author: McENTEE, Circuit Judge.

text:
    LEVITON MANUFACTURING COMPANY, INC., Petitioner, v. NATIONAL LABOR RELATIONS BOARD, Respondent.
    No. 73-1152.
    United States Court of Appeals, First Circuit.
    Argued Sept. 10, 1973.
    Decided Nov. 8, 1973.

      Richard W. Zacks, Providence, R. I., with whom Vernon C. Stoneman, Stone-man, Chandler & Miller, Boston, Mass., and Winograd, Shine & Zacks, Providence, R. I., were on brief, for petitioner.
    Charles N. Steele, Atty., Washington, D. C., with whom Peter G. Nash, Gen. Counsel, John S. Irving, Deputy Gen. Counsel, Patrick Hardin, Associate Gen. Counsel, Elliott Moore, Asst. Gen. Counsel, and Joseph A. Oertel, Atty., Washington, D. C., were on brief, for respondent.
    Before COFFIN, Chief Judge, Mc-ENTEE and CAMPBELL, Circuit Judges.
   McENTEE, Circuit Judge.

In this case Leviton Manufacturing Company, Inc. seeks review of a Labor Board order based on findings that Leviton violated § 8(a)(1) of the Act by discharging four of its employees. The Board countered with a cross-petition for enforcement. For the reasons set forth below, we set aside the Board’s order as not supported by substantial evidence on the record as a whole and deny its cross-petition for enforcement.

Until July 1970 the four employees in question — Mary Malstrom, Winifred Henault, Ruth Johnson, and Leo Johnson (Ruth Johnson’s son) — held elected or appointed positions in the union local which represents Leviton’s Warwick, R.I. plant. Malstrom served as business manager of the local, a full-time elected office for which she was on continuing leave of absence from Levitón. Henault was an elected member of the union’s executive board, and Malstrom had appointed her chief steward. Ruth Johnson was also an elected member of the executive board, and Malstrom had appointed her steward and editor of the union newspaper. Leo Johnson was an appointed steward. In a regularly-scheduled election held on June 6, 1970, Mal-strom ran for reelection as business manager and the three other employees ran for executive board positions, but only Henault was successful. Upon appeal by the losing candidates, higher union authorities set aside this election. But in a second election held on July 25, 1970, all four employees were defeated and none were appointed to any union positions. Malstrom returned to work in the Levitón plant.

Following this change in union leadership, a series of events occurred which form the substance of the record in the instant case. First, between June 29 and December 22, 1970, Malstrom, He-nault and Ruth Johnson jointly or individually filed a total of eight grievances and three “complaints” with Levitón and three additional charges with the Board. All fourteen accusations claimed that Levitón or the union had discriminated against these three women in various ways. But only one, a grievance filed on behalf of Ruth Johnson, was found to have even the slightest merit.

All three charges filed with the Board were rejected for lack of substantiating evidence.

Second, according to testimony by both company and union officials, these three women engaged in a year-long campaign of harassment and on-the-job truculence directed toward their immediate supervisors and the new union leaders. This testimony included several incidents involving obscene gestures and profane language. There was also testimony that Malstrom phoned the wife of a Leviton official to report a supposed affair between him and a married female employee. There was testimony, although of hearsay character, that Malstrom also threatened a work supervisor that she would take his house from him, apparently referring to an impending civil action she planned to file. Indeed, company officials learned that the union stewards deliberately avoided the department Malstrom worked in so as to avoid continuing verbal abuse. At the hearing before the trial examiner Malstrom, Henault, and Ruth Johnson denied many of these incidents, although Malstrom claimed lapses of memory with respect to several other incidents in which she was involved. In addition to the above, during the summer of 1971 Leo Johnson received three successive warnings from his supervisors that his work was unsatisfactory. Johnson was present but not called to testify at the hearing. No testimony, however, linked Leo Johnson with the incidents of harassment attributed to the three women.

Finally, on August 11,1971, Malstrom, Henault, Ruth Johnson and Leo Johnson filed a civil action in the United States District Court for the District of Rhode Island. Named as defendants were Levitón, the union, and sixteen individual company officials and union officers. The complaint alleged that the company and the union conspired to oust the four plaintiffs from their former union positions by improperly supporting the new union officers in the June and July elections. They sought aggregate actual damages of $165,000 plus an additional $1,900,000 in “exemplary” damages. This action was dismissed on the pleadings for failure to allege a basis for federal court jurisdiction. No appeal was taken from this dismissal, and no amended pleadings were filed.

A week after the filing of the civil action, Levitón fired Malstrom, Henault, and Ruth Johnson because of their “continuous harassment and aggravation of . . . fellow employees and management.” A day later, Leo Johnson was also fired. The stated reason for his discharge was continued poor work.

Responding to a charge filed by the union, the General Counsel issued a complaint against Leviton asserting violations of both § 8(a)(1) and § 8(a)(3) of the Act. At a hearing before the trial examiner, company officials conceded that they took into account the filing of the August 11 civil action in deciding to dismiss the three women. The company claimed that the suit was brought in bad faith and represented the “final straw” in the three women’s efforts to win back their former union positions by provoking dissension in the Leviton plant. Company officials denied, however, that Leo Johnson’s participation in 'the August 11 law suit was the cause of his dismissal, and insisted that the decision as to him was separately made and would have occurred whether or not he had joined in the suit.

The trial examiner recommended dismissal of the Labor Board complaint, finding as a fact that the August 11 civil action was brought in bad faith and thus did not constitute a concerted employee activity within the protection of § 7 of the Act. The Board, however, in a 2-1 decision, reversed the trial examiner and found that the civil action was brought in good faith. The Board further found that the filing of the civil action was the reason for Leo Johnson’s dismissal. It thus concluded that the § 7 rights of all four employees had been interfered with in violation of § 8(a) (1). No findings were made with respect to the § 8(a)(3) charges.

Reviewing the Board’s decision, we start with the proposition that the filing of a labor related civil action by a group of employees is ordinarily a concerted activity protected by § 7, unless the employees acted in bad faith. See Socony Mobil Oil Co. v. NLRB, 357 F.2d 662, 663-664 (2d Cir. 1966) (per curi-am) (employee suspended after processing safety complaint with Coast Guard); cf. Walls Mfg. Co. v. NLRB, 116 U.S. App.D.C. 140, 321 F.2d 753, 754, cert, denied, 375 U.S. 923, 84 S.Ct. 265, 11 L.Ed.2d 166 (1963) (employee fired after complaining to state health department about sanitary conditions).

In the instant case, therefore, the crucial issue is whether the August 11 suit was brought in good faith and thus constituted protected activity. We reverse the Board’s finding on this issue because we cannot conscientiously find that the evidence supporting its decision is substantial, when viewed in the light that the record in its entirety furnishes. Universal Camera Corp. v. NLRB, 340 U.S. 474, 488, 71 S.Ct. 456, 95 L.Ed. 456 (1951).

The trial examiner found as a fact that the civil action “had one purpose only — to force everybody — I.B.E.W. Second District, Local 1274, the duly elected local officials and all of management — to disregard the people’s choices and to restore Malstrom, Henault, Ruth Johnson and Leo Johnson to union office.” In reaching this conclusion, the examiner relied upon the testimony of company officials and employees which painted an overall picture of bitter former leaders, ousted from their positions of prominence, striking back through in-plant incidents of hostility and harassment coupled with a series of grievances and charges alleging discrimination against them. It is clear that the examiner disbelieved the denials of Malstrom, He-nault and Ruth Johnson. In determining that the civil action was brought in bad faith, the examiner also noted the vagueness of the complaint itself. The suit, the prior grievances, and the incidents of misbehavior in the plant were all found to “[bespeak] a grim determination to ‘get even’ with the world in general for having lost the union elections.”

In reversing the examiner’s finding of bad faith, the majority of the Board ignored the credibility aspects of the case and essentially relied on only two factors. According to the Board, the record shows that “many” of the grievances filed by the employees prior to the suit produced “beneficial results.” Second, the Board claimed that because all fourteen of the grievances, complaints and charges filed by the employees were disposed of at last six months prior to the filing of the civil suit, they were too remote in time to serve as evidence of continuing bad faith. For a number of reasons we find that these two objections in no way counteract the compelling evidence of bad faith by the employees in question which was presented by the company and credited by the trial examiner.

We have examined the record with care, paying particular attention to the series of grievances filed by the employees prior to the civil suit and their disposition, and can find only one which had even arguably beneficial results. This was the grievance filed by Ruth Johnson on the furnishing of raw materials, which we noted earlier. Meanwhile, the Board has failed to deal with the fact that virtually all fourteen charges of discrimination were either flatly denied by the company or dismissed for lack of evidence by the Board itself. While it is true that mere lack of merit in a complaint does not ordinarily establish bad faith, lack of merit in fourteen successive grievances, complaints and charges filed within a space of only six months strongly raises that inference.

With regard to the supposed remoteness in time between the fourteen earlier accusations and the civil action, we note first that the Board has not hesitated in the past to consider events occurring six months earlier in determining motivation. See, e. g., General Motors Acceptance Corp. v. NLRB, 476 F.2d 850, 854 n. 7 (1st Cir. 1973) (use of prior events to establish anti-union animus on part of employer). More important, in asserting this lack of connection between the prior actions and the suits, the Board has seemingly ignored the considerable evidence in the record of the three employees’ continued in-plant misbehavior for the full year between their ouster from union office and the filing of the suit.

Moreover, where the issue is the motive of the employees who filed the law suit, the trial examiner’s credibility findings are entitled to great weight. Here, the trial examiner clearly disbelieved the three employees’ denials of harassment. “[E]vidence supporting a conclusion may be less substantial when an impartial, experienced examiner who has observed the witnesses and lived with the case has drawn conclusions different from the Board’s than when he has reached the same conclusion.” Universal Camera Corp. v. NLRB, supra, 340 U.S., at 496, 71 S.Ct. at 469. The examiner’s contrary findings are most important when credibility is important in the case. Id. Indeed, it is the Board’s stated policy not to overturn the examiner’s resolutions on credibility unless the “clear preponderance of all the relevant evidence” points otherwise. See Smith & Wesson, 174 N.L.R.B. 1040 n. 1 (1969), enforced, NLRB v. Smith & Wesson, 424 F.2d 1072 (1st Cir. 1970). Yet here the Board has not responded at all to the credibility aspect of the trial examiner’s findings and has seemingly rejected out of hand the testimony which he credited as to the employees’ continued harassment activities.

