author: GEWIN, Circuit Judge:

text:
    NATIONAL LABOR RELATIONS BOARD, Petitioner, v. BUDDIES SUPERMARKETS, INC., Respondent.
    No. 72-3023.
    United States Court of Appeals, Fifth Circuit.
    June 25, 1973.

      G. Mallet Prevost, Asst. Gen. Counsel, N.L.R.B., Elliott Moore, Acting Asst. Gen. Counsel, Washington, D. C., Elmer P. Davis, Director, Region 16, N. L.R.B., Fort Worth, Tex., Charles P. Donnelly, N.L.R.B., Washington, D. C., for petitioner.
    Edward L. Kemble, Fort Worth, Tex., for respondent.
    Before WISDOM, GEWIN and CLARK, Circuit Judges.
   GEWIN, Circuit Judge:

The National Labor Relations Board seeks enforcement of its order holding that Buddies Supermarkets, Inc. (Company) violated §. 8(a)(1) of the National Labor Relations Act by discharging Charles Ray Smith for his participation in certain protected concerted activity; and § 8(a)(1) and (3) by discharging Nona B. Greever for her support of the union. Having carefully examined the record in light of the applicable legal principles, we hold that enforcement of the Board’s order must be denied in all respects.

I. The Discharge of Charles Ray Smith

Charles Ray Smith was hired by the Company in 1961 and for the greater part of his tenure there, he drove a truck hauling milk to the Company’s various stores. Prior to 1969, he and the other milk drivers were paid by the hour. But in December of that year, the company decided to change the method of compensation and called a meeting of the drivers to announce the new plan. The drivers were told that thereafter they would be paid on a commission basis. The understanding was reached, however, that the new compensation plan was being tried on an experimental basis and the drivers were given the option of returning to the former pay arrangement at the end of the quarterly period if they desired.

During the ensuing weeks, the advantages of returning to an hourly rate of pay were discussed on several occasions. The drivers finally decided against a change at that time. But from that point on, their attitudes towards the Company’s pay plan steadily began to sour. This was brought about mainly because of the Company’s decision to change from a Fort Worth to a Dallas milk supplier. As a result, the drivers were faced with the prospect of driving greater distances each day and working considerably longer hours, all without a proportionate increment in pay.

Quite predictably, they were concerned by this development and more meetings were held among themselves to assess the situation. Though they all indicated a desire to return to an hourly rate of pay, no group spokesman was appointed nor was any specific group action discussed. The most that can be said of Smith’s role to this point was that one of his fellow drivers believed that he would bring the matter to the Company’s attention.

Finally, at a meeting called by the Company on April 21, 1970, Smith did just that and was met with a sharp rebuff from Vice President Berman. Berman explained that it would be of no avail to the drivers to abandon the commission system of compensation since he would merely hire additional drivers and limit their hours so that their incomes would not exceed present levels. He further indictated that if they were adamant on this question, he would “have four new drivers there in the morning.” Thus faced with this alternative, the drivers decided to renew their contracts on substantially the same terms as before.

A period of relative calm followed. It lasted until early December 1970 when the contracts were again up for renewal and the Company wanted to reduce the commissions for drivers in the highest bracket of milk sales. This provision had a direct effect on Smith and Weaver, the two top salesmen, and consequently they refused to sign the proposed new contracts. Neither desired to receive less compensation than they had received during the previous quarter. The Company representative agreed that some adjustment in terms was in order and in early January of 1971 superseding contracts were offered to all four of the drivers. Apparently, only Smith refused to sign.

He continued to be dissatisfied with the proposed terms, particularly his commission rate, and asked for still further reconsideration of his contract by the Company. There is no evidence that he was seeking modifications in the commission rate or any other provisions of the contract for the benefit of anyone but himself. On January 19, when it became clear that no additional concessions were going to be granted, Smith finally signed a contract. He was told that, “Mr. Berman wasn’t going to make a special program” just to suit him.

Almost two months later, on March 10, 1971, Smith was fired. The reasons given for this action were that he was a chronic complainer who caused dissension among the workers by telling them about his problems with the Company’s commission plan. He accused the Company of unfair conduct and treatment. The Trial Examiner held that Smith was discharged for engaging in § 7 protected concerted activity. The Board affirmed in all respects. For reasons stated in the remainder of this opinion, we cannot agree.

To support the Board’s finding that Smith’s discharge was unlawful, it is the black letter rule in this circuit and others that there must be substantial evidence in the record showing that the employee was engaged in concerted activity for the purpose of mutual aid and protection and that the employer had some knowledge of this at the time of the discharge. The basic question here is whether Smith’s efforts to gain more favorable contract terms for himself constituted protected concerted activity within the meaning of § 7 of the National Labor Relations Act. The answer to this question lies in the distinction between concerted and non-concerted activity. If Smith’s actions can properly be classified as individual griping or complaining, then it is clear that under the applicable authority the Board’s decision must be reversed. Such conduct has never been considered protected. On the other hand, if in Smith’s efforts to gain more favorable contract terms for himself, there is some element of collective activity or contemplation thereof, then it is likewise clear that the Board’s order must be enforced.

One of the leading cases on this issue is Mushroom Transportation Co. v. NLRB. In that case, the court made a penetrating analysis of the nature of concerted activity as a prelude to its holding that the discharge of an employee was not unlawful under § 8(a)(1) even though the employee was engaged in advising his fellow workers about their rights under an existing collective bargaining agreement. The court observed :

It is not questioned that a conversation may constitute a concerted activity although it involves only a speaker and listener, but to qualify as such, it must appear at the very least that it was engaged in with the object of initiating or inducing or preparing for group action or that it had some relation to group action in the interests of the employees.
This is not to say that preliminary discussions are disqualified as concerted activities merely because they have not resulted in organized action or in positive steps towards presenting demands. We recognize the validity of the argument that ... it would come very near to nullifying the rights of organization and collective bargaining guaranteed by Section 7 of the Act if such communications are denied protection because of lack of fruition. However, that argument loses much of its force when it appears from the conversations themselves that no group action of any kind is intended, contemplated or even referred to.
Activity which consists of mere talk must, in order to be protected, be talk looking toward group action. If its only purpose is to advise an individual as to what he could or should do without involving fellow workers or union representation to protect his own status or working position, it is an individual, not a concerted, activity, and, if it looks forward to no action'at all, it is more than likely to be mere “griping”. (Emphasis added)

The Mushroom Transportation decision has been expressly followed in a number of subsequent employee discharge cases, but a cursory review of our court’s decisions on this point will show that none are direct descendants of Mushroom Transportation. Nevertheless, in resolving the question now presented, we are strongly persuaded to place primary reliance on that line of authority. In doing so we are guided principally by Southwest Latex Corp. v. NLRB. In that case this court indicated its awareness of the Mushroom Transportation standard and cited two important post-Mushroom Transportation decisions as authority for the proposition that individual griping and complaining are not protected concerted activity.

Applying these principles to the case at hand, this court is unable to uphold the Board’s finding of an § 8(a) (1) violation by the Company. The unusual thing about this case is that, unlike many of the Board decisions we review, the outcome turns more on a question of law than fact. Indeed, the central factual determinations of the Board for the most part appear to be uncontroverted and, to state our view of the case in brief, these facts as a matter of law simply cannot be equated with concerted activity.

The Board undertook to bring this case within the decision in NLRB v. Interboro Contractors, Inc. The gist of that opinion is that any activity involving attempts to enforce the provisions of a collective bargaining agreement may be deemed to be for concerted purposes notwithstanding the absence of any overt interest on the part of fellow employees. In line with this rationale, the Board placed special emphasis on the fact that Smith was the most vocal and assertive of the four drivers in presenting his views to Company officials. It then reasoned that since he was speaking on matters of common concern to all of the drivers, he was ipso facto engaged in concerted activity. Building on this conception of Smith’s conduct, the Board added further that Smith’s forceful expression of the driver’s grievances amounted to a clear invitation to his peers to join him in his protests and thus was intended to arouse some form of group action within the reasoning of Mushroom Transportation.

in reaching its decision we think the Board made two fundamental errors. The first has to do with its simultaneous reliance on the Interboro and Mushroom Transportation decisions. There appears to be a special irony in such reliance. Recently, the third circuit in NLRB v. Northern Metal Co. expressly refused to follow Interboro on the ground that it represented an unwarranted expansion of the definition of concerted activity enunciated in Mushroom Transportation. Such a decision might easily have passed unnoticed as a typical doctrinal clash between circuits if it were not for the fact that the third circuit is the same court that decided Mushroom Transportation in 1964. We are persuaded by the reasoning in Northern Metal, however, that a statutory basis for the concerted activity rule announced in Interboro is questionable and hence we decline to follow that decision. Moreover, apart from the fact that the Interboro decision has not received wide acceptance, there is another reason why it does not apply in the context of this case. Interboro is distinguishable on its facts since Smith’s activity here did not arise in the framework of an attempt to enforce an existing collective bargaining agreement. Thus, even if we were to fully agree with Interboro, this distinction would appear to place the instant case in a wholly different category. The essence of our holding therefore, is that regardless of our analysis of Interboro the result remains the same; the Board’s reliance on it for its finding of concerted activity cannot be sustained.

