author: CHOY, Circuit Judge:

text:
    Dean WALLING et al., Plaintiffs-Appellants, v. BEVERLY ENTERPRISES, a California corporation, Defendant-Appellee.
    No. 71-1510.
    United States Court of Appeals, Ninth Circuit.
    April 9, 1973.

      John P. Hanrahan (argued), Los Angeles, Cal., for plaintiffs-appellants.
    Thomas H. McGovern (argued), William F. Rinehart, H. Stephen Cranston, MacDonald, Halsted & Laybourne, Los Angeles, Cal., for defendant-appellee.
    Before MERRILL, HUFSTEDLER, and CHOY, Circuit Judges.
   CHOY, Circuit Judge:

Appellants (West Texas Shareholders), owners of all the shares of West Texas Medical Center, Inc. (West Texas), a Texas corporation, brought this action against Beverly Enterprises (Beverly), a California corporation, for alleged violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 781(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, and for breach of contract. Federal jurisdiction is based solely on the securities law violations.

The district court held that West Texas Shareholders had failed to state a claim for relief under federal securities law and therefore dismissed the action for lack of subject matter jurisdiction. The validity of this ruling is the sole issue presented on appeal. We reverse.

The federal securities claim asserted by West Texas Shareholders arose from an agreement dated August 26, 1969, between Beverly and West Texas Shareholders, for an exchange of all of the common stock of West Texas for common stock of Beverly. The total value of the Beverly stock consideration, $2,700,000, was payable in one down payment and three annual installments. Each of the four payments was to have a fixed value of $675,000 and the number of shares to be issued representing each payment was to be determined by the average closing price of Beverly stock on the American Stock Exchange during the ten day trading period preceding the payment date of the installment. Thus, substantial fluctuations in the trading price of Beverly stock would have a significant effect on the consideration West Texas Shareholders were to receive.

The arrangement, however, was never consummated because Beverly refused to proceed, claiming that it had received information that West Texas’s hospital building was in need of major repair and that it could not obtain a firm commitment from its own insurance carrier to include West Texas within its insurance plan. West Texas Shareholders attempted to accommodate Beverly, but the parties were unable to settle their differences and this suit was filed.

In reviewing a dismissal of a complaint for failure to sufficiently allege jurisdiction, we must accept the allegations in the complaint as true. Vine v. Beneficial Finance Co., Inc., 374 F.2d 627 (2nd Cir.), cert. denied, 389 U.S. 970, 88 S.Ct. 463, 19 L.Ed.2d 460 (1967); 2A J. Moore, Federal Practice ¶ 12.08 (2d ed. 1972). Disregarding the inordinate verbiage in their amended complaint, West Texas Shareholders in substance allege that Beverly entered into the reorganization agreement with the intent not to perform its obligations unless it later determined that it was in its best interests to do so, and that Beverly intended to raise and did raise fictitious excuses for refusing to fulfill the agreement. Alternatively, West Texas Shareholders allege that Beverly executed the agreement with the intent to speculate on fluctuations of the price of its stock at the expense of West Texas Shareholders, and that Beverly executed the agreement with the intent of refusing to consummate the reorganization unless it could obtain additional concessions from them to which it was not legally entitled. West Texas Shareholders also allege that Beverly established a pattern in its acquisition program of entering into other reorganization agreements with stockholders of other corporations with only a limited intention of performing. West Texas Shareholders contend that the above actions constitute acts, practices, or a course of business which operated as a fraud or deceit upon them under § 10(b) and Rule 10b(5).

We must decide whether entering into a contract to sell securities with only a limited intention of performing is a fraud cognizable under § 10(b) and Rule 10b-5 and whether the allegations of fraud in this complaint are sufficiently well pleaded. We hold that the district court erred in dismissing this action.

At the outset we note that “[s]ection 10(b) must be read flexibly, not technically and restrictively. Since there was a ‘sale’ of a security and since fraud was used ‘in connection with’ it, there is redress under § 10(b), whatever might be available as a remedy under state law.” Supt. of Insurance v. Bankers Life & Cas. Co., 404 U.S. 6, 12, 92 5. Ct. 165, 169, 30 L.Ed.2d 128 (1971). “And the fact that the transaction is not conducted through a securities exchange or an organized over-the-counter market is irrelevant to the coverage of § 10(b).” Bankers Life, supra at 10, 92 S.Ct. at 168. Likewise “[n] either § 10(b) nor Rule 10b-5 contains any language which would indicate that those provisions were intended to deal only with fraud as to the ‘investment value’ of securities . . . ” A. T. Brod & Co. v. Perlow, 375 F.2d 393, 396-397 (2nd Cir. 1967).

Proceeding on the assumption that the allegations in the complaint are true, and that any ambiguities must be resolved in favor of the pleading, Gillibeau v. City of Richmond, 417 F.2d 426, 430 (9th Cir. 1969), it seems clear that West Texas Shareholders have stated a claim which the district court had jurisdiction to entertain. Entering into a contract of sale with the secret reservation not to fully perform it is fraud cognizable under § 10(b).

We think the case at bar is governed by the rationale expressed in Perlow, supra and Commerce Reporting Co. v. Puretec, Inc., 290 F.Supp. 715 (S.D.N.Y. 1968). Perlow involved an action by a broker against his customers to recover the losses suffered by the broker when the customers refused to pay for securities they had ordered but which had dropped in price. The broker alleged that the customers placed buy orders with the intent of paying for the securities only if the market value increased. The Second Circuit found that this was a fraudulent scheme.

In direct accord with Perlow and perhaps more in point is Puretec, where the plaintiffs alleged that the defendant contracted to sell defendant’s stock to plaintiffs without any intention of consummating the deal if they could obtain a better price and terms from someone else. The court found that properly pled such allegations were sufficient to support a § 10(b) claim.

Beverly, however, contends that the district court properly dismissed the action because the complaint does not sufficiently allege fraud in that it fails to meet the requirements of F.R.Civ.P. 9(b) because no acts, words or other conduct are alleged showing its intent or state of mind at the time of the execution of the agreement.

Rule 9(b) requires that the circumstances constituting fraud must be stated with particularity. But “[r]ule 9(b) does not require nor make legitimate the pleading of detailed evidentiary matter.” 2A J. Moore, Federal Practice ¶ 9.03, at 1930 (2d ed. 1972). Nor does Rule 9(b) require any particularity in connection with an averment of intent, knowledge or condition of the mind. It only requires the identification of the circumstances constituting fraud so that the defendant can prepare an adequate answer from the allegations. Trussell v. United Underwriters, Ltd., 228 F.Supp. 757, 774 (D.Colo.1964); Gottlieb v. Sandia American Corp., 35 F.R.D. 223, 224 (E.D.Pa.1964).

Therefore, while mere conclusory allegations to the effect that defendant’s conduct was fraudulent in violation of Rule 10b-5 are insufficient, Shemtob v. Shearson, Hammill & Co., 448 F.2d 442, 444 (2nd Cir. 1971), here West Texas Shareholders have done much more. They have stated the time, place and nature of the alleged fraudulent activities. The fraud was entering into the August 26, 1969 agreement with only a limited intention of performing. This is a sufficient averment. 2A J. Moore, Federal Practice ¶ 9.03, at 1925-28 (2d ed. 1972). The circumstances constituting the alleged fraud have been pled with sufficient definiteness to advise Beverly of the claim it must meet. Rekeweg v. Federal Mutual Insurance Co., 27 F.R.D. 431, 434 (N.D.Indiana 1961), aff’d on other grounds, 324 F.2d 150 (7th Cir. 1963), cert. denied, 376 U.S. 943, 84 S.Ct. 798, 11 L.Ed.2d 767 (1964).

However, we want to make it clear that as the court in Perlow, supra, said, West Texas Shareholders have not proven that Beverly’s failure to consummate the agreement constituted a device or artifice to defraud. Not every breach of a stock sale agreement adds up to a violation of the securities law. Whether there is actionable fraud or a mere breach of contract depends on the facts and circumstances developed at the trial or on a motion for summary judgment. The pleading rules, designed to avoid and reduce long and technical allegations, are necessarily supplemented by procedures including summary judgment which enable a party to have a judgment in a relatively short time if there is actually no bona fide claim presented. Beverly is at liberty to avail itself of these procedures and thereby seek to avoid what otherwise might be protracted litigation. Perlow, supra, 375 F.2d at 398.

Moreover, if the federal claim is dismissed prior to trial, the state claims should be dismissed as well so that federal jurisdiction will not be abused. United Mine Workers of America v. Gibbs, 383 U.S. 715, 726, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966); Lanning v. Serwold, 474 F.2d 716 (9th Cir., 1973).

Reversed and remanded.

      . In pertinent part, Section 10(b) provides :
      “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange—
      * # Si* ❖ ❖
      (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.”

      . The rule provides:
      “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
      (a) To employ any device, scheme, or. artifice to defraud,
      (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
      (o) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person in connection with the purchase or sale of any security.”