Finally, in determining that the civil suit was brought in good faith, the Board made no mention of the vagueness of the allegations of the fact that a similar complaint had been dismissed by its own General Counsel for lack of evidence a year earlier, or of the fact that the complaint was later dismissed for failure to allege a basis for jurisdiction, with no amended pleadings being filed thereafter.

We can appreciate the desire of the Board to protect the right of employees to seek legal relief in good faith. But on this record, including the findings of the trial examiner, we cannot find substantial evidence to support the conclusion that the suit filed by the four employees in question was protected activity. It follows, therefore, that their discharge did not constitute a.violation of § 8(a)(1).

The petition for review is granted. The Board’s order may be set aside and the Board’s cross-application for the enforcement of said order against the petitioner is denied.

      . Section 8(a)(1) of the Act, 29 U.S.C. § 158(a)(1) (1970) reads:
      “(a) It shall be an unfair labor practice for an employer—
      (1) to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in [§ 7 of the Act].”
      Section 7, 29 U.S.C. § 157 (1970) reads in pertinent part :
      “Employees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection. . . . ”

      . Local 1274, International Brotherhood of Electrical Workers, AFL-CIO.

      . The parties have employed the term “complaint” to refer to charges which Malstrom, Henault and Ruth Johnson filed directly with the company without going through the union in accordance with normal grievance procedure.

      . In this grievance, dated August 17, 1970, Ruth Johnson contended that two other work sections were getting preferential treatment from the company in the furnishing of raw materials, thus denying her section an equal opportunity to meet incentive quotas. The company’s response did not concede discrimination against Ruth Johnson’s shift, but merely promised some changes to assure that no advantage would be given to other sections.

      . The third charge, filed by Malstrom and Ruth Johnson on October 12, 1970, alleged that the union refused to process any more of their grievances. The union had by this time processed five grievances for the women during the preceding three months. In refusing to issue a complaint on this charge, the Board’s regional director found that although the union had at some point indicated it would no longer process grievances for the women, the union thereafter assured them that it would continue to do so. Indeed, between the date the charge was filed and the date of the regional director’s response, the union processed two more grievances for Malstrom and one for Henault.

      . As a possible alternative ground for dismissing the action, the district court suggested that both federal and state court jurisdiction had been preempted by Congress’s assignment of such cases to the Board. See San Diego Bldg. Trades Council v. Garmon, 359 U.S. 236, 244, 246, 79 S.Ct. 773, 3 L.Ed.2d 775 (1959). But see Amalgamated Ass’n of St., Elec. Ry. & Motor Coach Employees v. Lockridge, 403 U.S. 274, 305 & n. 2, 91 S.Ct. 1909, 29 L.Ed.2d 473 (1971) (Douglas, J., dissenting).

      . Section 8(a) (3) of the Act, 29 U.S.C. § 158(a)(3) (1970), reads in part:
      “(a) It shall be an unfair labor practice for an employer —
      (3) by discrimination in regard to hire or tenure of employment or any term or condition of employment to encourage or discourage membership in any labor organization.”

      . The hearing was held April 26-28, 1972. After August 19, 1972, trial examiners acquired the new title of “administrative law judge.”

      . Chairman Miller, dissenting, agreed with the trial examiner that the suit was merely part of “a campaign of harassment caused by personal spite.”

      . Assuming good faith in the filing of the suit, the fact that it may have been groundless or that it was later dismissed on the pleadings would not in itself remove the activity from the protection of § 7. Cf. Walls Mfg. Co. v. NLRB, supra, 321 F.2d at 754. Similarly, the fact that Leviton may sincerely have believed the suit to have been brought in bad faith would not remove the activity from § 7 if in fact the suit was brought in good faith. See NLRB v. Burnup & Sims, Inc., 379 U.S. 21, 23-24, 85 S.Ct. 171, 13 L.Ed.2d 1 (1964).


source: Caselaw Access Project

author: STEVENS, Circuit Judge. FAIRCHILD, Circuit Judge

license: Public Domain

text:
    Ruth SHIRCK, Plaintiff-Appellant, v. Robert S. THOMAS et al., Defendants-Appellees.
    No. 18790.
    United States Court of Appeals, Seventh Circuit.
    April 6, 1973.
    Rehearing Denied Nov. 2,1973.
    Joseph R. Napoli, Peoria, Ill., Richard J. Medalie, Washington, D. C., for plaintiff-appellant.

      Richard N. Molchan, Peoria, Ill., for defendants-appellees.
    Stephen J. Pollack, David Rubin, Washington, D. C., amicus curiae.
    Before SWYGERT, Chief Judge and FAIRCHILD and STEVENS, Circuit Judges.

      . The following portion of the Roth opinion, on which plaintiff relies, is largely derived from Constantineau:

   STEVENS, Circuit Judge.

On April 1, 1969, defendants notified plaintiff that she would not be reemployed as a high school teacher for the 1969-1970 academic year. The question is whether that action deprived her of “property” or “liberty” protected by the Fourteenth Amendment.

Plaintiff received notice of the reasons for her nonrenewal as required by Ill.Rev.Stat. Ch. 122, § 24-10. As we explained when the case was first before us, those reasons “related to her performance in her work, particularly her failure to coordinate her teaching with that of the other German teacher so that students who needed to transfer at the end of a semester would not be handicapped.” 447 F.2d 1025, 1026. Our decision that she was entitled to the kind of hearing required by Roth v. Board of Regents, 446 F.2d 806 (7th Cir. 1971), which was then the law of this circuit, was vacated and we have been directed to reconsider in the light of the Supreme Court’s opinion in that case. Board of Regents v. Roth, 408 U.S. 564, 92 S.Ct. 2701, 33 L.Ed.2d 548. See Thomas v. Shirck, 408 U.S. 940, 92 S.Ct. 2848, 33 L.Ed.2d 764. The parties have filed extensive supplemental briefs; we now affirm the summary judgment entered by the district court in favor of defendants.

Plaintiff had no contractual entitlement, either express or implied, to future employment. Since she received notice of nonrenewal before completion of her second year of teaching, she had no statutory tenure. She argues, however, that the Illinois statute requiring that she be given such notice created a sufficient “property” interest to bring the due process clause into play. This argument confuses the decisive distinction between procedure and substance. Since the Illinois statutory procedure was observed, that statute affords plaintiff no substantive right.

Plaintiff also contends that the reason assigned by defendants for their nonrenewal decision deprived her of “liberty.” She argues alternatively that as a matter of law those reasons imposed a “stigma” sufficient to foreclose her “freedom to take advantage of other employment opportunities,” cf. Roth, 408 U.S. at 578, 92 S.Ct. at 2707, or, at the very least, that a question of fact is presented which precludes approval of the summary judgment.

We first note that there is no suggestion that the State has denied her employment to penalize or inhibit her exercise of any constitutionally protected right. Cf. Perry v. Sindermann, 408 U.S. 593, 597-598, 92 S.Ct. 2694, 33 L. Ed.2d 570, Illinois State Employees Union, et al. v. Lewis, 473 F.2d 561 (7th Cir. 1972). Nor did defendants’ action create any legal disability impairing her eligibility for other employment. There was no public “posting” of plaintiff’s name which might have created the kind of “stigma” upon “her good name, reputation, honor, or integrity” such as the Court condemned in Wisconsin v. Constantineau, 400 U.S. 433, 437, 91 S.Ct. 507, 27 L.Ed.2d 515. On the contrary, plaintiff’s injury stems entirely from (1) the fact that her employment was not continued, and (2) the reasons assigned by defendants for their decision.

“The State, in declining to rehire the respondent, did not make any charge against him that might seriously damage his standing and associations in his community. It did not base the nonrenewal of his contract on a charge, for example, that he had been guilty of dishonesty, or immorality. Had it done so, this would be a different case. For ‘[w]here a person’s good name, reputation, honor, or integrity is at stake because of what the government is doing to him, notice and an opportunity to be heard are essential.’ Wisconsin v. Constantineau, 400 U.S. 433, 437 [91 S.Ct. 507, 27 L.Ed.2d 515]; Wieman v. Updegraff, 344 U.S. 183, 191, [73 S.Ct. 215, 219, 97 L.Ed. 216] ; Joint Anti-Fascist Refugee Committee v. McGrath, 341 U.S. 123 [71 S.Ct. 624, 95 L.Ed. 817] ; United States v. Lovett, 328 U.S. 303, 316-317 [66 S.Ct. 1073, 1079, 90 L.Ed. 1252] ; Peters v. Hobby, 349 U.S. 331, 352 [75 S.Ct. 790, 801, 99 L.Ed. 1129]. (Douglas, J., concurring). See Cafeteria & etc. Workers v. McElroy, 367 U.S. 886, 898, 81 S.Ct. 1743, 1750, 6 L.Ed.2d 1230. In such a ease, due process would accord an opportunity to refute the charge before University officials. In the present case, however, there is no suggestion whatever that the respondent’s interest in his ‘good name, reputation, honor or integrity’ is at stake.” 408 U.S. at 573, 92 S.Ct. at 2707.

The fact that nonretention has unquestionably made plaintiff less attractive to other employers does not amount to a constitutional deprivation of “liberty.” This much is plainly settled by Roth and Sindermann, In our opinion, the adverse impact of the nonrenewal decision was not aggravated either by the fact that defendants gave plaintiff a written statement of reasons for their action or by the content of that statement. Assuming, as the record indicates that those reasons were not published to persons who did not participate in the nonrenewal decision, they could create no greater stigma than if the action had not been explained at all.

Even assuming, however, that the reasons were divulged to third parties, we are persuaded that they do not contain the kind of impact on “good name, reputation, honor, or integrity” contemplated by Constantineau or the part of Roth on which plaintiff relies. Cf. Lipp v. Board of Education, 470 F.2d 802, 804 (7th Cir. 1972). We therefore conclude that even accepting her allegations and affidavits as entirely true, her claim must fail.