The second error committed by the Board arises from its misapplication of Mushroom, Transportation. While it is clear that the activity of a single employee may be protected in certain circumstances, we do not find the appropriate circumstances to be present in this ease. The record does not support the Board’s conclusion that Smith was inviting the other drivers to join him in his protests and thereby was seeking to instigate some form of group action. The underlying reasoning is much too fine spun and, in our opinion, is based on an unreasonably narrow view of the record.

Our point can be supported by at least two illustrations. First of all, Hawkins and Weaver, two of Smith’s fellow drivers, both said that no spokesman was ever designated by the group, and further that at no time did Smith speak with the Company on their behalf. While neither factor is essential to a finding of protected concerted activity, their absence in this case tends to undermine the Board’s position. Secondly, the evidence further discloses that Smith’s complaints about the Company’s compensation plan were advanced entirely in pursuit of personal, not group, economic goals. This became increasingly evident after the milk drivers’ meeting with Company officials in December 1970. Smith’s displeasure with the contract terms offered by the Company at that time would not be abated. He refused to sign the proposed agreement. The fact that Weaver did likewise does not alter our view of the nature of Smith’s conduct. On the contrary, we think it is most significant that well after Weaver and the other drivers abandoned negotiations with the Company and signed employment agreements, Smith was still persisting in his efforts to get a more favorable commission rate written into his individual contract. Even if his success in this regard might have inured to the benefit of the other drivers, it is an exceedingly tenuous basis upon which to rest a finding of concerted activity. In fact he did not succeed. According to the Company, this unfortunate turn of events prompted him to make his individual grievance known to a number of fellow employees and at least one ihanagement level official. There is no substantial evidence that the purpose of these conversations was to arouse concerted action. The standards for determining the existence of concerted activity set forth in Mushroom Transportation and subsequent decisions have not been met. The substantial record evidence indicates that Smith was discharged solely because of his individual griping and complaining, activity which is beyond the scope of the § 8(a)(1) protections. The Board’s order insofar as it applies to Charles Ray Smith will not be enforced.

II. The Discharge of Nona B. Greever

We now come to a consideration of the facts with respect to the discharge of Mrs. Nona Greever. We are fully aware of the standards which we should follow in making our decision. If there is substantial evidence to support the conclusions reached by the trial examiner and the Board, we are not authorized to upset those conclusions simply because we may have made another choice. It is our duty to review the record as a whole, not in isolated segments, in determining whether the action of the Board is supported by substantial evidence. In our consideration we have given full weight to the credibility findings of the trial examiner.

It is not necessary to outline all of the evidence in minute detail, but a summary of it is important. In September 1970 the union conducted an organizational campaign in the Buddies Market Stores. During this campaign, Mrs. Greever was openly opposed to the union. The events involved in this case took place in early March 1971 some 5 or 6 months later. Mrs. Greever does not claim to have engaged in any union activity prior to the week of March 3,1972. Her discharge occurred one week later on March 10, 1972. She testified that late in February of that year while she was absent from her home, a union organizer left some union literature for her with her husband. She further asserted that during the week of March 3, 1972 she discussed the union with four fellow employees and that prior to that week she had a telephone conversation with union organizer Heise. In her conversations with co-workers, she claims to have inquired into their views about the union; suggested that the employees needed some sort of an organization; and on at least one occasion recommended union membership. Only two of the employees with whom she talked appeared as witnesses. Both of them contradicted her, one stating that she did not talk with Mrs. Greever until after her discharge and the other stating that Mrs. Greever did not discuss the union with her prior to discharge. The union organizer, Heise, stated he too did not have a conversation with Mrs. Greever until after her discharge.

It is undisputed that on the day of her discharge she took a “break” during the morning. At that time she saw store manager Hall and stated to him that she had the understanding that the Company had a rule which required employees to disclose union activity of certain types. The trial examiner found that there was no such rule, but apparently thought that Mrs. Greever believed one to be in effect. She explained to Hall that in late February a union organizer had left union literature at her residence. There was no discussion of the matter and the conversation ended.

Soon after lunch on that day, pursuant to strengthened security procedure, Mrs. Greever was requested to submit to a polygraph test to which she readily agreed. The test was unfavorable but she was not advised of that fact. She admitted to a security agent that she had “grazed” or taken merchandise from the store (candy) in the amount of fifteen cents. Soon after the polygraph test, in the presence of store manager Hall and another company official, Mrs. Greever was discharged for grazing. She expressed disappointment over the fact that she would be discharged for such a minor infraction.

At the hearing the company expanded its reasons for discharging Mrs. Greever, claiming that she had been suspected of shortages some two and a half years prior to this time. They further asserted that while two or three polygraph tests had reflected unfavorably upon her honesty as an employee, they were “afraid” to inform her of the results because of possible liability for slander. We do not disturb the findings of the Trial Examiner that Buddies had a history of anti-union animus; that Mrs. Greever was permitted to serve as cashier on occasions during rush hours; and that some employees who were also guilty of grazing, perhaps in larger amounts, had not been discharged. But it is critically important to recognize that these findings are peripheral to the main question presented by Greever’s discharge. A proper approach to this aspect of the case requires that three considerations be kept in mind: (1) whether Mrs. Greever was a union supporter; (2) did the Company know or should it have known that she was a union supporter; and (3) whether her discharge was motivated by her support of the union.

Of some importance is the fact that not until the day of her discharge did Mrs. Greever mail a card to the union evidencing her support of it. She first testified that she mailed the card in the afternoon but later amended her testimony to assert she mailed it that morning. In addition to her statements with respect to her support of the union, there is also evidence that she became a much more ardent supporter after her discharge than she ever was prior to that time.

We have considered the “small plant doctrine,” heavily relied on by the Trial Examiner. This doctrine has its place but we are doubtful that it can fill a total void of evidence with respect to knowledge of union activity on the part of the Company. Here there is nothing to indicate that the Company was ever actually informed of Mrs. Greever’s union sympathies. Not a single employee was presented who corroborated her assertion that she was a union proponent prior to her dismissal and she claims to have discussed the union with at least four. The two who did testify contradicted her story. Thus, if Greever’s co-workers who appeared to be friendly to her were ignorant of such a pivotal fact as union sympathy, the “small plant doctrine” should not apply. That doctrine is predicated upon the idea that the Company learns through the grapevine what is well known to its employees or a segment of them.

However, leaving that problem aside for the moment, the question still remains whether, taking a view of the record most favorable, Greever, knowledge of Greever’s union support could reasonably be imputed to store manager Hall, who was transferred to the store approximately thirty days before her dismissal. We think not. This is clearly not a case where the store manager had long been familiar with the activities and attitudes of the several employees under his supervision. In addition, where the “small plant doctrine” is applied, there is usually more evidence to support knowledge on the part of management than appears to be true here. Our decision should not be grounded on unwarranted speculation. One week of doubtful and unnoticeable alleged union activity disputed by friendly fellow employees in a store where the manager had only recently been assigned does not constitute substantial evidence to support the Board’s decision when considered in conjunction with the record in its entirety.

We reach our conclusion with a full evaluation of the fact that the Trial Examiner discredited much of the testimony presented by the employer and fully credited the testimony of Mrs. Greever, even that which was contradicted by the union organizer and two fellow employees. By the technique of making credibility choices, the trial examiner should not be allowed to reach factual conclusions which are not supported by substantial evidence. Based upon an evaluation of the record as a whole, we conclude there is no substantial evidence to support the conclusion that the Company knew or should have known that Mrs. Greever was a union adherent. Regardless of the Company's general attitude toward unions we are unable to hold that they discharged Mrs. Greever unlawfully because of her union sympathies.

Enforcement denied.

      . 29 U.S.C. § 158(a) (1).

      . 29 U.S.C. § 158(a)(1) and (3).

      . Retail Clerks International Association, AFL-CIO, Local 368.

      . Southwest Latex v. NLRB, 426 F.2d 50, 56 (5th Cir. 1970) ; NLRB v. Atkins Saw Division of Nicholson File Co., 399 F.2d 907, 911 (5th Cir. 1968) ; NLRB v. Laney & Duke Storage Warehouse Co., 369 F.2d 859 (5th Cir. 1966).

      . Hugh H. Wilson Corp. v. NLRB, 414 F.2d 1345 (3d Cir. 1969) ; Signal Oil and Gas Co. v. NLRB, 390 F.2d 338 (9th Cir. 1968) ; Indiana Gear Works v. NLRB, 371 F.2d 273 (7th Cir. 1967).

      . Southwest Latex Corp. v. NLRB, 426 F.2d 50, 56 n. 3 (5th Cir. 1970) ; Hugh H. Wilson Corp. v. NLRB, 414 F.2d 1345 (3d Cir. 1969) ; Indiana Gear Works v. NLRB, 371 F.2d 273, 276 (7th Cir. 1966) ; NLRB v. Office Towel Supply Co., Inc., 201 F.2d 838 (2d Cir. 1953).

      . Mushroom Transportation Co. v. NLRB, 330 F.2d 683, 685 (3d Cir. 1964). See also Hugh H. Wilson Corp. v. NLRB, 414 F.2d 1345 (3d Cir. 1969) ; Owens-Corning Fiberglas Corp. v. NLRB, 407 F.2d 1357, 1365 (4th Cir. 1969) ; NLRB v. Guernsey-Muskingum Elec. Co-Op., Inc., 285 F.2d 8, 12 (6th Cir. 1960).