      . The breach of contract claims are included under the doctrine of pendent jurisdiction. United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966).

      . It should be noted that Beverly’s stock has in fact fluctuated widely. In September, 1969 the stock was selling at approximately $27 per share. Since then it has traded for as high as $45 per share and as low as $9 per share.

      . There is a sufficient contractual relationship so that West Texas Shareholders have standing as purchasers or sellers under the rationale of the “aborted purchaser-seller” cases. Mount Clemens Industries, Inc. v. Bell, 464 F.2d 339, 342 (9th Cir. 1972).

      . “It has been the law under the mail fraud statute ever since a Supreme Court decision in 1896 [Durland v. United States, 161 U.S. 306, 16 S.Ct. 508, 40 L.Ed. 709] that ‘to promise what one does not mean to perform, or to declare an opinion as to future events which one does not hold, is a fraud.’ ” 3 L. Loss, Securities Regulation 1436—47 (1st ed. 1961); accord, Keers and Co. v. American Steel and Pump Corp., 234 F.Supp. 201, 203 (S.D.N.Y.1964).

      . Rule 9(b) provides:
      “Fraud, Mistake, Condition of the Mind. In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.”

      . We note that Beverly’s intent at the time it entered the agreement may be proven by reference to subsequent events.


source: Caselaw Access Project

author: ZIRPOLI, District Judge.

license: Public Domain

text:
    ESTATE of Martin M. MELCHER, etc., Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. ESTATE of Martin M. MELCHER, etc., Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
    Nos. 71-1650, 71-1651, 71-2377 and 71-2378.
    United States Court of Appeals, Ninth Circuit.
    March 20, 1973.

      Hilbert P. Zarky (argued), of Mitchell, Silberberg & Knupp, Los Angeles, Cal., for petitioners-appellants.
    Janet R. Spragens, Atty. (argued), Thomas L. Stapleton, Meyer Rothwacks, Attys., Scott P. Crampton, Asst. Atty. Gen., Tax Div., Dept, of Justice, Washington, D.C., for respondent-appellee.
    Before DUNIWAY and HUFSTEDLER, Circuit Judges, and ZIRPOLI, District Judge.

       The Honorable Alfonso J. Zirpoli, United States District Judge for the Northern District of California, sitting by designation.

   OPINION

ZIRPOLI, District Judge.

Appellants Doris Day Melcher and the estate of her deceased husband, Martin M. Melcher, appeal parts of a Tax Court decision assessing tax deficiencies for the years 1953 through 1956 and finding an overpayment for the year 1957. In those years Martin Melcher and his wife filed joint tax returns, which included income and deductions claimed on account of a tax avoidance scheme, a Livingstone-type transaction, in which the taxpayers claimed deductions for large' interest payments for an alleged indebtedness incurred in connection with the “purchase” of Federal Land Bank Bonds, and claimed a capital gain at the time the bonds were sold. This court has consistently held that in a Livingstone-type transaction there is no real purchase of bonds, no genuine indebtedness incurred, and consequently, no deductible interest expense created. See Cahn v. Commissioner, 358 F.2d 492 (9th Cir. 1966); Williams v. Commissioner, 323 F.2d 656 (9th Cir. 1963); MacRae v. Commissioner, 294 F.2d 56 (9th Cir. 1961), cert. denied, 368 U.S. 955, 82 S.Ct. 398, 7 L.Ed.2d 388 (1962); Kaye v. Commissioner, 287 F.2d 40 (9th Cir. 1961). Appellants concede that the Tax Court properly disallowed use of any expenses associated with this scheme as interest deductions pursuant to § 23(b) of the Internal Revenue Code of 1939 or § 163(a) of the Internal Revenue Code of 1954. They argue, however, that the Tax Court erred in not granting post-trial motions seeking to raise the issue that the out-of-pocket expenses in the transaction are deductible as a theft loss, and in holding that the out-of-pocket expenses are not deductible as a capital loss.

1. Theft-loss Deduction

After the death of Martin Melcher in April, 1968, disputes arose between Doris Day Melcher and Jerome Rosenthal, the attorney who represented the Melchers in the Tax Court, concerning alleged mismanagement of the Melchers’ financial affairs, breaches of fiduciary relationships, and improper representation of the Melchers’ interest in the Tax Court. Subsequent to the trial in the Tax Court, but before entry of the Findings of Fact and Opinion, Doris Day Melcher dismissed Rosenthal and engaged present counsel. Following entry of the Tax Court opinion, motions were filed asking the court to reopen the proceedings to allow appellants to assert a theft-loss deduction for out-of-pocket expenses incurred in the transaction pursuant to Nichols v. Commissioner, 43 T. C. 842 (1965). We do not hold that Nichols was correctly decided. We need not reach that question, because even if it were, reversal would not be required here.

The motions and accompanying affidavits alleged that Rosenthal was guilty of misconduct in arranging this Livingstone-type transaction for the Melchers, and that Rosenthal purposely chose to omit a Nichols theft-loss claim in order to prevent discovery of his misconduct. The motions first asked that the Findings of Fact and Opinion be modified so as to allow the theft loss for the year 1953 on the basis of the existing record. The motions also requested an opportunity to present further evidence regarding the theft loss for the years 1954 through 1956, and for the year 1953 if the motion to modify were denied. Reopening the hearing for the latter three years, but not for 1953, was necessary, appellants argued, because prior to 1954 theft losses could be deducted in the year sustained, but after 1954, they have had to be deducted in the year discovered. Compare Int.Rev.Code of 1939 § 23(e) with Int.Rev.Code of 1954 § 165(e). The Tax Court initially responded to the motions by requiring that appellants lodge proposed amendments to their petitions and file a short memorandum outlining the number of witnesses and exhibits that would be presented if the matter were reopened, and estimating the number of days of further trial that would be necessary. Thereafter, the Tax Court denied the motions, and later denied a motion to reconsider. Appellants argue that the Tax Court abused its discretion in refusing to reopen the proceedings.

A motion to reopen and hear further evidence is addressed to the sound discretion of the Tax Court, and a denial of such a motion will not be reversed on appeal in the absence of extraordinary circumstances showing a clear abuse of discretion. See Henry Van Hummell, Inc. v. Commissioner, 364 F.2d 746, 751 (10th Cir. 1966), cert. denied, 386 U.S. 956, 87 S.Ct. 1019, 18 L.Ed.2d 102 (1967); Mensik v. Commissioner, 328 F.2d 147, 151 (7th Cir.), cert. denied, 379 U.S. 827, 85 S.Ct. 55, 13 L.Ed.2d 37 (1964). The court readily agrees with appellants that the judiciary must be sympathetic to claims that an injustice has been perpetrated because an attorney has breached his fiduciary duty to his client, and in a proper case a failure to reopen a hearing to consider such a claim might constitute abuse. In the present case, however, the Tax Court’s decision not to reopen cannot be reversed, because appellants have failed to show that further hearings would have changed the result. See ARC Realty Co. v. Commissioner, 295 F.2d 98, 107 (8th Cir. 1961).

The Nichols case does not make a theft-loss deduction available to every taxpayer disappointed by the court’s conclusion that sham interest payments in a Livingstone-type transaction are not deductible. See Dooley v. Commissioner, 21 T.C.M. 1633, 1646 (1959), aff’d, 332 F.2d 463 (7th Cir. 1964). Rather, the taxpayer who seeks to salvage even this tax advantage must present “credible evidence that the form of the transaction was of critical importance to [him], and that [he] entered into it only after having been deceived . . as to its nature.” Nichols v. Commissioner, 43 T.C. at 887. Martin Melcher’s testimony shows that this is not such a case; he testified that he relied totally on his attorney, made no attempt to understand the transaction, and had no knowledge of the details of the transaction or the applicable tax provisions.

In view of this evidence, it was incumbent upon appellants to proffer evidence in their motion to reopen the proceedings that would overcome the implication of Melcher’s testimony that no theft loss resulted and would show that appellants were denied an opportunity to present the issue because of Rosenthal’s conflict of interest. It is unclear from the pleadings appellants filed precisely what evidence they intended to produce if the hearing were reopened. Assuming that they were offering to prove everything- suggested by the pleadings, the evidence still would not have shown that they are entitled to a Nichols theft-loss deduction. Most of the evidence would tend to show only that Rosenthal was guilty of misconduct in other matters he handled for the Melchers; this, of course, does not establish that they experienced a theft in the course of this transaction. The only evidence specifically relating to this transaction is that Rosenthal arranged a Livingstone-type transaction for himself at a lower rate of interest, and thus, a lower out-of-pocket expense, than the rate of interest he arranged for Melcher. The higher interest rate, however, would have resulted in tax savings for Melcher several times the additional out-of-pocket expense if the tax scheme had succeeded. The difference, therefore, may reflect nothing more than the different tax deduction needs of Melcher and Rosenthal; it would not prove a theft by Rosenthal.