Affirmed.

FAIRCHILD, Circuit Judge

(dissenting).

I think that it is a question of fact whether the criticisms included in the reasons for nonrenewal imposed a disability of enough substance to foreclose plaintiff’s freedom to obtain other employment.

      . See 447 F.2d at 1028 (dissenting opinion).

      . “Similarly, there is no suggestion that the State, in declining to re-employ the respondent, imposed on him a stigma or other disability that foreclosed his freedom to take advantage of other employment opportunities. The State, for example, did not invoke any regulations to bar the respondent from all other public employment in State universities.” 408 U.S. at 573, 92 S.Ct., at 2707.

      . “There is no suggestion of how nonretention might affect the respondent’s future employment prospects. Mere proof, for example, that his record of nonretention in one job, taken alone, might make him somewhat less attractive to some other employers would hardly establish the kind of foreclosure of opportunities amounting to a deprivation of ‘liberty.’ Cf. Schware v. Board of Bar Examiners, 353 U.S. 232 [77 S.Ct. 752, 1 L.Ed.2d 796].” 408 U.S. 574, n. 13, 92 S.Ct. at 2708.

      . “Similarly, the respondent here has yet to show that he has been deprived of an interest that could invoke procedural due process protection. As in Roth, the mere showing that he was not rehired in one particular job, without more, did not amount to a showing of a loss of liberty. Nor did it amount to a showing of a loss of property.” 408 U.S. at 599, 92 S.Ct. at 2698.
      See also Johnson v. Fraley, 470 F.2d 179, 185-186 (4th Cir. 1972), Borman, Senior Circuit Judge, concurring.

      . In the letter of termination “it was pointed out that you had failed to coordinate your teaching with that of the other German teacher to the extent that students who had to change teachers at the start of the second semester had been handicapped more than should be normally expected. In addition, these students were made to feel that the reason for their difficulty was due to the inferior methods used by the other teacher.” A. 9.

      . It would be anomalous if the delivery of a written statement of reasons, which the dissenters in Roth deem constitutionally required, should be regarded as a deprivation of liberty under the majority’s analysis.


author: PER CURIAM.

text:
    Tommy G. SHEAD, Petitioner-Appellant, v. Donald L. QUATSOE, Respondent-Appellee. Muriel Douglas BLACK, Petitioner-Appellant, v. Wilbur SCHMIDT et al., Respondents-Appellees.
    Nos. 72-1830, 72-1849.
    United States Court of Appeals, Seventh Circuit
    Argued Sept. 11, 1973.
    Decided Oct. 24, 1973.
    Charles Vetzner, Correctional Legal Services, Madison, Wis., A. Frank Putz, Milwaukee, Wis., Dennis Egre, Correctional Intern, Madison, Wis., for petitioners-appellants.
    Robert W. Warren, Atty. Gen., William A. Platz, Asst. Atty. Gen., Madison, Wis., for respondents-appellees.
    Before KILEY, FAIRCHILD and STEVENS, Circuit Judges.
   PER CURIAM.

Each petitioner claims that the failure to appoint counsel to represent him at his parole revocation hearing deprived him of due process. The district court denied both petitions for habeas corpus. While the appeals were pending here, the Supreme Court considered the question whether counsel must be appointed in such hearings. Gagnon v. Scarpelli, 411 U.S. 778, 93 S.Ct. 1756, 36 L.Ed.2d 656. The question we must now decide is the extent to which Scarpelli applies retroactively.

In Scarpelli the Supreme Court reversed our holding in Gunsolus v. Gagnon, 454 F.2d 416 (1971), that due process mandates the appointment of counsel at all revocation hearings. In the pending cases, the district court correctly held that an inflexible rule requiring counsel in all such hearings should not be applied retroactively. Cf. Zizzo v. United States, 470 F.2d 105 (7th Cir. 1972). Under the Supreme Court’s analysis in Scarpelli, however, the retroactivity issue is quite different.

In Scarpelli the Court concluded that the appointment of counsel is “constitutionally unnecessary in most revocation hearings.” 411 U.S. at 790, 93 S.Ct. at 1763. The Court did not hold, however, that counsel is never required. Consistently with its earlier analysis in Morrissey v. Brewer, 408 U.S. 471, 482, 92 S.Ct. 2593, 33 L.Ed.2d 484, the Court noted that the revocation of parole or probation is a serious deprivation of liberty to which the due process clause is applicable, 411 U.S. at 782, 93 S.Ct. 1756 and expressly stated that in some cases “fundamental fairness—the touchstone of due process—will require that the State provide at its expense counsel for indigent probationers or parolees.” Id. at 790, 93 S.Ct. at 1763.

As it had in Morrissey, the Court endeavored to provide the responsible state agencies with standards to be followed in future proceedings. These specific admonitions are in terms addressed to the parole authorities rather than the courts, and therefore arguably have only prospective application. Nevertheless, the basic analysis in the opinion indicates that if “fundamental fairness — the touchstone of due process” was offended by a revocation which happened to precede the date of the Scarpelli decision, the date of the revocation hearing should not necessarily foreclose relief. Just as the wide variations in the peculiarities of particular cases foreclose the use of an inflexible rule for deciding the merits of a claim that counsel was improperly refused, we believe that the fundamental fairnes's concept forecloses reliance on the date of the Scar-pelli decision as an inflexible bar to relief.

The same reasoning forecloses reliance on the date of the decision in Morrissey v. Brewer, 408 U.S. 471, 92 S.Ct; 2593, 33 L.Ed.2d 484, as invariably providing a sufficient response to any claim that an earlier revocation without any hearing at all violated due process. In Zizzo we held that the specific requirements set out in Part III of Morrissey do not apply to revocations prior to June 29, 1972. 470 F.2d 105, 108. Nevertheless, it is entirely possible that an earlier revocation without any hearing might for that reason have been so fundamentally unfair that relief is required.

Without intimating any views on the merits of either petitioner’s claim, we have therefore decided to remand both cases to the district court to determine whether, in the light of the Scarpelli decision, further proceedings are necessary. On remand in each case, both the petitioner and the respondent should have an opportunity to amend or supplement the papers filed in the district court.

As counsel for the state acknowledges, in Black’s ease the warden’s return leaves certain questions unanswered. Black’s parole was revoked on July 22, 1970, on the ground that he had a loaded pistol in his possession on December 22, 1969. Black has alleged that he was then arrested on an armed robbery-charge, that he was not guilty of that offense, and that the charge was ultimately dismissed. Or course, it is perfectly clear that petitioner may not have committed an armed robbery but may nevertheless have violated the terms of his parole by possessing a loaded pistol. His vigorous denials of the robbery charge are not, therefore, necessarily relevant in this proceeding. If the records relating to the parole revocation establish that the violation of the parole condition — as distinguished from the alleged violation of the law — was uncontested, then entirely apart from the non-retroactivity ground relied upon by the district court, the dismissal of the petition would be proper under Scarpelli. We believe, however, that the issue of fundamental fairness should be addressed in the first instance by the district court on a more complete record in the light of the Scarpelli opinion.

Similarly, in Shead’s case, even though the factual basis for the revocation is adequately disclosed by the record, the parties’ concentration on the retroactivity issue may have resulted in a failure to evaluate the alternative basis on which fundamental fairness will in some instances require the appointment of counsel. Even if the violation is a matter of public record, or is uncontested, there may be substantial ground for opposing revocation which only counsel can adequately present. Shead, who had been placed on parole as a result of a conviction for uttering bad checks, violated a prohibition against associating with females under 18 years of age. We do not suggest that the condition was improper or that mitigating circumstances justified his violation. But as in Black’s case, we believe the district court should address the issue in the first instance in the light of Scarpelli. Again, we believe the parties should be permitted to supplement the record on remand in the light of that opinion.

In each case, therefore, the order of the district court denying the petition for a writ of habeas corpus is vacated and the cause is remanded for such further proceedings as may be appropriate in the light of Scarpelli.

      . “The facts and circumstances in preliminary and final hearings are susceptible of almost infinite variation, and a considerable discretion must be allowed the responsible agency in making the decision. Presumptively, it may be said that counsel should be provided in cases where, after being informed of his right to request counsel, the probationer or parolee makes such a request, based on a timely and colorable claim (i) that he has not committed the alleged violation of the conditions upon which he is at liberty; or (ii) that, even if the violation is a matter of public record or is uncontested, there are substantial reasons which justified or mitigated the violation and make revocation inappropriate, and that the reasons are complex or otherwise difficult to develop or present. In passing on a request for the appointment of counsel, the responsible agency also should consider, especially in doubtful cases, whether the probationer appears to be capable of speaking effectively for himself. In every case in which a request for counsel at a preliminary or final hearing is refused, the grounds for refusal should be stated succinctly in the record.” 411 U.S. at 790-791, 93 S.Ct. at 1764.


author: McENTEE, Circuit Judge. LEVIN H. CAMPBELL,

text:
    LAN JEN CHU and Grace Y. P. Chu, Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Appellant.
    No. 73-1132.
    United States Court of Appeals, First Circuit.
    Argued Sept. 6, 1973.
    Decided Nov. 2, 1973.

      William S. Estabrook, III, Atty., Tax Div., Dept, of Justice, with whom Scott P. Crampton, Asst. Atty. Gen., Ernest J. Brown, and Grant W. Wiprud, Attys., Tax Div., Dept, of Justice, were on brief, for appellant.
    Paul J. Foley, Washington, D. C., with whom Robert H. Riñes and Riñes & Rines, Boston, Mass., were on brief, for appellees.
    Before McENTEE and CAMPBELL, Circuit Judges, and KILKENNY, Senior Circuit Judge.

       Of the Ninth Circuit sitting by designation.

   McENTEE, Circuit Judge.