      . 330 F.2d 683 (3d Cir. 1964).

      . Id. at 685.

        . Indiana Gear Works v. NLRB, 371 F.2d 273 (7th Cir. 1967) ; Signal Oil and Gas Co. v. NLRB, 390 F.2d 338 (9th Cir. 1968) ; Hugh H. Wilson Corp. v. NLRB, 414 F.2d 1345 (3d Cir. 1969) ; NLRB v. Northern Metal Co., 440 F.2d 881 (3d Cir. 1971).

      . Perhaps it can be argued that the view of concerted activity taken in Mushroom Transportation may be more liberal than the approach exhibited in earlier fifth circuit decisions such as NLRB v. Texas Natural Gas Corp., 253 F.2d 322 (5th Cir. 1958). But we are undisturbed by that fact, if indeed it is a fact, since it appears to us that the jurisprudence in recent years has indicated increasingly wide acceptance of the analytical standards established in Mushroom Transportation. See note 10 supra.

      . 426 F.2d 50 (5th Cir. 1970).

      . Id. at 56 n. 3 of 426 F.2d citing Hugh H. Wilson Corp. v. NLRB, 414 F.2d 1345 (3d Cir.. 1969) and Indiana Gear Works v. NLRB, 371 F.2d 273 (7th Cir. 1967).

      . 388 F.2d 495, 500 (2d Cir. 1967).

      . 440 F.2d 881 (3d Cir. 1971).

      . Even the second circuit found it necessary to restrict the logic of the Interboro decision. In NLRB v. John Langenbacher Co., 398 F.2d 459, 463 (1968), it held that an attempt by employees to enforce their understanding of a collective bargaining agreement is a protected activity “ . . .if the employees have a reasonable basis for believing that their understanding of the terms was the understanding that had been agreed upon. . . . ” (emphasis supplied)

      . Signal Oil and Gas Co. v. NLRB, 390 F.2d 338 (9th Cir. 1968); NLRB v. Guernsey-Muskingum Elec. Co-Op., Inc., 285 F.2d 8 (6th Cir. 1960).

      . Hugh H. Wilson Corp. v. NLRB, 414 F.2d 1345, 1349 (3d Cir. 1969); NLRB v. Guernsey-Muskingum Elec. Co-Op., Inc., 285 F.2d 8, 12 (6th Cir. 1960).

      . Indiana Gear Works v. NLRB, 371 F.2d 273 (7th Cir. 1967).

      . See cases cited note 6 supra.

      . Universal Camera Corp. v. NLRB, 340 U.S. 474, 96 L.Ed. 456 (1951); NLRB v. W. R. Bean & Son, Inc., 450 F.2d 93 (5th Cir. 1971); Southwest Latex Corp. v. NLRB, 426 F.2d 50 (5th Cir. 1970).

      . The rule is well established that absent a showing of anti-union animus by the Company, an employee may be discharged for good reason, bad reason or no reason at all. NLRB v. I. V. Sutpin Co.-Atlanta, Inc., 373 F.2d 890 (5th Cir. 1967). The corollary of that rule is that to prove a violation of § 8(a) (1) and (3) in a discharge case, knowledge by the employer of the employee’s union activity must be proved. Texas Aluminum Co. v. NLRB, 435 F.2d 917, 919 (5th Cir. 1970).

      . NLRB v. Mid States Sportswear, Inc., 412 F.2d 537, 539 (5th Cir. 1969). See also A. J. Krajewski Mfg. Co. v. NLRB, 413 F.2d 673, 676 (1st Cir. 1969).

      . See note 23, s' <.pra.


source: Caselaw Access Project

author: J. JOSEPH SMITH, Circuit Judge: HAYS, Circuit Judge

license: Public Domain

text:
    UNITED STATES of America, Appellee, v. Vinicio E. RUIZ-ESTRELLA, Appellant.
    No. 784, Docket 73-1007.
    United States Court of Appeals, Second Circuit.
    Argued April 12, 1973.
    Decided June 11, 1973.

      Phylis Skloot Bamberger, New York City (Robert Kasanof, The Legal Aid Society, New York City), for appellant.
    Raymond J. Dearie, Asst. U. S. Atty. (Robert A. Morse, U. S. Atty., E. D. N. Y., L. Kevin Sheridan, Asst. U. S. Atty., of counsel), for appellee.
    Before SMITH, HAYS and TIMBERS, Circuit Judges.
   J. JOSEPH SMITH, Circuit Judge:

This case presents us with a distressingly familiar situation — the possession of a dangerous weapon by one attempting to board an airliner. On May 17, 1972, Vinicio Ruiz-Estrella was preparing to board a Miami-bound National Airlines flight at John F. Kennedy International Airport. A federal sky marshal searched the shopping bag that he was carrying, and found a sawed-off shotgun inside. After an unsuccessful attempt to suppress this evidence before ludge Neaher in the Eastern District of New York, Ruiz-Estrella stipulated that the minutes of the suppression hearing might serve as those of a trial to the court, and was convicted of various firearms offenses.

The major questions presented for review center on the seizure of the shotgun and the exclusion of both the defendant and the public from a portion of the suppression hearing. For the reasons below, we reverse the judgment of the district court.

I.

The background facts may be quickly summarized. On the day in question, David Falen was serving as the ticket agent for National Airlines, checking passengers’ tickets for the Miami flight. In the location of his ticket counter, and in the general boarding area, there were several posters reading as follows: “It is a Federal crime to: Carry concealed weapons aboard aircraft Interefere with flight crews Passengers and baggage subject to search under: Federal Laws and FAA Safety Regulations.”

Pursuant to the FAA hijacking “profile,” Falen identified Ruiz-Estrella as a suspect when the latter sought to check in for the Miami flight. Falen marked appellant’s ticket accordingly, and then asked for identification, which was produced in the form of a bank book, social security card, and union card.

Falen directed appellant to the seat location counter and gate area. He then notified David Angielski, the gate agent, that a profile “selectee” was approaching. In accordance with a prearranged signal, Angielski turned over appellant’s ticket to John LaSota, a uniformed federal sky marshal.

LaSota then asked Ruiz-Estrella for identification. He was not satisfied with the bank book, since it had only a name on it, and lacked identifying remarks or an address. LaSota then took appellant into a stairwell at the end of the boarding ramp, and closed the door behind them. He asked for further identification, and was handed the social security and union cards. The former had the typed name “Vinicio Ruiz” on it, but was signed “Vinicio Ruiz-Estrella”; the latter bore the first name “Vincent.” LaSota thought these to be discrepancies, but admitted that even if the identification had been letter-perfect, he nonetheless would have sought to examine the shopping bag which appellant was carrying.

Consequently, LaSota “told him [appellant] he would have to go through a baggage search.” Ruiz-Estrella handed over the shopping bag, which appeared upon first glance to be filled with toys. LaSota picked up a box purportedly containing a toy truck, and found that the box was unexpectedly heavy. Before putting it down, he further noticed that the original cellophane wrapping on the package had been opened and retaped. He opened the box and found the shotgun, along with several shells inside.

II.

The first point raised on appeal concerns the conduct of the suppression hearing. Falen was the first government witness at that hearing. Pursuant to the practice in the Eastern District, see United States v. Lopez, 328 F.Supp. 1077 (E.D.N.Y.1971); United States v. Bell, 464 F.2d 667 (2d Cir.), cert. denied, 409 U.S. 991, 93 S.Ct. 335, 34 L.Ed.2d 258 (1972), the government moved to exclude the defendant and the public from the courtroom during Falen’s testimony, which was to deal with the secret “profile.” Defense counsel objected on “the confrontation and the Sixth Amendment,” but the motion was granted, and the courtroom cleared.

In United States v. Bell, supra, we held that the exclusion of the defendant and the public from that portion of a suppression hearing dealing with the necessarily confidential hijacking “profile” abridged neither the right to confrontation nor that to a public trial. We emphasized the strong public policy behind confidentiality in such circumstances, and noted that the rights of the defendant involved, while surely important, were not absolute. Consequently, emphasizing the limited nature of the exclusion involved, we upheld the in camera procedure employed in Bell.

In United States v. Clark, 475 F.2d 240 (2d Cir. 1973), we again faced the problem of excluding a defendant from the suppression hearing. The Clark defendant, however, had been excluded from the entire hearing, not just the limited portion dealing with the secret profile. We emphasized that the approval of the in camera procedure in Bell had been limited to the exigencies at hand, i. e., the protection of the secret profile. Consequently, exclusion from those parts of the hearing that dealt with other subjects was held to be an undue abridgement of the rights of confrontation and public trial. In view of the basic nature of those rights, we reversed the judgment of conviction.

The holding in Clark mandates reversal here. Only. a small portion of the thirty pages of transcript covering Falen’s testimony is devoted to the secret profile. Unlike the ticket agent in Bell, who had no independent recollection of the defendant and could only testify as to his general practice, Falen specifically remembered what had happened here, probably because the suppression hearing was held within about two months of the incident, and described the day’s events in some detail.

