author: PER CURIAM.

text:
    Carol LOLIE, Administratrix of the Estate of Allan Lolie, Deceased, Plaintiff-Appellant, v. The OHIO BRASS COMPANY, Defendant-Appellee.
    No. 73-1174.
    United States Court of Appeals, Seventh Circuit.
    Argued Jan. 15, 1974.
    Decided Aug. 13, 1974.

      Richard P. Shaikewitz, Alton, 111., for plaintiff-appellant.
    Paul L. Pratt, Phillip J. Kardis, East Alton, 111., for defendant-appellee.
    Before SWYGERT, Chief Judge, STEVENS, Circuit Judge, and PERRY, Senior District Judge.

       Senior District Judge Joseph Sam Perry of the Northern District of Illinois is sitting by designation.

   PER CURIAM.

Plaintiff’s husband, a coal miner, was fatally injured when a “power cable” fell from the roof of a mine. Defendant is a manufacturer of metal clips which were intended to hold the cable in place; they were dislodged, however, when the cable, having been struck by a heavy steel rail at a point some 439 feet from where decedent was standing, began to quiver violently. Since the clips did not prevent the cable from falling, plaintiff claimed that their design was defective and unreasonably dangerous, and defendant was strictly liable in tort. Cf. Suvada v. White Motor Co., 32 Ill.2d 612, 210 N.E.2d 182 (1965). Accepting defendant’s argument that the accident was entirely the result of the mine operator’s negligence when unloading the steel rail, the jury returned a verdict for defendant. We affirm.

I.

Subsequent to the accident a state mine inspector directed the mine operator to give the power cable added support by tying it with a sturdy polypro-pene rope every 60 feet; the operator, of course, complied with the directive. Plaintiff sought to introduce evidence of this post-occurrence change, but the district court excluded it. Her principal contention on appeal is that the exclusion constituted reversible error.

It is generally held that evidence of subsequent remedial measures is inadmissible to prove negligence or culpable conduct. See Rule 407 of the Proposed Rules of Federal Evidence. The primary ground for exclusion “rests on a social policy of encouraging people to take, or at least not discouraging them from taking, steps in furtherance of added safety.” Id., Advisory Committee Note. This basis clearly has no applicability when the evidence" is offered against a party, such as this defendant, which did not make the changes. Wallner v. Kitchens of Sara Lee, Inc., 419 F.2d 1028, 1032 (7th Cir. 1969); Sutkowski v. Universal Marion Corp., 5 Ill. App.3d 313, 318-319, 281 N.E.2d 749, 752-753 (1972).

In this case, plaintiff sought to impose strict liability on defendant for the defective design of its product. In such a case the plaintiff must establish that the “product in question has [not] lived up to the required standard of safety.” Wright v. Massey-Harris, Inc., 68 Ill.App.2d 70, 79, 215 N.E.2d 465, 470 (1966). See also W. Prosser, Law of Torts 644 (4th ed. 1971). This, of course, requires proof that, inter alia: 1) the product as designed is incapable of preventing the injury complained of; 2) there existed an alternative design which would have prevented the injury; and 3) in terms of cost, practicality and technological possibility, the alternative design was feasible. Evidence of post-occurrence change which tended to satisfy plaintiff’s burden on any of these issues would, therefore, be relevant. Hoppe v. Midwest Conveyor Co., 485 F.2d 1196, 1202 (8th Cir. 1973); Sutkowski, supra, 5 Ill.App.3d at 318-320, 281 N.E.2d at 752-753; Brown v. Quick Mix Co., 75 Wash.2d 833, 454 P.2d 205, 209-210 (1969); see Wallner, supra, 419 F.2d at 1032.

Since the proffered evidence was relevant and there existed no valid policy reason for excluding it, the evidence was admissible. However, after having considered the court’s action in light of the entire record, and taking into account the scope of the trial judge’s discretion in ruling on evidentiary questions, particularly when the proffer is arguably cumulative, we are persuaded that the exclusion was not reversible error.

More specifically, evidence of the accident itself established that the design of defendant’s clips could not prevent the power cable from falling under the circumstances which occurred in the mine. Plaintiff’s expert, Dr. Hornsey, also testified to this fact. Tr. 298-300. Dr. Hornsey further stated that, in his opinion,

either the clip should have been designed so that it was capable of withstanding the energy loads of the cable falling under its own weight, or as an alternative at some periodic interval some additional holding device could have been used such as polyethylene rope.

Tr. 298. Thus, on the issues of whether the design was inadequate and whether there existed an alternative design which would have prevented the accident, the evidence of post-occurrence change was cumulative.

No other evidence was admitted on the issue of feasibility. Plaintiff, however, has not argued that there was any dispute at trial over the feasibility of tying sturdy rope at periodic intervals. And it is highly improbable that a jury could reasonably believe that such an alteration was too costly, impractical or technologically impossible. It has been suggested that, under these circumstances, evidence of post-occurrence changes should not even be admitted on the issue of feasibility. See McCormick’s Handbook of the Law of Evidence 668-69 (2d ed. 1972); Rule 407 of the Proposed Rules of Federal Evidence. At the very least, exclusion of such evidence did not affect the “substantial rights” of plaintiff.

Our decision here is, of course, consistent with Wallner, supra, and Maho-ney v. Roper-Wright Mfg. Co., 490 F.2d 229 (7th Cir. 1973). In Wallner we held simply that admission of the post-accident change evidence was proper. In Mahoney exclusion of such evidence was reversible error because the plaintiff also had been precluded from offering any evidence of design alternatives.

II.

Plaintiff sought to introduce evidence of what she terms “other similar happenings.” One of her witnesses, an employee of the mine operator, had worked in another coal mine for several years. During this period he had seen fellow workers intentionally take down the power cable in a manner similar to cracking a whip. As in this case, the power cable had been suspended by means of clips; when the force was applied, the clips instantaneously and progressively flew out. Plaintiff contends that exclusion of this evidence also was error.

We believe that the trial court’s ruling was proper. Plaintiff offered no evidence that the clips used in the other mine were comparable, in terms of characteristics and. quality, to those manufactured by defendant. She thus failed to lay a proper foundation for the admission of the “similar happenings” evidence. See Walker v. Trico Mfg. Co., 487 F.2d 595, 599-600 (7th Cir. 1973), cert. denied, 415 U.S. 978, 94 S.Ct. 1564, 39 L.Ed.2d 873 (1974); Mahoney v. Roper-Wright Mfg. Co., 490 F.2d 229, 233 (7th Cir. 1973); Vlahovich v. Betts Machine Co., 101 Ill.App.2d 123, 128, 242 N.E.2d 17, 19 (1968), aff’d, 45 Ill.2d 506, 260 N.E.2d 230 (1970).

Furthermore, the proffered evidence was perhaps more helpful to defendant than to plaintiff. Power cables are generally non-permanent installations which must be transported from one mine tunnel to another. The “similar happenings” evidence tended to prove that the actual consumers of defendant’s product, i. e., mine operators, desired clips which allowed easy removal of the power cable. Defendant, therefore, might well have argued that this evidence supported its view that the product complied with the required standard of safety.

III.

Plaintiff’s contention that the trial court improperly commented upon the evidence is also without merit. During a colloquy with plaintiff’s expert the court stated, at several points, that the clips would not have been dislodged if the rail (or some other heavy object) had not initially fallen upon the power cable. Tr. 289-97. There was absolutely no evidence indicating that this was not the case; indeed, plaintiff’s own expert agreed that, absent a force sufficiently strong to dislodge the first clip, the accident would never have occurred. Tr. 296-97. The court’s comments clearly do not constitute that type of “distortion” referred to in Quercia v. United States, 289 U.S. 466, 470, 53 S.Ct. 698, 77 L.Ed. 1321.