In short, even assuming the truth of all the evidence appellants may have intended to proffer, the total record still indicates that Rosenthal recommended that Melcher take advantage of what, at the time, was believed by many competent tax attorneys to be a “tax loophole,” and Melcher accepted the advice. Cf. Miles v. Livingstone, 301 F.2d 99, 101-102 (1st Cir. 1962). Melcher was certainly no stranger to tax-avoidance schemes, as indicated by his testimony concerning the other issue before the Tax Court. On the basis of the evidence offered, the Tax Court could not conclude, as required for a Nichols theft-loss deduction, that Melcher “parted with money on the strength of . false representations and [was] thus swindled . . . within the meaning of the criminal law.” 43 T.C. at 887. Hence, it was not error for the Tax Court to deny the motions to reopen the hearing.

Although it is unclear, appellants also seem to argue that the court ought to hold that a theft-loss deduction should be allowed for the year 1953 even though appellants were not permitted to amend their pleadings to raise the issue in the Tax Court. This court clearly has the power to do this. See MacRae v. Commissioner, 294 F.2d 56, 59 (9th Cir. 1961), cert. denied, 368 U.S. 955, 82 S.Ct. 398, 7 L.Ed.2d 388 (1962). The evidence, however, as discussed above, does not show that appellants are entitled to a theft-loss deduction.

2. Capital-Loss Deduction

Relying on MacRae v. Commissioner, supra at 60, appellants argue that the Tax Court erred in holding that the out-of-pocket expenses are not deductible pursuant to § 1234(a) as a loss attributable to the failure to exercise an option to acquire property. There is some question whether MacRae, which involved provisions of the Internal Revenue Code of 1939, can be applied to the provisions of the Internal Revenue Code of 1954. See Lewis v. Commissioner, 328 F.2d 634, 639-640 (7th Cir. 1964); Brown v. United States, 396 F.2d 459, 465-467, 184 Ct.Cl. 410 (1968); Treas. Reg. 1.1234-1(f) (1959). This issue, however, need not be resolved here, because appellants have not established a right to a deduction even if MacRae is still viable.

In MacRae the court held that the taxpayer had entered into a contract that allowed him at any time to call in the notes from the lendor, cancel the indebtedness, and stop the running of interest. Had he done so, MacRae would not have lost his out-of-pocket expenses, so the court concluded that the loss was deductible pursuant to § 117(g)(2) of the Internal Revenue Code of 1939. In the present case, Melcher had only the limited right to terminate the transaction by giving notice to the lendor no less than ten nor more than thirty days prior to October 1, 1957, which was the maturity date of both the note and the purportedly pledged bonds. If Melcher gave the required notice, at that time the bonds would have been sold and the market price applied to the payment of the note.

By exercising the option, Melcher could have avoided the interest on the balance owed under the note between the date he acted and October 1, a period of no more than thirty days. This savings, however, would have been offset by the difference in the sale price of the bonds on that date and the sale price on October 1, because near to the time that Federal Land Bank Bonds are to be redeemed at par by the issuer their sale price is approximately the par value less interest for the period between the sale date and the redemption date. Thus, the only possible loss that might have resulted from the failure to exercise the option would be a de minimus interest differential — an amount far less than Melcher’s out-of-pocket expenses. If such a small loss had been incurred, appellants made no attempt to prove what it was, and they are, therefore, not entitled to deduct it. See Factor v. Commissioner, 281 F.2d 100, 110 (9th Cir. 1960), cert. denied, 364 U.S. 933, 81 S. Ct. 380, 5 L.Ed.2d 365 (1961); Tax Court Rules of Practice 32.

Affirmed.

      . Section 23. Deductions from Gross Income. [1939 Code.]
      In computing net income there shall be allowed as deductions: . . . .
      (b) Interest. All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from the taxes imposed by this chapter.

      . Section 163. Interest. [1954 Code.]
      (a) General Rule. — There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness.

      . Section 23. Deductions from Gross Income. [1939 Code.]
      In computing net income there shall be allowed as deductions : ... .

      (e) Losses by individuals. In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise— . . .
      (3) of property not connected with the trade or business, if the loss arises from fires, storms, shipwreck, or other casualty, or from theft.

      . Section 165: Losses. [1954 Code.]
      (a) General Rule. — There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.
      (e) Theft Losses. — For purposes of subsection (a), any loss arising from theft shall be treated as sustained during the taxable year in which the taxpayer discovers such loss.

      . Section 1234. Options to Buy or Sell. [1954 Code.]
      (a) Treatment of f/ain or loss. — Gain or loss attributable to the sale or exchange of, or loss attributable to failure to exercise, a privilege or option to buy or sell property shall be considered gain or loss from the sale or exchange of property which has the same character as the property to which the option or privilege relates has in the hands of the taxpayer (or would have in the hands of the taxpayer if acquired by him).
      (b) Special rule for loss attributable to failure to exercise option. — For purposes of subsection (a), if loss is attributable to failure to exercise a privilege or option, the privilege or option shall be deemed to have been sold or exchanged on the day it expired.


author: OAKES, Circuit Judge:

text:
    Hussein DEMIRAGH, on behalf of himself and all others similarly situated, Plaintiff-Appellee, and Mildred Freeland, Intervening Plaintiff-Appellee, v. Joseph DeVOS, Director of Welfare, City of Stamford, Defendant-Appellant.
    No. 431, Docket 72-1421.
    United States Court of Appeals, Second Circuit.
    Argued Feb. 15, 1973.
    Decided April 10, 1973.
    Ronand M. Schwartz, Asst. Corporation Counsel (J. Robert Bromley, Corporation Counsel, Stamford, Conn., of counsel), for defendant-appellant.
    Roger E. Koontz, Stamford, Conn., for plaintiff-appellee and intervening plaintiff-appellee.
    Before FRIENDLY, Chief Judge, OAKES, Circuit Judge, and DAVIS, Judge.

       Of the United States Court of Claims, sitting by designation.

   OAKES, Circuit Judge:

The City of Stamford, Connecticut, appeals from a judgment of District Judge Clarie declaring Municipal Ordinance 219 unconstitutional on its face, as in violation of the equal protection clause. The ordinance’s title states its purpose:

DECLARING IT A HEALTH HAZARD WHEN VACANCY RATE IN HOUSING FALLS BELOW 2% AND THAT ANY PERSON BECOMING A STAMFORD RESIDENT DURING THIS TIME SHALL NOT BE ELIGIBLE FOR WELFARE BENEFITS, NOR SHALL BE ABLE TO RECEIVE SUCH BENEFITS.

We agree with Judge Clarie that, because the ordinance did not have state wide effect, 28 U.S.C. § 2281 did not require the convening of a three-judge court, D.C., 337 F.Supp. 483. Moody v. Flowers, 387 U.S. 97, 101-102, 87 S.Ct. 1544, 18 L.Ed.2d 643 (1967). We agree also that the durational residence requirement is invalid under Graham v. Richardson, 403 U.S. 365, 91 S.Ct. 1848, 29 L.Ed.2d 534 (1971); Shapiro v. Thompson, 394 U.S. 618, 89 S.Ct. 1322, 22 L.Ed.2d 600 (1969); King v. New Rochelle Municipal Housing Authority, 442 F.2d 646 (2d Cir.), cert. denied, 404 U.S. 863, 92 S.Ct. 113, 30 L.Ed.2d 107 (1971); and Rivera v. Dunn, 329 F. Supp. 554, 556 (D.Conn.1971) (three-judge court), aff’d summarily, 404 U.S. 1054, 92 S.Ct. 742, 30 L.Ed.2d 743 (1972) .

The intervening plaintiff Freeland moved from Maryland, where she was receiving public assistance, to Stamford in October of 1971 to live near her daughter. On December 1, 1971, she was notified by the Director of City Welfare that she was ineligible under the ordinance to receive further payments. She would otherwise have been entitled under §§ 17-3a and 17-273 of the Connecticut General Statutes to receive them. At the time of filing her intervening complaint on January 14, 1972, she was a patient at a Stamford hospital suffering from a back injury, without assets and unable to support herself.

The trial court received evidence from the Director of City Welfare to the effect that Stamford had since the ordinance was adopted on August 15, 1971, at all times had a housing vacancy rate below the 2 per cent prescribed by the ordinance. The City Health Director testified to a housing crisis, with inadequate numbers of units, and overcrowding. The Mayor testified as to Stamford’s problems with people “flocking in” from New York City and claimed that the ordinance had a health, not a fiscal, purpose. But the trial court found, and we wholly agree, that “[t]he City failed to establish a necessary connection between the ordinance’s one-year residency classification, as a qualifying condition precedent to establishing eligibility for welfare assistance, and the claim that its objectives were to alleviate a health hazard, because of inadequate local housing.”