The government candidly conceded at oral argument that the exclusion here “technically” violates the Clark rule. However, correctly noting that Clark involved a defendant who was excluded from the entire hearing, while appellant here was only excluded during Falen’s testimony, the government urges that we find any error to be harmless in nature. Even assuming arguendo that denials of such fundamental rights as those to public trial and confrontation can ever be deemed harmless, but see United States v. Crutcher, 405 F.2d 239, 244 (2d Cir. 1968), cert. denied, 394 U. S. 908, 89 S.Ct. 1018, 22 L.Ed.2d 219 (1969); United States ex rel. Bennett v. Rundle, 419 F.2d 599, 608 (3d Cir. 1969) (en banc); Tanksley v. United States, 145 F.2d 58, 59, 10 Alaska 443 (9th Cir. 1944); Davis v. United States, 247 F. 394, 398 (8th Cir. 1917), we are unable to so conclude in this case. Falen’s testimony here covered a multitude of points far outside the confidential scope of the profile. Inter alia, he maintained that he had “a recollection of this specific incident,” recalled in detail the type of identification that Ruiz-Estrella produced, testified about the placement of the posters, remembered that appellant was carrying a shopping bag and that he had observed its contents, and testified that appellant did not act suspicious in any way, was accompanied by a girl who carried no luggage, and was the only selectee that day.

In light of the rather substantial amount of testimony wholly unrelated to the profile which both appellant and the public were barred from hearing, we are unable to conclude that the error here was “harmless beyond a reasonable doubt,” Chapman v. California, 386 U.S. 18, 23, 87 S.Ct. 824, 17 L.Ed.2d 705 (1967). With such fundamental constitutional rights at stake, and particularly in view of the fact that the suppression hearing in this case served as a trial on the merits, we cannot exclude “any reasonable possibility of prejudice from defendant’s absence,” Peterson v. United States, 411 F.2d 1074, 1080 (8th Cir.), cert. denied, 396 U.S. 920, 90 S.Ct. 247, 24 L.Ed.2d 199 (1969), or from that of the public. Consequently, we hold that the district court erred in excluding appellant from all of Falen’s testimony, and that the judgment of conviction must be reversed.

III.

Even if appellant had not been improperly excluded from portions of the suppression hearing, we would nonetheless be constrained to reverse the conviction here. We have concluded that the search of the bag and seizure of the shotgun by the sky marshal, under the particular circumstances of this case, cannot be justified under the Fourth Amendment.

At the outset, we think it patent that the seizure here was not predicated upon a showing of probable cause — indeed, the government does not so contend. The government conceded at argument that Ruiz-Estrella provided no one with any reason to be suspicious of him at the airport; Falen so testified during the suppression hearing. To be sure, Ruiz-Estrella did fit the hijacking profile, but no one contends that this statistical survey, which Judge Weinstein in Lopez described as identifying an armed individual about 6% of the time, 328 F.Supp. at 1097, can come close to supplying traditional probable cause for a search. See United States v. Meulener, 351 F.Supp. 1284 (C.D.Cal.1972).

Thus, if the seizure here is to be justified, a theory other than Fourth Amendment probable cause will have to be employed. We recognized this in Bell, supra, and upheld the seizure of narcotics from the person of a selectee there under the rationale of Terry v. Ohio, 392 U.S. 1, 88 S.Ct. 1868, 20 L.Ed.2d 889 (1968). In Bell, the suspect had not only met the profile, but had activated a magnetometer when he passed through it, was unable to supply any identification, and volunteered the information that he “had just been released from the Tombs and that he was out on bail for attempted murder and narcotics charges,” 464 F.2d at 668-669. In light of those circumstances, we held that the sky marshal acted reasonably in conducting a “limited search of outer clothing” of the suspect, in order to avoid the perceived danger to himself and the airline-traveling public. Id. at 673-674.

Chief Judge Friendly concurred, but went further. Because of the great danger to human life and property posed by the hijacking threat, he suggested that

“the danger alone meets the test of reasonableness, so long as the search is conducted in good faith for the purpose of preventing hijacking or like damage and with reasonable scope and the passenger has been given advance notice of his liability to such a search so that he can avoid it by choosing not to travel by air.” Id. at 675.

Neither the panel opinion, written by Judge Mulligan, nor Judge Mansfield, who concurred separately, found it necessary to reach a conclusion, and hence deferred Judge Friendly’s theory for another day.

In Clark, we emphasized that the frisk in Bell had been justified only by the peculiar circumstances in that ease. We went on to note, 475 F.2d at 247:

“Absent proof of similar compelling circumstances or that Clark voluntarily and intelligently consented to the search, the opening and examination of Clark’s bag would in our view be justifiable only upon a showing that he was aware that he had a right to refuse to be searched if he should choose not to board the aircraft. See United States v. Bell, supra, 464 F.2d at 675, 676 (concurring opinions of Chief Judge Friendly and Judge Mansfield); United States v. Meulener, 351 F.Supp. 1284 (C.D.Cal.1972); cf. United States v. Slocum, 464 F.2d 1180 (3d Cir. 1972).”

The inquiry in this case, then, is a tripartite one. We must consider whether the seizure here is justified either (1) on a consent theory; (2) because of the great danger of hijacking and because Ruiz-Estrella knew he could avoid the search by not boarding the plane; or (3) by “similar compelling circumstances” to those in Clark.

A.

The government strongly urges that the seizure of the shotgun here was justified by Ruiz-Estrella’s consent. The Supreme Court has recently had occasion, in Schneckloth v. Bustamonte, 412 U.S. 218, 93 S.Ct. 2041, 2045, 36 L. Ed.2d 854 (1973), to undertake a comprehensive review of the subject of consent searches. The Court began from the proposition that “[w]hen a prosecutor seeks to rely upon consent to justify the lawfulness of a search, he has the burden of proving that the consent was, in fact, freely and voluntarily given.” Id. at 222, 93 S.Ct. at 2045, quoting from Bumper v. North Carolina, 391 U.S. 543, 548, 88 S.Ct. 1788, 20 L.Ed.2d 797 (1968). While the question of voluntariness is one that must be resolved through an examination of “the totality of all the [surrounding] circumstances,” id. at 227, 93 S.Ct. at 2048, the Court emphasized that the prosecution’s burden could not be met by only showing acquiescence to a claim of lawful authority. Id. at 233, 93 S.Ct. 2041; Bumper, supra, 391 U.S. at 548-549, 88 S.Ct. 1788.

To be sure, the Court refused to adopt a rule requiring that the prosecution show, as an absolute prerequisite to a consent theory, that the suspect knew of his right to refuse the search. But it did note, as did this court in United States v. Mapp, 476 F.2d 67, 77 (1973), that absence of such knowledge is one factor to be considered on the issue of the voluntariness of a consent search. And, the Court, while refusing to place what it termed “artificial restrictions” upon consent searches, stressed that '[t]o approve such searches without the most careful scrutiny would sanction the possibility of official coercion.” 412 U. S. at 229, 93 S.Ct. at 2048.

Since the inquiry necessarily focuses on the facts of a given case, it is to those at hand which we must now turn the mandated “careful scrutiny.” Given the specific factual setting adduced at the hearing below, we are unable to conclude that the government has met its burden of proving voluntarily and freely given consent, absent the taint of implicit official coercion.

True, Ruiz-Estrella did hand over the bag to the sky marshal; it was not wrenched from his hands against his will. But this conduct, while admittedly relevant, will not suffice to meet the government’s burden in this case. Whether we adopt the theory that appellant was told “he would have to go through a baggage search” (as LaSota stated on direct), or that he was “asked” to submit to such a search (as was testified on cross), is of little moment. The “request” took place after the agent, attired in a uniform and badge, took Ruiz-Estrella away from the boarding area, into a stairwell, and closed the door behind them. The fact that a suspect, who has not been warned of his right to refuse the search, silently hands over his bag in such circumstances will not support the inference of freely given consent.

It is instructive to contrast the situation here with that in Bustamonte, where the Supreme Court upheld a state court finding of voluntariness. There, the permission to search was elicited from an automobile passenger in the presence of five other companions, in a roadside encounter that was characterized as “congenial.” Indeed, even the driver of the car testified that the assent to the search was freely given. The Supreme Court stressed that “the environment” in which the consent took place was not inherently coercive, being a far cry from custodial “interrogation in some remote station house.” Id., 412 U.S. at 247 and n. 36, 93 S.Ct. at 2058

Here, the environment in which the police questioning took place comes much closer to a traditional custodial situation. The suspect was taken away from public areas into a stairwell, the door was closed behind him, and only Ruiz-Estrella and the sky marshal were present. Under these particular facts, the government has shown no more than acquiescence to apparent lawful authority, and the theory of consent cannot be accepted. See Lopez, supra, 328 F.Supp. at 1093. See also United States v. Allen, 349 F.Supp. 749, 752 (N.D.Cal. 1972).

B.

We move on then, to Chief Judge Friendly’s Bell theory, that a limited airport search is justified by the danger alone, as long as the defendant is aware of his ability to avoid the search by refusing to board the aircraft. Even assuming arguendo the correctness of this theory, which the Bell majority did not adopt, the facts here do not amount to “a showing that he [appellant] was aware that he had a right to refuse to be searched if he should choose not to board the aircraft,” Clark, supra, 475 F.2d at 247. The record makes it quite clear that neither the ticket agent, the boarding agent, nor the sky marshal made Ruiz-Estrella aware of any such option.