It might also be noted that, during the trial, plaintiff made no motion to strike the court’s comments; she made no objection to them, and did not, in any way, attempt to call the court’s attention to their alleged impropriety. While there may be cases in which grossly improper remarks constitute plain error, cf. Webb v. Texas, 409 U.S. 95, 97, 93 S.Ct. 351, 34 L.Ed.2d 330; Myers v. George, 271 F.2d 168, 174 (8th Cir. 1959), this surely is not such a case.

IV.

Under regulations promulgated by the Federal Bureau of Mines, a federal mine inspector may not testify as an expert witness; he is only permitted to describe facts which he observed during the course of an investigation. Nevertheless, the district court ruled that an inspector called by the defense was an expert and thus could give an opinion as to the cause of the accident. Plaintiff repeatedly expressed concern that the witness, during cross-examination, would rely upon the Bureau’s regulations and refuse to give any further opinion testimony, thereby frustrating such examination. Plaintiff now contends that the district court erred in ruling that the mine inspector was an expert and in admitting his opinion testimony, and that she was denied her right to effective cross-examination.

Neither the Bureau of Mines nor the mine inspector himself may have thought that he was or should be an expert. But it is the trial judge, and not the witness or an administrative agency, who has the responsibility and discretion to determine whether a witness is qualified as an expert. In this case, the witness testified that he had been in the coal industry for over 30 years, that he had been an inspector for the Bureau of Mines since 1967 and that, at the time of trial, his title was “Supervisor of Federal Coal Mine Inspection.” Tr. 359. Thus, we do not believe that the trial court abused its discretion in considering the inspector an expert on the cause of a coal mining accident; nor do we believe that admitting his opinion testimony (that the accident was caused by the rail striking the power cable) was “manifestly erroneous.”

Plaintiff’s claim that she was denied effective cross-examination of the inspector is without basis in fact. The district court, at several points, informed the witness that the Bureau’s regulations were not a valid reason for refusing to give opinion testimony. Tr. 360, 366, 376, 387-88. That the witness understood the court’s directive and was willing to abide by it is apparent from the following testimony given during an offer of proof:

Q If I [plaintiff’s counsel] asked you a hypothetical question requiring your expertise, and if the Court directs you to answer that question, will you answer it, or will you say you have no opinion?
A If I know what I’m talking about I would probably answer it, but I’m going to have to know what I’m talking about.

Tr. 388-89. Furthermore, at no time during cross-examination did the witness refuse to answer any of plaintiff’s hypothetieals.

Y.

Plaintiff’s final contention is that testimony concerning the proper method of unloading rails in railroad yards was irrelevant and, therefore, should have been excluded. We disagree. Defendant’s theory was that the mine operator’s employees had been negligent in unloading the rails and that this negligence was the sole proximate cause of the accident. The Illinois courts have recognized that this is a proper defense in a strict liability action. Santiago v. Package Machinery Co., 123 Ill.App.2d 305, 310-312, 260 N.E.2d 89, 92-93 (1970). And, in our opinion, evidence that it would have been improper for the mine employees to follow the same procedure above ground that they actually followed in the mine had a tendency to prove negligence and, therefore, to support the theory of the defense. Under these circumstances, we believe that the evidence was relevant and that the trial court properly admitted it.

The judgment of the district court is therefore

Affirmed.

      . The only other ground is that evidence of post-occurrence change is not relevant to the issue of negligence.

       Defendant notes that, when the mine operator installed additional polypropene ropes, each clip retained the same size, shape, appearance and strength as before installation. Thus, contends defendant, the design of its product was unchanged and the evidence was irrelevant.
      The primary difficulty with this argument is that it characterizes defendant’s product as an individual clip. These clips, however, are manufactured, advertised and sold for the primary purpose of hanging a power cable. Because of the length and weight of this cable, a single clip is of no practical value; the clips must be purchased and used together in large quantities. Consequently, defendant’s product is a set of clips and not simply the individual clip. This set was designed so that it alone would support a power cable. Therefore, by supplementing the set with polypropene ropes, the mine operator modified the design of defendant’s product.

      . Fed.R.Civ.P. 61 provides in part:
      No error in the exclusion of evidence ... is ground for granting a new trial or for setting aside a verdict or for vacating, modifying, or otherwise disturbing a judgment or order, unless refusal to take such action appears to the court inconsistent with substantial justice. The court at every stage of the proceeding must disregard gny error or defect in the proceeding which does not affect the substantial rights of the parties.

        See also 28 U.S.C. § 2111. Plaintiff, of course, “carries the burden of showing that prejudice resulted” from the court’s rulings in this case. Palmer v. Hoffman, 318 U.S. 109, 116, 63 S.Ct. 477, 482, 87 L.Ed. 645.

      . In tlie light of this testimony, similar opinion testimony from other witnesses would have been cumulative; its exclusion was therefore not reversible error even if the testimony could properly have been received. It should be noted, moreover, that an issue has been raised, which we need not decide, as to whether plaintiff had laid a proper foundation for admission of the other testimony of this character.

      . As this Court noted in Hutter Northern Trust v. Door County Chamber of Commerce, 467 F.2d 1075, 1080 (7th Cir. 1972), “Harmless error is often found when substantially equivalent evidence has been admitted.”

      . The only evidence on this point was the witness’ testimony that he did not know whether the clips used were defendant’s. Tr. 145-46.

      . One of defendant’s experts testified that, on at least one occasion, large pieces of rock fell from the roof of a mine onto the messenger cable (the power cable was attached, by means of the clips, to the messenger cable) without dislodging the clips. The record indicates that the clips were defendant’s and that they were employed under circumstances essentially the same as those surrounding the accident in question. See Tr. 445 — 48. Consequently, a proper foundation was laid for this testimony. And since the evidence was relevant on the issue of foreseeability, the trial court properly admitted it.

      . The court’s statements were made largely to indicate the basis of his rulings sustaining objeetions posed by the defense. Compare Chapman v. Alton R. Co., 117 F.2d 669, 671 (7th Cir. 1941).

      . As the ¡Supreme Court lias concluded :
      Whether a witness is shown to be qualified or not as an expert is a preliminary question to be determined in the first place by the court; and the rule is, that if the court admits the testimony, then it is for the jury to decide whether any, and if any what, weight is to be given to the testimony. Cases arise where it is very much a matter of discretion with the court whether to receive or exclude the evidence; but the appellate court will not reverse in such a case, unless the ruling is manifestly erroneous.
      Spring Co. v. Edgar, 99 U.S. (9 Otto) 645, 658, 25 L.Ed. 487. See also Salem v. United States Lines Co., 370 U.S. 31, 35, 82 S.Ct. 1119, 8 L.Ed.2d 313.

      . With one exception all of plaintiff’s hypo-theticals concerned whether an alternative design of the clips would have prevented the accident. Objections to these questions were sustained by tlie court and, consequently, the reasons why the witness did not answer them were unrelated to the Bureau of Mines regulation. In response to the question of whether “if the power cable had not been hung up on the conveyor belt, [would] . . . these clips . . . have failed for' the additional distance of half a mile to a mile and all of the power cable come down?” the witness replied simply: “I have no opinion on that. I have no way of knowing. I can’t make an opinion on that. I have no way of knowing, your Honor.” Tr. 385.

