the BNDD. The defendants also claim to have been prejudiced by a statement made by Investigator Gross that he had seen a picture of the defendants, by a statement made by Feinberg that the different defendants in an entirely different trial arising out of unrelated events had been there found guilty, and by a statement made by the prosecutor during his questioning of Feinberg that Feinberg had said during a meeting with agents that he (Feinberg) feared Rizzo’s father and would not testify against Rizzo for that reason. The defendants claim that Gross’s statement indicated that the defendants had criminal records, Feinberg’s statement indicated that they were guilty of wrongdoing like the defendants in the unrelated case, and the prosecutor’s statement indicated that the defendants were members of an organized crime family. We think it is pure speculation to say, as the defense does, that the jury would have drawn the prejudicial inferences from the statements described or from its exposure to the fingerprint card (there is some dispute as to whether this card was actually seen by the jury). Moreover, on all occasions when possible adverse inferences could have been drawn, the trial judge took careful and effective corrective actions. The defendants were not deprived of their right to a fair trial.

The convictions are affirmed.

      . These sections were repealed Oct. 27, 1970 by Public Law 91-513, effective May 1, 1971.

      . In its endeavors to prevent clandestine dealings in contraband hard narcotics the Government has resorted for many years in the New York City area to the sordid business of using “special employees,” who, for pay, cooperate with enforcement officers to the extent of purchasing such narcotics from willing sellers with money furnished by the Government. Feinberg was such a “cooperating individual.” As a “special employee” of the BNDD- he was paid for whatever general information he might provide relative to dealers in hard narcotics and also for the help he might provide in preparing or attempting to prepare such cases for prosecution. There is no indication whatever in the record that the BNDD employed Feinberg with the intention that Feinberg should set up a narcotics transaction specifically with Cuomo and Rizzo. The use of this paid special employee does not, of itself, constitute entrapment, nor does it, in this case, “shock the conscience of the court.” See United States v. Smalls, 363 F.2d 417 at 419-420 (2 Cir. 1966), cert. denied, 385 U.S. 1027, 87 S.Ct. 755, 17 L.Ed.2d 675 (1967).

      . In the exercise of its supervisory power over the administration of justice in the federal courts of the circuit, the Circuit Council of the Second Circuit promulgated rules for observance in the district courts of the circuit with reference to the prompt disposition of criminal cases. These rules were first promulgated on January 5, 1971 and on May 4, 1971, and were in effect at the times pertinent to this case. They may be found in Title 28, U.S.C.A., Court of Appeals Rules, Cumulative Pocket Part 1972. Rule 4 provided:
      In all [criminal) cases the government must be ready for trial within six months from the date of the arrest, service of summons, detention, or the filing of a complaint or of a formal charge upon which the defendant is to be tried (other than a sealed indictment), whichever is earliest. If the government is not ready for trial within such time, or within the periods as extended by the district court for good cause under rule 5, and if the defendant is charged only with non-capital offenses, then, upon application of the defendant or upon motion of the district court, after opportunity for argument, the charge shall be dismissed.
      Rule 5 provides that in computing the time within which the Government should be ready for trial, many periods of reasonable delay are excluded from computation. The dispute here relates to whether the periods of delay set forth in the text were reasonable and came within the exclusions permissible under Rule 5. As pointed out in the text we find no violation of Rule 4.
      The Government further claims that even if the 90 days is included in the time computation chargeable to the Government the six month rule was not violated. However, in view of our finding that the 90 days should not be included, we do not reach this issue.
      We note in passing that the Circuit’s rules have since been superseded by the promulgation of district court rules for prompt disposition of criminal cases. These rules, which became effective October 1, 1972, were mandated by Fed. R.Crim.P. 50(b). See Hilbert v. Dooling, 476 F.2d 355 at 355, 356 (2 Cir., 1973) (in banc).

      . Rule 5(c) (ii) reads as follows:
      5. In computing the time within which the government should be ready for trial under rules 3 and 4, the following periods should be excluded:
      * * * * *
      (c) The period of delay resulting from a continuance granted at the request of a prosecuting attorney if:
      * * * * *
      (ii) the continuance is granted to allow the prosecuting attorney additional time to prepare the government’s case and additional time is justified by the exceptional circumstances of the case.


author: LEWIS, Chief Judge.

text:
    PRESTON NUTTER CORPORATION, Plaintiff-Appellant, v. Rogers C. B. MORTON, Secretary of the Interior, United States of America, Defendant-Appellee.
    No. 72-1403.
    United States Court of Appeals, Tenth Circuit.
    Argued and Submitted Nov. 15, 1972.
    Decided June 5, 1973.
    H. Byron Mock, Salt Lake City, Utah (Kent Shearer and Robert L. Schmid, Salt Lake City, Utah, with him on the brief), for plaintiff-appellant.
    Herbert Pittle, Washington, D. C. (Kent Frizzell, Asst. Atty. Gen., C. Nelson Day, U. S. Atty., and H. Ralph Klemm, Asst. U. S. Atty., Salt Lake City, Utah, and Jacques B. Gelin, and Larry G. Gutterridge, Dept, of Justice, Washington, D. C., on the brief), for def endant-app ellee.
    Before LEWIS, Chief Judge, and PICKETT and McWILLIAMS, Circuit Judges.
   LEWIS, Chief Judge.

