author: HAYNSWORTH, Chief Judge:

text:
    John DOE, Appellant, v. James P. BOYLE, District Director of Internal Revenue Service, and Johnnie M. Walters, Commissioner of Internal Revenue, Appellees.
    No. 73-2218.
    United States Court of Appeals, Fourth Circuit.
    Argued Feb. 8, 1974.
    Decided April 3, 1974.
    A. Andrew Giangreco, Alexandria, Va. (Giangreco, Seay & Manuel, Alexandria, Va., on brief), for appellant.
    Michael J. Roach, Atty., U. S. Dept, of Justice (Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, William A. Friedlander, Atty., U. S. Dept, of Justice, Brian P. Gettings, U. S. Atty., and David G. Lowe, Asst. U. S. Atty., on brief), for appellees.
    Before HAYNSWORTH, Chief Judge, and RUSSELL and FIELD, Circuit Judges.

      . The Government does not contest this allegation. It is conceded, and will be assumed for the purposes of this appeal, that criminal charges will be filed against the appellant.

   HAYNSWORTH, Chief Judge:

Appellant, appearing anonymously as John Doe, has failed to file his 1970 and 1971 income tax returns. He states that he is now prepared to file those returns, but has not done so because he fears that the Internal Revenue Service will use his late-filed returns as evidence in an action against him for failure to make a timely return, 26 U.S.C. § 7203. He seeks to enjoin the Internal Revenue Service from using those returns, if and when he files, in any criminal proceeding against him. The district court held that appellant had no right to proceed anonymously and therefore granted the Government’s motion to dismiss. We affirm.

Jurisdiction was predicated upon 28 U.S.C. § 1343(3). This is not a proper basis for jurisdiction against federal officials, Lynch v. Household Finance Corp., 405 U.S. 538, 547, 92 S.Ct. 1113, 31 L.Ed.2d 424 (1972). Jurisdiction lies, if at all, under 28 U.S.C. § 1331. However, appellant will not be allowed to amend his complaint to allege the requisite amount-in-controversy because he is not entitled to relief in any case.

Appellant alleges that he is now under investigation by the Internal Revenue Service. He contends that the use of late-filed returns, which he is still compelled to file under 26 U.S.C. § 6012, would involve the admission of a crucial element of the crime with which he expects he will be charged, and that compulsory filing would violate his fifth amendment privilege against self-incrimination. In concert to that argument, he suggests that were he to prosecute this action in his own name, the complaint could also be used later as an admission of failure to file timely returns. To require a person to identify himself in his pleadings as a precondition to vindicating his constitutional rights is, in effect, compelling him to testify against himself.

While the characterization of a complaint as “compelled testimony” does not have a familiar ring, there may be merit in appellant’s contention that, when an action is initiated to protect a constitutionally guaranteed right against self-incrimination, the judicial papers and proceedings in that action could be considered “compelled testimony” to the extent that the Government seeks to introduce them in a subsequent criminal prosecution. Using a similar approach, the Supreme Court has held that testimony taken at an evidentiary hearing on a motion to suppress is inadmissible at the trial-in-chief. Simmons v. United States, 390 U.S. 377, 389-394, 88 S.Ct. 967, 19 L.Ed.2d 1247 (1968).

We need not reach these interesting questions, however. Appellant has not urged that he has a constitutional right not to file his return. Rather his sole contention is that his unfiled returns, if filed, cannot be used as evidence against him. This action is, in effect, a motion to suppress in anticipation of indictment. It is therefore premature.

In the event of any subsequent criminal prosecution, the taxpayer may then assert what fifth amendment rights, if any, he may have against the prosecution’s use of any return he may have filed.

Affirmed.

      . Appellant is not seeking to proceed as John Doe in order to keep his identity unknown to the Internal Revenue Service. It was stated at oral argument that the Internal Revenue Service is aware of appellant’s identity.

      . There is no such right, California v. Byers, 402 U.S. 424, 91 S.Ct. 1535, 29 L.Ed.2d 9 (1971), United States v. Sullivan, 274 U.S. 259, 47 S.Ct. 607, 71 L.Ed. 1037 (1927). In any case, it would clearly turn the law on its head to say that a right to refuse to file one’s income tax returns arises in order to avoid or defend a criminal prosecution for failure to file.


source: Caselaw Access Project

author: PER CURIAM.

license: Public Domain

text:
    UNITED STATES of America, Appellee, v. James Alfred DUNN and William Carl Post, Appellants.
    Nos. 73-1868, 73-1900.
    United States Court of Appeals, Eighth Circuit.
    Submitted April 16, 1974.
    Decided April 18, 1974.

      Jack W. Meyer, Lincoln, Neb., on brief, for appellant in No. 73-1868.
    Douglas L. Kluender, Lincoln, Neb., on brief, for appellant in No. 73-1900.
    William K. Schaphorst, U. S. Atty., and Daniel E. Wherry, Asst. U. S. Atty., Lincoln, Neb., on brief for appellee.
    Before MATTHES, Senior Circuit Judge, and ROSS and WEBSTER, Circuit Judges.
   PER CURIAM.

Count I of an indictment charged that on or about August 15, 1973, William Carl Post, who was in the lawful custody of the United States Marshal for the District of Nebraska, did unlawfully and willfully attempt to escape from such custody in violation of 18 U.S.C. § 751 (a). Count II of the same indictment charged that from on or about July 15, 1973, to the date of the filing of the indictment (September 21, 1973) Post and James Alfred Dunn entered into a conspiracy with David Kennell and his wife, Beverly Kennell, (not named as defendants) to assist Post in attempting to es-capse from the custody of the United States Marshal as alleged in Count I. Numerous overt acts were delineated in support of the conspiracy.

Upon motion, a severance was granted and in separate trials Post was convicted of the substantive offense of attempting to escape from custody and both Post and Dunn were convicted of the conspiracy. These appeals are from the ensuing judgments of conviction.

No. 73-1900 — APPEAL OF POST

The following essential facts stand undisputed.

1. On August 15, 1973, Post was a federal prisoner at the Lincoln, Nebraska, jail on a charge of bank robbery;

2. That on or about that date he participated in cutting away a “grate” over an air conditioning shaft in the cell in which he was confined. The only factual dispute concerned the reason for the cutting activity. Post endeavored without success to convince the jury that the hole had been made to provide a means of smuggling narcotics into the cell. The government contended and offered evidence to support its position that a scheme had been devised to enable Post and others to escape custody. It is not our function to interfere with the jury’s evaluation of the evidence and accordingly, we hold that the case was properly submitted to the jury. Indeed, Post concedes in his brief that there was evidence of acts which appear on their face to be an attempt to escape and evidence of a conspiracy, but contends that his explanation was a reasonable alternative one and would have warranted the jury in finding him not guilty.

With respect to the conspiracy conviction we are convinced beyond doubt that the government by strong evidence proved that Post and Dunn had entered into a conspiracy 'which would enable Post to make an attempt to escape from custody. A key witness to the conspiracy count was David Kennell, who had also been charged with an offense. But, aside from his testimony, there was other evidence which corroborated his testimony and which was germane to the conspiracy.

No. 73-1868 — APPEAL OF DUNN

Dunn, who admitted at least five prior felony convictions, mounts another attack upon his conviction. He submits that the government’s case rested almost exclusively upon the testimony of co-conspirator, David W. Kennell. Dunn recognizes that the uncorroborated testimony of an accomplice is sufficient to sustain a conviction if the testimony is not otherwise incredible or unsubstantial on its face. United States v. Smith, 464 F.2d 221 (8th Cir. 1972); Hanger v. United States, 398 F.2d 91 (8th Cir. 1968); Wood v. United States, 361 F.2d 802 (8th Cir.), cert, denied, 385 U.S. 978, 87 S.Ct. 520, 17 L.Ed.2d 439 (1966) ; Williams v. United States, 328 F.2d 256 (8th Cir.), cert, denied, 377 U.S. 969, 84 S.Ct. 1651, 12 L.Ed.2d 739 (1964). He nevertheless invites us to re-examine and modify the rule. We find no support in this record to justify, much less require, reconsideration of the principle. There was corroborating and incriminating evidence which clearly pointed to the conspiracy. The instructions to the jury submitted all of the essential elements of the offense, including a proper charge on the credibility of witnesses. No exceptions were taken to any part of the court’s instructions. The record has been carefully considered and we have no difficulty in sustaining Judge Urbom’s submission of the conspiracy count to the jury.