      . Bule 401 of tlie Proposed Buies of Federal Evidence provides:
      “Belevant evidence” means evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence.


source: Caselaw Access Project

author: KOELSCH, Circuit Judge: HUFSTEDLER, Circuit Judge J. BLAINE ANDERSON, District Judge

license: Public Domain

text:
    John H. RICKEY and Lorraine C. Rickey, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
    No. 26-775.
    United States Court of Appeals, Ninth Circuit.
    July 19, 1974.
    Hufstedler, Circuit Judge, filed spe•cially concurring opinion.
    J. Blaine Anderson, District Judge, concurred and dissented and filed opinion.
    Paul E. Anderson (argued), San Francisco, Cal., for appellants.
    John A. Townsend (argued), Dept, of Justice, Washington, D.C., for appellee.

      Before KOELSCH and HUFSTEDLER, Circuit Judges, and ANDERSON, District Judge.

       The Honorable J. Blaine Anderson, United States District Judge for the District of Idaho, sitting by designation.

   OPINION

KOELSCH, Circuit Judge:

John H. Rickey (Taxpayer) and Lorraine C. Rickey appeal from a decision of the Tax Court determining a deficiency in income taxes for the tax year 1962. Our jurisdiction is founded on Section 7482 of the Internal Revenue Code of 1954, 26 U.S.C. § 7482.

Two distinct issues are presented for review. The first is whether Taxpayer received over 30 per cent of the selling price of stock in two corporations in the year of sale, thereby precluding reporting of the gain under the installment method provided by Code Section 453, 26 U.S.C. § 453. See 26 U.S.C. § 453(b) (2) (ii). The second is whether a loss suffered by Taxpayer on the liquidation of a corporation qualifies under the provisions of 26 U.S.C. § 1244 for treatment as an ordinary loss. The Tax Court held against Taxpayer on both issues.

I. The “Installment” Sale

In 1962 Taxpayer owned all of the stock of Rickey Enterprises (Enterprises), a California corporation. Enterprises owned and operated a restaurant in Palo Alto, California (Rickey’s), a bar-restaurant in San Francisco, California, and 90 pe&cent of the stock of a corporation which operated a restaurant next to Rickey’s in Palo Alto. Taxpayer also owned 50 percent of the stock of Rickey’s Studio Inn Hotel (Studio Inn), another California corporation; the other half was owned by two brothers, Alfred and Lewis Marsten. Studio Inn owned a large motel in Palo Alto adjacent to Rickey’s, and a restaurant in Marin County, California.

In early 1962 Hyatt Corporation of America (Hyatt) sought to purchase the motel owned by Studio Inn and the adjacent restaurant, Rickey’s, owned by Enterprises. Hyatt did not want any of the other assets. But, apparently because of tax considerations on both sides, the sale was ultimately cast in the form of a sale of the stock of the two corporations. To accommodate Hyatt and as part of the transaction, Taxpayer, shortly before the sale was consummated, purchased and received from the two corporations all their unwanted assets. The purchase price was set up on their books as an account receivable from Taxpayer. The contract to sell and purchase the corporate stock was then executed on March 31, 1962. The basic sales price was set at $3,600,000, subject to an immediate audit. Of the pre-audit sales price, $1,400,000 was allocated to mortgage indebtedness in that amount; $1,852,000 to the stock of Studio; and $348,000 to-the stock of Enterprises. The contract further provided for a payment of $250,000 upon execution and $852,000 plus interest at 4 per cent, reflected by long-term notes. The difference between the sum of these two figures and the adjusted total sales price was to be determined and paid as follows: the difference between the down payment of $250,000 and 29 per cent of the adjusted total sales price (hereafter the Deferred Down Payment) within 30 days of the audit, the remainder (hereafter the Residual Payment) on January 2, 1963.

The contract also provided a mechanism for off-setting Taxpayer’s indebtedness for the withdrawn assets against the amounts due him. Section 5-b of the contract provides:

“It is further expressly understood and agreed that in the audit as at the close of business on March 31, 1962, hereinafter provided for, all liabilities of said companies then owing to the selling stockholders and their related companies and all indebtedness of the selling stockholders and their related companies to said companies shall be offset and cancelled to the extent thereof; that each of the selling stockholders waives, releases and relinquishes all claims and demands against each of said companies which do not appear on or are reflected and accounted for in the respective audited balance sheets of said companies as of the close of business on March 31, 1962, and that after accomplishing such offsets any then remaining bal-anee of indebtedness of a selling stockholder and/or his related companies to said companies shall be paid as follows: first, by the application of the balance of the 29% installment of purchase price payable to such stockholder for his stock, provided for in paragraph 2 of this agreement; second, by the application of all installments of purchase price payable to such stockholder for his stock due on or after January 1, 1963; and third, by credit against amounts becoming due on such stockholder’s promissory note.”

Thus, Taxpayer was only to receive the payments on the sales price (except for the fixed sum paid on execution of the contract) after cancellation of his indebtedness to the two corporations for the withdrawn assets.

The sale was eonsumated on April 2, 1962. As agreed in clause 2-b, Taxpayer received $125,000 in cash and $426,000 in notes for his half interest in Studio Inn, and $100,000 in cash and $148,000 in notes towards payment for the stock of Enterprises. Immédiately on closing, Hyatt liquidated the two corporations; and Taxpayer’s debt to the corporations thereupon became payable to Hyatt.

The audit, completed in June, 1962, resulted in a slight reduction of the sales price. It also reduced the portion of the total sales price allocable to Studio Inn, in which the Marstens owned a half-interest, and thus entitled Taxpayer to a larger proportion of the payments. As stated in the Tax Court’s opinion (54 T.C. at 686) :

“The audit . . . determined an adjusted sales price of $631,605.50 for petitioner’s interest in Studio Inn and $449,487.98 for petitioner’s interest in Enterprises, or a total adjusted sales price of $1,081,043.48 for petitioner’s interest in both corporations. The amount of each payment due petitioner under the terms of the contract . for his stock of both corporations is as follows:
Rickey’s
Studio Rickey
Inn Hotel Enterprises Total
Due at closing $125,000.00 $100,000.00 225.000. 00
Due 30 days after audit 58,165.00 30,337.00 88,502.00
Due January 2, 1963 22,440.50 171,100.98 193,541.48
Payment due by note 426,000.00 148,000.00 574.000. 00
631,605.50 449,437.98 1,081,043.48

The amount due petitioner under the terms of the contract in the year of sale, namely the amounts due at closing and 30 days after audit, for his respective interest in each corporation represented 29 percent of the selling price of petitioner's stock in each corporation. Also, the total amount due petitioner in the year of sale for his stock in both corporations represented 29 percent of the total selling price of his stock in both corporations.”

The audit also revealed that Taxpayer “owed” the two corporations (and hence, after their liquidation, Hyatt) the net sum of $466,398.83 for the withdrawn assets. This sum was considerably larger than the parties had anticipated. As already noted, the contract provided for interest on Hyatt’s long-term indebtedness to Taxpayer; however, it contained no such provision with respect to Taxpayer’s debt, undoubtedly because the parties did not anticipate that the latter debt would exceed the sum of the Deferred Down Payment and the Residual Payment. Thus, because of the size of Taxpayer’s debt, Hyatt was unexpectedly confronted with the prospect of paying interest on long-term notes, the principal of which, because of the offset provisions of the contract, Hyatt would never have to pay — to follow the logic of the contract, Taxpayer “owed” Hyatt money on which he was not obligated to pay interest at the same time that Hyatt “owed” Taxpayer money on which interest was accruing.

When Hyatt threatened to rescind the contract, Taxpayer made some payments on his debt, but these were relatively small, and Hyatt remained dissatisfied.