Nor can the posters be relied upon for such a showing. Even putting to one side the government’s concession at argument that it does not rely at all on the posters in this case, it is clear that the posters do not alert passengers to their ability to avoid search by refusing to board. Indeed, there was but a single brief reference to the posters in the entire suppression hearing, and we would be loathe to infer from that both that appellant had seen them and had taken them to apprise him of his ability to avoid search. Whatever the merits of Judge Friendly’s Bell concurrence, it is factually inapplicable here.

C.

The final question then, is whether the seizure here can be justified on the less-than-probable cause standards of Terry v. Ohio, upon which we relied in Bell. In Bell, as we have noted above, we found present a number of “specific and articulable facts,” Terry, supra, 392 U.S. at 21, 88 S.Ct. 1868, 20 L.Ed.2d 889, which justified the marshal’s suspicion of danger. The suspect in Bell not only met the profile, but also activated a magnetometer, produced no identification, and admitted to a recent serious criminal history. In light of all these factors, we found the limited pat-down frisk of the passenger to be reasonable, and upheld the introduction into evidence of contraband found during that frisk.

Our Clark opinion noted that we would require “similar compelling circumstances” to justify the opening and examination of a passenger’s bag. We think it patent that such circumstances do not here exist. Ruiz-Estrella neither passed through nor activated a magnetometer, and it is conceded that he did nothing at all during the period in question that could be construed as suspicious in nature. At worst, he met the profile and produced marginally confusing identification, and any reliance on the latter factor must be negatived by the marshal’s candid admission that the identification was irrelevant to the intended search.

The district judge sought to meet this absence of Terry “articulable facts” by reasoning that had a magnetometer been used, it would have been activated, so that the marshal was simply acting as a “human magnetometer” when he opened appellant’s bag. But such a conclusion not only ignores the settled principle that searches are not to be justified by what they turn up, Beck v. Ohio, 379 U.S. 89, 85 S.Ct. 223, 13 L.Ed.2d 142 (1964), it also misconstrues much of what we said in Bell. There, we emphasized that the use of a magnetometer is “a reasonable caution” in view of the magnitude of the societal interests involved and the absence of “the personal indignities of the frisk.” 464 F.2d at 673. Cf. United States v. Slocum, 464 F.2d 1180, 1182 (3d Cir. 1972); United States v. Epperson, 454 F.2d 769 (4th Cir.), cert. denied, 406 U.S. 947, 92 S.Ct. 2050, 32 L.Ed.2d 334 (1972). The quite minimal invasion of privacy involved in use of the magnetometer is precisely the factor that recommends its broad use; the same logic cannot be employed to justify a necessarily more intrusive search for objects that the device, if initially employed, might have revealed.

We need not today decide, as the Fourth Circuit did in Epperson, supra, whether the frisk of a passenger can be justified solely through use of the magnetometer. We do note, however, that we regard the facts of that case, where the suspect activated the device a second time after removing several metal objects from his person, as presenting a far more compelling situation than the one at hand. Similarly, we need not decide what precise quantum of “specific and articulable facts” about the suspect and his behavior are necessary, either in and of themselves, see United States v. Moreno, 475 F.2d 44 (5th Cir., 1973); United States v. Lindsey, 451 F.2d 701 (3rd Cir. 1971), cert. denied, 405 U.S. 995, 92 S.Ct. 1270, 31 L.Ed.2d 463 (1972), in conjunction with use of the profile, see United States v. Riggs, 474 F.2d 699, 703 (2d Cir. 1973), or in conjunction with the combined use of the profile and magnetometer, Slocum, supra; Lopez, supra, to meet the Terry standard. Especially when dealing with a concept as elusive as “reasonable suspicion,” the inquiry will of necessity be a case-by-case one. Compare Terry with Sibron v. New York, 392 U.S. 40, 64, 88 S.Ct. 1889, 20 L.Ed.2d 917 (1968). We hold only that under the particular facts of this case, where the suspect did nothing at all suspicious and did not activate the magnetometer, the Terry rationale will not support the search of his bag.

IV.

We thus conclude that the seizure of the shotgun here cannot be justified under any applicable rationale, and that the motion to suppress, on the particular facts shown, should have been granted. We have also concluded, for the reasons noted in part II, supra, that the exclusion of both appellant and the public from part of the suppression hearing was in error. Consequently, the judgment of the district court is reversed.

HAYS, Circuit Judge

(concurring and dissenting):

I agree with the majority that this judgment must be reversed. However, I concur in the opinion of the court only with respect to the exclusion of the defendant and the public from that portion of the suppression hearing during which ticket agent Falen testified to material unrelated to the FAA “profile” material.

I believe that the search which the appellant complains of in this case was lawful because the appellant consented to it. It is highly unrealistic to believe that this passenger was not aware that if he chose not to board the plane his baggage would not be searched. If it was ever true that passengers thought their baggage would be searched whether or not they boarded the plane, that day is long since past. In the absence of evidence to the contrary, I would hold that appellant consented to the search of his luggage.

The very recent case of Schneckloth v. Bustamonte, 412 U.S. 218, 93 S.Ct. 2041, 36 L.Ed.2d 854 (1973) lends support to this conclusion. There the Court said at p. 248, 93 S.Ct. at p. 2059:

“Voluntariness is a question of fact to be determined from all the circumstances, and while the subject’s knowledge of a right to refuse is a factor to be taken into account, the prosecution is not required to demonstrate such knowledge as a prerequisite to establishing a voluntary consent.”

      . Tlie factual background of both the profile and the general anti-hijacking system is described in detail in United States v. Lopez, 328 F.Supp. 1077, 1082-1092 (E.D.N.Y.1971). See also MeGinley & Downs, Airport Searches and Seizures— A Reasonable Approach, 41 Fordham L. Rev. 293, 301-06 (1972); Note, Airport Security Searches and the Fourth Amendment, 71 Colum.L.Rev. 1038-40.

      . On cross-examination, LaSota testified that lie “asked” Ruiz-Estrella to submit to a baggage search. For reasons which we spell out in detail in part III A infra, we find it unnecessary to resolve this apparent inconsistency, or even to decide whether an inconsistency exists.

      . Upon subsequent questioning by the FBI, appellant admitted that he had bought the shotgun and sawed off its barrel. He said that he had intended to rob a liquor store in Miami, and then flee to his native Santo Domingo.

      . Nor would the mere posting of signs in the airport seem to meet the government’s burden of showing voluntariness. Meulener, supra, 351 F.Supp. at 1288; Lopez, supra, 328 F.Supp. at 1092. We need not reach that question in this case, however, since the government maintained at oral argument, apparently in an attempt to minimize the difficulties arising from Falen’s in camera testimony, that it did not rely upon the presence of the warning posters.

      . At least two commentators have viewed Judge Friendly’s Bell concurrence as inconsistent with both Terry and general Fourth Amendment principles. See Mc-Ginley & Downs, supra n. 1, 41 Fordham L.Rev. at 315-16. Cf. Note, Airport Security Searches and the Fourth Amendment, supra n. 1, 71 Colum.L.Rev. at 1049-50, suggesting that conditioning exercise of the right to travel upon relinquishment of Fourth Amendment rights is constitutionally impermissible. In view of our disposition of this ease, we express no views on the merits of either of thene contentions.

      . See note 4, supra.

      . There was apparently no metal-deteeting device present in the particular gate where this incident took place. Compare the fact situation in Bell and Lopez, both of which involved incidents at the same airport where magnetometers were present,

      . But see Meulener, supra, where the court suppressed evidence obtained through a search of the luggage of a passenger who both met the profile and activated the magnetometer.


author: AINSWORTH, Circuit Judge:

text:
    MIDLAND DISTRIBUTORS, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
    No. 72-3019.
    United States Court of Appeals, Fifth Circuit.
    July 11, 1973.

      Stephen T. Dean, Charles H. Egerton, Orlando, Fla., for plaintiff-appellant.
    Scott P. Crampton, Asst. Atty. Gen., Tax Div., Dept, of Justice, Meyer Rothwacks, Jay R. Weill, Attys., Robert S. Watkins, Asst. U. S. Atty., Washington, D. C., John L. Briggs, U. S. Atty., Jacksonville, Fla., for defendant-appellee.
    Before AINSWORTH, GODBOLD and CLARK, Circuit Judges.
   AINSWORTH, Circuit Judge:

Midland Distributors, Inc. sued the United States for a refund of income taxes following payment under protest of an assessed deficiency. At issue on appeal are questions whether certain advances by Midland to corporations should be treated as equity capital rather than indebtedness and whether upon liquidation of the corporations when the advances were unrecoverable they should be charged as ordinary rather than capital losses. We affirm the district court’s judgment in favor of the United States.

Midland is owned by Louis Fink and Melvin Wideman with its principal place of business at Orlando, Florida. Through salesmen assigned to cover various territories, Midland sells building materials and supplies throughout most of the State of Florida.