The judgments are affirmed.


text:
    STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant-Appellant, v. Nuel McNUTT et al., Plaintiffs-Appellees.
    No. 73-1894.
    United States Court of Appeals, Sixth Circuit.
    Argued Feb. 13, 1974.
    Decided April 11, 1974.

      Richard C. Roberts, Waller, Threlkeld & Whitlow, Paducah, Ky., for appellant.
    George Edward Overbey, Jr., Overbey, Overbey & Overbey, Murray, Ky., for appellees.
    Before EDWARDS, MILLER and ENGEL, Circuit Judges.
   PER CURIAM.

In this diversity action, State Farm Mutual Automobile Insurance Company, the defendant below, appeals from a final judgment of the United States District Court for the Western District of Kentucky, in which appellant was held to be liable under both of two separately issued policies issued to appellees Nuel and Zella McNutt, which provided for uninsured motorist coverage. State Farm was ordered to pay to the appellees the policy limits of the second policy. The district court held that, under Kentucky law, to the extent that the policies attempted to limit recovery to one policy only, such attempt was not valid, relying upon Meridian Mutual Insurance Co. v. Siddons, 451 S.W.2d 831 (Ky.1970).

The district court also held that to the extent of their limits, the medical payments provisions of both policies were available, and ordered State Farm to “pay all expenses for medical claims incurred within one year ... of the accident as to each of the three plaintiffs” up to the policy limits.

Nuel, Zella and Ronnie McNutt were injured when the vehicle which they occupied was struck by an uninsured motorist. The occupied vehicle was owned by Nuel and Zella McNutt and was insured by State Farm. Mr. and Mrs. McNutt also held another policy issued by State Farm on another car owned by them. A judgment against the uninsured motorist had been obtained in a state court in favor of the three Mc-Nutts, totalling in excess of $80,000.

In this appeal, State Farm claims that the district court erred in holding that the McNutts were entitled to recover under the second policy.

While, as an original question, the issue presented is not without difficulty, we note that it has, pending appeal, been resolved adversely to appellant by the Court of Appeals of Kentucky, in Allstate v. Napier, decided February 1, 1974, mandate issued March 5, 1974, 505 S.W.2d 169 (Ky.1974). Under Erie Ry. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), we are bound to apply this interpetation of Kentucky law as announced by its highest court. Napier, supra, compels us to conclude that the district court correctly held that the McNutts were entitled to recover under both policies.

State Farm also challenges the holding of the district court requiring it to pay medical expenses to the McNutts. Apparently for the first time on appeal, State Farm argues that the medical payment provision of the second policy does not extend to the circumstances here, because the McNutts were not “struck” by a land vehicle within the» meaning of the policy, it appearing that there was no direct bodily contact between the Me-, Nutts and the vehicle which struck that in which they were riding. In view of Napier, and of the rule that policies are to be construed most strictly against the preparer, we hold that the district court’s determination in this regard was not clearly erroneous.

Accordingly, the judgment of the district court is affirmed.

      . The third plaintiff Konnie McNutt was not a named insured, but was an “insured” as that term was defined in the policy.

      . After obtaining a judgment against tbe uninsured motoi'ist in state court following an accident involving such motorist, State Farm paid to the McNutts the limits of the first policy, $21,500.


author: PER CURIAM:

text:
    UNITED STATES of America, Plaintiff-Appellee, v. Richard Glynn BYRD, Defendant-Appellant.
    No. 73-1426.
    United States Court of Appeals, Fifth Circuit.
    May 28, 1974.
    Warren Heagy, Odessa, Tex., for defendant-appellant.
    Anthony J. P. Farris, U. S. Atty., Robert G. Darden, Asst. U. S. Atty., Houston, Tex., for plaintiff-appellee.
    ON PETITION FOR REHEARING AND PETITION FOR REHEARING EN BANC
    Opinion Sept. 7,1973, 5 Cir., 1973, 483 F.2d 1196.
    Before BELL, GODBOLD and IN-GRAHAM, Circuit Judges.
   PER CURIAM:

We grant appellee’s petition for rehearing. In United States v. Miller, 492 F.2d 37 (5th Cir., 1974), the court held that Almeida-Sanchez v. United States, 1973, 413 U.S. 266, 93 S.Ct. 2535, 37 L.Ed.2d 596, should be given only prospective application. We therefore abandon any reliance upon Almeida-Sanchez. We do, however, sustain our prior reversal upon the authority of United States v. Storm, 480 F.2d 701 (5th Cir., 1973), and Marsh v. United States, 344 F.2d 317 (5th Cir., 1965), as discussed therein. See also United States v. Bursey, 491 F.2d 531 (5th Cir., 1974).

      . United States v. Byrd, 483 F.2d 1196 (1973).


author: NICHOLS, Judge.

text:
    STATE OF ARIZONA, a body politic acting By and Through the ARIZONA HIGHWAY DEPARTMENT v. The UNITED STATES.
    No. 67-73.
    United States Court of Claims.
    April 17, 1974.
    Roderick G. McDougall, Phoenix, Ariz., for plaintiff. James R. Redpath, Phoenix, Ariz., attorney of record. Gary K. Nelson and Donald O. Loeb, Phoenix, Ariz., of counsel.
    Ray Goddard, Washington, D. C., with whom was Acting Asst. Atty. Gen. Irving Jaffe, for defendant.
    Before NICHOLS, KUNZIG and BENNETT, Judges.
    ON DEFENDANT’S MOTION AND PLAINTIFF’S CROSS MOTION FOR SUMMARY JUDGMENT
   NICHOLS, Judge.

This case is here on defendant’s motion and plaintiff’s cross motion for summary judgment. The plaintiff is the State of Arizona (Arizona) which brings this action to recover $81,361.18 of the costs it incurred in the removal and relocation of utility facilities owned by El Paso Natural Gas Co. (El Paso) for the construction of an interstate highway. In arriving at our decision we need only consider plaintiff’s first cause of action which is brought under the Tucker Act, 28 U.S.C. § 1491. The facts are as follows:

On September 18, 1950, the United States Forest Service issued a Special Use Permit to El Paso for the purpose of construction of a pipeline through the Kaibab National Forest in Arizona. Paragraph 14 of the permit states that the permit is terminable “at the discretion of the regional forester or the Chief, Forest Service.” Paragraph 10 requires the permittee, at its own expense, to remove all of its structures and improvements within a reasonable time after said permit is terminated.

On January 27, 1966, Arizona submitted an application for a Special Use Permit covering the same portion of the Kaibab Forest as El Paso’s permit. The purpose of use stated in such application was the construction of a section of the Kingman-Ash Fork Interstate Highway. The Kingman-Ash Fork Highway was to be built under the Federal Aid for Highways legislation, 23 U.S.C. § 101 et seq., under which the Federal Government enters into agreements with states to pay a large percentage of the cost of constructing interstate highways. The application provided that the following condition was to be made part of the Special Use Permit:

Where the State does not move the improvements involved, the State will reimburse the Forest Permittee for removing and rebuilding such improvements.

On the basis of the aforementioned application a Special Use Permit was issued to Arizona on May 25, 1966. Inter alia the permit provided: .

21. General:
■* * * * * X-
(g) Any National Forest recreation and administrative improvements and all other existing improvements damaged, disturbed, destroyed, or required to be moved from the right-of-way due to highway construction or maintenance, whether shown or not shown on the plans, will be replaced, repaired or moved to a suitable location as specified by the Forest Supervisor.