However, on August 29, 1962, the parties succeeded in amicably resolving the problem. As evidenced by letter agreement of even date, they in effect offset the Residual (and Deferred Down) Payment pro tanto against Taxpayer’s debt to Hyatt and provided that Taxpayer would pay interest from September 1, 1962, on the remainder.

In his tax return for 1962 Taxpayer reported his gain from the sale of his stock in Enterprises and Studio Inn as an installment sale in that year. The Commissioner rejected the installment method of reporting, concluding that Taxpayer had effectively received the 1963 Residual payment in 1962, thereby receiving more than the permissible 30 per cent of the sales price in the year of sale. The Commissioner computed the year of sale payments as follows:

Enterprises Studio Inn Total
Sale price of capital stock $449,437.98 $631,605.50 $1,081,043.48
Payments in year of sale 100,000.00 125,000.00 225,000.00
30,337.00 58,165.00 88,502.00
171,100.98 22,440.50 193,541.48
301,437.98 205,605.50 507,043.48
Percent of sales price 67 32.55 46.93

The Tax Court sustained the Commissioner. It held that Taxpayer received the $193,541.48 payment as income in the year of sale because an equivalent amount of Taxpayer’s indebtedness to Hyatt for the assets retained was effectively set off against Hyatt’s indebtedness to Taxpayer in 1962. The Tax Court rested decision on two separate bases: (1) that analysis of the substance of the transaction under familiar tax principles requiring attribution of income to the year of actual receipt indicated that $193,541.48 of Taxpayer’s debt to Hyatt was cancelled in 1962; and, alternatively, (2) that the letter agreement of August 29, 1962, had the effect of contractually accelerating the payment due January 2, 1963, into the year of sale.

Taxpayer has ignored the first holding and concentrated his attack on the second. Because we conclude that the Tax Court’s first holding is correct, we need not, and do not, express an opinion on the merits of the alternative holding.

It is fundamental that the “incidence of taxation depends upon the substance of a transaction . .• . .To permit the true nature of a transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.” Commissioner of Internal Revenue v. Court Holding Co., 324 U.S. 331, 334, 65 S.Ct. 707, 708, 89 L.Ed. 981 (1945). Applying this principle, the Tax Court held that the contractual provision for cancellation of the mutual debts on January 2 of the next year simply postponed technical receipt without deferring the actual enjoyment of over 30 per cent of the gain from the sale. The Tax Court stated:

“We think it clear that the payment of $193,541.48 was effectively received by petitioner in 1962 (the year of sale) .... As we view the transaction, petitioner deferred payment of that portion of the noninter-est-bearing payments which exceeded 29 percent of the selling price, to wit, $193,541.48, solely for the purpose of altering his tax liability. While we recognize that a taxpayer may deliberately arrange the terms of a sale so he will receive less than 30 percent of the sale price in the year of sale, nevertheless to so qualify the arrangements must have substance and reflect the true situation rather than being merely the formal documentation of the terms of the sale. Here petitioner did this with the knowledge that, by virtue of the provision requiring this amount to be offset against his in-* debtedness to Hyatt, he would never
receive this payment in the form cash. ^ :¡: * £ H« of

We agree. The parties’ agreement to a selling price for the stock “inflated” by the value of assets Hyatt did not want to purchase maximized the amount Taxpayer would receive in the year of sale (and the amount óf stepped-up basis Hyatt would receive on liquidation of the corporations). The contract operated so that regardless of the value of the assets transferred to Taxpayer, the post-audit adjusted sales price of the stock reflected only variations in the assets and liabilities of the motel and restaurant Hyatt purchased — the assets Taxpayer bought were reflected on the corporations’ books by a corresponding asset, his account receivable. Because Taxpayer’s debt exceeded the sum of the Deferred Down Payment and Residual Payment, the offset was inevitably an empty gesture entailing only book entries.

The Tax Court properly disregarded such formalism. Section 453 is a remedial provision designed to alleviate the hardship to taxpayers who do not receive cash or other assets in the year of sale sufficient to pay the tax on a large gain — 30 per cent is the statutory dividing line between those Congress thought in need of relief and those not. Commissioner of Internal Revenue v. South Texas Lumber Co., 333 U.S. 496, 68 S.Ct. 695, 92 L.Ed. 831 (1948). Taxpayer does not come within the ambit of § 453 because he received benefits well in excess of 30 per cent of the sales price in 1962. See Rushing v. Commissioner of Internal Revenue, 441 F.2d 593 (5th Cir. 1971). Indeed, Taxpayer received the assets, which created the debt to be can-celled in the following year, not only in the year of sale, but even before the sale. Recasting the transaction, it is apparent that of his portion of the sales price, $1,081,043.48, Taxpayer received $250,000 in cash plus assets more than sufficient to make the benefits received from the sale exceed 30 per cent of the sales price. Payment for the assets by creation of a debt technically to be can-celled in the future was simply a formal device, appropriately disregarded, to avoid the tax consequences of receipt of over 30 per cent of the sales price

Taxpayer alternatively contends that he is at least entitled to installment treatment on the proceeds of his Studio Inn stock. He argues that the sale of the two corporations was each a separate event, and that the cash payments made to prevent Hyatt from rescinding were repayments of the cash downpayment. He points out that if the proportion of the repayment allocable to Studio Inn is deducted from the year-of-sale payments for that corporation, the amount received for Studio Inn in the year of sale is less than 30 per cent, even with an accelerated offset. The simple answer to Taxpayer’s contention is that the Tax Court found:

“This argument can.be readily dismissed as being completely unsupported by the actual facts. The $76,763.86 paid by petitioner to Hyatt went to reduce the amount of petitioner’s indebtedness to Hyatt and was not a partial refund of the downpayment for the stock.” 54 T.C. at 698.

The finding is amply supported by the evidence; indeed, it is dictated by the schedule attached to the August 29, 1962, agreement.

11. The Section 1244 Loss

Taxpayer, relying upon 26 U.S. C. § 1244, applied ordinary, as distinguished from capital, loss treatment to a substantial loss suffered upon the liquidation of a domestic corporation in which he was the sole shareholder. The Commissioner, however, ruled that the stock was not within purview of that statute. The Tax Court agreed. It held that the “written plan” relied on by Taxpayer, consisting of the corporate minutes, resolutions, an application to the Commissioner of Corporations for a permit to issue shares, and the permit itself, was defective in two respects. First, that the corporate writings did not disclose in terms that the stock was issued in order to obtain the benefits of § 1244, and therefore failed to satisfy the requirement that the corporation’s plan be one “to offer such (i. e., § 1244) stocks . . . ” Second, that an offering period for the stock ending “not later than two years after the date the plan is adopted” was not specified in the plan.

The first ground relied on by the Tax Court is dispositive; we do not reach the second.

Courts called on to interpret § 1244 have uniformly upheld the Commissioner’s position that a qualifying § 1244 plan must provide evidence that the stock is being issued with § 1244 in mind. Anderson v. United States, 436 F.2d 356 (10th Cir. 1971); Godart v. Commissioner, 425 F.2d 633 (2d Cir. 1970); Childs v. Commissioner, 408 F. 2d 531 (3rd Cir. 1969); Spillers v. Commissioner, 407 F.2d 530 (5th Cir. 1969). This interpretation of the statute conditions the tax incentive provided for small business investment “both on doing certain things and on showing in an objective way that they were done with an intention of realizing the benefits Congress had afforded.” (Godart, supra, 425 F.2d at 637.) Taxpayer argues this is an unreasonable interpretation of the statute. He contends that Congress is ordinarily not interested in a taxpayer’s knowledge of tax law, but rather in the performance of the substantive acts which the tax benefit is designed to induce. Here, he maintains, the investment in the liquidated corporation had all the Congressionally desired characteristics set out in the statute, and he argues that he should be entitled to the benefits of the section without an explicit designation of the Code section in the qualifying plan.