In this case we are faced with the question of whether the transfer by a taxpayer of a patent application to his controlled corporation may properly be considered the transfer of “property of a character which is subject to the allowance for depreciation” within the meaning of Internal Revenue Code § 1239(b), so as to treat the gain realized from such transaction as ordinary income rather than capital gain. Section 1239 provides in relevant part as follows:

“§ 1239. Gain from sale of certain property between spouses or between an individual and a controlled corporation
(a) Treatment of gain as ordinary income. — In the case of a sale or exchange, directly or indirectly, of property described in subsection (b)—
* * * * * *
(2) between an individual and a corporation more than 80 percent in value of the outstanding stock of which is owned by such individual, .; any gain recognized to the transferor from the sale or exchange of such property shall be considered as gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231.
(b) Section applicable only to sales or exchanges of depreciable property.
■ — This section shall apply only in the case of a sale or exchange by a transferor of property which in the hands of the transferee is property of a character which is subject to the allowance for depreciation provided in section 167.”

The taxpayer in the instant action, Lan Jen Chu, is an eminent authority on electromagnetic theory and antenna systems. In the course of a long and distinguished academic career, he has written numerous articles on these subjects, and has been granted approximately twenty-five different patents relating to antennas. On June 26, 1956, Chu and an associate, Ivan Faigen, filed an application with the United States Patent Office seeking the issuance of letters patent on a new, completely enclosed antenna in which would be housed a transmission-line system consisting of a balanced and unbalanced line. In their application, Chu and Faigen maintained that because of its novel design, the system would be substantially less cumbersome and costly than existing antenna sys-terns, and additionally would be less subject to atmospheric interference. The application contained eighteen separate claims, the first thirteen of which can be characterized as pertaining to the principal antenna structure. Claims 14-18 involved an alternative structure, preferable only if more than two antenna units were “stacked” one on top of another. On July 5, 1957, the Patent Office informed Chu that claims 1-13 had been disallowed because of prior existing patents. However, it indicated that claims 14-18 “appear [ed] allowable.”

Still confident about the eventual pat-entability of their invention, Chu and Faigen, on December 9, 1957, filed an amendment A to the initial application. Although the amendment took strong issue with the determination made by the Patent Office and sought to clarify and explain more fully the design of the antenna system, the application was once again denied. This time, however, the Patent Office indicated that, in addition to claims 14-18, claim 12 also appeared allowable. Subsequently, a further clarifying statement, Amendment B, was filed, and on September 14, 1959, the Patent Office issued a notice adhering to its previous position.

Several months later, on December 18, 1959, Chu assigned his 11/12 interest in the patent application to Chu Associates, Inc. At the same time, Riñes (Faigen’s assignee) made a similar assignment with respect to his Viz interest. Pursuant to these assignments, Chu and Riñes were to receive, in respective Wiz and Vis proportions, a minimum purchase price of $317,000, to be paid over the life of the patent that both expected would be ultimately granted.

Chu Associates, Inc. was incorporated under the laws of the Commonwealth of Massachusetts in August 1959 for the purpose of manufacturing antennas. The Articles of Organization provided for an authorized capital stock of 1,000 shares of no-par common. At incorporation, however, only ninety shares were issued and paid for. Chu received eighty shares and Faigen received ten shares. The purchase price to each was $200 per share resulting in a paid-in capital of $18,000.

On December 15, 1959, just three days before the assignments' of the patent application in question, the corporation held a special joint shareholders and directors meeting. At that meeting, a resolution was adopted declaring a 100% stock split on the ninety existing shares. In addition, a second resolution was adopted, which provided;

“VOTED: To issue in addition to the shares of no par common stock already outstanding, 110 additional shares so as to make the number issued and outstanding 200 shares of no par common stock, of which 90 shares shall be issued to accomplish the stock split in accordance with the preceding vote, and the balance shall be issued to subscribers for $100.00 per share.”

At the conclusion of the stock transactions contemplated by the approved resolutions, Chu was to own 160 of the outstanding 200 shares of the corporation, or exactly eighty percent of its voting strength. Thus, the stock transfer book indicated that on December 15, 1959, eighty additional shares had been issued to Chu so as to effectuate the stock split, ten additional shares had similarly been issued to Faigen, and the twenty remaining newly issued shares had been sold to certain other individuals.

However, the transfers suggested by the stock transfer book may not have been fully completed by December 18, 1959, the crucial date on which the patent application was assigned to Chu Associates, Inc. The corporate balance sheet for the taxable year ending September 30, 1960, revealed a paid-in capital of $19,800, thus indicating that only eighteen of the twenty shares to be sold to others pursuant to the December 15 resolutions had been actually issued and paid for.

Sometime after the transfer of the application, on March 8, 1960, an Amendment C was filed with the Patent Office, once more attempting to clarify certain disputed aspects of the antenna’s design. This time the effort was successful, and on September 7, 1960, the Patent Office informed Chu that a “Notice of Allowance” on all 18 claims had been approved. Subsequently, on May 30, 1961, letters patent were issued.

Since the patent was granted, Chu Associates, Inc. has sold numerous antennas systems under patented claims 1-13. However, none of the systems merchandised by the corporation has yet to involve application of the alternative design embodied in claims 14-18. Pursuant to the December 18, 1959, assignments, Chu has received substantial sums of money, all of which he reported as long term capital gain. The Commissioner, deeming § 1239 applicable under the facts of this case, sought to assess a deficiency by requiring that those sums be taxed at ordinary income rates.

In a lengthy opinion, the Tax Court explicitly rejected the government’s contention that a patent application could be considered property “of a character subject to depreciation” within the intendment of § 1239(b), and thus concluded that § 1239 had no application. 58 T.C. 598, 609 (1972). The Tax Court also considered, and rejected, the argument that under the recent Seventh Circuit holding in Estate of Stahl v. Commissioner, 442 F.2d 324 (1971), the patent application at issue here had sufficiently “matured” so as to be viewed, at the time of transfer, as a depreciable patent governable by § 1239. By predicating its opinion on the “depreciable property” aspect of § 1239(b), the Tax Court found it unnecessary to decide whether the “control” test of § 1239(a) had been satisfied, though it intimated a belief that the government's position on this issue was strong. Because we feel constrained to agree with the Tax Court that the patent application transferred here was not “property of a character” subject to the depreciation allowance, we similarly find it inappropriate to pass upon the questions regarding control which are presented by these facts.

The government argues strongly that the broad language of § 1239(b) (property of a character subject to depreciation) justifies the conclusion that the limitations on capital gain treatment imposed by that section apply not only to the sale or exchange of depreciable property, but also to the transfer of property of the type which might ultimately become depreciable. Thus, while the government is apparently willing to concede that a mere patent application should not be considered depreciable property in the strictest sense, it nevertheless contends that since the application, if eventually approved, would then become depreciable, American Chemical Paint Co. v. Commissioner, 66 F.2d 381 (3d Cir. 1933); Kershaw v. United States, 180 F.Supp. 415, 148 Ct.Cl. 693 (1960), § 1239 should govern transactions involving the application itself. If we could consider the question strictly from the vantage point of developing a sound federal tax policy, this approach would indeed have some merit. Unless § 1239 is interpreted as the government suggests, a significant loophole could be created in the application of that section. It would be a simple matter for a tax conscious inventor to sell his pending application to a controlled corporation, pay capital gains on the excess of the purchase price over his basis, and then, once the application has been approved, allow the corporation to write-off against ordinary income, depreciation on the now stepped-up basis of the patent. Indeed, by immediately paying taxes on his profit at the favorable capital gains rate and thereby achieving long term avoidance of a comparable amount at ordinary income rates, the result is very likely to be a net loss to the public fisc.

However, much as we recognize the salutary effect of the government’s position, our role as a court is not to formulate tax policy in the first instance, but rather to ensure that the enactments of Congress are implemented in accordance with their intended legislative design. McClain v. Commissioner, 311 U.S. 527, 530, 61 S.Ct. 373, 85 L.Ed. 319 (1941) ; Graham v. Commissioner, 304 F.2d 707, 710 (2d Cir. 1962). Our examination of the legislative history of § 1239 convinces us that this section was intended to apply only to depreciable property. Consequently, the section as presently constituted can have no application to sales or exchanges of patent applications.

We begin by noting that the caption to § 1239(b) states explicitly that the section is “applicable only to sales or exchanges of depreciable property.” While it may be true, as the government urges, that the language of the caption is not necessarily controlling, Application of Magnus, 299 F.2d 335, 337 (2d Cir. 1962); cf. Brotherhood of Railroad Trainmen v. Baltimore & O. Rr., 331 U.S. 519, 528, 67 S.Ct. 1387, 91 L.Ed. 1646 (1947), such language certainly does provide at least some evidence of the intended Congressional scheme.

The House Report on the Revenue Act of 1951 which created the predecessor to § 1239 noted that the purpose of that section was “to forestall the practice of selling depreciable assets to controlled corporations in order to obtain the substantial tax benefits available under existing laws.” H.Rep.No.586, 82d Cong., 1st Sess. (1951) reprinted in 1951 U.S. Code Cong. & Admin.Service, pp. 1781, 1807 (emphasis added). The report went on to state that “this bill eliminates the tax advantage from such transactions by denying capital-gains treatment to the transferor with respect to sales or exchanges of depreciable property, .” Id. (emphasis added).

Although the Senate recommended deletion of the section for reasons not relevant to our inquiry, it also recognized that the application of the bill was strictly limited to transactions in depreciable property. S.Rep.No.781,. 82d Cong., 1st Sess. (1951) reprinted in 1951 U.S.Code Cong. & Admin.Service, pp. 1969, 2041-2042. Eventually, the section was salvaged in the House-Senate conference committee, with the conferees noting that the new statute would “provide that in the case of a sale or exchange, directly or indirectly, of depreciable property . . . (2) between an individual and a [controlled corporation], any gain recognized to the transferor shall be considered ordinary income and not capital gain.” Conf.Rep. on H.R.4473, 82d Cong., 1st Sess. (1951) reprinted in 1951 U.S.Code Cong. & Admin.Service, pp. 2121, 2135 (emphasis added). Moreover, administrative regulations promulgated after enactment of the section are entirely consistent with the notion that Congress intended § 1239 and its predecessor to apply only to depreciable property. Treas.Reg. § 1.1239-1 (1960).