On May 9, 1968, Arizona entered into a Utility Agreement with El Paso which obligated it to reimburse the utility for costs incurred in relocating its facilities. W. H. Baugh, Division Engineer for the United States Federal Highway Administration, had prior knowledge of such agreement and consented to it. On June 12, 1968, he formally approved the agreement by having his authorized representative, Jacob Erickson, sign it for him as Division Engineer, Bureau of Public Roads, under the word “Approved”. (The Baugh signature appears in the wrong capacity. The functions of the United States Bureau of Public Roads, Department of Commerce were transferred to the Department of Transportation effective April 1, 1967, 49 U.S.C. § 1651 note, E.O. No. 11340, and assigned to the Federal Highway Administration within such Department. We assume this fact is of no legal significance since not raised by the parties.) El Paso’s pipeline facilities were relocated in September 1968. In accordance with the Utility Agreement, Arizona reimbursed El Paso for the $86,187.69 of costs it incurred in relocating its pipelines.

By letter from the office of the Division Engineer, dated December 3, 1968, Arizona was informed that no authority could be found to permit any Federal reimbursement of the costs it incurred as a result of the relocation of El Paso’s facilities. However, on October 7, 1969, H. C. Tilzey, who succeeded Baugh as Division Engineer, approved a detailed estimate of the cost of relocating El Paso’s pipelines submitted by the plaintiff. On October 22, 1969, Jacob Erickson, an authorized representative of Til-zey signed a Federal-Aid Project Agreement for construction of the highway for him. This agreement expressly included the utility adjustment as part of the project.

On November 19, 1969, Arizona submitted a claim for $81,361.18. This amount is 94.4% of $86,187.69, the total amount paid El Paso by Arizona. On November 21, 1969, the Federal Highway Administration paid plaintiff’s claim certifying that the $81,361.18 was approved for payment and was justly due. Subsequently Arizona refunded this sum at the request of the Federal Highway Administration.

In compliance with Federal Highway Administration Policies and Procedures Memorandum 30-4, Arizona submitted a memorandum of law to the defendant dated June 24, 1971, supporting its right to reimbursement for the costs it incurred in relocating El Paso. The Federal Highway Administration was not persuaded by this memorandum. On December 15, 1971, it formally and finally denied any obligation on its part to grant Federal participation in the costs of the El Paso relocation.

Defendant relies heavily on the provisions of El Paso’s Special Use Permit. Such permit was expressly terminable “at the discretion of the regional forester or the Chief, Forest Service.” The permit further provided :

10. Upon abandonment, termination, revocation, or cancellation of this permit, the permittee shall remove within a reasonable time all structures and improvements except those owned by the United States, and shall restore the site, unless otherwise agreed upon in writing or in this permit. If the permittee fails to remove all such structures or improvements within a reasonable period, they shall become the property of the United States, but that will not relieve the permittee of liability for the cost of their removal and restoration of the site.

Defendant cites Sinclair Pipe Line Co. v. United States, 287 F.2d 175, 152 Ct.Cl. 723 (1961), as to the non-compensability of such a license as against a Federal taking.

Because of the above provisions, the defendant argues that it is not required to reimburse Arizona under 23 U.S.C. § 123, since Arizona was not legally obligated to recompense El Paso. Such contention is based on the Government’s assumption that El Paso’s permit was ipso facto terminated by either: (1) the issuance of the subsequent Special Use Permit to Arizona, or (2) the passing of title to the lands in question to Arizona. We reject defendant’s argument since it requires us judicially to impose a condition for the participation of Federal funds beyond those legislated by Congress. We therefore conclude: 1. the authority of Federal officials to reimburse Arizona for the relocation of El Paso’s utility facilities is established under 23 U.S.C. § 123, and 2. the exercise of such authority by the approval of the project plans contractually bound the defendant to pay its proportionate share pursuant to 23 U.S.C. § 106(a).

23 U.S.C. § 123 enumerates just two conditions that must be met before Federal funds may be used to reimburse States for the costs of utility relocations incident to highway construction. These are: (1) that such payment does not violate a law of the State or a legal contract between the utility and the State, and (2) the Secretary shall be satisfied by proof of the payment of such costs by the State. (When 23 U.S.C. § 123 was enacted in 1958, the word “Secretary” referred to the Secretary of Commerce. However his functions and duties, under Title 23, were transferred to the Secretary of Transportation by 49 U.S.C. § 1655(a) (1966)).

The Government does not contend that either of the above conditions for the participation of Federal funds has not been met in this case. It relies on the argument that 23 U.S.C. § 123(a) is not in and of itself sufficient to create a contractual obligation for Federal reimbursement. With this we agree. The statute speaks only to when “Federal funds may be used”. (Emphasis supplied). In doing so it merely states the limits of executive discretion without mandating its exercise in any particular manner.

The missing element in the statutory scheme which entitles the plaintiff to recover is quite logically an exercise of executive discretion in favor of reimbursement. 23 U.S.C. § 106(a) states:

* * * the State highway department shall submit to the Secretary for his approval, as soon as practicable after program approval, such surveys, plans, specifications, and estimates for each proposed project included in an approved program as the Secretary may require. * * * his approval of any such project shall be deemed a contractual obligation of the Federal Government for the payment of its proportional contribution thereto, x- x- -x- (Emphasis supplied).

As previously discussed the word “Secretary” as used in Title 23 refers to the Secretary of Transportation, 49 U. S.C. § 1655(a) (1966). Pursuant to 23 ■C.F.R. § 1.37, the functions of the Secretary were delegated to Francis Turner, Federal Highway Administrator and to various other employees of the Federal Highway Administration.

We hold that the Government has a contractual obligation to pay Arizona its proportionate share of El Paso’s relocation costs under 23 U.S.C. § 106 since the Government’s authorized employees approved an agreement so providing. Such approval is evidenced by:

(a) the affixation of Division Engineer W. H. Baugh’s signature to Arizona’s Utility Relocation Agreement with El Paso under the word “APPROVED”,

(b) the approval of a detailed estimate of relocation costs by Baugh’s successor as Division Engineer, H. C. Tilzey,

(c) Tilzey’s approval of the Federal-Aid Project Agreement which expressly included the utility adjustment, and

(d) the payment of plaintiff’s claim certifying that such amount was approved for payment and was justly due.

The Supreme Court has recently held that the expectation of continued enjoyment of a revocable license is not mandated by the Fifth Amendment as an element of damage for an eminent domain taking. United States v. Fuller, 409 U.S. 488, 93 S.Ct. 801, 35 L.Ed.2d 16 (1973). On this authority we may assume that the United States might have built the highway itself and not have had to reimburse the utility for the cost of relocating the pipeline. There is also no doubt that the United States may bind itself to pay to satisfy obligations it conceives to be moral, not legal. United States v. Realty Co., 163 U.S. 427, 16 S.Ct. 1120, 41 L.Ed. 215 (1896). Plaintiff points to the Uniform Relocation Assistance and Real Property Acquisitions Policy Act of 1970. 84 Stat. 1894, 42 U.S.C. § 4601 et seq., which compensates for the relocation of persons displaced as a result of Federal and Federally assisted programs. Plaintiff in its brief points out that this is an expansion of the policy originally unveiled in the 1956 Highway Act, of reimbursing for relocation of public utilities. See Senate Rep.No.1997, 1962, U.S.Code Cong. & Admin.News, pp. 3961-62, so stating, in comment on an earlier version of relocation assistance for persons. Plaintiff also quotes remarks of Senator Lehman on the 1956 Act, 102 Cong.Ree. 9219, 9220 (1956). They show that the Congress was willing to reimburse for the relocation of utilities along existing highway rights of way, subject only to the qualification, if the State could require relocation without reimbursement, the United States should have the benefit of the same right. Since 1956, a number of States have enacted laws providing for such reimbursement, that previously had required relocation without it. Nevertheless, the Congress has not changed the law except by requiring, as already cited, that the State must actually pay. Here it has. In the circumstances, we cannot attach controlling weight to the defendant’s demonstration, however convincing it may be, that El Paso’s license was subject to cancellation without reimbursement. There is no showing that Arizona would not have had to pay relocation costs in case of a project wholly its own. Counsel say it would have been so obligated.