Taxpayer’s argument misconstrues the purpose of § 1244. The section was not intended to provide general tax relief for all small business investment losses. It was passed during the business recession of 1958 and was designed “to increase the volume of outside funds which will be made available for the financing of small businesses. . . . ” H.R.Rep.No. 2198, 85th Cong., 1st Sess. (1958), reprinted in 1959-2 Cum.Bull. 709, 710. By passage of § 1244, Congress did not intend to establish a broad exception, with potentially large losses to the Treasury, from the ordinary capital loss treatment provided small business investment losses. As noted by Judge Friendly in Godart: “The House Report [indicates] that budgetary considerations required that any tax reductions accorded small businesses be kept at a minimum. . . . ” 425 F.2d at 637.

Congress therefore sought to provide tax benefits only to those additional investments which in fact were stimulated by the tax incentive. The section excluded investments already made, operating only prospectively. And, in order to exclude those investments which clearly would have been forthcoming without the stimulation provided by § 1244, Congress required a written “plan . to offer such (i. e., § 1244) stock”- — • a plan which evidences that the corporation is aware of § 1244. While not completely limiting the benefits of the section to investments which would not be made but for the inducement provided, the requirement at least insures that investments made without knowledge of § 1244 will not be subsidized. In short, Congress conditioned the tax benefit on knowledge of the incentives of § 1244 in order to limit the tax cost spent to obtain the same additional investment. See Godart, supra, at 637-638.

The judgment of the Tax Court is affirmed.

HUFSTEDLER, Circuit Judge

(specially concurring):

I concur fully in my brother Koelsch’s rationale in disposing of the section 453 issue. I reach his result in deciding the section 1244 issue, but by a different path.

I would not adopt the reasoning of Judge Friendly in Godart v. Commissioner (2d Cir. 1970) 425 F.2d 633 and of the other cases of Judge Friendly’s persuasion- that Judge Koelsch has collected. The requirement that “there must be some substantially contemporary objective evidence that the plan was adopted with § 1244 in view” (425 F.2d at 638), when applied to disqualify a plan that follows all of the objective criteria of section 1244, attributes to Congress an unreasonably mystical approach to business financing.

Rather, I think that the issue is controlled by Warner v. Commissioner (9th Cir. 1968) 401 F.2d 162. Warner struck down an otherwise qualifying plan because the plan did not contain terms explicitly requiring that the stock be sold within the requisite two-year period. Warner could have applied section 1244 and 26 C.F.R. § 1.1244(c)-l(c) less mechanically, but Warner is the law of this circuit, and it disqualifies Rickey’s plan.

J. BLAINE ANDERSON, District Judge

(concurring and dissenting):

I have no hesitancy in concurring with the disposition as to the section 453 issue.

The peculiar and special facts in this case, and the timing of the statute and the implementing regulations, all dealt with in more detail hereinafter, compel this dissent on the section 1244 issue. Warner v. Commissioner, (9th Cir. 1968) 401 F.2d 162, does not, in my opinion, require the result reached by Judge Hufstedler nor by Judge Koelsch in his reliance on Godart v. Commissioner, (2nd Cir. 1970) 425 F.2d 633. Some elaboration seems necessary to an understanding of the point of this dissent.

On June 17, 1960, petitioners incorporated “The Shack” under the laws of the State of California. An organizational meeting was held on June 27, 1960, and J. H. Rickey was elected president. The Shack was authorized to issue a total of 2,000 shares of stock at a par value of $100.00. A resolution was adopted authorizing the corporation to issue not more than 200 shares to J. H. Rickey. Is is apparent from reading the resolution that it was mandatory in its language and direction, requiring the officers to immediately comply with the terms of the permit. The resolution stated, in part:

“that upon issuance of a Permit by the Commissioner of Corporations of the State of California, pursuant to such Application, the President and/or the Vice-President and the Secretary be, and they are hereby authorized — and directed to sell and issue shares of stock of this corporation to any or all of the above-named individuals in the amounts and for the consideration stated in and in compliance with all the terms and conditions of such Permit and these resolutions.” (emphasis supplied)

In July, 1960, an application for a permit to issue shares in accordance with the above resolution was filed with the Commissioner of Corporations. On July 19, 1960, the Commissioner issued his permit to The Shack, authorizing it to sell 200 shares of its stock to petitioners for $100.00 per share. The permit stated:

“That unless revoked or suspended, or renewed upon application filed on or before the date of expiration specified in this condition, all authority to sell securities under paragraph I of this permit shall terminate and expire on January 30, 1961 . . . ”

On July 22, 1960, The Shack issued 200 shares to J. H. Rickey in return for $20,000.00 in cash. In December, 1963, The Shack, since renamed “Rick’s Swiss Chalet”, was liquidated at a loss. Of the total amount lost, $17,673.86 was attributable to the capital stock contribution. The Commissioner disallowed this loss as an ordinary loss pursuant to 26 U.S.C.A. Section 1244, 26 C.F.R. 1.1244, for two reasons: First, the plan did not blatantly limit the stock offering to two years, and second, that the plan did not specifically say it was a “Section 1244” plan.

Congress enacted Section 1244 of the Internal Revenue Code (effective Sept. 2, 1958) to encourage the flow of capital into small business, corporations, an area of commerce where there are substantial chances of failure. During the hiatus between congressional action, Sept. 2, 1958, and the promulgation of the regulation, October 8, 1960, one would need psychic qualities to comply with nonexistent regulations. It is felt that any interpretation of this section should have as its goal a realistic application of congressional wording without reference to the words of the then non-existing implementing regulation.

It is, I believe, sufficient evidence of intent that he formed a small corporation, and the transactions that occurred during its formation conform to the standards set out in the statute. Given only the statute, without benefit of case law or regulations, I feel that Rickey did an adequate job of conforming to its requirements. In cases such as this, we must look to the substance of the transaction, not the form. It is basic tax law that when there is an ambiguity in the statute, doubts should be resolved in favor of the taxpayer, Gould v. Gould, 245 U.S. 151, 38 S.Ct. 53, 62 L.Ed. 211 (1917). This has long been the rule as to other sections of the Internal Revenue Code, Sami v. United States, 277 F.2d 153 (9th Cir. 1960), and I cannot see why it should be different with Section 1244 standing alone without the guiding regulation. I feel that this policy is especially true in this case as the appellant was without the benefit of case law or applicable regulations to guide him at the time of the formation of the corporation. It was sometime later that anyone in the legal or accounting professions learned of the strict interpretation and application the IRS was to make of this statute.

In 33 St. John’s Law Review 172 (1958) there was a short discussion of new legislation. Section 1244 stock was one of the subjects mentioned and the following comment should be noted:

“Section 1244 stock must be issued pursuant to a corporate plan. While the statute is silent as to the form of such plan, the report of the House Ways and Means Committee specifies that such plan must be in writing. At present, why any plan is required as a condition precedent to issuing 1244 stock, and what the form and content of such a plan will be, are not apparent.” P. 173

It is apparent that the statute, without aid of regulations, engendered uncertainties. The statute does not even, for instance, require a written plan, only a plan.

