author: COTTERAL, Circuit Judge.

text:
    FRANKEL v. NEW YORK LIFE INS. CO.
    No. 390.
    Circuit Court of Appeals, Tenth Circuit.
    Aug. 3, 1931.
    J. M. Grubbs, of Cushing, Okl., for appellant.
    W. F. Wilson, Jr., of Oklahoma City, Okl. (W. F. Wilson and R. E. Owens, both of Oklahoma City, Okl., and Louis H. Cooke, of New York City, on the-brief), for appel-lee.
    Before COTTERAL, PHILLIPS, and McDERMOTT, Circuit Judges.
   COTTERAL, Circuit Judge.

The insurance company was obligated by a policy issued to Sam Frankel to pay his representatives or assigns $10,009 in case of his death, and a double indemnity if it should result solely from an external, violent, or accidental cause. He died on -December 7, 1928, as the result of a gunshot wound on the previous day. The company refused to pay the double indemnity, and this suit was brought by the administratrix to recover it. Her petition alleged the death was due to an external, violent, and accidental cause. The answer of the company was that it was due to suicide.

The ease came on for trial to a jury. The plaintiff rested, after introducing the policy and proofs rendered to the company. The defendant interposed a demurrer to the evidence which was submitted. Thereafter, at plaintiff’s request, the case was reopened, and she introduced further evidence. The defendant then demurred to the entire evidence. The court, after reviewing the facts and citing authorities, decided that the evidence was insufficient to support a finding upon any reasonable hypothesis except of suicide, sustained the demurrer, and rendered judgment for the company.

The plaintiff appeals and assigns six errors for reversal. One of them is that the trial court ruled she had the burden of proof. Three others complain of the admission of evidence, consisting of the reports of two deputies to the sheriff that the case was a suicide, and a letter found in Frankel’s pocket from his brother, dated November 23, 1928, advising him not to quit business, to move to another location, to advertise but not to put on a half price sale, etc. The last two assignments challenge the ruling on the demurrer and the judgment.

The record does not disclose that the burden of proof was imposed on the plaintiff. It is said to have occurred because the court would not first rule whether the plaintiff had need to introduce the additional evidence. But her election to introduce it without exception was a waiver of error.

The main question before us'is whether the trial court erred in withdrawing the ease from the jury and deciding it in favor of the company. This calls for a review of the evidence.

Frankel, formerly a merchant at Yale, Okl., engaged in business at Borger, Tex., in August, 1928. Early on December 6, witness White went to the store to verify an advertisement he had prepared at Frankel’s request for the sale of the stock. He found Frankel unconscious on the floor at the rear end of the store, with a gunshot wound 'in his head, which had entered over the left ear and emerged slightly higher on the right side. He was lying in a curved position, a Colt’s Automatic pistol beside him in the curve near his left hand, and an empty shell from the pistol on the floor at his back. His upper left arm was under the body and the lower arm and hand at right angles to the body. As he breathed, the forearm would work up and down. White placed a guard at the front door, and ran a block to call two of the sheriff’s deputies, who soon came to the store.

A pool of blood of the size of a hat, at Frankel’s head, had increased on his return to three feet. Powder bums were found on the left side of his head, indicating the pistol was fired at close range. He was left-handed. To fire the pistol, it was necessary to have the side safety down, grip the handle, and pull the trigger. It could not be discharged by falling or a blow. The pistol had some blood on it. If it was fired at the left side, the ejected shell would have gone out behind him. The course of the bullet was through a hat box six feet south of Frankel’s head and eight feet from the floor, and it lodged in the ceiling twelve or fourteen feet high and at a point ten feet south of his head. There was a partition across the storeroom, eight feet from the rear, the back door being elevated three steps. Frankel’s head lay toward the rear, and his feet even with the partition door. There was a lot of household effects occupying a space of six by eight feet at a point three feet from his body.

The back door was barred and all the windows were fastened. There was no evidence of a struggle, nothing was disturbed, and on a search no one was found hiding in the store. After the deputies came, $200 or $300 was found in the safe and some money in the cash register.

When Deputy Baird went in the store the previous day to buy a coat, Frankel was not alert to make a sale, as he had been theretofore, but appeared to be in a stupor. When White was there the previous day Frankel was much worried about the business, wished to make a sale, and arranged for the advertisement.

Witness Rosensweig, who had worked for Frankel at Yale and Borger, found him attached to his wife and two children, always in good humor, and without indication he was tired of life. He and his brother had $25,-000 worth of merchandise, at Yale and some merchandise at Cushing. He said Frankel had some trouble in ousting a man from a business lot at Borger. Mrs. Rosensweig testified she was employed in the store until the night of December 6; that after Mr. Turren-tine was there a week earlier, Frankel later told her he had sold to him, and expressed happiness over it, as well as his dissatisfaction with the living conditions at Borger. Several witnesses testified to close associations with him, his attachment to his family, and his cheerful disposition.

Mrs. Ftankel testified he and his brother had considerable property at Yale and Cush-ing, Old.; that the business at Borger was sold and it realized $4,500 over the bills. His stock at Cushing was sold to the brother for $6,000, and he had some corporate stock which had paid a dividend. She also gave an account of his plans on the day of his death, to visit the bank, close up the sale, and go with the family in a car to Amarillo, Dallas, and Tyler, then to Cushing, settle the partnership business there, and start in business at Tulsa. He told the older boy to don a new suit for the trip. She also said he had a happy disposition and loved his family. She was permitted to testify over objection that in the proofs of the death one of her answers was that he shot himself, but she disclaimed knowledge of it as well as of the report of suicide by the doctors and witnesses. He had two other policies in which he first named as beneficiaries his wife or surviving son, next his representatives or assigns, and finally his wife or son.

Appellant invokes the rule that there is a presumption a death is not due to suicide but to accident, and contends that this together with the evidence required a submission of the ease to the jury. The presumption is one- of law. It is indulged because self-destruction is “contrary to the general conduct of mankind; it shows gross moral turpitude in a sane person.” And a party is entitled to the benefit of the presumption, in the absence of evidence respecting the cause of a death. Travelers’ Ins. Co. v. McConkey, 127 U. S. 661, 8 S. Ct. 1360, 1363, 32 L. Ed. 308. But the plaintiff had the burden of proving the fact necessary to establish the liability of the insurance company, and the legal presumption that might aid her could be of value only under circumstances leaving the cause of death in doubt. Supreme Tent K. of M. v. King (C. C. A.) 142 F. 678; New York Life Ins. Co. v. Bradshaw (C. C. A.) 2 F.(2d) 457; New York Life Ins. Co. v. Weaver (C. C. A.) 8 F.(2d) 680; Mutual Life Ins. Co. v. Hatten (C. C. A.) 17 F.(2d) 889; 1 C. J. 496. As was aptly said in Von Crome v. Travelers’ Ins. Co. (C. C. A.) 11 F.(2d) 350, the legal presumption disappears where there is evidence of suicide. In this case, there was an ample showing of enlightening circumstances on the subject.

It was ruled in Mutual Life Ins. Co. v. Graves (C. C. A.) 25 F.(2d) 705, the presumption against suicide is overcome by evidence showing the death was self-inflicted, or facts inconsistent with any reasonable hypothesis of death by accident, or circumstances and conditions leaving no room for- any reasonable hypothesis but suicide, and it is where the facts in any particular ease are disputable or are of such character that different minds might reasonably draw different conclusions therefrom, a question is presented for the determination of the jury. And the practice is well sustained of directing a verdict in favor of an insurance company, when the evidence is inconsistent 'with any reasonable hypothesis but suicide. Supreme Tent K. of M. v. King, supra; New York Life Ins. Co. v. Bradshaw, supra; New York Life Ins. Co. v. Weaver, supra; Davis v. Reliance Life Ins. Co. (C. C. A.) 12 F.(2d) 248; Von Crome v. Travelers’ Ins. Co., supra; New York Life Ins. Co. v. Alman (C. C. A.) 22 F.(2d) 98. There was the same result in this ease, without complaint of the procedure.

Two theories are advanced by appellant’s counsel to show there was an issue for the jury in this case. One is assassination. But it depends wholly on a prior difficulty over the possession of a town lot and it is too remote for serious notice. The other is the assured might have been in the act of removing the pistol for storage with his household effects and might have stumbled at the rear steps and accidentally gripped and discharged the weapon in an effort to regain his balance. But this would have put mere conjecture against substantive evidence of suicide. It is our opinion that the uncontroverted physical facts leave no room for such an issue. We are firmly convinced that the location of the wound, the adjacent powder bums, the course of the bullet, the position of the body and arm, the fact that the assured was left-handed, the acts necessary to fire the pistol, and the place where the pistol and empty shell were found, are so forceful as evidence as not only to render an accidental shooting extremely improbable but to exclude any reasonable conclusion except suicide.

We have not overlooked the contention that there was evidence to support the theory of an accident, consisting of circumstances tending to show that the assured had a composed mental attitude and a motive opposed to self-destruction. But it suffices to say that they are unavailing to detract materially from the showing of undisputed facts which to any reasonable mind are little short of demonstration.

The administratrix was not entitled to have this unfortunate ease submitted to the jury. A finding in her favor could not be allowed to stand, and the trial court would have been required to set it aside, in the exercise of sound judicial discretion. New York Life Ins. Co. v. Weaver, supra; Barrett v. Virginian Ry. Co., 250 U. S. 473, 39 S. Ct. 540, 63 L. Ed. 1092; Small Company v. Lamborn, 267 U. S. 248, 45 S. Ct. 300, 69 L. Ed. 597; Slocum v. New York Life Ins. Co., 228 U. S. 364, 33 S. Ct. 523, 57 L. Ed. 879 ; Gunning v. Cooley, 281 U. S. 90, 50 S. Ct. 231, 74 L. Ed. 720.