Defendant’s motion for summary judgment is denied. Plaintiff’s cross motion for summary judgment is granted. Judgment is entered for plaintiff in the amount of $81,361.18.


author: PER CURIAM: GAMER, Trial Judge:

text:
    EXCAVATION CONSTRUCTION, INC. v. The UNITED STATES.
    No. 408-71.
    United States Court of Claims.
    April 17, 1974.
    Paul M. Rhodes, Washington, D. C., atty. of record, for plaintiff.
    Thomas W. Petersen, Washington, D. C., with whom was Acting Asst. Atty. Gen. Irving Jaffe, for defendant.
    Before SKELTON, KASHIWA and KUNZIG, Judges.
   OPINION

PER CURIAM:

This case comes before the court on plaintiff’s exceptions to a recommended decision filed September 28, 1973, by Trial Judge Saul R. Gamer, Chief of the Trial Division, pursuant to Rule 134(h). The court has considered the ease on the briefs and oral argument of counsel. Since the court agrees with the recommended decision, as hereinafter set forth, it hereby affirms and adopts the same as the basis for its judgment in this case. Therefore, plaintiff is not entitled to recover and the petition is dismissed. [See Keco Industries, Inc. v. United States, Ct.Cl., 492 F.2d 1200, decided February 20, 1974.]

OPINION OF TRIAL JUDGE

GAMER, Trial Judge:

The Architect of the Capitol invited bids for the performance of the excavation and foundation work on the James Madison Memorial Building, Library of Congress project, and plaintiff was the second lowest bidder. Contending that the low bidder’s bid contained disqualifying irregularities which made plaintiff entitled to the award, that plaintiff apprised the Architect of such defects in the low bid, but that the Architect nevertheless arbitrarily and capriciously proceeded to award the contract to the low bidder, plaintiff sues to recover its damages, including loss of profits, in the alleged amount of $950,000.

It is settled that in cases of this kind this court will not award recovery of lost profits. The damages cannot exceed bid preparation costs. Heyer Products Co. v. United States, 140 F.Supp. 409, 412, 135 Ct.Cl. 63, 69 (1956); Keco Industries, Inc. v. United States, 428 F.2d 1233, 1240, 192 Ct.Cl. 773, 784 (1970). And, while “[f]inal decisions should be based on the particular circumstances of each ease” (Keco Industries, Inc. v. United States, 428 F. 2d at 1240, 192 Ct.Cl. at 784), even such recovery by the aggrieved bidder is dependent upon a showing of arbitrary and capricious action by the Government in awarding the contract to another and thus failing to give honest consideration to the disappointed bidder’s bid. Keco Industries, Inc. v. United States, supra. Furthermore, “the standard of proof to be applied in cases where arbitrary and capricious action is charged should be a high one.” Keco Industries, Inc. v. United States, 428 F.2d at 1240, 192 Ct. Cl. at 784. “[I]n order to establish that the decision was arbitrary and capricious,” the aggrieved bidder “must show that there was no reasonable basis for the decision” of the responsible Government official to award the contract to someone else. Continental Bus. Enterprises, Inc. v. United States, 452 F.2d 1016, 1021, 196 Ct.Cl. 627, 637-638 (1971); ef. M. Steinthal & Co. v. Seamans, 147 U.S.App.D.C. 221, 455 F.2d 1289 (1971).

In this ease plaintiff, in its attempt to establish such arbitrary and capricious action, has not been able to meet this high standard of proof.

The bid invitation in question was the second issued for this project. The first was issued on December 1, 1970, the project thereunder being identified as “Job No. 7093,” and the requirements of the Davis-Bacon Act concerning minimum wages to be paid to laborers and mechanics being made applicable to the project. Plaintiff submitted a bid pursuant to this invitation. However, no award was made. The low bidder was Henry A. Knott, Inc., but upon the bid opening on January 15, 1971, the second low bidder (not the plaintiff) filed a protest against the award of the contract to Knott, resulting in the award being held up pending the resolution of the protest. Furthermore, on February 23, 1971, the President issued a Proclamation suspending the application of the Davis-Bacon Act to Federal contracts. Since the bids that had been submitted were based upon the application of the Act, the Architect of the Capitol decided that no award would be made on Job No. 7093 and that the invitation would be reissued, with the Davis-Baeon Act specifically being made inapplicable to the proposed contract.

Accordingly, on March 8, 1971, the Architect invited new bids for the excavation and foundation work. Such project this time was designated as “Job No. 7117.” Bids were to be opened on April 22, 1971.

However, on March 29, 1971, the President, by another Proclamation, revoked the suspension of the application to Federal projects of minimum wage rates required by the Davis-Bacon Act.

Thereupon, the Architect, on April 5, 1971, amended the outstanding invitation by issuing “Addendum No. 1,” which served to make the Act applicable to the project, and, on April 13, 1971, issued “Addendum No. 2,” which made certain additions to the Davis-Bacon Act provisions added by Addendum No. 1.

On Thursday, April 22, 1971, the bids were opened. Three bids were submitted and again Knott was the low bidder. This time plaintiff was the second low bidder.

On the morning of the following day, Friday, April 23, 1971, an official of the plaintiff was permitted to examine the bids of the other two bidders. He was particularly desirous of ascertaining whether there were such defects in Knott’s bid as to cause its disqualification, thus resulting in plaintiff’s advancing to the position of low bidder. The examination was made in the office of Mr. Robert W. Kneesi, the Head of the Contracts and Specifications Division, Office of General Counsel.

Upon completing his examination, plaintiff's official informed Kneesi that he had discovered two defects in Knott’s bid. The first related to Addendum No. 1. The cover sheets on the two addenda issued required bidders, in submitting their bids, to acknowledge their receipt, “giving the addendum number and its date.” Knott’s bid did acknowledge receipt of both addenda, but its acknowl-edgement of the first referred to it as “Addendum No. 1 dated March 8, 1971.” However, its proper date was, as above shown, April 5, 1971. March 8, 1971, was, instead, the date of the Invitation for Bids. The Addendum had also referred to the March 8, 1971 date since it was such invitation (and the documents issued together therewith) that the Addendum was amending.

The second error related to the bid bond. Bidders were required to submit with their bids a guaranty, which could take the form of a bid bond of at least 10 percent of the bid, to insure execution of the contract and of performance and payment bonds. Knott had submitted such a bond, executed by itself as principal and the Planet Insurance Company as surety. The form on which the bond was executed contained a space, under the heading “Bid Identification,” in which the “Invitation No.” was to be inserted. In this space, there had been inserted “7093.” As above shown, however, that had been the job number by which the first Invitation for Bids had designated the project. The correct designation of the project under the reissued second invitation was, as stated, Job No. 7117.

In response to an inquiry by Kneesi, who expressed the opinion that the two errors mentioned were minor informalities that would constitute an insufficient basis upon which to predicate a protest, plaintiff’s representative stated that he intended to report his findings to other officials of plaintiff and that he did not know what, if any, action plaintiff would take with respect to the matter.

On Monday, April 26, 1971, another official of the plaintiff hand delivered a protest letter to the offices of the Architect of the Capitol. A copy of the letter was also submitted to the Comptroller General on the same day. At that time plaintiff did not know that during the late afternoon of Friday, April 23, 1971, the same day that plaintiff’s official had earlier discovered the errors in the Knott bid and had reported them to Kneesi, the Architect of the Capitol had awarded the contract to Knott, and Knott had already executed the contract on April 26, 1971, prior to the filing of the protest.

Upon learning these facts shortly thereafter plaintiff, feeling it was useless to press its protest against an award that had already been made, withdrew it and on May 14, 1971, filed the instant suit. It contends that the action of the Architect in so swiftly making the award to Knott prior to a definitive resolution by the Comptroller General of the effect of the defects in Knott’s bid which plaintiff had discovered and pointed out to the Architect’s representative, amounts to a discriminatory failure to give its bid the fair consideration that it merited.

From plaintiff’s point of view, its feeling that the action of the Architect was, under the circumstances, unfairly precipitate, is understandable. However, a consideration of the problems with which the Architect was faced at the time, and the reasons why he took the action he did, as testified to by the Architect himself, make plain that his action was neither arbitrary nor capricious.