It is understandable why Congress would intend § 1239 to apply only to gain received from the transfer of property which could then be immediately depreciated by the transferee at the stepped-up basis. The evils against which § 1239 were designed would be virtually certain to occur where the taxpayer transfers depreciable property to his controlled corporation. The same may not properly be said of the transfer of property which only might become, at some prospective point in time, subject to depreciation as an off-set to ordinary income. Thus, we must not forget that not every patent application is ultimately approved. Consequently, were we to apply the interpretation of § 1239 sought by the government, the inventor who has the misfortune to transfer a patent application that is subsequently disapproved would face the worst of both possible worlds: he would pay ordinary income rates on his initial gain from the transfer, while his controlled corporation would never be able to take any depreciation deduction against ordinary income. It would be entirely rational, therefore, for Congress to conclude that § 1239 should apply only in those instances where the dangers of tax abuse were most acute (i. e. the transfer to a controlled corporation of depreciable property), while denying § 1239 treatment to situations where unwarranted tax results might occur.

We thus conclude that when § 1239 is considered in the light of its apparent policies and the legislative history that coincided with its passage, it becomes clear that this section is applicable strictly to the transfer of depreciable property. The question then is whether the patent application involved in this case can properly be treated as “depreciable property” within the intendment of § 1239. We hold that it can not.

There can be no doubt that, in general, patent applications are not deprecia-ble property. United States Mineral Products Co. v. Commissioner, 52 T.C. 177 (1969); Hershey Mfg. Co. v. Commissioner, 14 B.T.A. 867, aff’d, 43 F.2d 298 (10th Cir. 1930). Unless the application is subsequently approved, an event of uncertain outcome, it has only inchoate property characteristics, Mullins Mfg. Co. v. Booth, 125 F.2d 660, 664 (6th Cir. 1942). It certainly has no definitive life over which to be depreciated. 4 Mertens § 23.74 (1966).

However, the Seventh Circuit in Estate of Stahl v. Commissioner, 442 F.2d 324 (1971), affirming in part, reversing in part, 52 T.C. 591 (1969), has recently held that at some point in the application process, a patent application may have so fully “matured” as, in effect, to be considered a patent — and thus depre-ciable property — for the purpose of § 1239. Whatever the validity of the Stahl decision, a question as to which we intimate no view, it is clear that application of that opinion to our facts would prove of no assistance to the government’s contentions.

In Stahl, the taxpayer, in return for $300,000 worth of promissory notes, transferred to his wholly-owned corporation various (1) patents, (2) patent applications as to which notices of allowance or indications of allowability had been received prior to transfer, and which ultimately matured into patents, and (3) patent applications which had, prior to transfer, been rejected by the Patent Office. A specific allocation of the purchase price, as reflected in the promissory notes, was made as between the patents ($140,000) and the patent applications ($160,000). Moreover, with respect to the applications themselves, greater amounts were assigned to those applications which had been approved as compared with those which had been rejected. As the corporation gradually paid, off the promissory notes, the taxpayer reported his profit as capital gain. The Commissioner sought to have the entire transaction governed by § 1239. Instead, the Court of Appeals ruled that as to that proportion of the gain allocable to the patents and to those patent applications which had been allowed or appeared allowable prior to transfer, § 1239 did indeed apply. However, the court explicitly rejected the contention that this section should also govern the gain on that part of the transaction involving the disapproved applications, even though one of those applications was ultimately approved.

In addressing itself to the patent applications which had been allowed or which appeared allowable, the Seventh Circuit noted that “these three applications were virtually certain to mature into depreciable patents, as they did, with the merest of diligence by the transferee in processing the applications after the sale.” 442 F.2d at 328 (emphasis supplied). Consequently, it ruled that at the time of transfer, those applications had, for the purposes of § 1239, “matured” into depreciable patents, and were thus limited to ordinary income treatment.

Even under the Stahl rationale, we cannot say that the patent application involved in this case had sufficiently matured so as to trigger the limitation on capital gain benefits imposed by § 1239. In Stahl two of the three applications which the court found to be, in effect, depreciable patents, had already been approved and Notices of Allowance had appropriately issued. 442 F.2d at 326-328. The court, therefore, assumed that all that remained before issuance of letters patent was the mere ministerial act of “processing” the application. Even if such an assumption was completely valid, it is clear that the state of Chu’s application in the instant case was much further removed from the patent issuance-stage. Not only had no Notice of Allowance been granted on his application at the time of transfer, but the primary claims of that application had been thrice rejected. Indeed, Stahl actually provides ample authority for refusing § 1239 coverage here since, even in that ease, the two applications which had been rejected prior to transfer were held to escape the ambit of § 1239 despite the fact that one of those applications was eventually approved. Id.

It is true, of course, that Stahl also accorded § 1239 treatment to an application where, although no Notice of Allowance had been granted, the Patent Office had noted that two claims “appeared allowable.” Id. at 328. And we note that with respect to Chu’s application, the Patent Office had indeed indicated that the alternative design (claims 14-18) similarly appeared allowable, as did claim 12 of Chu’s primary structure. In considering this problem below, the Tax Court stated:

“We note that as to one of the three applications in Stahl, reference is made to the fact that there had been official notification that two of the claims ‘appear [ed] allowable,’ and, of course in the present case, the Patent Office had originally approved claims 14-18 as well as certain of the other claims in later notifications. But in the instant case claims 1-13 were the ‘heart’ of the patent, and until they had been declared ‘allowable’, the application as a whole must in substance be regarded as having been rejected. On the other hand, we have no knowledge as to whether the two claims regarded as ‘allowable’ in Stahl represented the essence of the invention, and in the absence of any further clarifying information, we may fairly assume that the Seventh Circuit regarded the basic claims in respect of that application to have been approved. In the instant case, it is clear that the application had not ‘matured’ to the point that it could be regarded as the substantial equivalent of a patent within the analysis set forth by the Court of Appeals. We regard our disposition of this matter as wholly consistent with that anaylsis.”

We are in complete agreement with the view thus expressed by the Tax Court. Moreover, we note that all of the income received by Chu pursuant to the assignment of his patent application has come as a result of the manufacture and sale of antenna systems embodying the primary, design (claims 1-13). Chu Associates, Inc. has never manufactured any system using the alternative structure described in claims 14-18. It is our conclusion, therefore, that even assuming the validity of the Stahl doctrine, it is beyond doubt that the patent application at issue in this case had not sufficiently matured within the meaning of that decision so as to be considered a deprecia-ble patent for purposes of § 1239.

If nothing else, the facts of this case demonstrate some of the infirmities which presently attend application of § 1239 to the nether area of property which, at the time of transfer to a controlled corporation is not depreciable, but which may subsequently become de-preciable, It may well be that reform is needed. But in the exercise of our judicial function, this court cannot legislate in order to accomplish such reform. That obligation must be left to the Congress.

The judgment of the Tax Court is affirmed.

LEVIN H. CAMPBELL,

Circuit Judge (concurring in the result).

Current Tax Court precedent, supported by Stahl v. CIR, 442 F.2d 324 (7th Cir. 1971), holds that patent applications are ordinarily not property “of a character which is subject to the allowance for depreciation.” A reading of neither § 1239 nor the Regulations would lead a taxpayer to conclude otherwise. The taxpayer is entitled to rely upon these decisions and the everyday reading of the statute and regulations when making decisions that will irrevocably fix his liability for taxes. When the decision is a close one, favoritism, if any, should be for the taxpayer rather than for the government. Fabreeka Products Co. v. CIR, 294 F.2d 876 (1st Cir. 1961) ; CIR v. Rabenold, 108 F.2d 639 (2d Cir. 1940). I therefore concur.

But the Supreme Court has also admonished us that when the taxpayer is, as here, claiming capital gains rather than ordinary rates, the construction should bear more strongly against the taxpayer. Capital gains are the exception, not the rule. CIR v. Gillette Motor Transport, Inc., 364 U.S. 130, 80 S.Ct. 1497, 4 L.Ed.2d 1617 (1960) ; Corn Products Co. v. CIR, 350 U.S. 46, 76 S.Ct. 20, 100 L.Ed. 29 (1955). The issue becomes more difficult still because § 1239, according to its legislative history, is a “penalty” provision, intended to discourage transfers to controlled corporations that enable the taxpayer to take income at capital gains rates while providing the corporation with an asset of stepped-up basis that can be depreciated against income ordinarily taxable at ordinary income rates. The question is whether Congress intended to reach only assets that were depreciable in the hands of the transferee on the day of transfer or whether it wrote a statute with broader impact. The meagre legislative history, marshalled by the court’s opinion here, talks of “depreciable” property. But the statute itself modifies “depreciable” with the words “of a character.” We can neither read 'them out of the statute nor blithely assume that the patent application here, which was probably not depreciable, at least under Revenue Ruling 67-136, at the time of transfer, possessed the requisite “character.”

In situations like this one, a Treasury Regulation would be of invaluable assistance to court and taxpayer alike. Had the Commissioner’s present position been foreshadowed in a properly drawn regulation setting out the conditions under which patent applications were property “of a character . . . subject to the allowance for depreciation,” I would have found against the taxpayer.

Treasury Regulations must be upheld if they “implement the congressional mandate in some reasonable manner.” United States v. Cartwright, 411 U.S. 546, 550, 93 S.Ct. 1713, 1716, 36 L.Ed.2d 528 (1973), quoting from United States v. Correll, 389 U.S. 299, 307, 88 S.Ct. 445, 19 L.Ed.2d 537 (1967). It is virtually inescapable that Congress, when it passed § 1239, meant to penalize transactions of the sort involved in this case. This transaction, no less than one involving property potentially depreciable (but not actually being depreciated) at the time of transfer, poses the threat of the evil Congress clearly sought to reach. Cf. Twentieth Century-Fox Film Corp. v. CIR, 372 F.2d 281 (2d Cir. 1967) (film capable of depreciation but not actually depreciated); 512 West Fifty-Sixth Street Corp. v. CIR, 151 F.2d 942 (2d Cir. 1945) (option is of depreciable character even though non-depreciable).