Preston Nutter Corporation (PNC) appeals from a summary judgment granted by the District Court for the District of Utah in favor of appellee, Secretary of the Interior, sustaining the Secretary’s decision that appellant is not the successor in interest to a certain Sioux Half-Breed scrip. For reasons hereinafter discussed the judgment is affirmed.

Treaty History

In 1830 the United States Government and the Sioux Indian.Nation signed the Treaty of Prairie du Chien, 7 Stat. 328, which among other guarantees set aside a reservation for half-breed Sioux in the Minnesota Territory. By the Act of July 17, 1854, 10 Stat. 304, Congress authorized the President to issue certificates or scrip to eligible half-breed Sioux Indians in return for a relinquishment of rights to land granted them by the Treaty of Prairie du Chien. The statute provided that the scrip would authorize individual Indians to relocate and patent land equal in amount to land relinquished in Minnesota.

The pertinent sections of the 1854 Act read:

Provided, [t]hat said certificates or scrip shall not embrace more than six hundred and forty, nor less than forty acres each, and provided that the same shall be equally apportioned, as nearly as practicable, among those entitled to an interest in said reservation: And provided further, that no transfer or conveyance of any of said certificates or scrip shall be valid. (Emphasis added.)

Josette Montre Scrip

Pursuant to the 1854 Act one Josette Montre, a half-breed Sioux, was issued certificate 567-E for 160 acres of land which would enable her, upon surrender of the scrip to the Department of the Interior, to relocate on 160 acres of available public lands.

Through a transfer device Anna R. Kean obtained authorization from Jos-ette Montre to locate land under certificate 567-E in the name of Josette Montre. Kean also obtained an irrevocable power of attorney to convey such land once located.

Around the year 1900 Kean located certain land in the state of Indiana for Josette Montre and then transferred said lands to herself. However, in the case of Kean v. Calumet Canal & Improvement Co., 190 U.S. 452, 23 S.Ct. 651, 47 L.Ed. 1134 (1903), the Supreme Court held that the property located by Kean had actually been conveyed to Indiana in 1855 and was, therefore, not public land for which Sioux Half-Breed scrip rights could be exercised.

Anna R. Kean then brought suit against Josette Montre and others in the Circuit Court of Lake County, Indiana to determine her rights under the scrip. The court determined that the contract between Kean and Montre had been left unfulfilled requiring that the scrip be returned to Kean so that she could make a new selection of land. The court then appointed Kean as a special commissioner of the court empowering her to apply for the certificate and upon receipt to execute in the name of Josette Montre duplicate powers of attorney to locate and convey land.

The Department of the Interior in an opinion issued April 29, 1914, D-29200, agreed with the ruling. of the Indiana court stating :

In view of the holding of the Court, it would appear that where a person has purchased and located and patented under this class of scrip and the title has failed because the Government had already disposed of the land such purchaser shall be permitted to govern the use of the scrip for purposes of making a new location. Of course, the new selection would have to be in the name of the scripee as was the former one.

Accordingly, the Secretary issued a duplicate Sioux Half-Breed Certificate No. 567-E in the name of Josette Montre but delivered said certificate to Anna R. Kean. Kean then executed in the name of Josette Montre an irrevocable power of attorney coupled with an interest to enter and convey lands patented to Jos-ette Montre under Sioux Half-Breed scrip 567-E. An application to locate such lands was also signed and executed by Kean on behalf of Josette Montre. These two documents subsequently were delivered in blank to Preston Nutter. After Nutter’s death in 1939 his interest in the scrip passed to his heirs and was assigned to appellant Preston Nutter Corporation in 1957.

The Acts of 1955 and 1964

Congress expressed its concern regarding the large number of outstanding scrip against public lands by passing the Act of August 5, 1955, 69 Stat. 534. This Act required that all undischarged scrip be recorded with the Department of the Interior within a specified time period or future rights to the acquisition of public lands would be forfeited. Preston Nutter Corporation duly submitted Sioux Half-Breed Certificate No. 567-E for recordation along with various other documents including the power of attorney covering the beneficial interest in lands which might be located.