On August 7, 1963, Linark, Inc. was incorporated with its principal place of business in Cocoa, Florida. The stockholders were Midland, owner of 50 per cent for which it paid $1,250, and Otto Wry Noble, an individual who owned the other 50 per cent and paid the same amount. Midland and Noble made further advances to the corporation of $20,000 each at the time of incorpora-, tion. Linark bought its inventory of building materials from Midland at cost plus 5 per cent, stored the inventory in a rented warehouse, and sold its merchandise at a markup of about 35 per cent. This arrangement enabled Linark to service customers locally and thereby avoid any delays previously experienced when customers’ orders had to be routed through Midland at Orlando. Linark operated about a year and a half before Noble wrote himself a check for several thousand dollars and disappeared. On October 15, 1964, Linark ceased operation, owing Midland $15,219.35 on open account. At that time Midland’s books reflected the following:

Stock investment in Linark $ 1,250.00
Notes receivable — Linark 20,000.00
Accounts receivable — Linark 15,219.36
Total $36,469.36

In the liquidation of Linark, Midland received $3,000 in assets which it applied against the notes receivable, the oldest debt, thus leaving the Linark account with a balance of notes receivable of $17,000, and accounts receivable of $15,219.36. These two amounts totaled $32,219.36 and the total was charged by Midland against its reserve for bad debt, thereby producing an ordinary loss. See 26 U.S.C. § 166(c). The remaining stock investment of $1,250 was charged as a capital loss. See 26 U.S.C. §§ 165, 1211, 1221, 1222, 1223. The Internal Revenue Service reclassified the Linark note as equity capital and applied the $3,000 received in liquidation against the accounts receivable. As a result of the IRS adjustments, with respect to Lin-ark, Midland wound up with a $12,219.-36 ordinary loss on accounts receivable and with a balance of $21,250 ($20,000 + $1,250) equity as a capital loss.

On February 15, 1963, ABS Company, Inc. was incorporated with its principal place of business in Fort Pierce, Florida. The stockholders were Midland, owning 50 per cent for which it paid $1,200; William G. Cooper, an individual who owned 25 per cent and paid $600; and Henry C. Meyer who owned 25 per cent and paid $600. Midland made a further advance of $20,000, Cooper an advance of $10,000, and Meyer an advance of $10,000 at the time of incorporation. ABS had essentially the samé business operation as Linark. ABS operated about two years when part of its inventory was stolen. On May 29, 1965, ABS ceased operation owing Midland $22,966.36 on open account. At that time Midland’s books reflected the following :

Stock investment in ABS $ 1,200.00
Notes receivable — ABS 20,000.00
Accounts receivable — ABS 22,966.36
Total $44,166.36

In the liquidation of ABS, Midland received $20,000 in assets which it applied against the notes receivable, the oldest debt, thus leaving the Midland account with a balance of accounts receivable of $22,966.36. This amount was charged by Midland against its reserve for bad debt, thereby producing an ordinary loss. The remaining stock investment of $1,200 was charged as a capital loss. The Internal Revenue Service reclassified the ABS note as equity capital and applied the $20,000 received in liquidation against the accounts receivable. As a result of the IRS adjustments, with regard to ABS, Midland wound up with a $2,966.36 ordinary loss on accounts receivable and with a balance of $21,200 ($20,000 + $1,200) equity as a capital loss.

Aside from challenging the Service’s treatment of the notes from Linark and ABS as equity and the Service’s application of liquidation assets against accounts receivable instead of against the notes, Midland also alternatively claims the loss on the stock and notes should be treated as ordinary and necessary business expenses under 26 U.S.C. § 162(a) or an ordinary loss under 26 U.S.C. § 165(a).

I.

The advances made by Midland at the time of incorporation had sufficient characteristics as equity capital to justify the district court’s conclusion to that effect. Although the advances by the stockholders may have been reflected by corporate notes, we have previously indicated that what the parties termed the advances is not determinative. See United States v. Snyder Bros. Co., 5 Cir., 1966, 367 F.2d 980, 982, cert. denied, 386 U.S. 956, 87 S.Ct. 1021, 18 L.Ed.2d 104 (1967). What the parties call the advances is only one of many factors to consider in deciding whether they are debt or equity for tax purposes. See Estate of Mixon v. United States, 5 Cir., 1972, 464 F.2d 394, 402; Montclair, Inc. v. Comm’r, 5 Cir., 1963, 318 F.2d 38, 40. No single factor is controlling. John Kelly Co. v. Comm’r, 326 U.S. 521, 530, 66 S.Ct. 299, 304, 90 L.Ed. 278 (1946). Under the applicable law, each case must be judged according to its own unique fact situation. Tomlinson v. 1661 Corp., 5 Cir., 1967, 377 F.2d 291, 295.

Although taxpayer alleges Linark and ABS issued demand notes, the creditor shareholders did not intend to call the notes as long as Linark and ABS operated properly, and there was no fixed maturity date. See generally Curry v. United States, 5 Cir., 396 F.2d 630, 634, cert. denied, 393 U.S. 967, 89 S.Ct. 401, 21 L.Ed.2d 375 (1968). By casting the advances in the form of demand notes, Midland had greater control over Linark and ABS. See generally In re Indian Lake Estates, Inc. v. United States, 5 Cir., 1971, 448 F.2d 574, 579.

Midland, however, relies on the fact that there was no provision in the notes subordinating them to claims of outside creditors. Cf. Plantation Patterns, Inc. v. Comm’r, 5 Cir., 462 F.2d 712, cert. denied, 409 U.S. 1076, 93 S.Ct. 683, 34 L.Ed.2d 664 (1972). This factor is not important here because there were no other substantial creditors. Furthermore, the debts were so large in comparison to capital contributions that it is doubtful whether Linark and ABS could have secured similar loans from an independent lending institution.

The district court found that the advances were used in part for purposes typically fulfilled by equity contributions, such as to purchase fixtures and equipment. See generally Tyler v. Tomlinson, 5 Cir., 1969, 414 F.2d 844, 848. Even more important, these advances were subject to the fortunes of the venture in that full payment could not be expected unless Linark made a profit. See generally Dillin v. United States, 5 Cir., 1970, 433 F.2d 1097, 1103. Accordingly, taxpayer cannot charge the worthless notes against its reserve for bad debt, since the debt was properly reclassified as stock.

II.

The next issue concerns the application of the $3,000 of assets in the Linark liquidation and $20,000 of assets in the ABS liquidation. Taxpayer contends that these assets should be applied against the notes while the Government contends that the assets should be applied against accounts receivable. Resolution of this issue depends on the status of the notes. A leading commentator states the well-known rule that “the assets of the dissolved corporation are a trust fund against which the corporate creditors have a prior claim before that of the stockholders.” 16A W. Fletcher, Cyclopedia of the Law of Private Corporation § 8161, p. 371 (1962).

Midland is a creditor with regard to the accounts receivable and a stockholder with regard to the notes now classified as equity capital. Once the notes are characterized as stock, thus preventing an unjustified bad debt deduction, it is also appropriate to classify the debt as stock for the purpose of allocating liquidation assets. Therefore, we affirm the district court’s application of these liquidation assets against the accounts receivable.

III.

Taxpayer contends that even if the notes were equity, an ordinary rather than a capital loss is appropriate. According to 26 U.S.C. § 1221, the term “capital asset” includes all property such as the notes here, except certain listed categories like inventory or accounts receivable acquired in the ordinary course of trade or business.

The Supreme Court had occasion to consider this definition of a capital asset in Corn Products Refining Co. v. Comm’r, 350 U.S. 46, 76 S.Ct. 20, 100 L.Ed. 29 (1955), a case involving a national manufacturer of products made from grain corn. Two years of droughts caused corn prices to rise above a level where the company could compete with cane and beet sugar. The company then purchased corn futures to assure a supply of corn at a stable price. Recognizing that the futures were an integral part of the company’s manufacturing operation, the Supreme Court held that the futures were not a capital asset and Corn Products’ gain on the purchase and sale of such futures was taxed as ordinary income.

This Court in Schlumberger Technology Corporation v. United States, 5 Cir., 1971, 443 F.2d 1115, applied the principle in Corn Products to equity where taxpayer acquired the stock and made loans to the corporations in order to obtain certain specialized expertise necessary to computerize taxpayer’s business and to aid it in obtaining markets for its electronic business. When the stock and loans were divested at a loss, we held that the stock and loans were not capital assets since taxpayer purchased the assets as an integral and necessary act in the conduct of its business rather than being motivated by an investment purpose. An ordinary business expense was allowed to taxpayer.

Midland did not contribute to equity as an integral and necessary act in the conduct of Midland’s business. Unlike Com Products where the purchase of futures was necessary to supply basic raw material and unlike Schlumberger where the acquisition of a corporation with scientific expertise was necessary to obtain specialized expertise, here Mr. Fink testified on behalf of Midland that he was satisfied with his preexisting sales arrangement.

Midland established an entity separate and apart from its own business, even though Linark and ABS were to handle customers previously contacted by territory salesmen. As the district judge noted in his closing remarks at the end of the trial, Midland participated more because of an interest in Linark’s and ABS’s anticipated 35 per cent markup than because of anticipated direct profit from selling inventory to Linark and ABS. We agree that Midland’s advances were to equity and motivated by investment reasons. Thus they were capital assets and the taking of an ordinary deduction in the tax years involved would be improper.

Affirmed.