There was no reversible error in the admission of evidence to which there was objection. A sufficient reason is that it may be eliminated without affecting the necessary result in this ease.

The action of the trial court must therefore be sustained. We find no sufficient reason for reversing the judgment. It is accordingly affirmed.


source: Caselaw Access Project

author: PHILLIPS, Circuit Judge.

license: Public Domain

text:
    HURT et al. v. NEW YORK LIFE INS. CO.

    No. 400.
    Circuit Court of Appeals, Tenth Circuit.
    Aug. 5, 1931.
    See, also, 35 F.(2d) 92.
    Arnold C. Todd and Austin M. Cowan, both of Wichita, Kan., for appellants.
    Wm. C. Michaels, of Kansas City, Mo., and Richard E. Bird, of Wichita, Kan. (Meservey, Michaels, Blackmar, Newkirk & Eager, of Kansas City, Mo., and Louis H. Cooke, of New York City, on the brief), for appellee.
    Before COTTERAL, PHILLIPS, and McDERMOTT, Circuit Judges.

      For opinion denying rehearing, see — F.(2d) —.

   PHILLIPS, Circuit Judge.

On April 9, 1924, Clayton L. Andrews made application to the insurance company for a $1,000 policy of life insurance. He was examined by the insurance company’s medical examiner on April 12> 1924, and the policy was issued shortly thereafter. On April 28, 1924, he made application to the insurance company for a $5,000 policy of life insurance. The latter application was predicated upon the medical examination of April 12. The second policy was delivered May 6, 1924. The insurance thereunder was made payable to “the executors, administrators or assigns of the insured.” It was assigned to Robert W. and Elmer R. Hurt on May 6, 1924. The insured died June 29’, 1924.

The second application contained the following provision:

“It is mutually agreed as follows: 1. That the insurance hereby applied for shall not take effect unless and until the policy is delivered to and received by the applicant and the first premium thereon paid in full during his lifetime, and then only if the applicant has not consulted or been treated by any physician since his medical examination.”

On April 1, 1926, such assignees filed a suit at law against the insurance company to recover the full amount of the second policy. On April 7, 1926, the insurance company commenced an independent suit in equity against such assignees and Minerva M. Andrews (as “the first person * * * entitled to be named as administrator of the estate of * * * Andrews, deceased”) to cancel such policy. In its complaint the insurance company alleged, as a breach of the above quoted condition precedent, that during the interval between the medical examination and delivery of the second policy insured was afflicted with a malignant bladder ailment and several times consulted and was treated by physicians therefor. On May 12, 1926, the insurance company filed an answer in the law action in which it set up the nonperformance of such condition precedent as an equitable defense, and prayed for a cancellation of the policy.

The second policy contained the following incontestable clause:

“This policy shall be incontestable after two years from its date of issue except for non-payment of premium and except as to provisions and conditions relating to Disability and Double Indemnity Benefits.”

And provided that it should take" “effect as of the twenty-eighth day of April, nineteen hundred and twenty-four.” It will be noted that the equity suit was filed before, and the answer in the law action after, the expiration of the contestable period.

The two cases were consolidated. The trial court dismissed the equity suit on the ground that the insurance company had an adequate remedy at law, and gave judgment on the pleadings for plaintiffs in the law action for the reason that the answer had not been filed until after the incontestable period had expired. The insurance company appealed. The appellate court held that, since the law action was brought by the assignees only, the insurance company had the right to bring an equity suit to protect itself against possible claims of the administra^ tor of the Andrews estate, and that, having initiated .the equity suit within the contestable period, the insurance company was thereafter entitled to the benefit of such contest in the equity suit, or in any other judicial proceedings respecting such policy, upon all and only the grounds of contest set up in such equity suit. It reversed and remanded both eases with instructions to try the law action first, and to dispose of the equitable issues in that action before taking up the legal issues. New York L. I. Co. v. Hurt (C. C. A.) 35 F.(2d) 92. Thereupon the case was transferred to the equity docket and heard on the merits. The court sustained the equitable defense, and entered a decree cancelling the policy.

A copy of the April 28 application was attached to the policy and by express reference was made a part of the insurance contract. The provisions of the application are entitled to the same consideration as if they had been inserted at large in the policy. First National Bank of K. C. v. Hartford Fire I. Co., 95 U. S. 673, 24 L. Ed. 563; Hubbard v. Mutual Res. Fund L. A. (C. C. A. 1) 109 F. 719, 721; New York L. I. Co. v. Wertheimer (D. C. Ohio) 272 F. 730; Person v. Aetna L. I. Co. (C. C. A. 8) 32 F.(2d) 459.

The evidence disclosed that the insured was treated by Dr. Hissem and Dr. Swope for a bladder ailment during the interval between April 12, 1924, the date of the medical examination, and May 6, 1924, the date of the delivery of the second policy. Dr. His-sem diagnosed the disease as a tumor and burned it with electricity. Dr. Swope gave the insured X-ray treatments therefor. An autopsy showed a malignant tumor on the bladder whieh had shrunk in size. Plaintiffs did not meet this evidence but undertook to show that the bladder malady had not contributed to the death of insured.

Counsel for plaintiffs contend that the disease for whieh insured was treated during the period intervening between the date of the medical examination and delivery of the policy did not contribute to his death, and therefore plaintiffs were entitled to recover on the poliey under the provisions of section 40 — 330, Kan. Rev. St. 1923, which reads as follows:

“No misrepresentation made in obtaining or. securing a policy of insurance on the life or lives of any person or persons, citizens of this state, shall be deemed material or render the policy void unless the matter misrepresented shall have actually contributed to the contingency or event on which the policy is to become due and payable.”

The above quoted provision in the second application, which became a part of the insurance contract, created certain conditions precedent to the taking effect of the insurance coverage which are valid and enforceable. Person v. Ætna L. I. Co. (C. C. A. 8) 32 F.(2d) 459; Paine v. Pacific Mut. L. I. Co. (C. C. A. 8) 51 F. 689; Ætna L. I. Co. v. Johnson (C. C. A. 8) 13 F.(2d) 824; New York L. I. Co. v. Griffith (C. C. A. 10) 35 F.(2d) 945; Logan v. New York L. I. Co., 107 Wash. 253, 181 P. 906; New York L. I. Co. v. Wertheimer (D. C. Ohio) 272 F. 730; Federal L. I. Co. v. Wright (Tex. Civ. App.) 230 S. W. 795, 799, 800; Hruska v. Prudential L. I. Co., 203 Iowa, 1165, 211 N. W. 858-9; American Nat. I. Co. v. Wiggins (Tex. Civ. App.) 4 S.W.(2d) 595; American Bankers’ I. Co. v. Thomas, 53 Okl. 11, 154 P. 44; Jones v. New York L. I. Co., 69 Utah, 172, 253 P. 200; note, 17 L. R. A. (N. S.) 1144; 37 C. J. p. 400, § 73.

Where a policy of life insurance contains such a condition precedent, performance (Ellis v. State Mutual L. A. Co., 206 Ill. App. 226; Reese v. Fidelity Mutual L. Ass’n, 111 Ga. 482, 36 S. E. 637; Anders v. Life Insurance Clearing Co., 62 Neb. 585, 87 N. W. 331; Stringham v. Mutual Ins. Co., 44 Or. 447, 75 P. 822) or waiver (37 C. J. p. 400, § 73; Id. p. 403, § 77) thereof is a prerequisite to recovery on such policy.

In the law of contracts, a condition precedent may be either a condition which must be performed before the agreement of the parties shall become a binding contract (13 C. J. p. 564, § 532), or a condition which must be fulfilled before the duty to perform a provision of an existing contract arises. Elson v. Jones, 42 Idaho, 349, 245 P. 95, 96; Lynch v. Stebbins, 127 Me. 203, 142 A. 735; Fox v. Buckingham, 228 Ky. 176, 14 S.W. (2d) 421, 423; Wells v. Smith, 2 Edw. Ch. (N. Y.) 78, 13 C. J. p. 564, § 532; Cavanagh v. Iowa Beer Co., 136 Iowa, 236, 113 N. W. 856. In the latter class of cases, the condition is not a condition precedent to the existence of the contract but is a prerequisite to liability thereunder. Mr. Williston, in his work on Contracts, vol. 2, § 666, says:

“In the law of contracts, conditions may relate to the formation of' contracts or to liability under them. * * * Generally in contracts when reference is made to conditions, what is meant is conditions qualifying liability under a contract or promise, not conditions qualifying the existence of a contract.”

The conditions precedent here involved qualify the liability under, and not the existence of the contract. Therefore, the incontestable clause of the second policy became effective.

After the expiration of the period fixed in such incontestable clause, the insurance company would have been precluded from contesting the policy on any ground not specifically excepted in such clause. Mutual Res. Fund L. Ass’n v. Austin (C. C. A. 1) 142 F. 398, 6 L. R. A. (N. S.) 1064; 37 C. J. p. 542, § 281. Such clause covered non-performance of the conditions precedent in the quoted provision of the second application. Mutual Res. Fund L. Ass’n v. Austin, supra; Head v. New York L. I. Co. (C. C. A. 10) 43 F.(2d) 517, 519; Mohr v. Prudential I. Co., 32 R. I. 177, 78 A. 554, 556; Dibble v. Reliance L. I. Co., 170 Cal. 199, 149 P. 171, Ann. Cas. 1917E, 34. Had.the insurance company failed to initiate a contest within the contestable period, it would have waived the non-performance of such conditions precedent.