In Godart v. C. I. R., 425 F.2d 633 (2nd Cir. 1970), a seemingly contrary result was stated. But even at the outset, Judge Friendly conceded that it was a “close question”. The facts further reveal that the taxpayer did not make a Section 1244 claim on his original return, but on an amended return after the Commissioner assessed him with a deficiency. In Godart the corporation was formed after the regulations were adopted. In Childs v. C. I. R., 408 F.2d 531 (3rd Cir. 1969), the court noted that there was no mention of Section 1244 in the taxpayer’s plan, a plan adopted after publication of the regulations, but went on to observe that:

“ . . . [Tjhere is nothing in the resolution of the board of directors . , nor in the minutes of the stockholders’ meeting, which would differentiate these resolutions and minutes from the ordinary purchase of stock by a buyer and seller. Here, if any offer was made, it was made on behalf of the appellant, . . . , and the acceptance was by the corporation and the respective resolutions and minutes merely set the same forth.” P. 533.

In Spillers v. C.I.R., 407 F.2d 530 (5th Cir. 1969), there, seems to be little question that even if the appellant had used the term “Section 1244 stock”, he would not have qualified for a Section 1244 deduction due to the numerous flaws in the formation of the corporation. In Anderson v. United States, 436 F.2d 356 (10th Cir. 1971), the appellant stipulated that at the time of formation he had no intent to satisfy the statute. The court, applying the rule in Godart, supra, 425 F.2d p. 638, said: “There must be some substantially contemporary objective evidence that the plan was adopted with § 1244 in view.” and concluded that with the facts as stipulated, the judgment had to be affirmed. In the present case Rickey is claiming that the substance of the transactions objectively demonstrate that he had § 1244 in view, even though he did not specifically mention the statute.

The holding in Warner v. C.I.R., 401 F.2d 162 (9th Cir. 1968), is distinguishable from the one at hand. There the stock offering was not limited to two years or less by a written plan or operation of local law and regulations and the Revenue Code regulations had been published at the time this stock was offered.

The Shack was incorporated in accordance with a plan. That plan was a written plan and consisted of the minutes of the organizational meeting of the board of directors augmented by the application to the California Commissioner of Corporations for a permit to sell stock and the issued permit. Corporate minutes are sufficient writings to meet the requirements of the statute, Eger v. C.I.R., 393 F.2d 243 (2nd Cir. 1968), and those writings may be augmented by applicable state laws. I would hold thát the minutes as augmented by the permit, are sufficient writings to satisfy the statute where, as here, no regulations had been adopted by the Commissioner.

The Commissioner urges that the plan must still fail for another reason, that the two-year limitation was not specifically stated in the writings. 26 C.F.R. 1.1244(c)-l(c) states, in part, that:

“The two-year requirement will be met if the period specified in the plan is based upon a date when, under the rules or regulations of a government agency relating to the issuance of the stock, the stock may lawfully be sold, and it is clear that such period will end, and in fact it does end, within two years after the plan is adopted.”

These regulations were adopted after the formation of The Shack. Nevertheless, in this case there is no dispute that the stock was in fact sold in less than six months and that the permit to sell the stock was only good for six months. The Commissioner argues that the permit said on its face that it could be renewed ; thus, the two-year limitation was not met. This is a highly speculative argument and during oral argument it was conceded that the permit could not, as a practical matter, be renewed more than twice. Since the permit is only good for six months, with two renewals, the stock could only be offered for a maximum of 18 months. As stated earlier, the stock was in fact sold within the original period of the permit. Therefore, I would hold that the two-year requirement was met. I would emphasize that this holding is confined to the peculiar facts of this case, as they relate to Section 1244 and the absence of guiding regulations during the crucial period.

      . Lorraine Rickey is a party to this action solely by reason of filing a joint return with her husband.

      . The opinion of the Tax Court is reported : John H. Rickey, 54 T.C. 680 (1970).

      . The facts are exhaustively set out in the opinion of the Tax Court, and we will provide only a summary necessary for an understanding of our disposition of the issues.

      . Pragraphs 5 and 5a of the contract provided :
      “(5) Anything herein to the contrary notwithstanding, it is understood and agreed by the parties that the purchase price to be paid for said shares of stock was negotiated and fixed upon the basis that the assets of each company at the time of closing, described in Exhibit E, would equal the liabilities of each of said companies at said time, other than said indebtedness to Equitable in an aggregate principal amount of $1,400,000.00. Therefore, said purchase price shall be increased by the amounts, if any, that the principal of said indebtedness owed to Equitable is less, at the time of closing, than $1,400,000.00, and by the amount, if any, that the assets of either of said companies as listed in Exhibit E exceed the liabilities of said companies, other than said indebtedness owed to Equitable.
      “(5-a) Conversely, said purchase price shall be decreased by the amounts, if any, by which at the time of closing said indebtedness to Equitable exceeds $1,400,000.00 (excluding the amount of any additional borrowings made by said companies from Equitable with the prior written consent of Ilyatt) and the liabilities of said companies other than said indebtedness to Equitable exceed the same assets of said companies as listed on Exhibit E.
      Exhibit E read:
      “OTHER ASSETS
      “1. Cash on hand and in banks.
      2. Poods and beverages.
      3. All merchandise held for sale in liquor store which Hyatt alects [sic] to purchase (at cost or market value, whichever is lower).
      4. The following prepaid expenses: * X * *
      5. Accounts and Notes Receivable.”

      . Taxpayer’s payments, amounting to $76,763.86 reduced his debt from $466,398.83 to $389,634.97.

      . The letter agreement contains this recital: “As of this date (August 29, 1962) Hyatt is owed $120,036.11 by you as a result of an overpayment in connection with the contract dated March 31, ' 1962 for the purchase of Rickey’s.”

      . The benefit received from discharge of a debt is taxable income. 26 U.S.C. § 61 (a) (12).

      “4. By purchasing the assets Ilyatt did not want through the establishment of accounts receivable it was obvious from the beginning that Ilyatt would never be called on to pay the $193,541.48. Petitioner retained possession of assets worth more than that at all times.” 54 T.C. at 694.

      . Of. Tombari v. Commissioner of Internal Revenue, 299 F.2<1 889 (9th Cir. 1962).

      . United States v. Ingalls, 399 F.2d 143 (5th Cir. 1968); Williams v. United States, 219 F.2d 523 (5th Cir. 1955); James Hammond, 1 T.C. 198 (1942). See J. Earl Oden, 56 T.C. 569 (1971); Everett Pozzi, 49 T.C. 119 (1967).

      . Taxpayer argues that his debt was owed to the two corporations, not Hyatt, and that Hyatt’s right to offset amounts which it owed Taxpayer against amounts he owed the corporations resulted solely from the liquidation of the corporations, over which he had no control. While Taxpayer may not have controlled the liquidation, it was certainly anticipated. Clause 5-b of the contract provides for cancellation of Taxpayer’s indebtedness to the corporations against Hyatt’s obligation to pay (a) the 29 per cent installment, (b) the January 2, 1963, payment, and (c) the long-term notes. The parties necessarily anticipated liquidation of the two corporations prior to Taxpayer’s payment for the withdrawn assets — the clause allowing the offset is otherwise meaningless.

      . Regardless of whether or not the August 29, 1962, letter agreement contractually accelerated the offset, we think the letter is evidence of the substance of the transaction • — the parties regarded the debts as offset at that time, at least as a practical matter, if not legally.

      . Moreover, we also agree with the Tax Court, see 54 T.C. 698, that characterization of the payments as repayments of an excess down payment would not alter the percentage Taxpayer received in the year of sale. As the total sales price was never reduced, any reduction in the down payment would necessarily be balanced, under the terms of the contract, by an increase in the 29 per cent payment or in the January 2, 1963, payment, in order to pay the total sales price without issuing more notes (which was not done). As the initial fixed payment, the payment due 30 days after audit, and the January 2, 1963, payment are all attributable to the year of sale, the percentage received in the year of sale is constant regardless of how payments are assigned to the three periods.