      . See generally B. Bittker & J. Eustiee, Federal Income Taxation of Corporations and Shareholders ¶ 4.04 (1971) ; 4A J. Mertens, The Law of Federal Income Taxation § 26.10 (1972) ; Plumb, The Federal Income Tax Significance of Corporate Debt: A Critical Analysis and a Proposal, 26 Tax.L.Rev. 369 (1971) ; Stone, Debt-Equity Distinctions in the Tax Treatment of the Corporation and Its Shareholders, 42 Tul.L.Rev. 251 (1968). See also 26 U.S.C. § 385, passed as part of the Tax Reform Act of 1969; Comment, Toward New Modes of Tax Decision-making'— The Debt-Equity Imbroglio and Dislocations in Tax Lawmaking Responsibility, 83 Harv.L.Rev. 1695 (1970).

      . Mr. Fink stated: “I never made any demand. We were willing to go along with whatever the status quo was so long as the branches [Linark and ABS] operated properly.”

      . Under the standard of Rule 52(a), Fed.R. Civ.P., we do not find the district court’s factual determination “clearly erroneous.” Mr. Fink testified that among the assets purchased were racks for the inventory, desk, chair, and a truck for one corporation. It was reasonable to infer that these assets cost each corporation more than the capital contributions, so that the corporation had to use some portion of the advances to purchase these capital assets.

      . Mr. Fink’s testimony was as follows:
      [W]e had a very good going business in those territories. We didn’t seek out Noble or Cooper. They sought us out. We were happy with the business we were doing and when we negotiated and contemplated opening these warehouses, I was very much concerned that this would not result in a diminishing of the profit that Midland was already making in those territories .... [0]ne of the terms, one of the conditions I insisted on with both of these so-called managers, was the fact that Midland could terminate within five days the arrangement that was contemplated at any time that it so desired.

      . The district judge’s closing remarks were as follows:
      Now, I cannot attach much significance to the position that they were interested only in getting the hidden profit in the quote, cost unquote figure, because it was obvious that they expected to get something like a thirty-five per cent markup over the cost plus five per cent and it would be out of that that they were to get, were presumably going to get some profit out of that. If no one expected that profit to materialize, there would have been no purpose in setting up the business. Certainly, it’s difficult to believe that the other parties would have gone into these businesses not expecting there to be any profit except that which was in the hidden profit in the cost figures. That just doesn’t appear logical ....


author: HEANEY, Circuit Judge.

text:
    UNITED STATES of America, Appellee, v. Leon Thomas WILLIAMS, Appellant.
    No. 73-1155.
    United States Court of Appeals, Eighth Circuit.
    Submitted June 14, 1973.
    Decided July 11, 1973.
    Rehearing Denied July 27, 1973.

      Phillip B. Sachs, Clayton, Mo., for appellant.
    Michael W. Reap, Sp. Atty., U. S. Dept, of Justice, Office for Drug Abuse Law Enforcement, St. Louis, Mo., for appellee.
    Before CLARK, Associate Justice, Retired, and HEANEY, Circuit Judge, and SCHATZ, District Judge.

       United States Supreme Court, sitting by designation.

       District of Nebraska, sitting by designation.

   HEANEY, Circuit Judge.

Leon Thomas Williams appeals from his conviction on two counts of knowingly and intentionally distributing heroin, in violation of 21 U.S.C. § 841(a)(1). He was sentenced to ten years imprisonment to be followed by a three-year mandatory parole period on each count, the sentences to run concurrently.

Williams first contends that there was insufficient evidence to support his conviction. He asserts that the testimony given by prosecution witnesses does not support the conclusion that delivery (distribution) of heroin by the defendant to a government informant was actually effected, and he, thus, reasons that an essential element of the crime was not proven. We disagree.

The government proved that delivery had taken place through the testimony of agents who witnessed the two transactions between the defendant and a paid government informant, Charles Bullock. In each case, the procedures surrounding the transactions were as follows:

(a) The informant was initially searched by an experienced narcotics agent and no narcotics or money was found.

(b) The informant was given money by the agents to make the purchase.

(c) The agents kept the informant under.continuous observation to the designated meeting place with the defendant.

(d) Observation of the defendant transferring something to the informant and the transfer of something from the informant to the defendant was made by the agents with the aid of binoculars.

(e) The observation continued through the informant’s return to the agents’ car, whereupon the informant turned over the packets, later determined to contain heroin.

(f) The informant was again searched and no money was found.

The defendant maintains here, as he did before the jury, that the initial search of the informant by the government agents was inadequate, and that the testimony of the agents alone was insufficient to prove beyond a reasonable doubt that the defendant delivered heroin to the informant. We disagree. The evidence must be viewed in a light most favorable to the prevailing party, and the verdict must be sustained where, as here, there is substantial evidence to support it. See United States v. Warner, 428 F.2d 730, 736 (8th Cir.), cert. denied, 400 U.S. 930, 91 S.Ct. 194, 27 L.Ed.2d 191 (1970). Uncontradicted testimony in the record indicates that an experienced narcotics agent conducted a thorough search. Furthermore, we note that this Court on a number of prior occasions has held that there was sufficient evidence to support a jury finding that a defendant delivered heroin to an informant where the evidence in the record was similar to that present here. See, e. g., United States v. Martin, Jr., 482 F.2d 202 (8th Cir., 1973); United States v. Mosby, 422 F.2d 72 (8th Cir.), cert. denied, 399 U.S. 914, 90 S.Ct. 2217, 26 L.Ed.2d 571 (1970).

Williams also contends that the jury, by rendering a guilty verdict, acted contrary to the District Court’s instruction that each element of the offense must be proven beyond a reasonable doubt. Consistent with his first contention, he maintains that the proof provided was insufficient to establish beyond a reasonable doubt that the defendant deliv-

ered heroin to the informant on each occasion. We disagree. The trial court’s jury instructions were proper and clear, and we must assume that the jury followed them. See, Mee v. United States, 316 F.2d 467, 470 (8th Cir. 1963), cert, denied, 377 U.S. 997, 84 S.Ct. 1923, 12 L.Ed.2d 1049 (1964).

Williams’ final contention is that the trial court erred in not requiring the informant to testify or, in the alternative, by failing to give an “absent witness” instruction.

First, in regard to the failure of the trial court to require the informant to testify, the applicable rule in this Circuit is that stated by Judge Van Oosterhout in United States v. Mosby, supra, 422 F.2d at 74.

“Absent unusual circumstances such as knowingly concealing evidence favorable to a defendant, the Government has a wide discretion with respect to the witnesses to be called to prove its case. The government is not ordinarily compelled to call all witnesses competent to testify including special agents or informers. * * * ”

Here, there were no unusual circumstances. There is nothing beyond the defendant’s speculation on this appeal to suggest that the failure by the government to call Bullock to testify was induced by any improper motive or that the government had knowledge that Bullock might give unfavorable testimony. The defendant’s counsel was given the informant’s name a few days before trial; and at no time did he; (a) file a motion requesting the government to produce the informant, (b) request a continuance so that the informant might be brought to testify, or (c) attempt to subpoena the informant. These factors make this case clearly distinguishable from United States v. Joseph Pollard, 479 F.2d 310 (8th Cir. 1973).

Similarly, the defendant first raises the “absent witness” instruction matter on this appeal. He neither requested that the court below give such an instruction, nor did he object below to the failure of the court to give the instruction. Accordingly, under Rule 30 of the Federal Rules of Criminal Procedure, the defendant is precluded from raising this contention on appeal. See, United States v. Folsom, Jr. and United States v. Singer, 479 F.2d 1 (8th Cir. 1973). In any event, we note that the propriety of such an instruction is largely left to the discretion of the trial court, see, Morrison v. United States, 365 F.2d 521 (D.C.Cir.1966), and it is apparent that the omission of such an instruction under the circumstances of this case did not amount to plain error.

Affirmed.

      . The defendant describes this desired instruction as :
      “The jury might ‘draw the inference that the testimony of that witness would be unfavorable’ to the government unless the witness’s absence was sufficiently explained.”


text:
    UNITED STATES of America, Plaintiff-Appellant-Cross Appellee, v. PARK CITIES BANK & TRUST COMPANY, Defendant-Appellee-Cross Appellant.
    No. 72-2887.
    United States Court of Appeals, Fifth Circuit.
    June 15, 1973.
    Frank D. McCown, U. S. Atty., Fort Worth, Tex., Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, Dennis M. Donohue, Attys., Tax Div., Dept, of Justice, Washington, D. C., for plaintiff-appellant.
    Jack M. Kinnebrew, Wilson W. Herndon, Dallas, Tex., for defendant-appellee.
    Before THORNBERRY, AINSWORTH and RONEY, Circuit Judges.
   AINSWORTH, Circuit Judge:

The United States sued Park Cities Bank and Trust Company under 26 U.S.C. § 3505(b) (1971) to recover $17,099.74 withholding tax owed to the Government by one of the bank’s customers, Newby-Fitch and Associates, Inc., for the first three quarters of 1968. The district court granted judgment in favor of the Government for $11,427.75 attributable to the second quarter and $1,324.85 attributable to the third quarter, but failed to award recovery for $4,-347.14 attributable to the first quarter. The Government appeals insofar as the district court failed to grant judgment for the first quarter, the Government contending that the salient facts were the same for all three quarters. Taxpayer cross-appeals the judgment relative to the second quarter, contending that the Government’s recovery should be limited to $4,055.61 instead of $11,427.75 actually awarded. We agree with the Government’s contention and reverse insofar as the judgment failed to grant recovery for the first quarter and affirm the stated recovery for the second and third quarters.