Continued concern for indefinite charges against public lands prompted Congress to pass the Act of August 31, 1964, 78 Stat. 751, which required that holders of outstanding scrip rights registered under the 1955 Act must exercise those rights before January 1, 1970 or the scrip would become null and void. The Act provided that scrip holders could exercise their rights to locate public lands until January 1, 1968 or in the alternative elect to receive cash for scrip rights until January 1, 1970. The cash value would be based upon the average fair market value of public lands actually conveyed in exchange for scrip since August 5, 1955. Preston Nutter Corporation elected to receive cash in lieu of land and filed its claim worth $210,000 with the Department of the Interior on August 22, 1969.

The Litigation

The Secretary of the Interior by letter decision on April 29, 1970 rejected the claim submitted by Preston Nutter Corporation pursuant to Half-Breed Certificate No. 567-E. The Secretary’s decision stated in part:

Therefore, since the Preston Nutter Corporation is not such a person who may succeed to the personal right of the original scrip holder your application for redemption of the certificate is rejected. This constitutes the final administrative determination of the Department. (43 CFR 1844.)

Preston Nutter Corporation then filed suit in the United States District Court against the Secretary of the Interior invoking the Administrative Procedure Act, 5 U.S.C. §§ 702-703, the Declaratory Judgment Act, 28 U.S.C. § 2201, and 28 U.S.C. § 1361 seeking a writ of mandamus to compel the Secretary to recognize its claim. The district court sustained the ruling of the Secretary of the Interior determining that the decision was supported by substantial evidence in the administrative record. Summary judgment for the Secretary was granted March 29, 1972.

On appeal, the issue presented is: Whether the district court correctly sustained the administrative ruling of the Secretary of the Interior that Preston Nutter Corporation did not have a valid claim for cash or public lands in satisfaction of Sioux Half-Breed Certificate No. 567-E held by Preston Nutter Corporation as a successor in interest.

The Appeal

The Act of July 17, 1854, 10 Stat. 304, specifically provides that no transfer or conveyance of Sioux Half-Breed scrip would be valid. Such a proscription was an effort by Congress to protect the Indians’ land rights from dishonest speculators. Cong.Globe, 33rd Cong., 1st Sess. 1114 (1854). In an attempt to nullify the provisions of the 1854 Act a transfer device was created involving a power of attorney to select and locate lands in the name of the scripee and a second blank power of attorney authorizing the unnamed attorney to sell or convey any lands so located. The party holding the power of attorney to locate would file the scrip and the location of lands chosen with the General Land Office and receive a patent therefor in the name of the scripee. Then, the second instrument allowing an unnamed attorney to sell or convey such lands held by scripee would either be assigned or executed. Thus the statutory requirement that Sioux Half-Breed scrip could not be conveyed or transferred was effectively circumvented.

The General Land Office, realizing the actual effect of these transactions, refused to recognize their validity asserting they were an illegal conveyance of scrip. Allen v. Merrill, 8 I.D. 207 (1889); Strong v. Pettijohn, 21 I.D. 111 (1895). On appeal the Supreme Court in a series of opinions sustained such transactions within limited bounds. Myrick v. Thompson, 99 U.S. 291, 25 L. Ed. 324 (1878); Felix v. Patrick, 145 U.S. 317, 12 S.Ct. 862, 36 L.Ed. 719 (1892); Midway Company v. Eaton, 183 U.S. 602, 22 S.Ct. 261, 46 L.Ed. 347 (1902). In each of the Supreme Court cases there were two instruments involved: a power of attorney to locate lands and a power to sell once located. The Supreme Court, in essence, held that the power of attorney to locate lands in the name of the scripee did not' make the transaction a transfer of scrip within the prohibition of the 1854 Act. And, once the lands became vested in the scripee the blank power of attorney to sell or convey such lands was valid, even if executed before the land was located. The Eaton court, in approving prior case holdings, stated that “the transactions were intended as a conveyance of the land, and represented that intention, and could not be shown to be a transfer of the scrip.” Midway Co. v. Eaton, supra at 616, 22 S.Ct. at 267. But, in those cases approving such transactions there was a valid location of land in the scripee before the statutory requirements could be successfully contravened.

In the present case there was no such location of land in the name of the scripee nor does appellant Preston Nutter Corporation possess a valid power of attorney to locate and patent lands. Notwithstanding, Preston Nutter Corporation argues that the irrevocable power of attorney to convey lands located under the scrip entitled it to a cash settlement because all requirements of the 1964 Act were met. Appellant further contends that requiring it to follow in full the procedures developed to evade the requirements of the 1854 Act serves no necessary purpose.