Patent applications have all or virtually all of the attributes one normally associates with a depreciable “character.” They are used “in trade or business.” 26 U.S.C. § 167. Pekras v. CIR, 2 T.C. M. 195, aff’d, 139 F.2d 699 (6th Cir. 1943). They meet the requirements generally laid down in Treas.Reg. 1.-167(a)-2, since they are “wasting” assets that decline in value over time. Indeed, patent applications are, in some circumstances, depreciable assets. See Rev.Rul. 67-136, 1967-1 Cum.Bull. 58. The only bar to depreciating all patent applications is that they are of uncertain duration, so that it is difficult to ascertain the proper amount of depreciation in any given year. Even that problem is not insuperable; Rev.Rul. 67-136 solves it by allowing depreciation equal to the total royalty payments attributable to the application within the tax year. The Tax Court itself has acknowledged, in some cases not cited in its opinion in the instant case, that patent applications are of a depreciable character. Best Lock Corp., 31 T.C. 1217, 1234 (1959); Century Tank Mfg. Co., 18 T.C.M. 430 (1959). In one case the Tax Court characterized patent applications as intangible property “subject to depreciation in the hands of the transferee.” McDermott, 41 T.C. 50, 58 (1963).

Patent applications represent the same underlying res — the invention — as do patents. Both application and patent represent the full bundle, of legal rights available at the time; both waste; both are, in theory if not in fact, depreciable. The business transaction in the instant case reflects this economic reality. Taxpayer sold all of his rights in the patent to Chu Associates. The contract provided for royalty payments over time whether or not a patent was granted. The grant of a patent would not increase the size of the royalties, nor would its refusal reduce them. The tax treatment for purposes of other sections of the Internal Revenue Code parallels this structure. Chu Associates acquired one basis for the application that carried over to the patent when granted; the application and patent are treated as identical for basis purposes. It is difficult to see why they should be treated differently for purposes of § 1239.

Regulations could, I feel, accord with the statute in either of two forms. First, they could set out the attributes that describe “of a character subject to the allowance for depreciation.” A second approach, more complex, would avoid what the court in this case sees as the “worst of both worlds” situation in which admittedly wow-depreciable applications are involved and the taxpayer “loses” the opportunity to transfer these to a controlled corporation while being taxed at capital gain rates. The regulation might create a rebuttable presumption that all patent applications are de-preciable. This is a reasonable presumption, in light of the data in footnote 5 of the court’s opinion. It is a particularly appropriate presumption in eases like the present one, in which taxpayer has engaged in a sophisticated commercial transaction which discloses that taxpayer was relatively certain that the patent would be granted, and Chu Associates was willing to pay substantial sums for the applications on the assumption that a patent would issue. Taxpayer has firmly asserted a belief in patent-ability; it would not seem unjust to hold him, in tax matters, to the same assumption on which he acted in his dealings with Chu Associates.

Such a presumption, although powerful, could be rebutted. The • regulation might allow taxpayer to apply to the Commissioner before transfer for a ruling that the application was not depreciable for reasons peculiar to itself. It might also provide that taxpayer could rebut the presumption at some time after the transfer.

In conclusion, I support the court’s decision because the language of a tax statute should not be turned into a trap for the unwary. But I suggest that this may be a situation where, with the aid of appropriate Treasury Regulations, the Commissioner should be encouraged to accomplish what it is unfair to permit under the unaided language of the tax statute.

      . Under the terms of the assignments, Chu and Riñes were to receive a total of $2,000 immediately; $60,000 in 1960; and 15% of the gross selling price of every antenna system manufactured and sold by Chu Associates, Inc. in each year thereafter until the patent expired (but not less than $15,000 per year). At the time of the assignments, Chu Associates, Inc. had already received assurances from the United States Air Force that it intended to contract to purchase approximately $400,000-$500,000 worth of systems embodying the new antenna design. During the taxable years in question (1962-1965), Chu received income under his assignment in the respective amounts of $84,020.14, $67,572, $74,629 and $25,405.

      . When the original ninety shares were issued, at $200 per share, in August 1959, the paid-in capital was $18,000. Of the 110 shares authorized by the December 15 resolutions, ninety shares were to be issued as a simple stock dividend to Chu and Faigen and would thus not have increased the paid-in capital. The final twenty shares, to be purchased by subscribers at $100 per share, should have, if actually issued and sold at the time indicated in the stock transfer book, produced an additional paid-in capital of $2,000, for a total capital account of $20,000. If we were to assume that by the time of the assignments of the patent application, only eighteen of the twenty shares had been issued and sold, Chu would own 80.8% of the corporation’s voting strength (160 out of 198 shares). Since § 1239 would only have application to this case if, at the time of the assignment, the taxpayer owned “more than 80% in value” of his corporation’s stock, the exact status of the newly authorized shares would normally become extremely critical. It appears from the record that the corporation received the purchase price for the remaining two shares somewhere between October 1, 1960, and December 31, 1960, or approximately one full year after the transfer of the patent application.

      . We note in passing that even if the stock issuance authorized by the December 15 resolutions had been completely effectuated, leaving Chu with exactly eighty percent of the corporation’s voting strength, it is not entirely clear that he would necessarily escape the ambit of § 1239(a). Recent decisions have indicated that the “more than 80% in value" test of that section requires a subjective determination of the comparative fair market value of the taxpayer’s shares, rather than simply a numerical count. See United States v. Parker, 376 F.2d 402 (5th Cir. 1967); Trotz v. Commissioner, 361 F.2d 927 (10th Cir. 1966). Thus, these cases suggest that such considerations as a premium for management control, or restrictions on minority stock alienability, might add sufficient value to a stock ownership of technically eighty percent or less of the corporate voting strength, so as to satisfy § 1239(a). However, this view does not have complete support among the earlier cases, see, e. g., Mitchell v. Commissioner, 300 F.2d 533 (4th Cir. 1962) (taxpayer owned 79.54% of stock; § 1239(a) held not satisfied), and has been subjected to the criticism that such ephemeral subjective evaluations would add unwarranted uncertainty to the application of the tax laws. Note, “Meaning of ‘More than 80 Percent in Value of the Outstanding Stock’ Under Section 1239.” 66 Mich.L.Rev. 533, 536-540 (1968.).

      . The section was carried forward unchanged as § 1239 of the Internal Revenue Code of 1954. See H.Rep.No.1337, 83rd Cong., 2d Sess. (1954) reprinted in 1954 U.S.Code Cong. & Admin.News p. 4428; S.Rep.No.1622, 83rd Cong., 2d Sess. (1954) reprinted in 1954 U.S.Code Cong. & Admin.News p. 5087.

      . In 1970, for example, approximately 100,000 patents were applied for. Of that number, nearly 34,000 were rejected. Annual Report of the Commissioner of Patents for Fiscal Year 1970, p. 16.

      . It is true, of course, that on the facts of this case, no such unfortunate tax re-suit would occur since the patent application at issue here was eventually approved. However, this does not alter the fact that were we to adopt the government’s interpretation, many such unwarranted tax results would necessarily occur in other cases whenever an application was ultimately denied. In exercising our obligation to construe this statute, no compromise result is possible. We cannot say that a patent application is “property of a character” subject to depreciation if it is eventually approved, while such an application is not “property of a character” subject to depreciation if it is not eventually approved.

        In the first place, the tax must be paid at the time of the transfer, not some months or years afterward when final action on the patent application is taken. Clarity and certainty in application of the tax laws must be maintained. But more important, formulation of such a compromise, while perhaps satisfying our policy goals, is clearly without the scope of our judicial function and is properly a matter to be left for the Congress, which is in a better and more appropriate position to harmonize the competing interests.

      . Notices of Allowance had been received for patent application numbers 274,761 and 274,762. They were each assigned a price allocation of $50,000. Application number 361,229 had received a notice that two of its claims “appear[ed] allowable.” It was also assigned a value of $50,000. The remaining two applications, numbers 450,931 and 454,134 had been rejected and were assigned a value of $5,000 each. Some time after the transfer, the Patent Office reversed itself as to application number 450,-931, and letters patent on that application were ultimately issued.

      . The Seventh Circuit may have been too quick to assume that simply because a Notice of Allowance had been granted, a patent would ultimately issue in due course should the applicant exercise only the “merest of diligence” in “processing the application.” Under Rule 313 of the Rules of Practice of the United States Patent Office, the allowance may be withdrawn at any time prior to issuance of letters patent for reasons of mistake on the part of the Patent Office, fraud or illegality in the application, or any alleged “interference” (i. e. where some other applicant is claiming the same invention). Had the Seventh Circuit fully considered these potential impediments to the eventual issuance of a patent even after receipt of a Notice of Allowance, it might not have concluded, that these patent applications were sufficiently “matured” for purposes of § 1239. What has been said here is even more pertinent where no Notice of Allowance has been issued, but the Patent Office merely indicates that certain claims “appear allowable.”

      . One sensible avenue of reform was suggested at oral argument by my brother Campbell. Most assignments of patent applications to controlled corporations can be expected to involve royalty arrangements whereby the transferor is to receive income spread over the life of the expected patent. Congress could simply provide that although the initial transfer of a mere patent application to the corporation would not result in § 1239-type treatment on the immediate sums received, once the patent is ultimately approved, all subsequent royalty payments would become subject to ordinary income taxation. Thus, the taxpayer would not be unjustly penalized if his application were eventually disapproved. Correspondingly, the tax abuses envisaged by § 1239 would be effectively thwarted precisely at the time they would appear most likely to result.


author: McCREE, Circuit Judge.

text:
    Richard V. BISCEGLIA, as Vice President of the Commercial Bank, Middlesboro, Kentucky, Respondent-Appellant, v. UNITED STATES of America and B. L. Brutscher, Special Agent, Internal Revenue Service, Petitioners-Appellees.
    No. 72-1783.
    United States Court of Appeals, Sixth Circuit.
    Argued Feb. 2, 1973.
    Decided Oct. 18, 1973.

      Mary J. McGinn, Tax Div., Dept, of Justice, Washington, D. C., for petitioners-appellees; Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, Crombie J. D. Garrett, Attys., Tax Div., Dept, of Justice, Washington, D. C., on brief; Eugene E. Siler, Jr., U. S. Atty., Moss Noble, Asst. U. S. Atty., of counsel.
    William A. Watson, Middlesboro, Ky., for respondent-appellant; Watson & Watson, Middlesboro, Ky., of counsel.
    Before McCREE and LIVELY, Circuit Judges, and KENNEDY, District Judge.

       The Honorable Cornelia G. Kennedy, United States District Judge for the Eastern District of Michigan, sitting by designation.