The only connection that the City really advances, to quote from its brief, is that

to allow in-migrants who are in need of welfare benefits to continue to locate in Stamford, completely without any limitation when there is insufficient housing available for them, would create and is creating a severe and discriminatory hardship to those residents already living in the City, but who have been unable to find decent housing.

Under any approach we might take to equal protection analysis, the Stamford ordinance cannot be sustained by this state interest. We say this without in any way failing to recognize that the right to travel abridged by the Stamford ordinance has only recently been reaffirmed as a “fundamental” one, requiring the showing of a “compelling” state or local interest to warrant its limitation. Graham v. Richardson, supra; Shapiro v. Thompson, supra. See also Rivera v. Dunn, supra (summary affirmance). Indeed, only the other day the “fundamental right”“compelling state interest” formulation was referred to with approval in San Antonio Independent School District v. Rodriguez, 411 U.S. 1, 93 S.Ct. 1278, 36 L.Ed.2d 16 (1973); see also Roe v. Wade, 410 U.S. 113, 93 S.Ct. 705, 35 L.Ed.2d 147 (1973). One may inquire whether, under the circumstances that the City relies upon, hardship to present residents, all “in-migrants” should not be excluded from Stamford, not just those “who are in need of welfare benefits. . . . ”

But even under the narrower test recently explicated in our own Boraas v. Village of Belle Terre, 476 F.2d 806 (2d Cir., 1973), at 813, whether absent a “fundamental right” the legislative classification is in fact substantially related to the object' of the statute, the statute would fail. See also Gunther, The Supreme Court, 1971 Term, Foreword, In Search of Evolving Doctrine on a Changing Court: A Model for a Newer Equal Protection, 86 Harv.L.Rev. 1 (1972). As mentioned above, the classification drawn by the statute is grossly undermclusive in terms of the statute’s objective. Unless one assumes that welfare payments are so substandard as not to permit locating- “healthful” Stamford housing and that all non-recipients of welfare can afford and find such “healthful” -Stamford housing, the rationality of the classification between those who require welfare and those who do not becomes even more doubtful. When added to this questionable classification is another classification between those who apply for welfare after residing in Stamford for one year and those who do so after residing for a shorter period of time, the “rationality” of the ordinance totally escapes one; why not make the standard for eligibility ten year’ residence, or twenty, since each higher limit would presumably do more to eliminate Stamford’s housing crisis. Given the nature of the classification made by the Stamford ordinance, it is doubtful whether it would survive even the “minimum rationality” test of the old equal protection analysis, Shapiro v. Thompson, supra, 394 U.S. at 638, 89 S.Ct. 1322; King v. New Rochelle Municipal Housing Authority, supra, 442 F.2d at 649, much less any higher standard.

The City, presumably not with tongue in cheek, argues that “A man who is provided with food and clothing by a municipality but is fortuitously deprived of decent shelter is the unwitting victim of municipal despair.” Wherever the remedy may lie, through federal housing aid, revenue sharing, making other cities and areas more attractive to welfare recipients, changing the welfare system, providing more jobs and job training for the indigent, or doing some thing else, it is constitutionally impermissible for a municipality to wall welfare recipients out. We could say more accurately perhaps that if Stamford’s ordinance were upheld other cities would, we suspect, quickly follow suit with similar ordinances, to wall welfare recipients in the ghettos and urban slum areas where they now live. This court, unless and until directed otherwise by higher authority, will have no part of this, however much we may sympathize with the plight or dilemmas of the cities confronted with the problem of housing the poor.

Judgment affirmed.

      . The text of the ordinance is as follows:
      Whenever the vacancy rate in Housing as reported by the Director of Health, shall fall below 2%, it shall be deemed to constitute a health hazard ; and that any person who shall apply for welfare assistance who has not resided within the City of Stamford for one year prior to the date of said application, shall be ineligible for any assistance during the existence of said Health Hazard. However, the Department of Public Welfare shall be authorized to provide necessary temporary assistance or care until arrangements are made for said applicant’s return.
      This Ordinance shall take effect upon its adoption.
      Stamford, Conn., City Ordinance No. 219 (Aug. 15, 1971).

      . The original plaintiff’s case was mooted rather ironically by his leaving Stamford for Texas.

      . This was substantiated by figures showing that during the fiscal year ended June 30, 1971, Stamford with an estimated population of 111,300 people had total relief expenditures of $271,970; hospital costs of $77,000; and administrative and operating expenses of $185,000. Since the State reimbursed the city $337,000 the net cost to the city was only $196,970.

      . One might also inquire whether Stamford liad taken adequate steps to provide suitable housing. Cf. Norwalk CORE v. Norwalk Redevelopment Agency, 395 F.2d 920 (2d Cir. 1968). Furthermore, as Judge Clarie pointed out below, Stamford has many other resources, including health and building codes, to insure the quality of its current housing supply. However unpleasant it may be to those in charge of city affairs to contemplate, there are other ways of meeting the problems of an urban area with an “in-migration” of poor people than erecting a wall around the city to exclude them, either by a “health” ordinance, as here, or by exclusionary zoning or otherwise. See Note, The Equal Protection Clause and Exclusionary Zoning After Valtierra and Dandridge, 81 Yale L.J. 61 (1971).

      . ■ Income group clustering of the poor in the central city is a common phenomenon of the demography of American metropolitan areas and suburban land use restrictions may aggravate the phenomenon. See Branfman, Cohen & Trubeck, Measuring the Invisible Wall: Land Use Controls and the Residential Patterns of the Poor, 82 Yale L.J. 483 (1973). The Stamford ordinance here, were it widely adopted, would be another device insuring the isolation of the urban poor. As the Mayor of Stamford here conceded, as bad as Stamford’s housing situation was, it still was far better off than New York City’s.


author: ALBERT V. BRYAN, Senior Circuit Judge:

text:
    FARMERS’ AND MERCHANTS’ BANK, a corporation, Appellant, v. UNITED STATES of America, Appellee.
    No. 72-1883.
    United States Court of Appeals, Fourth Circuit.
    Argued Jan. 8, 1973.
    Decided April 6, 1973.

      Thomas N. Chambers, Charleston, W. Va. (Benjamin G. Reeder, Morgantown, W. Va., Louis S. Southworth, II, Charleston, W. Va., Reeder & Shuman, Morgantown, W. Va., and Jackson, Kelly, Holt & O’Farrell, Charleston, W. Va., on brief), for appellant.
    Charles R. Burnett, Atty., Tax Div., U. S. Dept, of Justice (Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, Bennet N. Hollander, Attys., Tax Div., U. S. Dept, of Justice, Paul C. Camilletti, U. S. Atty., and James F. Companion, Asst. U. S. Atty., on brief), for appellee.
    Before HAYNSWORTH, Chief Judge, BRYAN, Senior Circuit Judge, and WIDENER, Circuit Judge.
   ALBERT V. BRYAN, Senior Circuit Judge:

A refund of 1964 Federal income taxes was sued for by the Farmers’ and Merchants’ Bank of Morgantown, West Virginia in April 1972, but the District Court sustained the Government in denying the tax benefit on which the bank’s claim rested.- The bank appeals.

Its claim, amounting to $36,410.20 plus interest, arose in the computation of the bad debt deduction allowed for income tax purposes. 26 U.S.C. § 166 (Internal Revenue Code of 1954.) Since 1948, with the permission of the Secretary of the Treasury, the bank had utilized the uniform ratio method of calculating its reserve for bad debts, pursuant to 26 U.S.C. § 166(c). The formula for establishing the annual addition to this reserve, it was stipulated, “involved the application of an average loss experience factor for the determination of the ratio of losses to outstanding loans for the taxable year”. For 1964 this factor when based upon the ratio of outstanding loans thought by the bank to be eligible produced for appellant bank $61,066.91, and this sum was therefore deducted from its taxable income.

The bank here contends that under a mistaken belief of their ineligibility, loans known as “Federal funds sold”, explained in stipulation 8, infra, amounting to $1,200,000 were omitted from the aggregate outstanding loans in computing its 1964 bad debt reserve; that if this amount had been included, the reserve would have been $133,909.31 instead of $61,066.91, a difference of $72,842.40; and the bank would have then been assessable with $36,410.20 less in taxes — the amount now in suit.

The point of this appeal is that the Government in 1964 let some other banks include Federal funds sold as outstanding loans in calculating their bad debt reserve, but without reason denied this privilege to the appellant. It does so by a 1968 Internal Revenue ruling, infra, that allows the benefit of such an inclusion only to a bank which claimed it in its return for a taxable year prior to November 1968. Thus, it refused appellant this privilege because it was not asserted in its 1964 return but, rather, by way of a timely claim for refund filed in 1966.