      . 26 U.S.C. § 1244, so far as pertinent, reads:
      “(a) General Rule. — In the case of an individual, a loss on section 1244 stock issued to such individual or to a partnership which would (but for this section) be treated as a loss from the sale or exchange of a capital asset shall, to the extent provided in this section, be treated as a loss from the sale or exchange of an asset which is not a capital asset.”

      . 26 U.S.C. § 1244(c) (1) (A) reads :
      “ (c) Section 1244 stock defined.-—
      “(1) In general. — For purposes of this section, the term ‘section 1244 stock’ means common stock in a domestic corporation if—
      “(A) such corporation adopted a plan after June 30, 1958, to offer such stock for a period (ending not later than two years after the date such plan was adopted) specified in the plan. . . .”

      . See Treas.Reg. § 1.1244(c)-l(c) (1) ; H. R.Rep.No. 2198, 85th Cong., 2d Sess. 8 (1958), reprinted in 1959-2 Cum.Bull. 709, 714.

      . Under Eger v. Commissioner of Internal Revenue, 393 F.2d 243 (2d Cir. 1968), a corporation’s minutes are adequate to satisfy the requirement that the plan be in writing, and if they otherwise satisfy the statutory prerequisites, will qualify as a § 1244 plan. The Tax Court did not reject Taxpayer’s contention that the minutes of the corporation’s organizational meeting constitute a written plan; rather it held that the plan did not satisfy the statute because it was not a written plan to issue § 1244 stock.

      . It is also curious that, although § 1244 was intended to encourage investors to commit their funds to small business corporations, Godart requires that the corporation have § 1244 in mind. It is not inconceivable that an investor would buy stock due to the § 1244 incentive even though the corporation in which he was investing did not have the section in mind. ■ Such an investor’s purchase of stock would serve the congressional purpose; the Godart requirement, however, would deny him the section’s benefits.

      . See footnotes, 13 and 14, supra.

      . For an interesting and informative discussion on the practicalities and policies which led Congress to pass this statute see L. Ward Wright’s Utilization of Subchapter S and Section 1244 Stock, 12 Western Reserve Law Review 225.

      . The regulations pertaining to Section 1244 were not adopted until October 8, 1960 (T. D. 6495, F.R. 9675), some two and one-half months after the corporation was formed. The first appellate court decision would not appear for eight years, Eger v. C. I. R., 393 F.2d 243 (2nd Cir. 1968).


author: WEIS, Circuit Judge.

text:
    UNITED STATES of America v. Otto Samuel GULLO et al. Appeal of Sheila HOLLOWAY, in No. 73-1941. Appeal of Robert Clement POWELL, in No. 73-1942. Appeal of Joseph BERENATO, in No. 74-1153.
    Nos. 73-1941, 73-1942 and 74-1153.
    United States Court of Appeals, Third Circuit.
    Argued June 14, 1974.
    Decided Aug. 26, 1974.
    As Amended Sept. 18, 1974.

      Michael A. Kaplan, Tomar, Parks, Se-liger, Simonoff & Adourian, Camden, N. J., for appellant in No. 73-1941.
    Arthur J. Abramowitz, Hyland, Davis & Reberkenny, Cherry Hill, N. J., for appellants in Nos. 73-1942 and 74-1153.
    Jonathan L. Goldstein, U. S. Atty., William T. Pizzi, Asst. U. S. Atty., Newark, N. J., for appellee.
    Before STALEY, GIBBONS and WEIS, Circuit Judges.
   OPINION OF THE COURT

WEIS, Circuit Judge.

In the unique circumstances of this case, the defendants were denied a fair trial when an improper question was directed to a witness by the prosecutor who then promised, but failed to call another witness who could correct the situation.

The defendants, Joseph Berenato, also known as “Dragon,” Sheila Holloway and Robert Powell, were each convicted on counts of conspiracy to assault a federal officer and the assault itself. A co-defendant, Otto Gullo, was acquitted by the jury, and the actual perpetrator of the assault, Raymond George Taylor, who was also named in the indictment, pleaded guilty to the conspiracy count before the consolidated trial began.

The indictment grew out of an attempt by John Comey, and undercover federal narcotics officer, to make a “buy” of drugs from the defendant “Dragon” Berenato. The evidence pointed to the conclusion that the defendants were more interested in getting the cash which the agent had displayed during preliminary negotiations than in actually selling him drugs. Agent Com-ey testified that after having had discussions with Berenato early in the evening, he returned to a pre-arranged meeting spot in a parking lot adjacent to an apartment building in Lindenwold, New Jersey. At that time, Taylor got into the agent’s car and directed him to another parking lot nearby. Once there Taylor brandished a gun and demanded the agent’s money. Comey was able to get to his own revolver and shot Taylor several times.

During the course of redirect examination of the agent, the prosecutor posed the following question:

“There was some testimony on cross-examination directed to you asking you whether you shot Raymond George Taylor in the back while he was trying to run away. Are you aware that on May 21, 1973, Raymond George Taylor entered a plea of guilty?”

Defense counsel promptly objected and the trial judge, after a side bar conference, instructed the jury to disregard the question and whatever part of the answer might have been given. The jury was then excused for luncheon recess, and the defendants promptly moved for a mistrial. After some discussion, the trial judge deferred ruling until after the recess.

When the court reconvened, the Assistant United States Attorney stated, “I can circumvent the necessity of having argument on this. I now represent to the court that I will bring in George Taylor as a witness and he will so testify and there will be no Bruton problem because he will testify and all defense counsel will have an opportunity to cross-examine him as to the truth of that statement.” After further argument on the legal points involved, the court adjourned to provide ■ counsel the opportunity for additional research.

On the following day, the prosecutor continued to present evidence and then rested the government’s case without calling Taylor. The trial judge, sua sponte, then referred the jurors to the objectionable question and instructed them, inter alia, “ . . . the fact that the defendant, Raymond George Taylor, who is named in the indictment, has pleaded guilty ... is not evidence of the guilt of these four defendants »

The Motion for Mistrial was renewed, and during argument the Assistant United States Attorney stated that he had decided not to call Taylor because the prosecutor had come to the conclusion that curative instructions would be legally adequate to remove any prejudice resulting from the improper question.

The trial judge refused the motion for mistrial on the basis of the instructions which he had given to the jury and stated that the defendants were free to have Taylor as their witness, although on the previous day their counsel had indicated that they did not wish to call him. The judge stated for the record that Taylor had apparently been under the influence of alcohol or drugs on the previous day and seemingly was still in that condition but that he could be brought in the following day for testimony.

After a noontime conference with Taylor, defense counsel put him on the stand in the late afternoon, and his testimony continued through the following morning. Taylor repudiated his guilty plea and generally was a most unimpressive witness. In the charge to the jury, the trial judge again cautioned about the effect of Taylor’s plea.

It is the general rule in this Circuit that while the evidence of a guilty plea by a co-conspirator is not admissible, United States v. Toner, 173 F.2d 140 (3d Cir. 1949), under some circumstances curative instructions are adequate to remove the harm where the pleas are to substantive counts. United States v. Farries, 459 F.2d 1057 (3d Cir. 1972), cert. denied, 409 U.S. 888, 93 S.Ct. 143, 34 L.Ed.2d 145; United States v. Restaino, 369 F.2d 544 (3d Cir. 1966). The guilty plea to a conspiracy charge carries with it more potential harm to the defendant on trial because the crime by definition requires the participation of another. The jury could not fail to appreciate the significance of this and would realize, as the court said in a similar case, United States v. Harrell, 436 F.2d 606, 614 (5th Cir. 1970), that “it takes two to tango.” A plea by a co-conspirator thus presents a unique situation which may require the courts to scrutinize more closely the purported remedial effect of instructions to the jury. However, we need not decide here whether there should be a distinction between cases where the plea is to a substantive, rather than to a conspiracy count because the combination of events which occurred is enough to necessitate the grant of a new trial.