   McCREE, Circuit Judge.

This appeal requires us to determine whether the Internal Revenue Service may use a civil summons to compel a third party to produce for examination records pertaining to the financial affairs of unspecified and unidentified persons and organizations for the purpose of ascertaining their identities. We hold that it may not.

The facts of the case are not disputed. On November 6, 1970, and on November 16, 1970, the Cincinnati branch of the Federal Reserve Bank of Cleveland received deposits of currency from the Commercial Bank of Middlesboro, Kentucky. Each deposit included $20,000 in one-hundred dollar bills which were “tissue paper thin” and in such a badly deteriorated condition that they were no longer fit for circulation. (Appendix at 22) Accordingly, the Cincinnati Branch of the Federal Reserve Bank destroyed them.

Apparently pursuant to federal reporting requirements, the Cincinnati branch of the Federal Reserve Bank reported these deposits to the Internal Revenue Service (IRS). The report informed the IRS of the “deteriorated condition” of the bills “apparently [resulting] from [a] long period of storage.”

The Intelligence Division of the IRS, suspecting that this money may not have been properly reported for income tax purposes by the person or persons who had transferred it to the Commercial Bank, assigned Special Agent B. L. Brutscher to investigate possible criminal violations of the tax laws. During his investigation, Brutscher, allegedly pursuant to section 7602 of the Internal Revenue Code, 26 U.S.C. § 7602 (1967), caused a summons, “In the matter of the tax liability of John Doe,” served on Richard V. Bisceglia, vice president of the Commercial Bank, requesting that he testify and bring with him

[t]hose books and records which will provide information as to the person (s) or firm(s) which deposited, redeemed or otherwise gave to the Commercial Bank $100 bills U. S. Currency which the Commercial Bank sent in two shipments of (200) two hundred each $100 bills to the Cincinnati Branch of the Federal Reserve Bank on or about November 6, 1970 and November 15, 1970.

When Bisceglia refused to comply with the summons, Special Agent Brutscher, pursuant to sections 7402(b) and 7604(a) of the Internal Revenue Code, 26 U.S.C. §§ 7402(b), 7604(a) (1967), filed a petition in United States District Court to enforce the summons. At the hearing on the petition, evidence was adduced showing that it was unusual for the Commercial Bank to deposit with the Federal Reserve Bank so large an amount of money of one hundred dollar denominations and so large a number of bills in such a deteriorated condition. Although the IRS thought that there might be tax liability for 1970 because it appeared that someone might have been hoarding money for a considerable period of time in an unusual storage place, the IRS admitted that it neither suspected nor was it investigating a par-tieular person or taxpayer. Instead, the purpose of the summons was to ascertain the identity of that person or those persons who had transferred the deteriorated bills to the Commercial Bank and then to determine whether anyone was liable for income taxes. Bisceglia testified that the bank had both cash and deposit tickets for the period in question. He explained, however, that only deposit tickets disclose the identity of a person making a deposit. Cash tickets show only the amount of cash deposited and the identity of the teller who received the deposit. He also informed the court that the bank keeps no records of exchange transactions, that is, transactions in which an individual exchanges his currency for new currency or for currency of different denominations.

In opposition to the enforcement of the summons, Bisceglia urged four affirmative defenses: (1) the summons was neither authorized by section 7602 of the Internal Revenue Code nor was it valid under the Fourth Amendment because it failed to specify the identity of the taxpayer being investigated; (2) a section 7602 civil summons was improper because the dominant purpose of the investigation was criminal; (3) the general nature of the summons made it impossible and impracticable for the bank to notify every taxpayer who had transacted business with the bank during the period of time in question and therefore denied the bank’s customers their right to challenge its enforcement; and (4) the IRS had not acted in good faith in issuing the summons.

The district court, on June 1, 1972, rejected Bisceglia’s affirmative defenses and ordered the bank to make available to the IRS those records reasonably related to the investigation. To avoid overburdening the bank and unnecessarily disclosing the transactions of bank customers that were not relevant to the IRS inquiry, the court specified the records required as

those deposit tickets, if any, of the Commercial Bank, Middlesboro, Kentucky, which reflect cash deposits during the period from October 16, 1970, through November 16, 1970, in the amount of $20,000.00, and those deposit tickets, if any, of said bank which reflect cash deposits involving one hundred dollar bills totaling amounts equal to or in excess of $5,000.00 per deposit for a like period.

Bisceglia has appealed from this order, the enforcement of which was stayed pending this appeal on July 14, 1972, and contends first, that the summons and subsequent order enforcing the summons are not authorized by section 7602 of the Internal Revenue Code, 26 U.S.C. § 7602 (1867), and second, that they violate the Fourth Amendment’s prohibition of unreasonable searches and seizures. Because we find that the summons and the order enforcing the summons are not authorized by the Internal Revenue Code, we do not reach the constitutional question.

In enacting section 7602 of the Internal Revenue Code, Congress specified the purposes for which the Internal Revenue Service is authorized to issue a summons as follows:

[f]or the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax or the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting any such liability. . . 26 U.S.C. § 7602 (1967).

In this section, Congress has not authorized the IRS to examine records pertaining to the financial affairs of an indefinite number of unspecified persons for the purpose of ascertaining the identity of one or some of those persons who may be taxpayers and liable for taxes. Instead, the section presupposes that the IRS has already identified the person in whom it is interested as a taxpayer before proceeding. Even the IRS summons form, Treasury Department Form 2039, acknowledges this presupposition because it begins with the words “In the matter of the tax liability of ___— and informs the recipient of the summons that he is required to appear and give testimony “relating to the tax liability or the collection of the tax liability of the above named person. . . . ” In this case, the IRS has inserted the name “John Doe” into the space provided for the name of the taxpayer under investigation, and it admits that the name is fictitious and that no person of that name is under investigation.

Although courts are required to “liberally construe the powers given the governmental agency” by section 7602 of the Internal Revenue Code, here, the district court’s sweeping interpretation of this section has gone beyond mere statutory construction. United States v. Giordano, 419 F.2d 564, 569-570 (5th Cir. 1969), cert, denied 397 U.S. 1037, 90 S.Ct. 1355, 25 L.Ed.2d 648 (1970). In the past, whenever the IRS has sought to use its summons power as an exploratory or identifying device to compel the production of records pertaining to a group of otherwise unidentified persons in the hope of discovering whether persons in this group may be taxpayers or, if so, may be liable for income taxes, courts have moved swiftly to arrest or curtail the attempt. When the IRS seeks to obtain records from persons not themselves under investigation for the purpose of investigating others whose identity is known, courts have been particularly careful to ensure that investigation of the taxpayer and not a sweeping exploratory search is its object.

Thus, in Mays v. Davis, 7 F.Supp. 596 (W.D.Pa.1934), decided under the predecessor of section 7602, the court refused to require a trust officer of a trust company to produce for IRS examination all records disclosing the “names and addresses of the beneficiaries of trusts created by will where the widow, a beneficiary, has elected to take under the will . . . where the will provides for payment to her of income of the trust estate; and where income was paid to the widow” and all records showing “the name of each such trust.” Id. at 596. The court properly characterized this summons as merely exploratory. The IRS, having no identifiable taxpayer under investigation, was seeking information about a group of persons having common characteristics in the hope of discovering some tax liability.

In First Nat. Bank of Mobile v. United States, 160 F.2d 532 (5th Cir. 1947), the court, also interpreting the predecessor of section 7602, refused to enforce a summons during an IRS investigation of several named taxpayers, that required a bank “to produce for inspection and examination . . . any and all books, papers and records of whatever nature, irrespective of whether such records also pertain to similar transactions with other persons or firms. ...” Id. at 533. (emphasis added). The court, finding that the order exceeded the scope of the statute, struck the italicized part of the order and substituted “which pertain to or reflect the issuance of cashier’s checks . . . [which bear upon, or have reference to the federal] tax liability of the above named firm and individuals. . . . ” Id. In denying a petition for rehearing, the court added that “[n] either the revenue agent nor the Court has authority under the statute to require the production of memoranda, books, etc., of third parties unless they have a bearing upon the return or returns under investigation.” Id. at 534.

In enacting section 7602 of the Internal Revenue Code, Congress intended to make “no material change [in] existing law.” H.R.Rep.No.1337, 83d Cong., 2d Sess. (1954); S.Rep.No.1622, 83d Cong., 2d Sess. (1954); U.S.Code Cong, and Admin.News, 1954, p. 4025 et seq. Accordingly, courts have continued to refuse to sanction IRS “John Doe” summonses issued to third parties for the purpose of examining their records pertaining to the affairs of a particular group of persons when no identifiable taxpayer is under investigation.

In United States v. Humble Oil & Refining Co., 246 F.Supp. 944 (S.D.Tex. 1972), the IRS sought from Humble Oil the identities of lessors of mineral rights to whom the company had surrendered expired mineral leases without having extracted any minerals in order to determine whether these lessors had remembered to restore in their most recent tax returns the depletion allowances which they had claimed during the life of the lease. The IRS, upon admitting that it had neither the oil company nor any particular lessor, lease or land under investigation, was not permitted to use the summons power granted in section 7602 as a tool for research and exploration. The court found that “Congress intended that a person or persons or particular returns be under scrutiny by the Internal Revenue Service before such a summons can be issued.” Id. at 947.

Similarly, in United States v. Theodore, 479 F.2d 749 (4th Cir. 1973), the court refused to uphold an order enforcing a summons that required an accounting firm to produce all the income tax returns and any and all related material pertaining to all its clients for a three year period. The summons was issued as part of a nationwide investigation of tax preparation firms to determine whether these firms were fairly computing the tax liabilities of their clients. In the course of the investigation, the IRS became suspicious of the Theodore accounting firm after the firm had prepared an incorrect tax return for one of,its agents posing as a customer. The purpose of the summons was to determine whether the firm had made similar incorrect returns for other customers and, if it had, to determine their correct tax liability. The summons, characterized as “ ‘a rambling exploration’ of a third party’s files” was unenforceable because section 7602 “only allows the IRS to summon information relating to the correctness of a particular return or to a particular person and does not authorize the use of open-ended Joe [sic] Doe summonses.” Id. at 754, 755.