The facts of the case were agreed by the parties and, essentially, the bank’s claim evolved from the following provisions of the stipulation:

“8. In March, 1964, officials of Mellon National Bank and Trust Company outlined a procedure to officials of plaintiff known in banking circles as ‘Federal funds sold.’ ‘Federal funds sold’ is a term used to describe a loan from one bank to another which is collaterally secured by United States Government securities owned by the borrower. The loans are normally of short duration, from one to three days in most cases. The purpose of the transaction, in the case of the borrower, usually is to meet reserve requirements and, in the ease of the lender, is to loan excess reserve funds. .
“10. The first transaction in ‘Federal funds sold’ by plaintiff occurred in April, 1964. The amount of Federal funds loaned to Mellon during 1964 ranged from a low of $0 to a high of $2,000,000 on October 6, 1964. On December 31, 1964, the bank had outstanding a ‘Federal funds sold’ loan to Mellon in the amount of $1,200,000.
“11. ... It was the plaintiff’s intention to add to its bad debt reserve for 1964, and to deduct in arriving at its taxable income for such year the maximum amount allowable under the method or formula prescribed by [the Government formula to establish the reserve].
“16. If this Court should determine that the plaintiff is entitled to include the aforesaid ‘Federal funds sold’ loan of $1,200,000 to Mellon among its eligible loans outstanding for purposes of the formula computation, the plaintiff’s maximum addition to its reserve for bad debts for 1964, is $133,909.31, or a sum of $72,842.40 larger than the maximum addition as computed in its 1964 income tax return.
“19. On or about April 9, 1966, the plaintiff filed with the District Director of Internal Revenue for the District of West Virginia, Parkersburg, West Virginia, a claim for refund of 1964 income taxes. .
“20. By letter dated January 27, 1969, the District Director of Internal Revenue, Parkersburg, West Virginia, transmitted to plaintiff a copy of an examination report respecting plaintiff’s 1964 and 1965 Federal income tax returns. . . . Said examination report denies plaintiff’s claim for refund of 1964 Federal income taxes in the amount of $36,421.20. The reason given for disallowance of the claim was stated . . . to be that ‘Recently the National Office [of the Internal Revenue Service] ruled that the claim for refund, is not allowable based on Revenue Ruling 68-630.’ .” (Accent added.)

The inequity of the Government’s position appears on a reading of Revenue Ruling 68-630. It is said to “clarify” the bad debt reserve computation. The ruling, in effect, declares that the course pursued by the appellant in not including ‘Federal funds sold’ was always the correct course. Nevertheless, the clarification indulges the “incorrect” banks to retain their gains while declining on a procedural point to accord the appellant enjoyment of the same indulgence. The unfairness is compounded by the stipulated fact that 68-630 was promulgated more than two and one-half years after the refund claim was filed — the rules of the game were changed at the end of the contest.

Revenue Ruling 68-630 in its apt parts provides as follows:

“SECTION 1. PURPOSE.
The purpose of this Revenue Ruling is to clarify certain questions regarding the eligibility of items for inclusion in the loan base by banks using the uniform. reserve ratio method of computing annual additions to reserves for bad debts.
“SECTION 8. MONEY MARKET INVESTMENTS.
Accordingly, it is held that banks using the uniform reserve ratio method .. . must exclude from the loan base upon which annual additions to a reserve are calculated the following money market obligations:
(1) ‘Sales’ or ‘loans’ of Federal funds irrespective of the purchaser or borrower. .
“SECTION 10. EXTENT OF APPLICATION WITHOUT RETROACTIVE EFFECT.
The position stated in this Revenue Ruling clarifies certain questions that have arisen concerning computation of the loan base but does not represent a change in a previously published position of the Internal Revenue Service. It would, therefore, normally be applied to all open taxable years. However, in view of the nature of the deduction for additions to a reserve for bad debts, over-all tax deductions to taxpayers here involved would not be significantly affected by the timing of the application of this Revenue Ruling. Therefore, under the authority of section 7805(b) of the Code, the position stated herein will not be applied by the Service to deductions claimed for taxable years ending on or before November SO, 1968, to the extent that such deductions were based on inclusion of the following items in the loan base (accent added):
(4) ‘Sales’ or ‘loans’ of Federal funds. .
“The amount of the deduction for an addition to the reserve for bad debts for a taxable year must be based upon the amount contemporaneously entered on the taxpayer’s books during the taxable year, or as soon as practicable after the close of the taxable year, and cannot be subsequently increased.”

The Government attempts to salve its discrimination by embracing the discretion vested in the Secretary of Treasury by 26 U.S.C. § 7805 as follows:

(b) Retroactivity of regulations or rulings. — The Secretary or his delegate may prescribe the extent, if any, to which any ruling or regulation, relating to the internal revenue laws, shall be applied without retroactive effect.”

But here the Secretary abused his discretion, for “The Commissioner cannot tax one and not tax another without some rational basis for the difference”. Justice Frankfurter concurring in United States v. Kaiser, 363 U.S. 299, 308, 80 S.Ct. 1204, 1210, 4 L.Ed.2d 1233 (1960). No rational basis is found here for differentiating between the appellant and the other banks. Fortunately, such use of discretion is reviewable, Automobile Club of Michigan v. Commissioner, 353 U.S. 180, 184, 77 S.Ct. 707, 1 L.Ed.2d 746 (1957), and we decry it.

The Government would excuse the arbitrary retroactivity of revenue Ruling 68-630 by saying that it was not a departure from prior rulings, since the Government had never given permission to any bank to use Federal funds sold in calculating a bad debt reserve. But this assertion dissolves on scrutiny. The Government had approved the very method of computing the bad debt reserve followed by the appellant and over the years had deliberately withheld disapproval of Federal funds sold as eligible loan-predicates for fixing bad debt reserves. It was quite aware of this practice and unequivocally tolerated it with full knowledge of its prevalence. That this acquiescence was accepted by the banks, as well as acknowledged by the Government, is evidenced by the need for clarification emphasized in the ruling and by the anointment of the practice for years prior to November 1968. Such a reversal of position, as applied to this taxpayer, is too inequitable to be permissible. Cf. Exchange Parts Company of Fort Worth v. United States, 279 F.2d 251, 254, 150 Ct.Cl. 538 (1960).

Added argument against the appellant relies upon the last paragraph in Section 10 of Ruling 68-630, supra, providing that the reserve cannot be “subsequently increased” after the close of the taxable year. True, the appellant does endeavor to increase its 1964 reserve, but not by the injection of a later accrued sum. The addition is simply a correction of previous figures. Surely this is not the kind of increase forbidden in the ruling, for either the Government or the taxpayer may rectify an earlier erroneous return. This again demonstrates that the appellant’s claim was rejected because it was made in the form of a refund request instead of in an original deduction.

Finally, the Government suggests that the instant claim should fail because the benefit accruing to the “incorrect” banks will be “washed out in* later years” and that all banks will then be on the same footing. But this is no ground for withholding from this taxpayer the asserted deduction, for the Government’s suggestion is no more than a prediction ■ — one that did not prove true between 1964 and 1968. Moreover, the argument totally ignores appellant’s right to equal treatment for the specific tax year involved.

Our mandate will vacate the judgment at trial and direct the District Court to order the refund for which the Farmers’ and Merchants’ Bank of Morgantown sued.

Vacated with directions.

      . See Mimeograph 6209, C.B. 1947-2, 26; modified Rev.Rul. 54-148.


author: GROOMS, District Judge: THORNBERRY, Circuit Judge

text:
    UNITED STATES of America, Plaintiff-Appellee, v. Frank RAGANO, Defendant-Appellant.
    No. 72-2594.
    United States Court of Appeals, Fifth Circuit.
    April 9, 1973.

      Michael L. Kinney, St. Petersburg, Fla., John R. Parkhill, Edward M. Waller, Jr., Tampa, Fla., for defendant-appellant.
    John L. Briggs, U. S. Atty., Jacksonville, Fla., Claude H. Tison, Jr., Asst. U. S. Atty., Tampa, Fla., for plaintiff-appellee.
    Before BELL and THORNBERRY, Circuit Judges, and GROOMS, District Judge.
   GROOMS, District Judge:

The appellant was convicted on Count III, of a three count indictment, of a violation of 26 U.S.C.A. § 7206(1).

Count III related to appellant’s 1968 return and charged that on June 16, 1969, appellant knowingly made a false declaration in his claim to have sold 20 shares of Two Seasons, Inc. stock for $230,022.20 that he had purchased for $50,000.00, and that the income of $180,022.20 was properly treated as a long term capital gain.

In late 1964 and early 1965 appellant assisted S. A. Rizzo in obtaining a $5,000,000.00 loan from the Pension Fund of the Teamster’s Union. The loan was to be used to buy and develop 700 acres of land just north of Miami-, Florida. The land which had an appraisal value of $9,500,000.00 was purchased for $3,500,000.00. Two Seasons, Inc. was organized by Rizzo for the purpose of acquiring, holding and developing the land. The property purchased, together with the balance of the loan proceeds, was transferred by Rizzo to the corporation.