First, the construction of the Madison Building was designed to be accomplished in four separate stages. The stage covered by the instant Invitation for Bids for the performance of the excavation and foundation work was the first. The commencement of the work on each of the three subsequent stages — the furnishing of the stone and marble, the construction of the superstructure, and the final finishing work and preparation for occupancy — was dependent upon the progress of the prior stage. The delay that had already been caused by the failure to make a letting under the first invitation and the necessity of re-advertising the first stage had set the construction schedule behind by approximately 3 months. Because of the rate of inflation then being experienced in the construction industry, the Architect felt that the longer the later stages were delayed the more expensive the entire project would become. For these reasons, the Architect was particularly interested in expediting the making of the award and the giving of the notice to proceed to the successful bidder as promptly thereafter as possible.

Second, as soon as the bids were opened on April 22, 1971, and Knott was revealed to be the low bidder, a Knott representative informed the General Counsel of the Architect of the Capitol of an impending strike in the steel industry. He suggested that if the Architect intended to make the award to his firm, the sooner the award was made, the sooner Knott could place its orders for the required steel materials, including the steel for bracing. For this reason, to the form of letter of award that had been prepared in advance of the opening — a standard procedure designed to expedite the mechanics of the letting of the contract after the bid opening— there was added to the Knott letter that it was “authorized at this time to proceed with placing your procurement orders for such steel as you require for the performance of your contract.”

Third, there was special concern about eliminating as quickly as possible the annual outlay of approximately $2,000,-000 for rental of space that would be given up as soon as the Madison Building became available for occupancy.

The errors in the Knott bid which plaintiff’s representative pointed out to Kneesi on the morning of April 23, 1971, were in fact promptly reported to the Architect and considered by him before he made the award the afternoon of the same day. Kneesi immediately informed the General Counsel, Mr. F. W. Winkel-mann, who in turn promptly advised the Architect (who, in addition to being an architect and engineer, was also a lawyer). Kneesi, Winkelmann and the Architect agreed that the two defects in question were in the nature of minor in-formalities which the Architect could waive. A paragraph of the “Bidding Conditions” which formed a part of the Invitation for Bids specifically provided that “the Government reserves the right * * * to waive any informalities in bids received whenever such rejection or waiver is in the interest of the Government.”

As to the use in the acknowledgment of the receipt of Addendum No. 1 of the incorrect date of the Addendum, they felt that the error was sufficiently cured by the proper acknowledgment of Addendum No. 2. Since all that Addendum No. 2 did was to amend Addendum No. 1 by adding certain provisions to the Davis-Bacon Act article added to the contract by Addendum No. 1, they felt that a proper acknowledgment of Addendum No. 2 plainly served to indicate the receipt of Addendum No. 1.

As to the error in the second bid bond’s use of the job number by which the first Invitation for Bids designated the project, they felt that, in view of the fact that the second bond reflected the correct bid opening date for the project to which the bond related, there could be no question concerning the identification of the project to which the bid bond related and that neither Knott nor the surety could use the error as a basis for withdrawing. The same surety had been on the bid bond that Knott had submitted under the first invitation, and the same attorney-in-fact for the surety had executed both bonds.

However, despite the unanimity of opinion, the Architect felt that, before he made the award to Knott, Winkel-mann should discuss the matter with an appropriate official of the General Accounting Office. Thereupon, Winkel-mann contacted Mr. Robert H. Rumizen, the Assistant General Counsel of the General Accounting Office, in charge of the Procurement Law Section, Office of the General Counsel. The responsibilities of this Section included the handling of bid protest matters and the making of recommendations for final decisions with respect thereto by the Comptroller General. After explanation by Winkelmann of the two defects, Rum-izen agreed that both errors were waiva-ble minor informalities.

Upon being advised of Rumizen’s opinion, the Architect decided to waive the two errors as minor informalities and, as previously intended for the reasons indicated, to proceed with the making of an immediate award to the low bidder. Thereupon, he executed the letter of award, which was dispatched that same afternoon. At that time it was not known whether plaintiff would in fact file any formal protest.

Certainly, considering all the facts and circumstances, there can be no question of the bona fides of the Architect’s action. There is no basis for any conclusion that plaintiff was the subject of arbitrary and capricious discrimination.

Plaintiff differs with the Architect as to the propriety of considering the errors in the Knott bid as waivable minor informalities, placing particular reliance upon the bid bond error. Plaintiff argues that the use of the wrong job number constituted a fatal misidentifi-cation of the project, which served to invalidate the bond. It is not necessary, however, to decide what the result of a law suit would be in the event of an attempted disavowal of the bond by either the principal or the surety. The problem is instead, whether the Architect was arbitrary and capricious in concluding that the error was a waivable minor informality. This was a matter of judgment which the Architect certainly did not exercise unreasonably. There is no statute or regulation that would make illegal or improper the acceptance of a bid backed by a bid bond containing an error such as was here involved. It is not every bid deviation or error which automatically compels a bid rejection. Al-bano Cleaners, Inc. v. United States, 455 F.2d 556, 197 Ct.Cl. 450 (1972). In the language of the court in Continental Bus. Enterprises, Inc. v. United States, supra, plaintiff has, considering the nature of the errors in the Knott bid upon which it is relying, failed to “show that there was no reasonable basis for the decision” of the Architect.

Plaintiff contends the Architect should have awaited a formal ruling from the Comptroller General before making the award, or at least, after plaintiff filed its protest, before issuing the notice to proceed. But again plaintiff points to no statute or regulation which would prevent the Architect from awarding a contract under such circumstances as are here involved without first obtaining a formal decision from the Comptroller General. Cf. the Federal Procurement Regulations issued under the Federal Property and Administrative Services Act, which provide that contracting agencies covered by the Regulations (the Architect of the Capitol being specifically excluded, 41 CFR § 1-1.203 (1972)) need not withhold awards pending final disposition by the Comptroller General of protests. Under § 1-2.407-8(b) (4) of the Regulations, the contracting officer may, despite the receipt of a protest, nevertheless make the award if he determines that “[t]he items to be procured are urgently required,” or “[d]elivery or performance will be unduly delayed by failure to make award promptly,” or “[a] prompt award will otherwise be advantageous to the Government.” 41 CFR § 1-2.407-8(b) (4). Section 2.407-8(b) (3) of the Armed Services Procurement Regulations is identical. 32 CFR § 2.407-8(b)(3). Section 20.4 of the General Accounting Office Regulations also permits the making of an award despite the filing of a protest where “factors * * * will not permit a delay * * *.” 4 CFR § 20.4 (1973). In this connection, the General Accounting Office will consider protests not only against a proposed award, but also against awards already made (4 CFR § 20.1) so that had plaintiff not withdrawn its protest, it apparently could have received a decision from the Comptroller General despite the fact that the Architect made the award before plaintiff filed its protest. The Comptroller General has ruled that awards made were improper and that contracts executed pursuant thereto should be can-celled. See John Reiner & Co. v. United States, 325 F.2d 438, 163 Ct.Cl. 381 (1963), cert, denied 377 U.S. 931, 84 S. Ct. 1332, 12 L.Ed.2d 295 (1964); Albano Cleaners, Inc. v. United States, supra.

For all of the reasons hereinabove set forth, plaintiff is not entitled to recover.

      . 40 U.S.C. § 276(a) (1970).

      . No. 4031, 36 Fed.Reg. 3457.

      . No. 4040, 36 Fed.Reg. 6335.

      . The Architect executed the contract on April 28 or 29, and notice to proceed to Knott was given on April 30,1971.

      . Under the terms of the Invitation for Bids, the Architect was given 60 days within which to make the award.

      . Telephone requests for guidance from Government agencies with respect to such matters as Winkelmann discussed were commonplace, although the practice was for the General Accounting Office official to make plain that the informal advice given was not binding on the Comptroller General and did not affect what his ruling mig¿t be in the event a bid protest was filed.

      . Knott’s qualifications as a responsible and qualified contractor had already been satisfactorily established as a result of the investigation that had been made on the first invitation.