While the failure of the insured to advise the insurance company of the events affecting the risk which transpired between the date of the application and the date of the delivery of the second policy was a misrepresentation of a material fact (Stipcich v. Metropolitan L. I. Co., 277 U. S. 311, 48 S. Ct. 512, 72 L. Ed. 895; New York L. I. Co. v. Gay (C. C. A. 6) 36 F.(2d) 634), such events also effected a non-performance of a condition precedent. Neither such condition nor the non-performance thereof was waived by the insurance company, and such non-performance precluded recovery on the policy unless such condition is within the purview of the Kansas statute quoted above. In the ease of Mutual L. I. Co. of N. Y. v. Mandelbaum, 207 Ala. 234, 92 So. 440, 29 A. L. R. 649, the court held a similar condition in a contract of insurance to be within section 4572, Ala. Code 1907, which reads as follows:

“No written or oral misrepresentation, or warranty therein made, in the negotiation of a contract or policy of life insurance, or in the application therefor or proof of loss thereunder, shall defeat or void the policy, or prevent its attaching, unless such misrepresentation is made wifh actual intent to deceive, or unless the matter misrepresented increase the risk of loss.”

The court held that in insurance law the word “warranty” and the term “condition precedent” are used interchangeably, and that the word “warranty” in such statute embraced a condition precedent. It will be noted that the Kansas statute contains neither the word “warranty” nor the term “condition precedent.” The Missouri courts in a number of cases have held that similar provisions in contracts of insurance are within the purview of section 6142, Mo. Rev. St. 1919, which reads as follows:

“No misrepresentation made in obtaining or securing & policy of insurance on the life or lives of any person or persons, citizens of this state, shall be deemed material, or render the policy void, unless the matter misrepresented shall have actually contributed to the contingency or event on which the policy is to become due and payable, and whether it so contributed in any ease shall be a question for the jury.”

See Salts v. Prudential I. Co., 140 Mo. App. 142, 120 S. W. 714; Lynch v. Prudential I. Co., 150 Mo. App. 461, 131 S. W. 145; Frazier v. Metropolitan L. I. Co., 161 Mo. App. 709, 141 S. W. 936; Dodt v. Prudential I. Co., 186 Mo. App. 168, 171 S. W. 655; Benson v. Metropolitan L. I. Co., 161 Mo. App. 480, 144 S. W. 122; State ex rel. John Hancock Mut. L. I. Co. v. Allen, 313 Mo. 384, 282 S. W. 46; Clark v. National L. & A. I. Co. (Mo. App.) 288 S. W. 944; Jenkins v. Covenant Mut. L. I. Co., 171 Mo. 375, 71 S. W. 688; Mathews v. Modern Woodmen of America, 236 Mo. 326, 139 S. W. 151, Ann. Cas. 1912D, 483; Bohannon v. Illinois B. L. Ass’n (Mo. App.) 20 S.W.(2d) 950. These cases are predicated on the theory that such statute abolished the distinction between conditions precedent and mere representations. We find nothing in the language of the statute to indicate such a legislative intent. There is a manifest distinction between a condition precedent and a representation of fact. The Missouri statute contains the word “misrepresentation” and omits the word '.'warranty” and the term “conditions precedent.” Likewise the Kansas statute, by its express language, is limited to misrepresentations made in obtaining or securing a policy of insurance.

It is our conclusion that a condition precedent is not embraced within the word “misrepresentation” and is not within the purview of the Kansas statute. See Barker v. Metropolitan L. I. Co., 188 Mass. 542, 74 N. E. 945; Logan v. New York L. I. Co., supra; Southern Surety Co. v. Benton (Tex. Com. App.) 280 S. W. 551; note, 29 A. L. R. 656, 658, 659; Federal L. I. Co. v. Wright (Tex. Civ. App.) 236 S. W. 795, 800.

The decree is affirmed with costs.


author: STONE, Circuit Judge.

text:
    CENTRAL LIFE ASSUR. SOC., MUT., v. COMMISSIONER OF INTERNAL REVENUE.
    No. 9134.
    Circuit Court of Appeals, Eighth Circuit.
    July 13, 1931.

      Donald Evans, of Des Moines, Iowa (Richard S. Doyle, Charles D. Hamel and John Enrietto, all of Washington, D. C., Carr, Cox, Evans & Riley, of Des Moines, Iowa, and Hamel, Doyle, Park & Saunders, of Washington, D. C., on-the brief), for petitioner.
    A. G. Divet, Sp. Asst, to Atty. Gen. (G. A. Youngquist, Asst. Atty. Gen., Sewall Key, Sp. Asst, to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and R. N. Shaw, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., on the brief), for respondent.
    Before STONE and GARDNER, Circuit Judges, and MARTINEAU, District Judge.
   STONE, Circuit Judge.

This is a petition to review an order of the Board of Tax Appeals sustaining the Commissioner in the redetermination of deficiencies in the taxes of the petitioner for the taxable years 1921 and 1923 to 1926, inclusive.

The petitioner presents here but one issue. That issue is whether the income covered by these deficiency assessments was truly the income of the petitioner, or was income of stockholders in a stock insurance company which petitioner was organized to take over.

The facts are as follows: The Central Life Assurance Society of the United States was a stock company under the laws of Iowa, doing a life insurance business on both the nonpartieipating and the participating plans. The petitioner, Central Life Assurance Society of the United States (Mutual) is a mutual life insurance company organized to do only a mutual life insurance business. The latter company was organized for the purpose of taking over the assets and business and assuming the liabilities of the former. This was done by a contract of May 15, 1919. Provisions of that contract, here essential, are as follows. The purchasing company was to receive all of the assets and to assume all of the liabilities of the stock company with full power to collect premiums and maintain the insurance of the stock company then in force. A further consideration from the purchaser was the payment to the then stockholders of the stock company of the earnings from the nonpartieipating business thus conveyed. The provision of the contract covering this latter matter is as follows:

“That in further consideration of the transfers and promises of the Stock Company, the said Mutual Company agrees that it will pay to the persons hereinafter specifically mentioned, who are all the stockholders of the said Stock Company, in such proportions as are herein indicated, any earnings there may be for a period of twenty-two years from the date hereof, from the non-participating business hereby and hereunder transferred to such Mutual Company.
“For that the earnings from such nonparticipating business may be determined, the Mutual Company agrees that it will maintain a separate department for such business, in which department shall be shown:
“(a) The gain or loss from loading from such non-participating business. •
“(b) The gain or loss from mortality from such non-participating business.
“(e) The gain or loss from interest earnings from such non-participating business.
“(d) The gain or loss from all other sources from such non-participating business.
“(e) Total surplus of non-participating department.
“That prior to February 15, 1929, and prior to such date in each year thereafter for a period of twenty-two years, the said Mutual Company shall make up a gain and loss exhibit, as of date J anuary 1st of such year, in such department, and shall on February 15, 1921, and on February 15th of each year thereafter during such period, distribute all surplus, if any in excess of $109,000, as shown by such exhibit to the persons hereafter named, their heirs, personal representatives, or assigns, the whole amount to be distributed being represented by 2009 and the distribution to each person, his heirs, personal representatives or assigns so named being in the proportion that the amount set out opposite to his name herein bears to 2000.”

The reserve of $100,000, stated in the last paragraph of the above quotation was set up at the suggestion of the insurance department of the state of Iowa as a reserve against excess liability upon the nonparticipating policies. The period of twenty-two years was selected as the time within which it was estimated that the entire nonparticipating business would be liquidated through mortality, lapse, or otherwise.

In accordance with the above contract, the assets were conveyed and a separate department was maintained by the mutual company for the purpose of carrying out the above-quoted provision of the contract. The deficiencies covered by this controversy are the surplus earnings of the nonpartieipating insurance which were paid over, under the above contract, to the stockholders of the stock company.

The issue here is whether those earnings constituted income of the petitioner, in a taxable sense, or were income of the stockholders. The contention of the petitioner is that it was a trustee of such earnings for the benefit of the stockholders.

Tax laws are essentially practical in their purposes and application, and the federal income tax laws are no exception. While, for purposes of convenience and certainty in collection of such taxes, it is sometimes provided that those who collect income for others shall pay therefrom the taxes thereon, yet a cardinal purpose of the income tax laws is to tax the income to the person who has the right or beneficial interest therein, and not to throw the burden upon a mere collector or conduit through whom or which the income passes. Shellabarger v. Commissioner, 38 F.(2d) 566, 567 (C. C. A. 7); Young v. Gnichtel, 28 F.(2d) 789 (D. C. N. J.); O’Malley v. Eaton, 24 F.(2d) 436 (D. C. Conn.); also compare U. S. v. Robbins, 269 U. S. 315, 327, 328, 46 S. Ct. 148, 70 L. Ed. 285; Kaufmann v. Commissioner, 44 F.(2d) 144, 146 (C. C. A. 3); Mitchel v. Bowers, 15 F.(2d) 287, 289 (C. C. A. 2). It is also a basic principle in the application of such laws that substance and not mere form be regarded as governing. Having the above principles in mind, it seems to us that the Board of Tax Appeals was in error in deciding that the above income was really and. truly the income of petitioner. It is unnecessary to determine whether the relationship here is technically a fullelothed trust or is something else, although the facts here may well be held to establish a trust relation as to this income. Barnes v. Alexander, 232 U. S. 117, 34 S. Ct. 276, 58 L. Ed. 530. The undisputed fact is that the petitioner bound itself to pay to designated persons “any earnings there may be for a period of twenty-two years from the date hereof, from the nonparticipating business hereby and hereunder transferred,” and that a method of determining those earnings, which is apparently fair and sincere and workable, is set forth in the contract. Also, that under such plan, the earnings of the nonpartieipating business were segregated as much as the nature of the business would permit and were handled in a separate department organized and maintained for that purpose. These earnings never became the absolute property of petitioner, and it could lawfully do with them but one thing, which was to pay them over in accordance with the contract. It secured no beneficial interest whatsoever from them. There was as complete a segregation of these earnings as could possibly be made under the circumstances. The facts of this ease are somewhat analogous to those in the Bettendorf Case, recently decided by this court in an opinion by Judge Gardner. Bettendorf v. Commissioner, 49 F.(2d) 173.