On January 3, 1967, a certificate representing 20 shares of Rizzo’s stock in Two Seasons, Inc., a 40% interest, was transferred to appellant, who on the same date executed a non-interest bearing demand note to Rizzo in the amount of $50,000.00. On March 24, 1967, appellant’s stock certificate was cancelled, and reissued to Rizzo, ostensibly for use by Rizzo as collateral. On November 6, 1967, the shares were reissued to appellant, who claimed that during the interim the stock was in effect held in trust for him by Rizzo.

On January 12, 1968, appellant transferred his stock to Rizzo in consideration of the cancellation of the $50,000.00 note of January 3, 1967, and Rizzo’s assumption of appellant’s indebtedness to the County National Bank of North Miami Beach in the amount of $68,364.08, to the Central Bank of Tampa in the amount of $51,108.12, and to Two Seasons, Inc. in the amount of $60,550.00, a total of $230,022.20.

Beginning in 1965 and over a period of approximately three years Two Seasons paid fees and expenses and made loans to or on behalf of appellant of $252,332.09. However, no amount was paid on the principal sum of $50,000.00.

The Government’s basic charge stems from its claim that the real consideration for the issuance of the twenty shares of Two Seasons stock was not a $50,000.00 debt evidenced by the note but fees earned by appellant in procuring the loan from the Pension Fund.

A careful review of the evidence covering more than eleven hundred pages of the transcript, leads us to the definite conclusion that the sufficiency of the evidence as to appellant’s guilt was for the jury under the guiding principles so frequently announced. Glasser v. United States, 315 U.S. 60, 80, 62 S.Ct. 457, 469, 86 L.Ed. 680; Gordon v. United States, 438 F.2d 858, 867 (5th Cir.).

In reaching this conclusion we could not overlook appellant’s testimony at a hearing in June 1968, before the Shevin Committee of the Florida legislature in the course of its investigation into organized crime, in which he testified that the Two Seasons stock was a part of his fee — “a combination of attorney’s fees and I am in hope of finder’s fees.” Nor appellant’s deposition of October 7, 1968, taken in connection with a libel suit that he filed against Time, Inc., wherein he deposed that he had achieved ownership of the stock, “partially for legal services and partially as a finder’s fee.” Nor his second deposition on December 26, 1968, in the same case wherein he again deposed to substantially the same statement; nor his testimony in this ease as follows: ■

“[B]ut the ultimate result was that I gave him $50,000 note for the stock, and that’s how I was able to acquire the stock, regardless of how I labeled it.
Q. Regardless of how you labeled it, sir?
A. That’s right. If you recall. Mr. Dempsey, I said this time and time again, it is a combination of finder’s fee and legal fees. I left that up to my accountant. I left it up to the IRS Agent. But when you come down to it, whether after all that is said and done, I never would have gotten the stock without the $50,000 note.”

This answer appears to sum up appellant’s construction of the consideration for the stock as well as his qualifications of prior statements.

Likewise, on the issue of wilfulness and intent we have not overlooked appellant’s evidence that he laid the whole transaction before the agents preceding the filing of his 1968 return and that he cooperated with them in supplying whatever information that he had in his possession. The fact that appellant bared his breast to the investigating agents and extended his cooperation would not exempt him from prosecution and the penalties of the law, if he, nevertheless, proceeded to do what the law proscribed.

Counts I and II of the indictment were grounded upon appellant’s alleged failure to report the receipt of the value of the stock as income for 1967, and in making a false statement as to same, respectively. The jury found appellant not guilty on these counts. He contends that there is such repugnancy and inconsistency between the not guilty verdicts on Counts I and II and the guilty verdict on Count III, that Count III cannot stand. Throughout the trial appellant took the position that the stock had no value on the date of its acquisition in January 1967; that its enhancement from zero to the sum for which it was sold in 1968 resulted from the development of the property during that period. Under this theory the jury could well have found that there was no value to report for 1967, or, at least, could have held that there was ample doubt about the value. Other assumptions could be, but will not be, indulged as a basis of the jury’s verdict on Counts I and II. The court did not err in denying appellant’s motion for judgment of acquittal on the ground of inconsistency of verdicts. Dunn v. United, States, 284 U.S. 390, 52 S.Ct. 40, 76 L.Ed. 520; United States v. Panzavecchia, 446 F.2d 1293 (5th Cir.).

Appellant insists that there was error to reverse in the action of the court in admitting the testimony of Revenue Agent Greenwald of an alleged admission by appellant as to Rizzo’s testimony before the Florida State Beverage Commission to the effect that appellant had earned the stock “as a finder’s fee, an attorney’s fee.” The issue was first presented in the course of the prosecution’s opening statement and was represented to the court as being an admission by appellant of Rizzo’s testimony. Over objection the court ruled that appellant having responded to the statement, the statement of the agent became “res gestae of admission.”

The question was again presented in the course of the direct examination of appellant’s accountant, Andretta. The court stated that anything that appellant said in- the course of the interview with the agent would constitute “an admission exception to the hearsay rule,” and that it was necessary in order to determine the extent of the admission to have not only what appellant said but what was said to appellant. The court further stated that he would instruct the jury that it could not consider the comments made by Rizzo to prove the truth of the assertions of Rizzo, but that the jury could consider the comments in the context of appellant’s response.

When Greenwald took the stand, counsel for appellant reminded the court that he had objected to the conversation in the October 1968 conference as to what Rizzo had testified to when the accountant was called. The court replied by instructing the jury as to the consideration to be given to the conversation, the statement of Rizzo, and the response of appellant, following which Greenwald testified that:

“A. I told Mr. Ragano that I was aware of testimony that Rizzo had given to the State Beverage Department, wherein Mr. Rizzo had testified that Ragano had received the stock for services rendered. I asked Mr. Ragano whether that was true, whether they were legal fees. Mr. Ragano replied no, it was not for services rendered in that he had bought the stock for $50,000 note. He said the books of Two Seasons would bear this out.
“Q. Did he indicate if he was aware of Mr. Rizzo’s testimony ?
“A. He said he was aware of it.”

Greenwald also testified with respect to a further conference in May 1969, when Mr. Adair, an agent now deceased, was present:

“A. Mr. Adair pointed out to Mr. Ragano that the statements of Rizzo that the stock had been given to Ragano as a legal fee, and that there was no other consideration.
Ragano said that he did not know why Rizzo had testified this way, but it was not true.”

Defendant’s witness Whyte was cross-examined as to a telephone conversation between him and Greenwald which related to the witness’s awareness that Rizzo had testified before the Beverage Commission that the stock had been given to appellant for services rendered.

In his closing argument the prosecutor put the matter flatly as follows:

“[A]nd we know from the evidence that Mr. Rizzo testified that the payments of stock which had been made to Mr. Ragano in January of 1967 were payments to Mr. Ragano for legal fees.”

Appellant neither tacitly nor expressly admitted the alleged statement by Rizzo. On the contrary he flatly denied the truth of any such statement. Certainly in the face of his denial, appellant’s knowledge of Rizzo’s testimony can hardly be construed as an admission. Where the witness’s total response adds up to a clear-cut denial, even any theory of implied admission is not available. McCormick, Handbook of the Law of Evidence, at 528 (1954 Ed.); Com. v. Twombly, 319 Mass. 464, 66 N.E.2d 362, and People v. Wysocki, 267 Mich. 52, 255 N.W. 160. “A flat denial [is] in no sense an admission.” Twombly, supra.

The confrontation clause of the Sixth Amendment is not'violated as long as “the declarant is testifying as a witness and subject to full and effective cross-examination.” California v. Green, 399 U.S. 149, 90 S.Ct. 1930, 26 L.Ed. 2d 489. But here Rizzo did not testify, and, of course, was not subject to cross-examination. In short the prosecutor succeeded in getting Rizzo’s testimony before the jury and in exploiting it in his closing argument without calling Rizzo as a witness. He now seeks to avoid the consequences of his action by a resort to the harmless error rule and the court’s instruction that the jury could not consider what Greenwald related as having been said by Rizzo as going to the truth of Rizzo’s statement. Successfully getting Rizzo’s statement before the jury was not the result of a passing incident but of a persistent and sustained effort. The court’s instruction anticipated an inculpatory response by appellant that did not materialize, and was consequently misdirected.

In the recent case of United States v. Johnson, 5 Cir., 439 F.2d 885 (1971), where hearsay testimony was introduced solely to show that customs agents were on the lookout for defendant, and not to show the truth of what the informer said, and where the court accepted the ruling and instructed the jury accordingly, Judge Rives, speaking for this court, said:

“The government next argues that the statements of the informer at most constituted harmless error under Fed.R.Crim.P. 52(a). Erroneous admission of evidence can often be corrected by appropriate jury instructions. Conner v. United States, 5 Cir. 1963, 322 F.2d 647. But before a constitutional error can be held harmless, the court must believe it harmless beyond a reasonable doubt. Chapman v. California, 1967, 386 U.S. 18, 22-24, 87 S.Ct. 824, 17 L.Ed.2d 705.”