      . 38 Comp.Gen. 532, upon which plaintiff relies, is inapplicable. In that case, the bidder failed to submit any bid bond at all at the time of the bid opening. 39 Comp.Gen. 827, upon which plaintiff also relies, is also inapplicable. In that case the invitation required bid bonds in the amount of 20 percent of the contract price. The bond there in question was for only 10 percent. The Comptroller General held that the fact that the mistake was allegedly due only to clerical error was immaterial and that such failure to comply with the bid bond requirement represented a material deviation which could not be waived administratively.
      On the issue concerning the addenda, see 34 Comp.Gen. 581, in which the bidder’s failure specifically to acknowledge addenda 1 and 2 that had been issued, was held to constitute an informality that could be waived where the bidder’s bid on an item that had been added by addendum No. 1, clearly indicated that he had received it, and where addendum No. 2 affected the cost of the work only to a negligible degree, if at all.
      In its brief, plaintiff states with respect to the addenda issue that it “does not rely on the failure of the low bidder to properly acknowledge an addendum to the bid, standing alone, as being an irregularity that could not be waived, in the discretion of the Contracting Officer.”

      . 41 U.S.C. §§ 251-60- (1970).

      . In this case the Architect himself was the contracting officer.


author: SETH, Circuit Judge.

text:
    ESTATE of Leonard E. WHITLOCK, Deceased, et al., Cross-Appellants, Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Cross-Appellee, Appellant.
    Nos. 73-1497, 73-1498.
    United States Court of Appeals, Tenth Circuit.
    April 22, 1974.
    Rehearing Denied May 22, 1974.
    Gary R. Allen, Atty., Tax Div., Dept, of Justice, Washington, D. C. (Scott P. Crampton, Asst. Atty. Gen., Meyer Roth-wacks, and Jonathan S. Cohen, Attys., Tax Div., Dept, of Justice, Washington, D. C., with him on the brief), for appellant.
    Philip J. Erbacher, Kansas City, Mo. (R. Eugene McGannon, of Hoskins, King, McGannon, Hahn & Hurwitz, Kansas City, Mo., with him on the brief), for appellees.
    Before LEWIS, Chief Judge, and SETH and McWILLIAMS, Circuit Judges.
   SETH, Circuit Judge.

This is an appeal and cross-appeal which concern the taxation of stockholders of a controlled foreign corporation, which was also a foreign personal holding company. The issue centers on the question whether increases in earnings invested in United States property (section 951(a)(1)(B), Int.Rev.Code of 1954) by Whitlock Oil Services, Inc. should be included in taxpayers’ gross income. The Commissioner assessed deficiencies based on increases in such earnings so invested. The Tax Court held that the increases should not be included by reason of section 951(d). The opinion of the Tax Court, 59 T.C. 490, and the dissenting opinion, were filed on December 29, 1972.

The taxpayers’ cross-appeal raises an issue of the constitutionality of section 951(a), and a limitations question under section 6501(e)(1) of the 1954 Code for one year. The Commissioner appealed on the application made by the Tax Court of section 951(d) to exclude from the taxayers’ gross income, in determining the deficiencies, increases in earnings invested in United States property.

Whitlock Oil Services, Inc. (Oil Services) was a Panamanian corporation. The only stockholders during 1963, 1964, 1965, 1966, and 1967 were the taxpayers, or Georgia Whitlock alone after the death of her husband. Joint returns were filed. The stockholders were citizens and residents of the United States.

Oil Services during the time in question was a “controlled foreign corporation” under section 957(a) of the Internal Revenue Code of 1954. For each year except 1963, Oil Services was also a “foreign personal holding company” under section 552(a) of the 1954 Code. It had not been such a holding company before January 1,1964.

It was stipulated that there was includable in taxpayers’ gross income for each of the years 1964 through 1967 stated amounts of undistributed foreign personal holding company income from Oil Services (section 551(b)). Furthermore, it was agreed that Oil Services held investments in “United States property” under section 956(b) of the 1954 Code at the end of each year 1963 through 1967 and the increases each year were established. Under section 956(a) of the Code, the retained earnings and profits of Oil Services at all pertinent times were more than the total of its investment in United States property. Also such earnings and profits accumulated before the end of 1963.

The Commissioner by the deficiency assessments took the position that the yearly increases in earnings invested in United States property by Oil Services were includable in the gross income of the taxpayers under section 951(a)(1) (B) of the 1954 Code.

A divided Tax Court, three judges dissenting, held as to 1964, 1965, and 1967 that taxpayers were not required to include Oil Services’ increases in earnings invested in United States property in their gross income for such years by reason of the language of section 951(d) of the 1954 Code, and held further that Treasury Regulations to the contrary were invalid. (Treasury Regulations on Income Tax, 1954 Code (26 C.F.R.) § 1.951-3).

The Tax Court unanimously upheld the constitutionality of the statute against taxpayers’ challenge, and declared that the year 1963 was under the six-year limitation period as an instance of substantial omissions (section 6501(e)(1) of the 1954 Code).

We will consider first the increases in earnings of Oil Services invested in United States property in years when it was a “foreign personal holding company” and also a “controlled foreign corporation.” Since, except for 1963, Oil Services was within both definitions, its shareholders came within the two categories in the 1954 Code. These were sections 551-556 and sections 951-964. This litigation centers on the meaning and scope of section 951(d). This section, added by the Revenue Act of 1962 to the provisions relating to controlled foreign corporations, seeks to prevent the imposition of double taxation of stockholders when a foreign corporation is within the two definitions described above as was Oil Services. It reads as follows:

“(d) Coordination With Foreign Personal Holding Company Provisions. —A United States shareholder who, for his taxable year, is subject to tax under section 551(b) (relating to foreign personal holding company income included in gross income of United States shareholders) on income of a controlled foreign corporation shall not be required to include in gross income, for such taxable year, any amount under subsection (a) with respect to such company.”

The reference in section 951(d) to section 551(b) relating to foreign personal holding companies is to the provision which requires undistributed income of such a company to be included pro rata in the gross income of its shareholders as a dividend. Section 951(a) describes the amounts to be included in the gross income of a shareholder of a “controlled foreign corporation.” Thus section 951 (d) is the subsection which attempts to relate or coordinate the tax on shareholders of a corporation which is both a personal holding company and a controlled corporation.

Under existing law the earnings from year to year of a foreign personal holding company are taxed to the shareholders, as above indicated. Thus the section 951(a) application is to earnings which accumulated in those years when the controlled foreign corporation was not a foreign personal holding company.

Section 951(a) requires to be included in the gross income of shareholders of controlled foreign corporations several different items. These are, roughly, foreign source income (section 952); provision for separate treatment of withdrawals of dividends, interest, and gains therefrom invested in “less developed countries,” which was excluded sub-part P income or foreign source income; and for increases in “earnings” invested in United States property (section 951 (a)(1)(B)). There are thus included items of income and the somewhat different category of earnings invested. We are, of course, here concerned with the assessment for increases in earnings invested. This is an item created by the corporate decision to move funds to this country and into investments here. These were accumulated earnings of Oil Services made before 1963.

By express provisions, the computation of increases in earnings invested in United States property excludes earnings attributable to the foreign personal holding company income of such company. By section 551(a) amounts taxed to shareholders are as to them considered as dividends, and as to the company they are also so treated to eliminate them from the corporate earnings. Thus there is really no possibility of a second taxation of income previously taxed under the prescribed computations for section 951(a)(1)(B). There is, however, the possibility of double taxation under section 551(a) and under section 951(a) (1)(A) since both may include income from a foreign personal holding company. This double taxation is prevented by the express provisions of section 951(d). But does the subsection do more?