The prosecutorial question was improper, and the failure to abide by the unequivocal representation to call Taylor as a government witness compounded the prejudice to the defense. The record reveals, and it was amplified at oral argument before this court, that George Taylor was far from being an appealing witness. Though called by Dragon’s counsel, George was not a saint. Defense counsel had made it clear that they did not intend to call him and, absent the necessity to counter the prejudicial question, would not have done so.

We cannot fault defense counsel for their unwillingness to accept the premise that curative instructions would remove the issue from the jurors’ minds. The decision to call Taylor to the stand and meet the issue is understandable, but the defendants should not have been put in the positiqp of weakening their case because of prosecutorial dereliction. Had the unfortunate question not been asked, it seems quite possible that the trial would have proceeded without Taylor’s testimony. Neither side would have been harmed, and we may assume that the truth-finding process of the trial might have been aided. It is, after all, the quality and not the quantity of evidence which is important.

While the curative instructions which were given at the conclusion of the government’s case were adequate, they came some twenty-four hours after the inadmissible question had been injected into the case. The delay was induced by the prosecution’s representation that Taylor would be called to testify. Whatever efficacy curative instructions possess cannot help but be weakened by the lapse of time. In addition, the incident was thus recalled to the attention of the jurors, and its import emphasized.

We think the total effect of the improper question, the delay in giving proper curative instructions, and the failure to call the witness as promised, thus pressuring the defense to produce an unwanted and questionably credible witness, combined to make the trial unsatisfactory.

The Assistant United States Attorney told the district court that he was not aware that his question was le-gaily improper. We will accept his representation at face value and will not impute deliberate misconduct to him. Were it otherwise, we would invoke the provisions of § 5.6(b) of the American Bar Association Standards Relating to The Prosecution Function and The Defense Function:

“It is unprofessional conduct for a prosecutor knowingly and for the purpose of bringing inadmissible matter to the attention of the judge or jury to offer inadmissible evidence, ask legally objectionable questions, or make other impermissible comments or arguments in the presence of the judge or jury.”

While we do not find knowing misconduct on the part of the prosecutor, we think it appropriate once more to express our concern with the all too frequent complaints of improper conduct by government attorneys. See the discussion of the problem in United States v. Somers, 496 F.2d 723 (3d Cir. 1974), and United States v. White, 486 F.2d 204 (2d Cir. 1973). Berger v. United States, 295 U.S. 78, 88, 55 S.Ct. 629, 633, 79 L.Ed. 1314 (1934), has been quoted many times, but we think it bears repeating once more:

“The United States Attorney is the representative not of an ordinary party to a controversy, but of a sovereignty whose obligation to govern impartially is as compelling as its obligation to govern at all; and whose interest, therefore, in a criminal prosecution is not that it shall win a case, but that justice shall be done. As such, he is in a peculiar and very definite sense the servant of the law, the twofold aim of which is that guilt shall not escape or inno-

cence suffer. He may prosecute with earnestness and vigor — indeed, he should do so. But, while he may strike hard blows, he is not at liberty to strike foul ones. It is as much his duty to refrain from improper methods calculated to produce a wrongful conviction as it is to use every legitimate means to bring about a just one.”

This is a high standard indeed, but one to which we require conformance and which is accepted with pride by the overwhelming majority of United States Attorneys and their assistants.

We have reviewed the other contentions of the defendants and find that the alleged errors will be obviated by the retrial. A study of the trial court’s charge reveals no error.

The judgments of the district court as to the defendants Berenato, Holloway, and Powell will be vacated, and a new trial will be granted.

      . The stenographic record does not disclose any answer having been made by the witness.

      . Counsel for the Government on appeal did not participate in the trial in the district court.

      . See also United States v. Davis, 487 F.2d 112 (5th Cir. 1973); United States v. Rothman, 463 F.2d 488 (2d Cir. 1972), cert. denied, 409 U.S. 956, 93 S.Ct. 291, 34 L.Ed.2d 504.

      . The prosecutor’s question did not specifically mention a guilty plea to the conspiracy count, but the jury was given the indictment, which still retained the name of Taylor as a defendant, for its use during deliberations. It may reasonably be inferred from this that the jury would assume that he had pleaded to both counts.

      . Although the trial court did instruct the jury soon after the question was asked to disregard it and any answer which might have been given, we find a charge of such a general nature insufficient to meet the test enunciated by this Court in United States v. Newman, 490 F.2d 139, 144 (3d Cir. 1974):
      “At the very least, the district court should have instructed that the testimony regarding [the co-defendant] was no proof whatsoever of [the defendant’s] guilt and that the testimony proferred should be disregarded completely in determining the guilt or innocence of [the defendant].”


author: PER CURIAM:

text:
    Harold WASSERMAN, Petitioner-Appellant, v. The MUNICIPAL COURT OF the ALHAMBRA JUDICIAL DISTRICT, Respondent-Appellee.
    No. 26757.
    United States Court of Appeals, Ninth Circuit.
    Sept. 17, 1974.
    Edwin M. Rosendahl (argued), Beverly Hills, Cal., for petitioner-appellant.
    Robert Lederman, Deputy Dist. Atty. (argued), Los Angeles, Cal., for respondent-appellee.
    Before BARNES, DUNIWAY and WRIGHT, Circuit Judges.
   OPINION

PER CURIAM:

The original opinion in this case is reported at 9 Cir., 449 F.2d 787. On cer-tiorari the Supreme Court vacated and remanded on July 25, 1973, 413 U.S. 910-911, 93 S.Ct. 3036, 37 L.Ed.2d 1025. This court, in the light of this and other remands by the Supreme Court, ordered this case heard in banc. The full court has now returned the case to this panel.

The order appealed from is vacated and the case is remanded to the district court for further consideration in the light of the cases listed in the mandate of the Supreme Court, 413 U.S. at 911, and of the following more recent decisions of that Court: Jenkins v. Georgia, 1974, 418 U.S. 153, 94 S.Ct. 2750, 41 L. Ed.2d 640 (June 24, 1974); Hamling v. United States, 1974, 418 U.S. 87, 94 S.Ct. 2887, 41 L.Ed.2d 590 (June 24, 1974). Vacated and remanded.


text:
    CHIP STEAK CO., INC., and Vao L. Cheney, as President, Plaintiffs-Appellants, v. Earl A. BUTZ, Secretary of Agriculture, et al., Defendants-Appellees.
    No. 73-1776.
    United States Court of Appeals, Ninth Circuit.
    Sept. 23, 1974.
    George A. McKray (argued), San Francisco, Cal., for plaintiffs-appellants.
    Brian B. Denton, Asst. U. S. Atty. (argued), San Francisco, Cal., for def endants-appellees.
    Before HAMLEY and DUNIWAY, Circuit Judges, and NEILL, District Judge.

       The Honorable Marshall A. Neill, United States District Judge for the Eastern District of Washington, sitting by designation.

   OPINION

PER CURIAM:

The judgment is affirmed for the reasons stated in the opinion of the district court, reported in Chip Steak, Inc. v. Hardin, 353 F.Supp. 438 (N.D.Cal. 1973).