In Bruton v. United States, 391 U.S. 123, 137, 88 S.Ct. 1620, 1628, 20 L.Ed.2d 476, the court ruled that it could not “accept limiting instructions as an adequate substitute for petitioner’s constitutional right of cross-examination,” in the context of a joint trial, where a co-defendant implicated petitioner in a written confession, but did not take the stand.

In Pointer v. Texas, 380 U.S. 400, 85 S.Ct. 1065, 13 L.Ed.2d 923, where it was held that the trial court was in error in admitting the transcript of the testimony of an absent witness taken on a preliminary hearing when the defendant was without counsel, the court stated:

“There are few subjects, perhaps, upon which this Court and other courts have been more nearly unanimous than in their expressions of belief that the right of confrontation and cross-examination is an essential and fundamental requirement for the kind of fair trial which is this country’s constitutional goal.”

In Krulewitch v. United States, 336 U.S. 440, 69 S.Ct. 716, 93 L.Ed. 790, involving a hearsay statement by a co-conspirator to the complaining witness some six weeks after transportation in violation of the Mann Act, the court stated:

“It is contended that the statement attributed to the alleged co-conspirator was merely cumulative evidence, that without the statement the case against petitioner was so strong that we should hold the error harmless under 28 U.S.C. (1946 ed.) § 391. In Kotteakos v. United States, 328 U.S. 750 [66 S.Ct. 1239, 90 L.Ed. 1557], we said that error should not be held harmless under the harmless error statute if upon consideration of the record the court is left in grave doubt as to whether the error had substantial influence in bringing about a verdict. . . . We cannot say that the erroneous admission of the hearsay declaration may not have been the weight that tipped the scales against petitioner.”

Barton v. United States, 263 F.2d 894 (5th Cir.), was a case involving the admissibility of an unsigned statement of a co-defendant given out of the presence of the defendant, Mitchell, and a motion for a severance. The court in reversing ruled:

“The sole reliance for Mitchell’s protection was the court’s instruction to the jury, several times repeated, not to treat the statement as evidence against Mitchell. Considering the substance and terms of Barton’s statement, we doubt whether it was at all possible to carry out that instruction. To do so certainly would require twelve minds more perfectly disciplined than those of the average human jurors.
* * * * * *
“The Government argues that a separate trial for Mitchell would have made no difference in the outcome, because ‘Mitchell was bound hand and foot by the most awesome array of evidence imaginable, quite apart from the confession of Barton.’ We cannot, however, substitute ourselves for the jury, whose duty it was to pass upon Mitchell’s guilt or innocence.”

See also, Douglas v. Alabama, 380 U.S. 415, 85 S.Ct. 1074, 13 L.Ed.2d 934.

Appellant’s “admissions” with respect to the consideration for the stock were not unequivocal but qualified. The jury should have been permitted to consider their weight unburdened by inadmissible hearsay. We conclude there was error and that the evidence of guilt in this case was not so overwhelming as to render the error harmless, as was found by the Supreme Court in Schneble v. Florida, 405 U.S. 427, 92 S.Ct. 1056, 31 L.Ed.2d 340, and by this court in Hoover v. Beto, 5 Cir., 467 F.2d 516, under the facts of those cases.

Appellant challenges the action of the court in overruling his motion to strike the answer of witness Brock as to why appellant should have reported the receipt of the stock in his 1967 return. The witness answered: “Because this is the year that he received pay for services rendered in the form of stock.”

Though the question and answer related primarily to the 1967 return involved in Count I, the answer went to the key issue involved in Count III — the crux of the Government’s charges against appellant in reporting the transaction as a long term capital gain rather than ordinary income.

The Court is not unmindful of the modern trend to abandon the rule allowing experts to express an opinion upon ultimate issues when the opinion is otherwise admissible. The mere qualifying of a witness as an expert, Paschal v. United States, 306 F.2d 398 (5th Cir.), does not necessarily render his every conclusion immune from challenge. Experts “ought not to [be] asked or allowed to state their conclusions on the whole case.” United States v. Spaulding, 293 U.S. 498, 506, 55 S.Ct. 273, 277, 79 L.Ed. 617. “It is generally agreed that testimony of an essentially factual nature should not be predicated on the opinions, inferences and conclusions of others.” Paschal, supra.

The Sixth Circuit in Kentucky Trust Co. v. Glenn, 6 Cir., 217 F.2d 462, had for consideration the claim that certain trusts had been created in contemplation of death. The question and the answer by the agent of the Internal Revenue Service were as follows:

“ ‘Upon what facts or circumstances, did you base your determination that the Trust estates were part of Mr. Schmidt’s estate?’ The answer was: ‘Well, my determination was made by the fact that the Will, the Trust instruments and the life insurance policy assignments were all made at practically the same time.’ ”

The court, in ruling that the trial court erred in overruling the objection, stated:

“The testimony of the government witness as to why he made the determination to the effect that the trusts in question were made in contemplation of death invaded the province of the jury and permitted the witness to express his opinion as to the ultimate fact. The witness should not have been permitted to testify, in effect, why he believed the deceased made the trusts in contemplation of death. The testimony was incompetent and prejudicial.”

The court erred in overruling appellant’s motion to strike.

The court’s instruction on presumption of the knowledge of the law was not such as to constitute plain error under Rule 52(b), Fed.R.Crim.P. There was no objection to the charge. The first part of the instruction is identical to the charge before the court in Edwards v. United States, 334 F.2d 360 (5th Cir.), Note 3, and held to be not such plain error as to require a reversal. The last sentence properly submitted to the jury the question of appellant’s ignorance of the law as that question related to specific intent. The court’s action finds support in Wardlaw v. United States, 5 Cir., 203 F.2d 884, where it was held that whether the defendant acted under a bona fide misconception of income tax law in failing to report income was for the jury on the issue of knowledge and willfulness.

Taking the court’s instruction as a whole, we likewise find no error in any failure of the court to define the essential elements comprising the offense charged in Count III.

Appellant claims that he was denied a fair trial because of the cumulative effect of a series of prejudicial and unfair tactics by counsel for the Government. We have carefully considered these claims, and must frankly state that in certain particulars counsel went to the outer limits of legality. However, in those particulars the court was prompt and firm in its efforts , to eradicate any resulting prejudice; and in view of such efforts we are reluctant to and will not hold that it did not succeed in doing so.

Although the court’s action in overruling the objections to the admission in evidence of the income tax returns of Rizzo and Two Seasons, Inc., was not challenged on this appeal, we, however, in the interest of trial economy deem it proper to direct attention to the decision of the Ninth Circuit in Greenbaum v. United States, 80 F.2d 113, 125, as to the correctness of such action.

The judgment of conviction is reversed and the cause is remanded for a new trial.

Reversed and remanded.

THORNBERRY, Circuit Judge

(specially concurring):

I agree that the conviction should be reversed and the ease remanded for a new trial because the admission into evidence of Agent Greenwald’s report of Rizzo’s statement contravened the hearsay rule and the Confrontation Clause of the Sixth Amendment. Rizzo made the statement in question- — that Ragano had received the stock as “a finder’s fee, and attorney’s fee” — under oath before the Florida Beverage Commission in the course of applying for a liquor license. Since Ragano denied the truth of Rizzo’s prior-hearing statement when confronted with it, the statement was not an admission and should have been excluded under the hearsay rule. C. McCormick, Evidence, §§ 269, 270 (2d ed.1972). Because Rizzo was not subject to cross-examination by Ragano when he made the statement and did not testify at trial, his statement was likewise inadmissible under the Confrontation Clause. California v. Green, 1970, 399 U.S. 149, 90 S.Ct. 1930, 26 L.Ed.2d 489. Further, I agree that despite the district judge’s limiting instruction to the jury the constitutional error cannot be said to have been harmless beyond a reasonable doubt in the context of this case. Bruton v. United States, 1968, 391 U.S. 123, 135, 88 S.Ct. 1620, 1628, 20 L.Ed.2d 476; Chapman v. California, 1967, 386 U.S. 18, 87 S.Ct. 824, 17 L.Ed.2d 705.

Since our ruling on the hearsay-confrontation issue is sufficient to dispose of this appeal, I would not reach the other asserted errors.

      . “Any person who—
      (1) Declaration under penalties of perjury. — Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter;
      shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $5,000, or imprisoned not more than 3 years, or both, together with the costs of prosecution.”

      . Much evidence was taken as to another note of July 16, 1965, executed by appellant to Rizzo in the amount of $50,000.00. Appellant claims that that note evidenced the purchase price of the 20 shares of stock, but that he was unable to borrow money to pay off the note and that Rizzo would not issue the stock; that he was informed that the note had been lost; that Rizzo wished a new note; that he agreed to give a new note if the stock was issued to him ; and that the January 3, 1967, note was executed and the stock issued pursuant to that understanding.