The order of the Board of Tax Appeals should be and is reversed, and the cause remanded, with instructions to enter an order sustaining the contention of petitioner and abating these taxes.


author: KENYON, Circuit Judge.

text:
    REED v. UNITED STATES.
    No. 9120.
    Circuit Court of Appeals, Eighth Circuit.
    July 23, 1931.

      Walter F. Maley, of Des Moines, Iowa, for appellant.
    Ray C. Fountain, Asst. U. S. Atty., of Des Moines, Iowa (Ross R. Mowry, U. S. Atty., of Newton, Iowa, and Frank F. Wilson, Asst. U. S. Atty., of Mt. Ayr, Iowa, on the brief), for the United States.
    Before KENYON, BOOTH, and GARDNER, Circuit Judges.
   KENYON, Circuit Judge.

Appellant was convicted on both counts of an indictment charging that he unlawfully, knowingly! and feloniously retained in his possession with intent to convert to his own use certain property of the United States, consisting of harness sets and parts thereof, knowing the same to have been stolen from the United States.

The assignments of error argued and relied on charge as error:

(a) Improper cross-examination of defendant.

(b) Refusal of the court to strike an alleged prejudicial answer on the cross-examination of government witness Burris.

(e) Erroneous admission of government exhibits.

(d) Failure of the court to instruct on certain phases of the'case.

(e) Not sustaining the motion for an instructed verdict made at the close of the government’s ease, and also after, the testimony had all been introduced.

These in their order.

The claimed error as to cross-examination is this: When appellant was on the stand he testified that he did have certain army harness in his possession, but that he had purchased same at Fort Des Moines, at Camp Dodge, and in the City of Des Moines; that he had not received any army harness within the last three years knowing it to have been stolen. He was asked on cross-examination a number of questions concerning the meaning of the contents of a certain letter which had been admitted in evidence and which he testified he had written to one Virgil Reynolds concerning certain harness which was part of the property referred to in the indictment but concerning which he had not been interrogated on the direct examination. This letter is as follows:

“Mr. Virgil Reynolds. Dear Friend:
“I set self to let you know that I am very sad to think that the best friend I ever had is mad. Now Virgil, please don’t be mad at me. I am not to blame. That boy is the one that done it. Don’t be mad at Lula, she is a good woman. I love her better than any one on earth. Now I thought it was salvage stuff. They told me it was. So please do not hold me for all of it. I have always tried to play straight; Just because the boy wanted to try and be smart, just because he don’t like me. Now Virgil if I don’t have to go to the pen I will pay all the boys their money back. The set that Dixon got was a set that I bought at the sale so he will get them back. I wish you knew how I felt when I couldn’t get you to. talk to me.
“Tours, Jack to Yirgil.”

References in this letter to “salvage stuff” and going “to the pen” tend strongly to contradict the testimony he liad given as to where he had purchased the sets of harness which had been found in his possession and the honesty of such possession. Certainly the cross-examination tended to impeach the statements made by defendant on his direct examination.

This court has not hesitated to reverse convictions where the cross-examination of a defendant was so unwarranted and unfair as to transgress well-established rules of evidence and result in an unfair trial. Haussener v. United States (C. C. A.) 4 F.(2d) 884; Wilson v. United States (C. C. A.) 4 F.(2d) 888. We are satisfied this examination did not so transgress.

When a defendant takes the stand in Ms own defense, he subjects Mmself to cross-examination and impeachment to the same extent as any other witness in the same situation, but not to a greater extent. Tucker v. United States (C. C. A.) 5 F.(2d) 818. We think the cross-examination concerning the Reynolds letter was entirely witMn the bounds of legitimate cross-examination.

As to the alleged error of the court in refusing to strike a portion of the answer of one Burris, a stepson of appellant, who entertained very hostile feelings 'towards him, which appellant seems cordially to have reciprocated, we may say that Burris testified on cross-examination that the defendant chased him off the. farm with a gun. Then followed this: “Q. In any event, you left the place? A. Yes, I left, and he said if I ever came back, he would kill me.” Appellant’s counsel moved to strike out the answer as not responsive to the question. Of course, the words in the answer, “Yes, I left,” were 'entirely responsive, and counsel did not segregate the part he desired stricken as not responsive. It was not error to refuse to strike the entire answer. West v. United States (C. C. A.) 15 F.(2d) 916; Chicago G. W. Ry. Co. v. McDonough (C. C. A.) 161 F. 657. Under the circumstances presented showing that the appellant had chased the stepson, Burris, off the place with a gun, the statement that Ms stepfather said if he ever came back he would kill Mm could hardly be considered prejudicial. Where one person is chasing another with a gun it is quite natural to assume that the performance was not merely in the interest of exercise, and a statement from the pursuer that if the pursued returned he would kill him adds but little to the situation.

It is insisted that certain exMbits designated as “A to A-l,” inclusive, and consisting of sets of harness and parts thereof, were erroneously admitted in evidence; that they were not sufficiently identified. At the close of the government’s case on May 8, 1936, Counsel for appellant with reference to these exhibits said:

“Mr. Maley: Before maHng any objection to the several exMbits that have been offered I should like to have a little time to look them over.
“The Court: You can reserve the right to look them over this evening.”

On May 9, 1936, appellant filed formal objection to the introduction of Exhibits A to A-l, inclusive.

The court ruled as follows: “The Court: The motions filed by the Defendant are overruled by the Court and exceptions allowed. There is so much confusion about the exMbits that it is impossible for me to tell what should stay in and what should go out, but if you will pick out some particular one that you feel there is no foundation for in the evidence, I will consider it.”

It is to be noted that the court called the attention of counsel specifically to the confusion about the exhibits and asked Mm to pick out the particular ones that he was objecting tó, and counsel agreed to renew the matter later, which was not done. It is to be noted also that considerable testimony with reference to each of these exhibits was introduced without objection. The exMbits were in the courtroom. The jury saw them and heard the evidence concerning them, wMch identified the harness as those found on appellant’s place. Only one of the exMbits went to the jury room and to this appellant made no objection. The jury had complete information concerning these exMbits before the offer was made to introduce them in evidence. Some of them were clearly admissible. If others were not, there could be no prejudice under the circumstances shown resulting from their admission.

It is urged in argument that certain assignments of - error relative to the instructions of the court should be considered. No instructions were requested by defendant’s counsel and no exceptions were taken to tbe instructions. These assignments allege error in the court not properly instructing on the question of reasonable doubt, in not stating the correct rule relative to the credibility of witnesses, and in failing to instruct the jury that the government was required to- prove the essential elements charged in count 2. It is argued that notwithstanding the fact that no exceptions were taken to the alleged failure of the court to instruct as to reasonable doubt and the alleged erroneous instructions of the court on other subjects, that the errors are so apparent that this court should consider them. An appellate court will notice plain errors not excepted to when it is necessary to prevent a miscarriage of justice. United States v. Rhodes (C. C. A.) 49 F.(2d) 228. Such situation is not presented here. In the first place, the court clearly instructed on the subject of reasonable doubt and credibility of witnesses; and, secondly, there was in our judgment no miscarriage of justice in this case.

The point apparently relied on as of substance is the failure of the court to instruct a verdict for appellant either at the close of the government’s testimony or at the close of all the testimony. This requires some review of the evidence. Appellant was a farmer living near the army post at Port Des Moines, and operating a 200-acre farm. The evidence shows that soldiers from the army post frequently visited this farm and there is testimony that one of them named Shaw brought army harness there at least twice, and other soldiers had been seen coming to the farm with sacks of harness. Parties from near and far were purchasing sets of harness from appellant. In March, 1929', one Hess came thirty miles to this farm and bought a set of new United States army harness from appellant for $20. Later he returned and bought some halters. Virgil Reynolds, hereinbefore spoken of, purchased a set of new United States army harness for $20, and later bought some halters. Other parties who purchased harness were one Barger, who lived thirty miles south of Des Moines. He paid $25 for a set, and on it were brass marks, “U. S.,” similar to those appearing on army harness; one Samuelson bought a set of army harness; also the witness Dixon. The standard price for a new set of harness seemed to be $20, although in some instances $25 was secured. These prices paid were much less than such harness could be bought for at any other place, and purchasers were informed by appellant that he could sell harness cheaper than they could send off and get it. Appellant seemed to do a flourishing business during the year 1929 in selling army harness. In that year the Fourteenth Cavalry stationed at Port Des Moines were short some twenty sets of army harness, and in December, 1929, were short six pairs of lines. In January, 1930, a raid was made on the farm occupied by defendant by two deputy sheriffs of Polk county, and Captain Bryant, Provost Marshal at Port Des Moines, and a large quantity of army harness was found by these officers, some in an upstairs room of the house, some in the bam and granary under lock and key, which key was in the possession of appellant. Some harness was found by other parties on other pajtfs of the farm. A number of these sets of harness found in the barn and granary had yellow hames, which was the mark adopted by the Fourteenth Cavalry at Port Des Moines, and was not adopted elsewhere. Captain Bryant testified concerning some of the harness found ,'as follows: “The harness upon Exhibit L, including Exhibits M, 1ST, O, P, T, U and B, have been in my possession since tbe date it was seized, January 13, 1930. It is government harness and differs from ordinary harness by its stamps and its style, a different type of traces and breeching. I can identify some of the harness as coming from Port Des Moines by the yellow hames. That is harness belonging to 14th Cavalry. When component parts of harness, such as hames and other pieces, are assembled and fitted to a mule in the wagon train, or a horse, the cavalry paints their hames yellow; the artillery paints their hames red. It is the first Post I have been in that has adopted that method, and would therefore indicate to me that the harness is the property of the 14th Cavalry. Other markings on the harness indicating it was government property are the brass stampings here U. S. and stamp of U. S. on the leather. Por instance, these lines, Q. M. D., Jefferson Depot, 1927, Inspector’s, initials, J. E. K., made in 1927, and is stamped U. S. That appears on Exhibit N. The same stamp appears upon Exhibit T. Exhibit N is one part of a’line, and Exhibit T is the other part of a line.”