We believe that these cases control the disposition of this appeal. Here, the IRS has requested and the district court has approved a summons directed to a third party, the Middlesboro Commercial Bank to produce for inspection bank records relating to a group of persons who either deposited $20,000 at one time or who made deposits of one hundred dollar bills exceeding $5,000 at one time. The IRS has admitted that it has no particular taxpayer under investigation and that it desires the records solely for the purpose of obtaining the identities of persons and firms who made deposits of the nature described. It does not seek the records “[f]or the purpose of ascertaining the correctness of any return,” for the purpose of “making a return where none has been made,” for the purpose of “determining the liability of any person for any internal revenue tax or the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or” for the purpose of “collecting any such liability” as required by section 7602 of the Internal Revenue Code. In short, the IRS has not made the demonstration requisite for the enforcement of a summons — that it seeks third party records pertaining to the income tax liability of a particular taxpayer in whom it is interested. Instead, the IRS has been granted a summons enabling it to inquire into the financial affairs of a group of unspecified persons in the hope of identifying one or more of them as the person or persons who transferred deteriorated bills to the Commercial Bank, a purpose not authorized by section 7602 of the Internal Revenue Code.

We believe, therefore, that Tillotson v. Boughner, 333 F.2d 515 (7th Cir.), cert, denied 379 U.S. 913, 85 S.Ct. 260, 13 L. Ed.2d 184 (1964) and the related case of Schulze v. Rayunec, 350 F.2d 666 (7th Cir. 1965), cited by the IRS, are inappo-site. In those cases, the court ordered enforced section 7602 summonses issued to a third party bank and an attorney during an investigation in which the IRS sought the identity of the person for whom the attorney had obtained a cashier’s check for $215,499.95 from the bank. The attorney had sent the check to the IRS accompanied by a letter that informed the IRS that the check was for unpaid taxes owed by an anonymous taxpayer. The IRS sought his identity from the attorney, whose claim of attorney-client privilege was upheld in Tillot-son v. Boughner, 350 F.2d 663 (7th Cir. 1965), and from the bank, which was ordered to disclose the identity of the taxpayer whose money had been used to purchase a cashier’s check from it. The court, in the earlier Tillotson case, was careful to distinguish the Mays case, supra, on the ground that in Tillotson not only did “a taxpayer” exist but also that the bank was requested to assist in determining that “specific taxpayer’s liability.” 333 F.2d at 516. (Emphasis in opinion). The court did not sanction an examination of bank records pertaining to the affairs of a class of persons when no particular, specific taxpayer was under investigation.

We decline to do by interpretation that which Congress has declined to do by legislation. The IRS is not authorized to issue a summons to a third party to compel production of that party’s records except in furtherance of an investigation of the possible tax liability of specified taxpayers.

Reversed and remanded with instructions to deny enforcement of the summons.

      . In their briefs, both parties refer to a Form TCB-1, a copy of which was filed by the Cincinnati branch of the Federal Reserve Bank with the IRS. This form entitled “Report of Currency Transactions” requires three primary kinds of information: (1) the name, address, and business, occupation or profession of the person or organization initiating the transactions reported; (2) a description of the transactions reported, that is, the total amount of the currency involved, the amount of denominations of $100 or higher, and whether the transaction was a deposit, withdrawal, or exchange of currency, or the cashing or purchasing of a check; and (3) the name and address of the financial institution reporting. The obligation of financial institutions to provide this information is imposed by 31 C.F.R. §§ 102.1-.4 (1972) (Instructions Relating to Reports of Currency Transactions). This regulation provides:
      § 102.1 Reports of currency transactions required.

      Commencing with transactions occurring in the month of August 1959, every financial institution in the United States shall file monthly reports on Form TCR-1 concerning each deposit or withdrawal, or other payment or transfer, effected by, through, or to such financial institution, which involves transactions in United States currency as follows:
      (a) Transactions involving $2,500 or more of United States currency in denominations of $100 or higher ;
      (b) Transactions involving $10,000 or more of United States currency in any denominations, and
      (c) Transactions involving any amount in any denominations, which in the judgment of the financial institution exceed those commensurate with the customary conduct of the business, industry or profession of the person or organization concerned.
      § 102.2 Filing of reports.

      Reports on Form TCR-1 shall be filed on or before the 15th day of the month following that in which the reported transactions occur, with the Federal Reserve Bank of the district in which the reporting financial institution is located. All information called for in such form shall be furnished. A supply of Form TCR-1 may be obtained upon request directed to any Federal Reserve Bank.
      § 102.3 Identification required.

      No financial institution shall effect any transaction with respect to which a report is required unless the person or organizations with whom such transaction is to be effected has been satisfactorily identified.
      § 102.4 Definitions.

      As used in this part “payment or transfer” shall include exchange of currency; and “financial institutions” shall mean banks, trust companies, savings banks, private bankers, investment bankers, building and loan associations, securities and commodities brokers, and currency exchanges and other persons or organizations engaged primarily in cashing and exchanging currency.
      It appears that this regulation did not require the Cincinnati branch of the Federal Reserve Bank to file Form TCR-1. It does appear, however, that this regulation required the Commercial Bank in this case to file a Form TCR-1 in which, of course, the information sought by the IRS in this proceeding would have been disclosed.
      It should also be noted that after the events that are the subject of this litigation had transpired, the Currency and Foreign Transactions Reporting Act of 1970, 31 U. S.C. §§ 1051 et seq. (Supp.1973), became effective. This Act requires similar disclosures by financial institutions. A part of this Act and a regulation promulgated thereunder requiring domestic financial institutions to report any currency transaction with any customer involving more than $10,000 has been declared unconstitutional. Stark v. Connally, 347 F.Supp. 1242 (N.D. Cal.1972) (appeal pending).

      . At the hearing before the United States District Court, the employee of the Federal Reserve Bank who had noticed the deteriorated condition of the bills deposited by the Commercial Bank testified that to the best of his knowledge, “there was only one paral-lei situation' and that was several years ago where a large hoard of money was found that was in comparable condition. It was stored in milk cans that were buried in concrete.”

      . 26 U.S.C. § 7602 (1967), “Examination of books and witnesses,” provides :
      For the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax or the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting any such liability, the Secretary or his delegate is authorized
      (1) To examine any books, papers, records, or other data which may be relevant or material to such inquiry;
      (2) To summon the person liable for tax or required to perform the act, or any officer or employee of such person, or any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act, or any other person the Secretary or his delegate may deem proper, to appear before the Secretary or his delegate at a time and place named in the summons and to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry ; and
      (3) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry.
      The IRS has also argued on appeal that 26 U.S.C. § 7601 (1967) authorizes the issuance and the enforcement of its summons in this case. That section provides :

        Canvass of districts for taxable persons and objects

        (a) General rule. — The Secretary or his delegate shall, to the extent he deems it practicable, cause officers or employees of the Treasury Department to proceed, from time to time, through each internal revenue district and inquire after and concerning all persons therein who may be liable to pay any internal revenue tax, and all persons owning or having the care and management of any objects with respect to which any tax is imposed.
      Section 7601, however, merely “flatly imposes upon the Secretary the duty to canvass and to inquire.” Donaldson v. United States, 400 U.S. 517, 523, 91 S.Ct. 534, 539, 27 L. Ed.2d 580 (1971). Accordingly, we do not believe that Congress intended to provide in this section grounds additional to those specified in section 7602 for the issuance of a summons.

      . 26 U.S.C. § 7402(b) (1967), conferring jurisdiction upon the United States District Courts, provides:

        (b) To enforce summons. — If any person is summoned under the internal revenue laws to appear, to testify, or to produce books, papers, or other data, the district court of the United States for the district in which such person resides or may be found shall have jurisdiction by appropriate process to compel such attendance, testimony, or production of books, papers, or other data.
      26 U.S.C. § 7604(a) (1967), relating to the enforcement of summons, provides:

        (a) Jurisdiction of district court. — If any person is summoned under the internal revenue laws to appear, to testify, or to produce books, papers, records, or other data, the United States district court for the district in which such person resides or is found shall have jurisdiction by appropriate process to compel such attendance, testimony, or production of books, papers, records, or other data.

      . At the hearing before the United States District Court, Bisceglia testified that the Commercial Bank processes approximately 1,250 to 1,500 cash tickets and 600 to 700 deposit tickets daily.

      . In Local 174 v. United States, 240 F.2d 387 (9th Cir. 1956), the IRS, allegedly pursuant to § 7602, issued a summons to a union local to produce any and all of its records for a five year period pertaining to any transaction between the Local and its president, Brewster, his wife and any of their agents. The court, characterizing the summons as a request for “a blanket turnover for an unlimited time,” found that the Local, as a third party, was not “required to produce any item or document unless it was (1) in his possession, (2) relevant to the tax liability of the Brewsters or either of them, or (3) material to the inquiry.” Id. at 391. The summons was general, not particularized, and therefore unenforceable.
      Even when the IRS seeks records held by a taxpayer who is under investigation, its power to examine records is not unlimited. Thus in In re International Corporation Co., 5 P.Supp. 608 (S.D.N.Y.1934), the court refused to order a taxpayer whose tax liability was under investigation to disclose the names of the foreign corporations that the taxpayer had helped organize because “the particular name of a corporation organized by petitioner would seem to have nothing whatsoever to do with the correctness of the income, or the deductions, reported in its return.” Id. at 612.
      In McDonough v. Lambert, 94 F.2d 838 (1st Cir. 1958), the court refused to order a taxpayer under investigation to disclose the name of an attorney to whom the taxpayer had allegedly paid $10,000 for legal services because even if that expense were disallowed, the tax liability of the taxpayer (who had sustained a loss of over $100,000 that year) would be unaffected. In refusing to uphold the order enforcing the summons, the court explained:
      We do not think the provisions of this section can be given such a broad construction ; that by its terms it is more limited in scope and confined to the procurement of evidence, oral or documentary, bearing upon matters required by law to be included in a given tax return to determine the correct tax liability of the person who made the return or who failed to make one, and was not intended to authorize the procurement of evidence that might be material in verification of the tax return of some other person, not known to the Bureau of Internal Revenue, and who may or may not have made a return Id. at 841.