The Commissioner argues that a distinction should be made because as to income a possibility exists that double taxation of stockholders could take place if the corporation is in both categories, but no such possibility exists as to increases in earnings invested in United States property and income under section 551(a). This distinction, the Commissioner argues, was recognized and provided for in a Treasury Regulation. This Regulation on Income Tax § 1.951-3 was specifically directed to section 951 (a) (1) (A). The text of the regulation is followed by several examples which seek to demonstrate or explain. The regulation is not particularly clear on the problem at hand, but the examples do make the distinction above described. As indicated above, the Tax Court held the regulation to be invalid as contrary to the wording of section 951 (d)T

The Tax Court, contrary to the argument of the Commissioner, held in substance that if the shareholder was subject to tax under section 551(b) on income he need not include in his gross income “any amount . . . with respect to such company.” Thus under section 951(a) (1)(B) it held that if the personal holding company’s undistributed income was included in the shareholders’ gross income, then the increases in United States investments as a controlled foreign corporation need not be included. Thus the reference to “such company” freed the shareholder from tax for increases in corporate investments. This in effect exempts Oil Services’ actions in repatriating earnings which are not otherwise taxed, and in circumstances where there is no possibility of double taxation of shareholders. This frees from taxation an event which is of importance in the taxation of controlled foreign corporations. The Commissioner argues that this repatriation by Oil Services of funds without taxation is thus permitted although this was one of the events sought to be met by the tax legislation relating to controlled foreign corporations.

Section 951(d) of the Internal Revenue Code of 1954 in the reference to section 551(b) describes it as covering corporate income, which it does, and also describes the shareholder as subject to tax on income of such corporation. This is a clear reference to income only, and it is corporate income to be included in the shareholders’ gross income. This is clearly a device to prevent double taxation for or on “income.” However, the wording can be construed, with no difficulty at all, to also immunize the other event included in section 951(a) which would otherwise be included in the shareholders’ gross income — the pro rata share of the increase in the corporation’s earnings invested in United States property. This event like the “income” events is just as clearly in “subsection (a).” However, it is an event, as indicated above, which cannot give rise to double taxation. It is not an “income” type item of the corporation, and the computations prevent the double tax. Thus there is no apparent explanation why this should also be excluded by section 951(d). The taxpayer has advanced no such explanation which is compatible with the overall purpose of the legislation.

The legislative history is rather extensive, but it really shows no more than the sorting of several possible devices to prevent the postponement of the inclusion of earnings in the shareholders’ gross income; to cover the repatriation of earnings, and to select provisions to prevent double taxation when the foreign corporation was both a personal holding company and a controlled foreign corporation. The statute must be construed in the light of these purposes, and to meet the intention of Congress to provide an integrated coverage of the subject without voids or unexplained inconsistent treatment of essentially the same position. There is no indication that shareholders of foreign personal holding companies were to receive favored treatment.

The consideration of the purpose of the statute as a whole; the aspects of double taxation; the details of computation provided as to year by year treatment of income, and the absence of any explanation as to why the shareholders of a corporation in both classifications should receive special consideration contrary to the purpose of the Act, leads us to the conclusion that Regulation § 1.951-3 is a reasonable contemporary construction of section 951(d).

This court has had some fairly recent experience with a similar inconsistency between the wording of a tax statute and the “intent of Congress.” See United States v. Skelly Oil Co., 394 U.S. 678, 89 S.Ct. 1379, 22 L.Ed.2d 642; Oestereich v. Selective Service Board, 393 U.S. 233, 89 S.Ct. 414, 21 L.Ed.2d 402; see also Perry v. Commerce Loan Co., 383 U.S. 392, 86 S.Ct. 852, 15 L.Ed.2d 827.

It would serve no useful purpose to reexamine the authorities on the matter of construction by regulations of statutory provisions by the agency charged with the execution of the legislation. These include Bingler v. Johnson, 394 U.S. 741, 89 S.Ct. 1439, 22 L.Ed.2d 695; United States v. Correll, 389 U.S. 299, 88 S.Ct. 445, 19 L.Ed.2d 537; Comm’r v. South Texas Lumber Co., 333 U.S. 496, 68 S.Ct. 695, 92 L.Ed. 831; Fawcus Machine Co. v. United States, 282 U.S. 375, 51 S.Ct. 144, 75 L.Ed. 397. The dissent in the Tax Court treats these authorities and this issue in detail.

The Supreme Court has clearly stated that such a contemporaneous construction by regulation must be followed unless “. . . unreasonable and plainly inconsistent with the revenue statutes.” Comm’r v. South Texas Lumber Co., supra. We cannot hold that the regulation here concerned is plainly inconsistent with the statute, when read in the light of the overall purpose of the statute, and the obvious need not to permit voids or unexplained exceptions. Again as in Corn Products Co. v. Comm’r, 350 U.S. 46, 76 S.Ct. 20, 100 L.Ed. 29, the wording of a tax act must not be applied to defeat the overall purpose of Congress. See also United States v. Correll, 389 U.S. 299, 88 S.Ct. 445, 19 L.Ed.2d 537. We hold that Regulation § 1.951-3 is valid, and the Tax Court must be reversed on this point. Furthermore, the regulation was directed specifically to the problem at hand, and we thus hold that it is here applicable.

The Tax Court held the provisions of subpart F (section 951 et seq.) constituted a constitutionally valid exercise of Congressional authority. The taxpayers had contended that the provisions violated the Fifth Amendment, and the provisions relating to direct taxes. As to due process the claim is basically that the Act ignores the separate entity of the corporation. We find no merit in this contention; it has been held otherwise as to corporate accumulated earnings. Helvering v. National Grocery Co., 304 U.S. 282, 58 S.Ct. 932, 82 L.Ed. 1346, as to the “direct tax” argument. The tax here considered is computed in reference to a transaction, United States v. Manufacturers National Bank, 363 U.S. 194, 80 S.Ct. 1103, 4 L.Ed. 2d 1158, an investment in United States property, and an event which came about when the taxpayers controlled the corporation. When the provisions of Article I of the Constitution, the Sixteenth Amendment, Comm’r v. Glenshaw Glass Co., 348 U.S. 426, 75 S.Ct. 473, 99 L.Ed. 483; Eisner v. Macomber, 252 U.S. 189, 40 S.Ct. 189, 64 L.Ed. 521; Pollock v. Farmers’ Loan & Trust Co., 158 U.S. 601, 15 S.Ct. 912, 39 L.Ed. 1108, are considered together, we find no merit to the contention that the increased earnings provision is contrary to the Constitution. We can add little to the analysis by the Tax Court of the direct tax argument and the “separate entity” arguments of the taxpayers, and agree fully therewith. See also Garlock, Inc. v. C. I. R., 489 F.2d 197 (2d Cir.).

Likewise we agree with the Tax Court in its conclusion and analysis of the limitations issue, the “clue” problem as to the 1963 income, and refer to its opinion on this point.

In our consideration of section 951(a) (1)(B) above, we have applied it to the earnings of Oil Services accumulated during 1962 and prior years. Section 951 is not limited by its terms to accumulations of earnings after 1962. It is, of course, limited to property acquired after 1962. This holding is consistent with the treatment of dividends if distributed. We find no basis for any other construction, and no legislative history to suggest it. Section 1248 of the Code, a related provision, contains a limitation but it is applied only to sales of stock in a controlled foreign corporation. Thus the absence of such a specific limitation in section 951(a) becomes significant. The earnings and profits accumulated between 1913 and December 31, 1962, are thus sought to be included.

The decision and judgment of the Tax Court in both cases is reversed as to the application of section 951(d) as above described, and insofar as it voided Treasury Regulation on Income Tax (1954 Code) § 1.951-3 (Coordination of Sub-part F with Foreign Personal Holding Company Provisions). The decision of the Tax Court is otherwise affirmed.


author: HAYS, Circuit Judge:

text:
    SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Harris A. SHAPIRO et al., Defendants, Norman Berman, Defendant-Appellant.
    Nos. 377, 695 Dockets 72-1927, 73-1120.
    United States Court of Appeals, Second Circuit.
    Argued Jan. 21, 1974.
    Decided April 9, 1974.