Witness Bailey, connected with the United States Army, who had a good deal to do with the Fourteenth Cavalry harness, testified: “Don’t know of any government sales of harness at Port Des Moines during that time. I was sergeant under Captain Slider when he had charge of the transportation pool from August, 1929, until I was discharged January 14th. In December, 1929, I lost 6 pairs of lines, 2 sets of wheel, and 4 sets of lead. Exhibits Z1 and Z2 are samples of the lines issued at that time. These are from Port Des Moines and are a part of the 40 sets issued to me at the time. Of these 40 sets, 6 pair were missing.”

Defendant on the stand admitted having sets of government harness and parts thereof, which he claimed he had bought at sales at Port Des Moines, Camp Dodge, and in the city of Des Moines. He testified: “During the last three years, I have not purchased any harness or sets of harness or pieces of harness, or government property of any kind, from any officers or soldiers at the Army Post at Port Des Moines or any of the Exhibits which are scattered throughout the court room. Have not paid any money for harness or government property during the last three years to any officer or soldier. Neither purchased nor received from any officer or soldier at the Army Post at Port Des Moines, any harness or government property of any kind within the last three years which I knew to have been stolen property.” .

The testimony disclosed that no new harness was ever sold at Port Des Moines; that some old leather was sold as salvage. It further showed there were no sales of harness at Camp Dodge. Appellant testified that at an army post sale he put up a $500 certified check, but he had not looked for the check and did not produce it in the trial, although he implied that he had it at home. As to the harness he sold Dixon, he testified he got it at the Hull Brothers sale in 1928 and gave a check for it, but he did not have the canceled cheek in court. JThe explanation of appellant as to his possession of government harness evidently did not impress the jury. It is argued by counsel for appellant that all these circumstances merely arouse a suspicion, and that a defendant eannot be convicted upon speculation or conjecture. That is true. This evidence, however, is productive of more than mere suspicion. We do not see how an unprejudiced mind can review the evidence and come to any other conclusion than that the appellant was guilty beyond any reasonable doubt of the crimes charged in the indictment. The case seems free from prejudicial error.

The judgment is affirmed.


author: PARKER, Circuit Judge.

text:
    C. W. DENNING & CO. v. SUNCREST LUMBER CO.
    No. 3128.
    Circuit Court of Appeals, Fourth Circuit.
    July 28, 1931.

      Felix E. Alley, of Waynesville, N. C. (S. W. Black, of Bryson City, N. C., A. Hall Johnston, of Asheville, N. C., E. P. Stillwell, of Sylva, N. C., and Alley & Alley, of Waynesville, N. C., on the brief), for appellant.
    Thomas L. Johnson and J. Bat Smathers, both of Asheville, N. C. (Thomas S. Rollins, Jr., of Asheville, N. C., on the brief), for ap-pellee.
    Before PARKER, Circuit Judge, and McCLINTIC and ERNEST F. COCHRAN, District Judges.
   PARKER, Circuit Judge.

This is an appeal from a judgment on promissory notes given for the purchase price of timber. The plaintiff, the Suncrest Lumber Company, was the seller of the timber, and the defendant, C. W. Denning & Company, was the purchaser. Defendant admitted the execution of the notes, but pleaded by way of counterclaim fraud and false warranty in the sale of the timber. The jury returned a verdict for plaintiff for the sum of $12,500, being half of the amount sued for; and from judgment thereon defendant has appealed.

The pertinent facts may he briefly stated: Plaintiff, being the owner of a large tract of timber land in Western North Carolina, entered into a written contract agreeing to sell and convey 'to the defendant the merchantable timber thereon, excepting, however, the pulp and extract wood, the hemlock and spruce timber, and so much of the chestnut-timber as might not be required to complete the total of 20,000,000 feet sold to- the defendant. There was no warranty as to quantity; but the contract described the timber sold as “twenty million feet of merchantable timber” on the tract of land described, and the purchaser agreed to pay therefor $100,-000. The contract shows that this amount 'was based upon the assumption that the purchaser was obtaining 20,000,000 feet under the contract and was paying for same at the rate of $5 per thousand feet; $50,000 of the purchase price was paid in cash and notes were executed for the remainder. Two of these, amounting to $25,000, remained unpaid at the time of the institution of the action and plaintiff sought judgment for that amount.

At the time the defendant was negotiating for the purchase of the timber, plaintiff’s manager, one Gaskill, stated to the officer of the defendant conducting the negotiations in its behalf that he believed the boundary of timber to contain 20,000,000 feet. He stated also that it had been cruised by one Lemieux, whose cruise showed 36,000,000 feet, but that he thought that estimate too high. A copy of Lemieux’s cruise was furnished to defendant ahd its representatives made a visit to the timber and looked it over, without cruising or estimating it, however, for the purpose of determining upon methods of operation. Lemieux seems to have been highly regarded by both parties, and his cruise apparently satisfied them that there was at least 20,000,-000 feet of timber on the land. There is no evidence that the plaintiff’s manager used the cruise of Lemieux for the purpose of deceiving the agents of defendant, that he made any false representations of fact, or that he expressed any opinion which he did not honestly entertain.

After the execution of the contract, defendant entered and began cutting timber upon the land, and by April, 1929, had cut approximately eight and one-half million feet therefrom and had paid $75,000 on the purchase price. It then ceased operations because of the condition of the lumber market, which had declined, and because it had on hand a large quantity of lumber whieh it was unable to sell. Shortly thereafter, its mill was destroyed by fire. It failed to pay the notes given for the remainder of the purchase price and, when suit was instituted by plaintiff, pleaded that there was a deficiency in the timber sold entitling it to a cancellation of the notes outstanding and to a recovery by way of counterclaim of payments already made in excess of the value of the timber conveyed. Defendant introduced evidence showing that the merchantable timber on the boundary did not exceed 15,000,000 feet. The evidence of plaintiff, on the other hand, showed that it was well in excess of 20.000. 000 feet.

The trial judge charged the jury that there was no evidence of fraud and withdrew that issue from their consideration. He also withdrew defendant’s claim of damages on account of loss of prospective profits on the deficiency in the timber conveyed. He instructed the jury that there was no warranty of quantity, in the sale o'f the timber, but further instructed them that if they should find that there was less than 20,000,000 feet, defendant would be entitled to recover for the shortage at the rate of $5 per thousand feet and would be entitled to credit the amount of the recovery on the notes sued on and have judgment against the plaintiff for the balance if any. The jury returned a verdict for plaintiff for the sum of $12,500, which under the charge amounted to a finding by them that there was a shortage of 2,500,000 feet. Three questions are presented by the appeal: (1) Whether there was error in withdrawing the issue of fraud from the consideration of the jury; (2) whether there was error in withdrawing from consideration on the issue of damages defendant’s claim to prospective profits on the timber as to which there was a deficiency; and (3) whether there was prejudicial error in the instruction that there was no warranty as to the quantity of the timber sold. We think that all of these questions must be answered in the negative.

Defendant’s contention as to fraud must fail because there is no evidence of scienter or fraudulent intent. There is evidence, it is true, that plaintiff’s manager stated to the representative of defendant that there was 20.000. 000 feet of merchantable timber on the land; but the evidence shows that he stated this as a mere estimate or opinion, and there is no evidence that he did not honestly entertain such opinion. On the contrary, the evidence leads irresistibly to the conclusion that he did entertain it both at the time the opinion was expressed and also at the time of the trial. He furnished defendant’s representative with copy of the Lemieux cruise showing that the amount.of timber on the land was largely in excess of 20,000,000 feet, but at the same time warned him that he regarded this estimate as high and invited investigation. Expressions of opinion and estimates by one having peculiar knowledge of the facts of a situation, or in position to have such knowledge, may in some circumstances amount to fraud; but before they can be deemed fraudulent it must appear that they were made with knowledge of their falsity or in reckless disregard of truth. They can never be deemed fraudulent where the party making them honestly believes them to be true and has a reasonable basis for such belief.

A case directly in point is the recent decision of this court in Halsey v. Minnesota-South Carolina Land Co. (C. C. A. 4th) 28 F.(2d) 720, 722, where the question is fully discussed in the light of the controlling authorities. In that case it was alleged that plaintiff had purchased certain timber rights from defendant because of representations by the latter that the timber standing on the tracts of land involved exceeded 20,000,000 feet; that at the time of the representations defendant furnished plaintiff with the field note book of a timber estimator who shortly before had made an estimate for defendant, showing that" there were some 19,250,000 feet of timber on the land; that defendant assured plaintiff that these figures were conservative, that the timber actually on the land would exceed the amount shown by the figures by 20 per cent., and that the amount of the timber was approximately 24,000,000 feet. It was alleged that, as a matter of fact, there were only 12,652,194 feet of timber on the land and that plaintiff had been greatly damaged by reason of the false representations of the defendant. In sustaining a demurrer to the complaint, we said: “The complaint states no cause of action ex delicto, and this because there is no averment that the representations relied on were false to the knowledge of defendant or its agents, or that they were made recklessly as positive assertions without knowledge of their truth or falsity, or that they related to matters peculiarly within the knowledge of defendant or its agents. It is true, of course, that in an action on the case for false warranty, which is an action sounding in tort, it is not necessary to allege or prove scienter. Shippen v. Bowen, 122 U. S. 575, 7 S. Ct. 1283, 30 L. Ed. 1172; Schuchardt v. Allen, 1 Wall. 359, 368, 17 L. Ed. 642. ■ But this cannot be maintained as an action for false warranty, because, as shown above, there was no warranty. The only question which remains, therefore, is whether in an action for damages for false' representation it is necessary to allege and prove scienter. In a few of the states, unquestionably, the action can be maintained without such allegation or proof. 12 R. C. L. 347; note 16 Ann. Cas. 646 et seq. But it is equally clear that under the rule settled by the overwhelming weight of authority, which is the rule in South Carolina as well as in the federal courts, such allegation and proof are necessary. State v. Bolyn, 143 S. C. 63, 141 S. E. 165 at page 173; Bromonia Co. v. Greenwood Drug Co., 78 S. C. 482, 59 S. E. 363; Poag v. Charlotte Oil Co., 61 S. C. 190, 39 S. E. 345; Gem Chemical Co. v. Youngblood, 58 S. C. 56, 36 S. E. 437; Chisholm v. Gadsden, 1 Strob. [S. C.] 220, 47 Am. Dec. 550; Munro v. Gairdner, 3 Brev. [S. C.] 31, 5 Am. Dec. 531; Cooper v. Schlesinger, 111 U. S. 148, 4 S. Ct. 360, 28 L. Ed. 382; Erwin v. Jackson (C. C. A. 4th) 22 F.(2d) 56; Bell v. Morley (C. C. A. 9th) 223 F. 628; 20 Cyc. 13; 26 C. J. 1063; note 16 Ann. Cas. 646; note Ann. Cas. 1913 C, at page 64.”