Newby-Fitch was required to withhold federal income tax from wages paid its employees and to pay such withheld amounts to the Government. See 26 U.S.C. §§ 3402(a), 3403 (1971). Each employee receives a tax credit for the amount withheld from his wages. See 26 U.S.C. § 31(a) (1971). In this case Newby-Fitch withheld the tax but was financially unable to pay over to the Federal Government $4,347.14 for the first quarter of 1968, $11,427.75 for the second quarter, and $1,324.85 for the third quarter.

The statute involved, section 3505(b), was passed by Congress to discourage banks from loaning employers enough money to pay employees’ “net wages” but not enough to pay the withholding tax due on wages. See S.Rep.No.1708, 89th Cong., 2d Sess. (1966), 1966-2 Cum.Bull. 876, 891. To hold the bank liable, two essential conditions must exist. First, the bank must supply funds for the specific purpose of paying wages. Second, the bank must have actual notice or knowledge that the employer will not be able to make timely payment of the withholding tax to the Government. See generally United States v. Algernon Blair, Inc., 5 Cir., 1971, 441 F.2d 1379, 1381 (1971). The liability of the bank is limited to an amount equal to 25 per cent of the funds supplied for the purpose of paying wages.

The evidence is clear that the Government has met the first condition. New-by-Fitch maintained two accounts at the Park Cities Bank, one a payroll account entitled in the bank records “NewbyFitch & Associates, Inc. Payroll Aect” and the other a general account entitled “Newby-Fitch & Associates, Inc.” As early as January, and during each of the first three quarters in 1968, checks drawn on the payroll account frequently exceeded the balance in the account; however, the bank paid most of the overdrafts. Deposits from the general account were made in the payroll account, but such deposits sometimes resulted in overdrafts on the general account which the bank honored. Additionally, the bank made loans to Newby-Fitch, and part of the amounts loaned were deposited in the payroll account. The bank’s payment of overdrafts and grant of loans for the benefit of the payroll account was clear evidence that the bank supplied funds for the specific purpose of paying employees’ wages within the meaning of section 3505(b).

In each quarter the amount of funds supplied was more than four times the overdue taxes sought to be collected by the Government. Therefore, the only remaining issue concerns the second condition relative to actual notice or knowledge of the bank.

Section 3505(b) provides that the bank, at the time the funds were supplied, must have had “actual notice or knowledge (within the meaning of section 6323(i) (1)) that such employer does not intend to or will not be able to make timely payment or deposit of the amounts of tax required by this subtitle to be deducted and withheld by such employer from such wages.” According to section 6323(i) (1), 26 U.S.C. § 6323(i) (1) (1971), the bank is deemed to have “actual notice or knowledge of any fact from the time such fact is brought to the attention of the individual conducting such transaction.” See generally United States v. Estate of Swan, 5 Cir., 1971, 441 F.2d 1082, 1087.

Here the loan officer in charge of the Newby-Fitch accounts from the beginning of the year through early June was Harold W. Lehrman, a vice president of the bank. He initialed his approval on overdrafts and also granted the loans. His working relationship with the management of Newby-Fitch gave him personal knowledge of the company’s financial status. On January 29, 1968, he wrote a letter on behalf of Park Cities Bank requesting the Small Business Administration to purchase 75 per cent of a proposed bank loan of $150,000 to New-by-Fitch. After reviewing the request the SBA refused to participate for reasons expressed in a letter to Lehrman dated February 19, 1968, which pertained to what was stated to be NewbyFitch’s disproportionate debts to net worth, consistent operating losses despite increased sales, inadequate working capital even after the loan, and insufficient collateral to secure the loan. Lehr'man did not bring this SBA letter to the attention of other bank officials.

Moreover, he suppressed other facts about the company. For example, the bank had a Loan and Discount Committee composed of one bank employee and eight independent businessmen who reviewed loans in excess of $2,500 and all overdrafts paid by the bank. Lehrman granted loans to Newby-Fitch in excess of $2,500 without obtaining the committee’s approval, and struck from a list of overdrafts several Newby-Fitch overdrafts which were not paid in full by the company. In Weekly Maturity Reports submitted to the committee showing amounts outstanding, Lehrman altered the March 31, 1968 Report to show New-by-Fitch owing about $43,000 instead of the correct amount of $53,000, and altered the June 17, 1968 Report to show $69,000 outstanding instead of the actual amount of $109,000.

In June, Lehrman was relieved of his duties for engaging in such irregularities. Even after his departure, the bank continued to approve overdrafts and grant loans to Newby-Fitch.

The district court made a factual determination that Lehrman understood the financial condition of Newby-Fitch well enough to know the company would not be able to pay the amount of tax required to be paid on June 30, 1968, and that other executive officers knew New-by-Fitch would not be able to pay the tax due September 30, 1968. The district court made no finding with regard to Lehrman’s knowledge about NewbyFitch’s ability to pay the tax due for the first quarter on March 31, 1968, but we consider the evidence overwhelming that Lehrman also knew that Newby-Fitch would be unable to pay the tax due on March 31, 1968.

The bank contends, however, that Lehrman’s knowledge of the company’s inability to pay should not be imputed to it because of the well-known agency rule that the principal is not charged with knowledge of his agent where the agent deals for himself or where he is more intent on furthering the interests of a third party than that of his principal. Park Cities Bank argues that this rule is applicable by virtue of the legislative history of section 6323(i)(l). Internal Revenue Code section 6323 (i) (1) is clear in expressing the rule that knowledge by the individual conducting a transaction is deemed to be knowledge by the organization, so we need not resort to the legislative history for further guidance.

Since the bank knew through Lehrman that Newby-Fitch would not be able to make timely payments of the withholding tax to the Government, it is liable for the amounts due in all three quarters.

Newby-Fitch has cross-appealed on the theory that the bank did not have notice of Newby-Fitch’s financial condition until June when Lehrman’s employment was terminated, and that only the funds supplied after his departure should be considered for purposes of the 25 per cent limitation in section 3505(b). However, we have already concluded that Lehrman’s knowledge is imputed to the bank, and thus, funds supplied by the bank in all three months of the second quarter were properly considered by the district court.

We, therefore, affirm the district court’s holding in favor of the Government for the second and third quarters of 1968, and reverse insofar as the district court failed to award judgment for the Government as to the first quarter.

Reversed in part, affirmed in part.

      . Section 3505 (b) reads as follows :
      “If a lender, surety, or other person supplies funds to or for the account of an employer for the specific purpose of paying wages of the employees of such employer, with actual notice or knowledge (within the meaning of section 6323 (i) (1)) that such employer does not intend to or will not be able to make timely payment or deposit of the amounts of tax required by this subtitle to be deducted and withheld by such employer from such wages, such lender, surety, or other person shall be liable in his own person and estate to the United States in a sum equal to the taxes (together with interest) which are not paid over to the United States by such employer with respect to such wages. However, the liability of such lender, surety, or other person shall be limited to an amount equal to 25 percent of the amount so supplied to or for the account of such employer for such purpose.”

      . There was an involuntary petition in bankruptcy filed against Newby-Fitch on August 2, 1968.

      . Section 6323(i) (1) reads as follows:
      “For purposes of this subchapter, an organization shall be deemed for purposes of a particular transaction to have actual notice or knowledge of any fact from the time such fact is brought to the attention of the individual conducting such transaction, and in any event from the time such fact would have been brought to such individual’s attention if the organization had exercised due diligence. An organization exercises due diligence if it maintains reasonable routines for communicating significant information to the person conducting the transaction and there is reasonable compliance with the routine. Due diligence does not require an individual acting for the organization to communicate information unless such communication is part of his regular duties or unless he has reason to know of the transaction and that the transaction would be materially affected by the information.”

      . See 3 C.J.S. Agency § 269, pps. 202, 203. Even if this rule applied, we do not believe that the facts show that Lehrman acted adversely to the bank’s interests. Quite the contrary, he appears to have undertaken to preserve the Newby-Fitch loans because he believed that with more time the company could repay Park Cities Bank in full. There is no evidence that he was motivated by personal gain, or that he had any interest in Newby-Fitch beyond that of a customer of the bank. Furthermore, the district court decided that his knowledge should be imputed to the bank under the exception to the adverse interest rule, that is, that an adverse agent’s knowledge is imputed to his principal if the agent was the sole representative in the transaction.

      . The relevant Senate Report No. 1708, 89th Cong., 2d Sess. (1966), 1966-2 Cum. Bull. 876, 885, indicates that Congress adopted the Uniform Commercial Code concept of “actual notice or knowledge” expressed in UCC 1-201(27). With Congress’s adoption of the concept in UCC 1-201(27), the bank contends that Congress adopted also the general rules of agency expressed in UCC 1-103, entitled “Supplementary General Principles of Law Applicable,” which reads in pertinent part as follows: “Unless displaced by the particular provisions of this Act, the principles of law and equity, . principal and agent, . . . shall supplement its provisions.”

      . Furthermore, the legislative history does not lead to a different result. Congress did no more than track the language of UCC 1-201(27) without adopting any other concept of the Uniform Commercial Code. UCC 1-103 declares that the principles of agency apply only if not “displaced by the particular provisions of this Act.” The specific rule of UCC 1-201(27) appears to displace the general principles of agency in the circumstances of this case.