      . “It is not for us to weigh the evidence or to determine the credibility of witnesses. The verdict of a jury must be sustained if there is substantial evidence, taking the view most favorable to the Government, to support it. United States v. Manton, 2 Cir., 107 F.2d 834, 839.”

      . “[I]n considering the sufficiency of the evidence we do not determine whether it establishes guilt beyond a reasonable doubt, but only whether the evidence would permit the triers of fact to find the defendants guilty beyond a reasonable doubt.”

      . Counsel for appellant stated that lie would object when the time came, in reply to which the court ruled that it was not necessary to object.

      . “THE COURT: Ladies and Gentlemen of the Jury, in telling you what transpired between himself, Mr. Greenwald, and the defendant in the form of conversation, it is anticipated that Mr. Greenwald is going to relate the conversation, and in relating the conversation ho will say some things that Mr. S. A. Rizzo told him in the defendant’s absence. In other words, during his conversation with the defendant, he may occasionally say, ‘Mr. S. A. Rizzo said such and such to me. and what do you have to say about that,’ or words to that effect.
      “Now, you may not consider what he relates, the witness relates as having been said by S. A. Rizzo out of the defendant’s presence. You may not consider that as going to the truth of the matter of the statement that S. A. Rizzo said, but you may consider the defendant’s response to those statements.”

      . See proposed New Federal Rules of Evidence, Rule 704 and note thereunder.

      . “It is not necessary for the prosecution to prove that the defendant knew that a particular act or failure to act is a violation of law. Unless and until outweighed by evidence in the case to the contrary, the presumption is that every person knows what the law forbids, and what the law requires to be done. However, evidence that the accused acted or failed to act because of ignorance of the law, is to be considered by the Jury in determining whether or not the accused acted or failed to act with specific intent, as charged.”


author: PER CURIAM:

text:
    Raymond L. HALL, Appellant, and Quaker City Industries, Inc., a corporation of New York, v. U. S. FIBER & PLASTICS CORPORATION, a corporation of New Jersey.
    No. 72-1212.
    United States Court of Appeals, Third Circuit.
    Argued Jan. 9, 1973.
    Decided April 5, 1973.

      Lawrence I. Lerner, Lerner, David & Littenberg, Newark, N. J., for appellant.
    Alfred P. Ewert, Morgan, Finnegan, Durham & Pine, New York City, Milton, Keane & DeBona, Jersey City, N. J., for appellee.
    Before McLAUGHLIN and VAN DUSEN, Circuit Judges, and GREEN, District Judge.
   OPINION OF THE COURT

PER CURIAM:

This is a patent infringement case involving an above ground swimming pool. Plaintiffs charged that similar pools manufactured and sold by defendant infringed their patent, which covered a certain type of walk-around deck surrounding the basic pool frame. The patent in suit was held by appellant Hall and was licensed exclusively to Quaker City Industries, Inc., the other plaintiff below.

The district court, 341 F.Supp. 978, held plaintiff Hall’s patent invalid and not infringed by defendant U. S. Fiber and Plastic Corporation. Hall appeals only the question of invalidity and not non-infringement so that the portion of the decision pertaining to non-infringement became final. During oral argument, the attorney for appellee suggested that appellee had no interest in the matter since he had conclusively not infringed, and therefore could be in no way affected by any possible change in the validity holding on appeal. In that position appellee asserts that the appeal should be dismissed as moot, since no case or controversy existed between the parties, as is constitutionally required for this court’s jurisdiction.

Considering all the circumstances, the panel recommended that each side submit supplemental briefs on the point of mootness, so that an accurate and fair decision could be reached. The parties have so complied.

Appellant first contends that Electrical Fittings Corp., et al. v. Thomas & Betts Co., et al., 307 U.S. 241, 59 S.Ct. 860, 83 L.Ed. 1263 (1939) and Altvater et al. v. Freeman, et al., 319 U.S. 359, 63 S.Ct. 1115, 87 L.Ed. 1450 (1943) are similar to the appeal before us. They do enable this court to consider the validity of the suit patent. We disagree with appellant’s interpretations of the Thomas and Betts decisions because the case at bar is not only readily distinguished but should be. In Electrical Fittings, the court concluded that the contested patent there was valid but not infringed. The defendant appealed the validity holding which was, in effect, against his interests since in future litigation, that result could be res judicata against him. The Supreme Court’s opinion showed concern for this possible injustice to the plaintiff, and held that the defendants were entitled to have that portion of the decree eliminated. Therefore, the Court of Appeals had jurisdiction to hear the appeal and consider the decree of validity, for the purpose of doing complete justice to the defendants. See Electrical Fittings Corp., supra, 307 U.S. p. 242, 59 S.Ct. 860. In the present litigation the patent was declared invalid and not infringed and the appeal was by plaintiff on the question of validity. Therefore no injustice could be done even indirectly to the defendant as the entire decisión was in his favor. He did not appeal because he had nothing more to gain or lose by a change in the validity determination.

The Altvater suit, like Electrical Fittings, involved a holding of patent validity, which had not been infringed. There, however, the alleged infringer counterclaimed, asserting the invalidity of the patent, and actively sought such a declaration. A judgment thereon, would then have been open to appeal, for there would still have existed an active controversy, defendant having established his continued interest by his counterclaim. That was not the situation in the present appeal as no .counterclaim of invalidity was ever entered. Therefore it is readily seen that the Electrical Fittings opinion does not control the particular problem in the instant appeal.

Appellant admits in his brief, that our question in issue here has already been passed upon by a number of the circuits, which generally have decided that appeals of this type are moot and that the lower court judgment of patent invalidity will not be vacated. Cover v. Schwartz, 133 F.2d 541 (2 Cir. 1942); Scaramucci v. Universal Manufacturing Co., Inc., 359 F.2d 388 (5 Cir. 1966). Appellant questions what he alleges is the harshness of such holdings and cites Hayes Spray Gun Co., et al. v. E. C. Brown Co., 291 F.2d 319 (9 Cir. 1961) as standing for the proposition that circuit courts have jurisdiction to review holdings of patent invalidity under circumstances as are argued in this appeal. In Scaramucci v. Universal Mfg. Co., supra, the Hayes decision was criticized and it was pointed out how the Supreme Court, relying on Cover v. Schwartz, supra, determined in Altvater v. Freeman, 319 U.S. 359, 63 S.Ct. 1115, 87 L.Ed. 1450 (1943) “To hold a patent valid if it is not infringed is to decide a hypothetical case.” We agree with the Fifth Circuit that where no case or controversy exists, even in patent disputes such as this, a court of appeals is without jurisdiction and will not render an advisory opinion.

It also seems strange that appellant should claim in the harshness of so holding, when to accept his theory and claim for jurisdiction, would cause appellee to be party to a cause which he has no interest whatsoever, and nothing at all to gain or lose. He would have no reason to spend time preparing a defense where he has nothing to defend against. This would obviously call for an advisory opinion by the court and would create unwarranted hardship to appellee.

The harshness which appellant alleges could befall him because of the holding of invalidity, is based on his interpretation of Blonder-Tongue Laboratories, Inc. v. University of Illinois Foundation, et al., 402 U.S. 313, 91 S.Ct. 1434, 28 L.Ed.2d 788 (1971), which concluded that a plaintiff patent owner may be collaterally estopped from asserting his patent in a second action before a second court where the patent has been found invalid in an earlier litigation. There are, of course, circumstances under which Blonder-Tongue would allow a second court to reconsider the validity of the same patent on appeal, depending upon whether the party against whom estoppel is sought had a full and fair opportunity to litigate his claim in the first action. (Blonder-Tongue, p. 347, 91 S.Ct. 1434). Whether the circumstances in the instant matter would dictate ¡.the invocation of the collateral estoppel doctrine in future litigation, we need not and cannot now determine. Blonder-Tongue deals exclusively with a second action before a second court. The case at bar is still the first action within the Blonder-Tongue doctrine. In Carter-Wallace, Inc. v. Otte, 474 F.2d 529 (2 Cir. 1972), Judge Friendly mentioned that whether the district court’s judgment below and this court’s dismissal of the appeal as moot will deprive the district court’s judgment of its collateral estoppel effect is a query for other courts where that effect can be asserted. This is not such a court. Appellant urges then, the possibility of harsh result to him versus the strong policy against advisory opinions and the unfair problems which would develop to appellee. Plainly the question is moot and this court has no right under the facts and law before us to attempt to pass upon it.

This appeal as it stands presents no claim or controversy between the parties. It will be dismissed as moot.

      . We note that the Restatement of Judgments, § 69 (2), provides:
      “ § 69. EFFECT OF APPEAL OR INABILITY TO APPEAL.
      “(2) Where a party to a judgment cannot obtain the decision of an appellate court because the matter determined against him is immaterial or moot, the judgment is not conclusive against him in a subsequent action on a different cause of action.”
      See also comment d, page 317, of that section.