The general rule is well stated in 20 Cyc. 13, as follows: “To constitute actionable fraud, it must appear: (1) That defendant made a material representation; (2) that it was false; (3) that when he made it he knew it was false, or made it recklessly, without any knowledge of its truth and as a positive assertion; (4) that he made it with the intention that it should be acted upon by plaintiff; (5) that plaintiff acted in reliance upon it; and (6) that he thereby suffered injury.”

This succinct and lucid statement has been adopted in many decisions (see 26 C. J. 1063), and .has been approved by this court in an able opinion by Judge Northeott in the recent case of Erwin v. Jackson, 22 F.(2d) 56. And it has been adopted also by the Ninth Circuit in a case practically “on all fours” with the case at bar. Bell v. Morley, 223 F. 628.

In Tarault v. Seip, 158 N. C. 363, 74 S. E. 3, 6, Mr. Justice Brown thus states the rule as it is applied by the courts of North Carolina: “An essential element of actionable fraud is the scienter or knowledge of the wrong on the part of the vendor. Where the representation is made as a part of the warranty, the vendor is held liable for his statement, whether he knew it to be true or not; but, where the action is for fraud, the burden is upon the party setting' it up to prove the scienter. This distinction is well made by Chief Justice Pearson in Etheridge v. Palin, 72 N. C. 216, and is well supported by numerous authorities in this and other states. This court said, in Tilghman v. West, 43 N. C. 183: ‘Nor can fraud exist where the intent to deceive does not exist, for it is emphatically the action of the mind that gives it existence.’ And in Hamrick v. Hogg, 12 N. C. 350, Judge Henderson says :• ‘It is not sufficient that the representation be false in point of fact; the defendant must be guilty of a moral falsehood. The party making a representation must know or believe it to be false, or, what is the same thing, have no reason to believe it to be untrue.’ The action for fraud and deceit rests in the intention with which the representation is made, and not upon the representations alone.”

Coming to the second question, we think that the learned judge below properly withdrew from the consideration of the jury the question of prospective profits on the shortage of the timber. There was no evidence that defendant had sold at a profit the 20,-000,000 feet of timber which it had purchased from the plaintiff; nor was there evidence upon which to base a reasonable conclusion that same could be sold at a profit. The price of lumber had declined after the making of the contract and the demand had fallen off to such an extent that, after manufacturing eight and one-half million feet, defendant voluntarily suspended operations although admittedly a large amount of timber remained uncut and several hundred thousand feet of logs which had been cut had not been sawed. Manifestly whether a profit could be realized by further operations under such circumstances was purely a matter of speculation. It is argued that because the shortage existed at the time of sale, the ability to realize a profit must be referred to that date. But the answer to this is that there was no understanding that the timber was to be sold, and it was not sold, by defendant at that time. Defendant undertook to manufacture the timber into lumber and sell the lumber as it was manufactured; and whether it would realize a profit depended upon a number of factors, including cost of operation and the condition of the lumber market. While engaged in its operations, conditions changed to such an extent that it suspended the cutting of timber for which it had already paid and which was readily available. How can it be said with any certainty that it would have realized any profit on the timber which was short, when the prospect of profit on that which was available was so remote that operations were suspended? To ask the question is to answer it.

Assuming, without deciding, that profits from manufacturing the timber into lumber and selling it were reasonably within the contemplation of the parties, so that in case of shortage loss of such profits could be considered as an element of damages, it is clear that to justify recovery the fact that such profits would have been realized must be established with reasonable certainty, and that a recovery of prospective profits cannot be allowed where, as here, same are entirely speculative. Boston & Albany R. R. v. O’Reilly, 158 U. S. 334, 15 S. Ct. 830, 39 L. Ed. 1006; Howard v. Stillwell & Bierce Mfg. Co., 139 U. S. 199, 205, 210, 11 S. Ct. 500, 35 L. Ed. 147; De Ford v. Maryland Steel Co. (C. C. A. 4th) 113 F. 72; Taber Lumber Co. v. O’Neal (C. C. A. 8th) 160 F. 596, 602; Curran v. Smith (C. C. A. 3d) 149 F. 945, 952; Iron City Toolworks v. Welisch (C. C. A. 3d) 128 F. 693; Central Coal & Coke Co. v. Hartman (C. C. A. 8th) 111 F. 96, 102; Central Trust Co. of New York v. Clark (C. C. A. 8th) 92 F. 293, 298; 8 R. C. L. 452; 17 C. J. 791.

On the third question, the instruction that there was no warranty of quantity in the sale of the timber could not have been prejudicial to the defendant, in view of the fact that the court at the same time instructed the jury that they were to credit the defendant at the contract price with any shortage in the timber sold, and of the further fact that the jury actually did give the defendant credit for $12,500, which was the contract price for two and one-half million feet. Even if the language of the contract be construed as a warranty of quantity, there was no evidence which would justify the awarding of damages on a basis different from that upon which damages were allowed for shortage in the timber sold. Instead of presenting defendant’s contention under the theory of a breach of warranty of quantity, the court presented it under the theory of a breach of contract to convey; and under the latter theory instructed the jury to give defendant all that it would have been entitled to recover under the former.

A careful examination of the record discloses no error prejudicial to defendant, and •the judgment below will accordingly be affirmed.

Affirmed.


text:
    WASHBURN v. COMMISSIONER OF INTERNAL REVENUE.
    No. 8886.
    Circuit Court of Appeals, Eighth Circuit.
    Aug. 11, 1931.

      A. McC. Washburn, of Minneapolis, Minn., for petitioner.
    Hayner N. Larson, Sp. Asst, to Atty. Gen. (G. A. Youngquist, Asst. Atty. Gen., Sewall Key and J. P. Jackson, Sp. Assts. to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and J. K. Polk, Sp. Atty., Bureau of Internal Eevenue, both of Washington, D. C., on the brief), for respondent.
    Before KENYON and BOOTH, Circuit Judges, and OTIS, District Judge.
   KENYON, Circuit Judge.

This appeal is from a decision of the Board of Tax Appeals (hereinafter designated the Board) holding that petitioner was not entitled to a deduction on his income tax for 1923, based on a loss sustained in 1922, for the reason that the same did not result from the operation of any trade or business regularly carried on by petitioner. The facts are these:

From 1880 until 1921 petitioner was a lawyer engaged in the active practice of his profession at Duluth, Minn. While practicing law, he organized a number of corporations and enterprises. In 1911 he retired from such practice in order to give his entire time to these various enterprises in which he was heavily interested, and which consisted in a general way of a national bank, a mineral association, a transit corporation, a hotel company, an abstract company, a land and loan company, and other corporations, four of which were timber holding corporations, which he practically managed alone. Whatever amounts he received as salary from these corporations were payments to reimburse him for actual expenses in connection with services rendered. Certain bonuses were paid him in appreciation of his services, but there was no legal obligation to pay either salary or bonus. The stock in most of the corporations, which was originally acquired by him as an investment, was closely held and seldom traded in. In order to open up the timber lands of one of the companies he organized in 1913 what was known as the Gales Creek & Wilson Eiver Eailroad Company, which built a fourteen-mile railroad to said property. He was the principal stockholder therein, managed its affairs, and selected its officers and directors, who were persons residing in Oregon where the railroad was built. He advanced the money with which to build, and took back stock. In 1922 he sold this stock, which had cost him $365,300 for $252,600.89, sus-’ taining a loss in the amount of $112,699.11, which he sought to carry over to the year 1923 and secure credit therefor in the adjustment of income taxes for that year. Ee-spondent concedes that a loss was sustained for the taxable year 1922, but denies that it resulted from the operation of a regular trade or business.

The issue here arose under subdivisions (a) and (b) of section 204 of the Eevenue Act of 1921 (42 Stat. chap. 136, pp. 227, 231, now repealed), the applicable provisions of which are:

“Sec. 204. (a) That as used in this section the term ‘net loss’ means only net losses resulting from the operation of any trade ■or business regularly carried on by the taxpayer (including losses sustained from the sale or othej.’ disposition of real estate, machinery, and other capital assets, used in the conduct of such trade or business); and when so resulting means the excess of, the deductions allowed by section 214 or 234, as the ease may be, over the sum of the following : * * *
“(b) If for any taxable year beginning after December 31, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be deducted from the net income of the taxpayer for the succeeding taxable year.”

Was petitioner regularly operating ■ a trade or business? If so, the decision of the Board is erroneous, and he is entitled to the benefit of section 204 (b).