In Felix v. Patrick, supra, 145 U.S. at 326, 12 S.Ct. at 865, the Court noted that “[t]he device of a blank power of attorney and quitclaim deed was doubtless resorted to for the purpose of evading the provision of the act of congress,” and “the scheme [was] a palpable device to evade the law against the assignment of the scrip.” Even recognizing the underlying purpose of the blank powers of attorney, the Supreme Court approved the transactions. But, the language of the cases evidenced a clear intention by the Court to only allow this procedure if formalities were strictly observed. The right of free alienation of property was balanced against the protective intentions of Congress resulting in the Court recognizing a limited exception to the 1854 statutory prohibition. No tendency to extend that exception was manifested.

In the recent case of Barney R. Colson, 70 I.D. 409, the rationale of the earlier Supreme Court decisions was examined when almost the identical question to that in this case was presented. In Colson an attempt was made to locate public lands under rights granted in Sioux Half-Breed scrip. Colson possessed documents signed by Anna R. Kean and Jesse L. Linn on behalf of half-breed Sioux granting an irrevocable power of attorney to enter on and convey lands located under the scrip. Col-son had no power of attorney to locate and patent lands for the Indians. The Secretary of the Interior ruled that the documents possessed by Colson did not confer on him the right to locate lands under the scrip issued to seripees thus preventing him from entering on or conveying such lands. Barney R. Colson, supra at 421-422. Those rights that Colson had obtained were nullified by failure to observe the formalities of the transfer device. The Secretary’s decision was affirmed in Colson v. Udall, D. C.Fla., 278 F.Supp. 826, aff’d sub nom., Colson v. Hickel, 5 Cir., 428 F.2d 1046, cert. den., 401 U.S. 911, 91 S.Ct. 875, 27 L.Ed.2d 810. We find that Colson reasoning persuasive as it applies to this case.

Furthermore, any attempt by Preston Nutter Corporation to contend that the irrevocable power of attorney which it now possesses gives it the right to locate and patent lands for Josette Montre is self-defeating. If it does have the power and it is irrevocable, then it is coupled with an interest and would be an actual transfer or conveyance of scrip as specifically prohibited by the 1854 Act. See Frederick S. Schultz, 52 I.D. 601, 607; Anna R. Kean, 39 I.D. 554, 556; Felix v. Patrick, supra 145 U.S. at 326-327, 12 S.Ct. 862; Colson v. Udall, supra 278 F.Supp. at 830.

Finally, Preston Nutter Corporation asserts that the 1964 Act requiring all holders of Sioux Half-Breed scrip to extinguish their rights by selecting public land or receiving cash altered any existing necessity to possess a power of attorney to locate lands. The purpose of the 1964 Act reveals a contrary intention. Congress and the Department of the Interior were concerned about the disruptive effect on governmental management caused by long-standing claims against public lands. When the Interior and Insular Affairs Committee of the Senate reported the proposed act out of committee they stated :

The holders of the recorded scrip and similar rights are entitled to the land that the United States pledged to their predecessors in interest. . . .
Enactment of H.R. 4149 will provide procedures to assure that scrip holders will have a reasonable selection of public lands from which to choose in satisfying the rights they hold. The bill also provides that if these rights are not exercised by January 1, 1970 . a cash settlement will be effected. (S.Rep. 1455, 88th Cong., 2 Sess., 1964 U.S.Code Cong. & Admin. News, pp. 3330, 3331.)

The legislative history and the 1964 Act itself clearly indicates that there was no attempt to change the purpose or procedures of the 1854 Act. Rather, Congress finally desired to rid itself of these 100-year-old claims against public lands. ^To do that they offered land or cash in lieu of land with a termination date. To construe the 1964 Act as requiring that appellant no longer needs to show a power of attorney to locate lands under Sioux Half-Breed scrip, if he chooses the cash option, is to run afoul of Congressional intent. Only where Preston Nutter Corporation can show a right to receive public lands would the option to a cash settlement come into play. Therefore, failure to produce a valid power of attorney to locate and patent lands on behalf of Josette Montre becomes fatal to appellant’s claim.

The judgment of the district court is affirmed.

      . Josette Montre’s Sioux Half-Breed scrip was only one of nine over which Anna R. Kean held power of attorney and for which she had located land in Indiana. The Indiana suit involved her right to all nine certificates.

      . Under the 1955 Recordation Act, PNC registered the scrip in question and an irrevocable power of attorney to convey lands signed by Anna R. Kean on behalf of Josette Montre. The record shows that PNC also possesses an application to locate lands executed by Anna R. Kean on behalf of Josette Montre but such was not registered under the 1955 Act.

      . The documents held by Colson were very, similar to those described in this case.