At the threshold of this case we are met with the contention that there is substantial evidence in the record to support the findings of faet by the Board, and that hence its decision should be affirmed. There is no dispute here whatever as to the facts. Petitioner was the only witness.

This eourt is given the power under section 1226, title 26, USCA, in reviewing appeals from the Board of Tax Appeals, “to affirm or, if the decision of the board is not in accordance with law, to modify or reverse the decision of the board, with or without remanding the ease for a rehearing, as justice may require.” If the decision of the Board is not in accordance with law, it is the duty of the appellate eourt to reverse it. It is true that under the authorities questions of fact are for the Board to determine, but whether its findings of fact are supported by substantial evidence is for the appellate ■court to determine. Royal Packing Co. v. Commissioner of Internal Revenue (C. C. A.) 22 F.(2d) 536; Lucas v. Mercantile Trust Co. (C. C. A.) 43 F.(2d) 39. The Board here found certain primary facts. It drew therefrom the ultimate conclusion that petitioner. was not regularly engaged in trade or business under section 204 (a). This required a construction of section 204 (a) as applied to the facts. The question here is a mixed one of law and fact. Where similar question was raised in Bishoff v. Commissioner of Internal Revenue (C. C. A.) 27 F.(2d) 91, 92, the court said: “Even accepting as conclusive the Board’s findings of primary facts, it. sometimes happens that the reviewing eourt must inquire, as on writ ■of error, into the ultimate faet finding in order correctly to determine whether the decision is validly supported by evidence and therefore is ‘in accordance with law.’ ” This court in H. B. Glover Co. v. Bladine, Collector of Internal Revenue, 34 F.(2d) 605, 607, where objection was made to review because no special findings were requested by plaintiff nor declaration of law asked or motion made for judgment, said: “But we are of the opinion that, though the finding was designated by the eourt below as a finding of ultimate faet; in substance and effect it was a conclusion of law, or at least was a mixed finding of law and fact, since it involved the construction of the statute above quoted. We think the question sought to be reviewed comes within such eases as Federal, etc., Bank v. L’Herisson [(C. C. A.) 33 F.(2d) 841], supra, and others therein cited, to the effect that the question whether findings of faet support the conclusion of law is reviewable.” Of course, we are not “concerned with the weight of the evidence before the Board, W. K. Henderson Iron Works & Supply Co. v. Blair, Commissioner of Internal Revenue, 58 App. D. C. 114, 25 F.(2d) 538, but we are concerned with the ultimate conclusion that may be drawn from the facts, and whether or not there is substantial evidence to support such conclusion. That there may be some degree of finality in a finding of faet by an administrative body may be conceded, but such finding cannot take from the courts the power to construe a statute and determine whether it covers sueh a situation as the facts present. Great Northern Ry. Co. v. Merchant’s Elevator Co., 259 U. S. 285, 42 S. Ct. 477, 66 L. Ed. 943. In our judgment, there is nothing in the point urged by respondent that we are concluded by the decision of the Board because of its finding as an ultimate faet that petitioner was not engaged in a trade or business regularly carried on.

To avail himself of the deduction provided by section 204 (a) of the Revenue Act of 1921, supra, petitioner must show that the loss resulted from the operation of some tradfe or business regularly carried on by him. Whether the work which petitioner was doing in connection with his various interests was trade or business under the statute, it was certainly something he was regularly and persistently carrying on. It is not important that we enter into any discussion as to whether the terms “trade” and “business” are used synonymously in the statute. Petitioner here was not engaged in trade within the general acceptance of that term. Was he engaged in business? •

Respondent contends that petitioner was a mere investor; that the statute is restricted in its application to taxpayers whose income is derived from regular trade with others, such as merchants, manufacturers, and those who have paid taxes on incomes reflected by inventories; that petitioner was not a dealer in securities, but was merely holding securities of corporations and enterprises in which he was interested; that his occupation was guarding his various investments in order to reap a harvest from past sowings; and that the loss was the result of an isolated transaction.

Petitioner does not claim that he was engaged in the railroad business or that he was a dealer in securities. His position is that his occupation was the personal attention given to the management of the various enterprises in which he had investments for the purpose of making those enterprises successful and profitable; that to this he gave his entire time, and was doing a great deal more than merely guarding his investments; that the loss on the sale of the railroad was occasioned in carrying on his general avocation.

The Supreme Court in Flint v. Stone Tracy Co., 220 U. S. 107, 171, 31 S. Ct. 342, 357, 55 L. Ed. 389, Ann. Cas. 1912B, 1312, has interpreted the word “business” in passing on a case under the Corporation Excise Tax Law in such an exceedingly broad way as to cover nearly every range of human endeavor, saying: “It remains to consider whether these corporations are engaged in business. ‘Business’ is a very comprehensive term and embraces everything about which a person can be employed.” The court seems to have restricted this language somewhat in Von Baumbach v. Sargent Land Co., 242 U. S. 503, 516, 37 S. Ct. 201, 204, 61 L. Ed. 460, where it said, with reference to what constitutes business within the meaning of the Corporation Tax Law of August 5, 1909, “that the decision in each instance must depend upon the particular facts before the court.”

In McCoach v. Minehill Railway Co., 228 U. S. 295, 306, 33 S. Ct. 419, 424, 57 L. Ed. 842, the court held that, where a railway company had leased its line to another company which operated it exclusively, the former collecting rentals and dividends from investments, it was not engaged in business-under the meaning of the Corporation Tax Act. The court said: “In our opinion the mere receipt of income from the property leased (the property being used in business by the lessee, and not by the lessor) and the receipt of interest and dividends from invested funds, bank balances, and the like, and the distribution thereof among the stockholders of the Minehill Company, amount to no more than receiving the ordinary fruits that arise from the ownership of property.”

In Edwards, Collector, v. Chile Copper Co., 270 U. S. 452, 455, 456, 46 S. Ct. 345, 346, 70 L. Ed. 678, the Supreme Court, in discussing the exemption “not engaged in business” in the statutes imposing upon domestic corporations organized for profit a tax, “with respect to carrying on or doing business,” said: “The activities and situation must be judged as a whole. Looking at them as a whole we see that the plaintiff was a good deal more than a mere conduit for the Chile Exploration Company. It was its brain or at least the efferent nerve without which that company could not move.” -See, also, United States v. Emery, Bird, Thayer Realty Co., 237 U. S. 28, 35 S. Ct. 499, 59 L. Ed. 825; Argonaut Consolidated Mining Co. v. Anderson, Collector of Internal Revenue (D. C.) 42 F.(2d) 219; Blair, Commissioner of Internal Revenue, v. Wilson Syndicate Trust (C. C. A.) 39 F.(2d) 43.

In Hughes v. Commissioner of Internal Revenue, 38 F.(2d) 755, the Circuit Court of Appeals of the Tenth Circuit indicated that in its judgment the broad interpretation of the term “business” by the Supreme Court in Flint v. Stone Tracy Company was not applicable to the term “trade or business,” as used in section 204 (a), and that it was apparent from that section that a narrower construction must be indulged in as to it, and held the section had no application to wage-earners, salaried or professional men; that they employed no capital in their trade or business regularly carried on and suffered no net loss that could be carried over to other years. The court was careful to say that it was concerned only with the meaning of the phrase as used in section 204 (a), which is, of course our situation here. The Board of Tax Appeals has followed Flint v. Stone Tracy Company in its definition of “business.” In Schwinn v. Commissioner of Internal Revenue, 9 B. T. A. 1304, 1308, it said: “The chief occupation or business of one, so far as worldly pursuits are concerned, is that which is of principal concern to him, of some permanency in its nature, and on which he chiefly relies for his livelihood or as the means of acquiring wealth, great or small.” Again in Ostenberg v. Commissioner of Internal Revenue, 17 B. T. A. 738, 746, “It appears, from the evidence that Osten-berg was a capitalist and an investor on a large scale. He invested in stocks and bonds ■and in various enterprises which showed a prospeet of profit. Such investing and connections with the various enterprises in which he was interested constituted the only business he had, the source of his income, and his means of livelihood.”

The statute does not provide that to secure the benefits the taxpayer must be engaged in only one business. It is any “trade or business.” A party may be engaged in many kinds of business and still be entitled to the benefit of the statute. Oscar K. Eysenbach v. Commissioner of Internal Revenue, 10 B. T. A. 716; E. M. Elliott v. Commissioner of Internal-Revenue, 15 B. T. A. 494; Crane v. Commissioner of Internal Revenue, 17 B. T. A. 720. Under the Hughes Case, supra, one-fifth of' petitioner’s time was devoted to looking after his investments, and the court referred to that as his business of investment banking.

Am isolated transaction in itself would not be a business regularly carried on, but it could well be a part of a general business. In Goldberg v. Commissioner of Internal Revenue, 59 App. D. C. 147, 36 F.(2d) 551 (the Court of Appeals of District of Columbia), the question discussed is whether Goldberg was entitled to a deduction within the meaning of section 204 (a) of the Revenue Act of 1921 resulting from loss sustained by the sale of a house and lot. The court found that this was a single, isolated business venture. His regular business of buying and selling real estate was carried on through a corporation. He owned the entire stock of the corporation, but it was a distinct entity, and the business of appellant was not the business of the corporation. The loss sustained in the individual transaction was held to have resulted from a private transaction andi not sustained in appellant’s regular trade or business.

In Mente v. Eisner (C. C. A.) 266 F. 161, 11 A. L. R. 496, it was held that deductions incurred in trade -are limited to losses incurred in the actual business of the taxpayer as distinguished from isolated transactions, and do not include losses sustained through dealings on an exchange by one engaged in another business.

In Pabst v. Lucas, Commissioner of Internal Revenue, 6 B. T. A. 843 (affirmed in 59 App. D. C. 154, 36 F.(2d) 614) petitioner’s business was that of pharmaceutical preparations, and an operating owner of and investor in mines. He claimed a loss under section 204 (a) by reason of an investment in a corporation to manufacture porch shades and in the management of which he had no voice. The Board refused to allow it, and the Court of Appeals of the District of Columbia sustained the Board. In Rogers v. United States (Ct. Cl.) 41 F.(2d) 865, 868, the court held that the investment of his professional income by a physician did not in itself constitute a “business regularly carried on.”

The Board of Tax Appeals regarded the loss in the sale of the railroad as an isolated transaction, and referred to it as a business in which petitioner had an investment. The railroad corporation was not a separate and distinct enterprise — it was no different than if petitioner had built a wagon road in order to haul lumber out of his timber lands. It was constructed- solely as an aid to his timber holding companies, and was a part of the general enterprise. It was merely the alter ego of petitioner. The statute refers particularly, to losses “sustained from the sale or other disposition of real estate, machinery, and other capital assets, used in the conduct of such trade or business.” The railroad could be regarded as a part of the capital assets. It may be assumed that, when the property was developed, the railroad was no longer needed, so the sale was made.

Much is said in argument as to petitioner being engaged solely in holding the securities of the enterprises in which he was interested, and that he was a mere investor receiving the ordinary returns of ownership. A party may have investments in corporate stock, have no particular occupation, and live on the return of his investments. That would not constitute business under the statute in question. He may, however, take such an active part in the management of the enterprise in which he has investments as to amount to the carrying on of a business. In Ames v. Commissioner of Internal Revenue, 49 F.(2d) 853, this court said that an executor might carry on sueh activities for the purpose of earning- profits as would constitute the doing of business. In Bedell v. Commissioner of Internal Revenue (C. C. A.) 30 F.(2d) 622, 624, the court said: “A trader on an exchange, who makes a living in buying and selling securities or commodities, may be said to carry on a ‘business’; a person who frequents brokers’ offices, and continually dabbles in real estate is conceivably quite different. Most men who have capital change their investments, and may speculate all the time; we should hardly call this a business, though the line is undoubtedly hard to draw.” ¥e think the line here is not difficult to draw. The business of petitioner was not merely looking after investments or reaping the return of past labor represented thereby. He had an office with a complete organization, and gave personal attention to, and participated in, the management of these various companies and enterprises in which he had the investments, not for the purpose of conserving them merely, but of carrying them on successfully and making them profitable. To this he gave his entire time, receiving no salary, except such as might cover his expenses. His work for these different enterprises was not merely sporadic, but was a continuous and regular carrying on. Petitioner testifies he worked as hard at his new line of work as he did when he was practicing law. His income was the result, not alone of his investments, but also of his labor expended in connection with the management of the companies in which he had such investments. The combination of the two is his vocation.

Can it be said that the numerous investment bankers, underwriters, manufacturers, promoters, and others, who, having large investments in enterprises, give their time and attention to assisting in the management of such enterprises .in order to make them successful, are nothing but investors and not engaged in any business regularly carried on? We think not. Whether petitioner’s business, viewing his entire activities, be regarded as a general one involving active participation in the supervision of the various companies in which he was interested, or whether he be regarded as carrying on a number of separate kinds of business, among which was the development of the timber holdings, the loss in question occurred in a business regularly carried on.

We are satisfied from a careful survey of the authorities that no decision can be found in favor of respondent’s position, except the decision of the Board in this case, which has been practically overruled by its subsequent decisions, to some of which we now refer.

This case was decided June 20, 1929, 16 B. T. A. 1091. September 30, 1929, the decision in Crane v. Commissioner of Internal Revenue, 17 B. T. A. 720, was promulgated. The member of the Board who dissented from the opinion in this case wrote the opinion in that. There is considerable similarity in the two eases. Crane devoted his time to the financing and supervising of mining and railroad corporations. This work took his time, with the exception of one-half day a week, which he devoted to other corporations, from which he received a salary. His business was carrying on the financing of these corporations, which took the form sometimes of loans and at others of the acquisition of stock. He suffered losses on loans made to one of the corporations, and in the sale of stocks, and asked that his net loss be taken into consideration under section 204 of the Revenue Act of 1921. It was held that petitioner was engaged in business under the statute. On the same day the Board decided the case of Ostenberg et al. v. Commissioner of Internal Revenue, 17 B. T. A. 738. Petitioners’ investments there covered a wide range of business. He divided his time between different enterprises sueh as banks, laundries, farms, in which he had investments. The Board held that during the years 1921 to 1923 Ostenberg was regularly engaged in carrying on a trade or business within the meaning of section 204 (a) of the Revenue Act of 1921. In Baker v. Commissioner of Internal Revenue, 17 B. T. A. 733, petitioner was engaged in the business of organizing and promulgating corporations, and was required as an incident thereto to finance some of them with his personal funds. He suffered a loss by the lending of money to one of them. The Board held that the loss resulted from the operation of a trade or business regularly carried on.

The opinion in Potter v. Commissioner of Internal Revenue, 18 B. T. A. 549, was promulgated in December, 1929. Petitioner there was actively interested as stockholder and managing director in various hotel enterprises which he conducted in his private capacity and later through corporations. In some instances he received a small salary. He sold out his stock in one of the companies at a considerable loss. He claimed the loss as a deductible one. The Board held that his loss was not one in an isolated business transaction, but was an incident of a regular vocation. It points out that the investment and the personal management were clearly related, each dependent. on the other, and that in the hotel line of business he was employing in 1923 jointly his time and Ms capital, and tMs had been his sole business. It was held that he was carrying on a definite and distinct business constituting a regular vocation, and that in carrying on that business he incurred the loss. Mr. Potter was not merely an investor, but gave to the business in which his funds were invested his personal attention exactly the same as Mr. Washburn did, though Mr. Potter seems to have received salaries. The investment and personal management existed in botli cases, and the two combined produced the income. The only distinction in the ease is that Mr. Potter’s enterprises related entirely to the hotel business, while Washburn had a diversity of interests, although the loss that is sought to be deducted here occurred entirely out of the timber holding business. However, the statute, as we have pointed out before, in order to confer its benefits, does not require that the taxpayer shall have but one business.

June 2, 1930, the opinion in Anthony v. Commissioner of Internal Revenue, 20 B. T. A. 5, was filed, which can hardly be said to be in harmony with its opinion in the present ease. October 8, 1930, the Board filed its decision in the case of Averill v. Commissioner of Internal Revenue, 20 B. T. A. 1196, 1199. In the light of this ease we do not see how respondent can claim the Board’s decision was right in the present ease, for the Averill Case and the present ease, cannot be satisfactorily reconciled. In that case petitioner was a man of large resources and interested in many varieties of business in Cedar Rapids, Iowa. He maintained an office and employees, and gave his time to looking after different enterprises in which he had investments, some of which were corporations, and others of a personal nature. He sustained a loss by one of these corporations going into receivership and liquidating. The sole issue in that case was whether he had sustained a loss in 1922 which could be carried forward and applied in 1923 under the provisions of section 204 of the Revenue Act of 1921. We quote from that opinion as follows: “To come within the intendment of the statute it is not sufficient that the loss sustained be sustained in a business transaction. It must be sustained in a trade or business regularly earned on by the taxpayer. This Board has, therefore, distinguished between a business regularly carried on and a single, isolated transaction. Such was J. J. Harrington [1 B. T. A. 11], supra. When an activity ceases to be isolated and assumes a continuity and importance that characterize it as an activity regularly engaged in, must necessarily depend on the facts of each particular case. Obviously in every ease a business to be regularly carried on must be characterized by a continuing activity in some field of business endeavor. The loss contemplated by the statute is an operating loss, and the party claiming it must be the operator of the trade or business in which the loss occurs. Therefore, a business regularly carried on by the taxpayer means a business regularly operated by the taxpayer on his own behalf.” The Board points out that relief to stockholders who suffer loss through liquidation of a corporation must often be denied, for the reason that the same is an investment loss and not an operating loss, and that, upon the sale of stocks or bonds or failure or liquidation of the corporation, the stockholders or bondholders may sustain an operating loss, which is different from the operating loss of the corporation, “and must rest upon the ground that investments in such stocks or bonds is a part of, or incident to, the operation of a trade or business regularly carried on by the taxpayer. It is obvious that an individual may suffer a 'net loss’ within the meaning of the statute upon the failure of a corporation or a sale or other disposition of his interest therein.” The Board refers directly to its decision in this case as follows: “The line between one who invests in corporations and another whose dealings with corporations is so broad that it may be said to be his trade or business is not one which may be drawn clearly. See J. L. Washburn, 16 B. T. A. 1091; T. I. Crane, supra; W. H. Ostenberg, supra; Elmore L. Potter, supra; E. D. Anthony, 20 B. T. A. 5. It is difficult to distil guish the decision in the Washburn Case from the later cases. We believe, however, that the principle upon which these later cases were decided is sound, that they should be followed, and that the instant case falls within them.” (Italics ours).

Ever since the decision in this ease, as evidenced by the decisions we have cited, the Board has veered away from the position which it took therein, and has come to the conclusion, as stated in the Averill Case, that the later eases are sound, and that the decision in this case cannot be distinguished from those cases. It was stated to us in the oral argument by counsel upon inquiry from the bench that the Averill Case had not been appealed, so respondent evidently accepts that ease as expressing the correct doctrine. If the decision there is right, the decision in this ease is wrong. We are satisfied that petitioner was engaged in a business regularly carried on within the meaning of section 204 (a) of the Revenue Act of 1921, and entitled, under section 204 (b), to the deduction sought. The decision is therefore reversed and the ease remanded to the Board of Tax Appeals for appropriate action in accordance with the views expressed in this opinion.

Reversed and remanded.