      David Ferber, Sol., Securities and Exchange Commission (Lawrence E. Ner-heim, Gen. Counsel, Jacob H. Stillman, Asst. Gen. Counsel, and Frederic T. Spindel, Securities and Exchange Commission, on the brief), for plaintiff-ap-pellee.
    Milton S. Gould, New York City (Ronald H. Alenstein, Lois S. Yohonn, and Shea, Gould, Climenko & Kramer, New York City, on the brief), for defendant-appellant.
    Before HAYS, MANSFIELD and OAKES, Circuit Judges.
   HAYS, Circuit Judge:

The Securities and Exchange Commission brought this action against defendants Shapiro, Berman and others for violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1970), and the Commission’s Rule 10b-5, 17 C.F.R. § 240.10b-5. The district court, finding that violations had been committed, enjoined defendants from further violations of section 10(b) and Rule 10b-5 and ordered defendants to surrender their profits to a trustee. 349 F.Supp. 46 (S.D.N.Y.1972). Defendant Berman brought this appeal.

We affirm.

I.

Shapiro and Berman were partners in a firm which specialized in arranging corporate mergers and acquisitions. In October 1970 they commenced efforts on behalf of Ridge Manor Development Corporation to arrange a merger with Harvey’s Stores, Inc. On December 11, 1970, Harvey’s rejected their proposal in a letter to Joel Friedland, president and major shareholder of Ridge Manor, from William Richter, chairman of the board of Harvey’s.

Later in the month Shapiro and Friedland met and again discussed a merger with Harvey’s. Friedland supplied Shaprio with unaudited financial data concerning Ridge Manor’s earnings for the outgoing year. With these figures Shapiro and Berman prepared a pro forma consolidated financial statement showing a sharp increase in Harvey’s earnings if the two firms merged. In order to alleviate fears expressed by some of Harvey’s officials, Shapiro and Berman also collected data concerning the price-earnings multiples of several land development companies.

On January 6, 1971, Friedland, Shapiro, and Berman met with David Rosen-bloom, a director of Harvey’s and a personal friend of Shapiro and Berman, and presented him with these data in an attempt to rekindle merger talks. Rosen-bloom stated that certain of Harvey’s officials opposed the merger, but that he viewed the merger favorably. He agreed to raise the issue again with the other members of Harvey’s board.

After the meeting Berman purchased Harvey’s stock for the first time, buying 100 shares at 7*4.

Rosenbloom’s efforts apparently succeeded, for Richter and Gerald Cohen, the two members of Harvey’s merger and acquisition team, agreed to meet Shapiro and Berman on January 21 to discuss terms of a possible merger. On January 25 Harvey’s executive committee met and drafted a letter setting down Harvey’s terms for the proposed merger. One term insisted upon was the purchase of at least 200,000 shares of restricted stock in Harvey’s. The letter was delivered to Shapiro on the same day.

On January 25 Berman purchased 400 shares of Harvey’s stock at prices ranging from 7% to 7%.

On the morning of January 26 Shapiro and Berman met again with Richter and Cohen to discuss the terms stated by Harvey’s in the January 25 letter. During and after the meeting Shapiro telephoned an acquaintance, Jay Zises, to discuss financing for the merger.

On the afternoon of January 26 Shapiro and Berman visited the office of Danard Unschuld, a New York stock broker and friend of Shapiro. Berman opened an account with Unschuld and purchased 400 shares of Harvey’s at 8%. Berman testified that it was possible that during the discussion with Un-schuld he mentioned the merger negotiations between Harvey’s and Ridge Man- or. On the next day Unschuld purchased 100 shares of Harvey’s. Over the next two weeks Unschuld on several occasions bought Harvey’s stock for his own account and for discretionary accounts controlled by him.

At the request of Zises, Berman arranged a meeting for January 28. At the meeting Shapiro and Zises discussed financing for the merger with Richter, Cohen, Rosenbloom, and Andrew Heine, of Harvey’s executive committee. Zises requested an exclusive agency for 90 days for selling the restricted shares in Harvey’s, during which time Harvey’s would pursue no other mergers. The representatives of Harvey’s rejected this proposal and left the meeting because at the time Harvey’s was also discussing a merger with Liberty Circle Corporation. On the same day or the next day Liberty Circle accepted in principle a plan under which it would be acquired by Harvey’s. During the following week Harvey’s continued merger discussions with Liberty Circle without concluding an agreement.

Meanwhile, on January 28 Berman discussed with Frederick Robinson, a large shareholder in Harvey’s, the purchase of some of Harvey’s restricted stock. At least twice in the next two weeks Robinson purchased Harvey’s stock.

On February 4 Harvey’s executive committee again met with Shapiro and Berman and representatives of Ridge Manor. At the meeting an updated pro forma consolidated balance sheet containing non-public information for the merged companies was circulated. The parties reached no final accord, but did agree on a public announcement that Harvey’s was conducting merger negotiations with two unidentified companies. The announcement, made the next morning, was the first public disclosure of the merger discussions.

On February 5 Joel Friedland discussed with Maurice Wilkens, representative of an institutional investor, the purchase of Harvey’s restricted stock. Later in the week he told Wilkens he expected the merger to be consummated within two or three weeks. Meanwhile Friedland continued discussions with Richter.

On February 8 Berman sold 600 shares of Harvey’s stock at prices ranging from 18 to 18%.

On February 9 Harvey’s executive committee met with representatives of Ridge Manor. The parties drafted, without signing, a “letter of intent” incorporating the provisions of the proposed merger. They also agreed on a public announcement, released the next day, that Harvey’s was conducting further negotiations with two companies and identifying Ridge Manor as one. On February 11 representatives of Harvey’s and Ridge Manor met again to discuss details of the merger. Negotiations continued for the next several days.

On February 16 Berman purchased 500 shares and two calls on Harvey’s stock at 22.

On February 18, in response to a request from the American Stock Exchange (AMEX), the parties issued four announcements which disclosed, respectively, that Harvey’s and Ridge Manor had agreed in principle to merge, Ridge Manor’s earnings for 1970, the expectation of a split in Harvey’s stock after the merger, and that the merger was subject to AMEX approval.

After the third announcement Berman purchased 500 shares of Harvey’s at between 23% and 23%.

In the middle of March the AMEX approved the merger, but by this time Friedland had begun to question the wisdom of the merger. On April 3 Harvey’s agreed to merge with Liberty Circle. On April 5 Harvey’s and Ridge Manor met again, but Friedland’s dissatisfaction prompted Harvey’s to withdraw from the deal.

On February 24 and March 8 and 9 Berman sold his entire holdings in Harvey’s at prices ranging from 21 to 22%.

II.

A. Violations of Section 10(b) and Rule 10b-5.

The SEC claims that the foregoing facts establish violations of section 10(b) of the Securities Exchange Act and of the Commission’s Rule 10b-5 in that Berman traded in the stock of Harvey’s Stores while possessing material, non-public information about the company without disclosing that information to those with whom he traded.

Appellant concedes that he traded while in possession of information which did not become public until February 18. However, he denies that this information was material because the possibility of a merger was always remote, Harvey’s was well-known to be acquisition-minded, and Harvey’s was engaged in constant merger talks.

Facts are material for purposes of Rule 10b-5 if a “reasonable investor might have considered them important in the making of [an investment] decision.” Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 154, 92 S.Ct. 1456, 1472, 31 L.Ed.2d 741 (1972). See also Mills v. Electric Auto-Lite Co., 396 U.S. 375, 385, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970). Whether facts relating to a future event are material, depends “upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity.” SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968) (en banc), cert, denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969).

Appellant argues that the cases establish a rule as to when information concerning merger negotiations becomes material. We cannot find such a rule. Appellant relies primarily on our decisions in List v. Fashion Park, Inc., 340 F.2d 457 (2d Cir.), cert, denied, 382 U. S. 811, 86 S.Ct. 23, 15 L.Ed.2d 60 (1965), and Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876 (2d Cir. 1972). In List the defendant, who was a director of Fashion Park, purchased stock in the company from plaintiff. Two days prior to the sale Fashion Park commenced negotiations which ultimately led to a merger. However, defendant was unaware of these negotiations at the time of the purchase. He knew only that Fashion Park’s board had resolved to seek a merger or sale and that there might be an unidentified purchaser on the horizon. We affirmed the decision of the district court that this information was not material. In Radiation Dynamics plaintiff sold stock in Technical Research Group (TRG) to an officer of TRG and others. At the time the shares were transferred TRG was pursuing negotiations which led to a merger and a sharp increase in the price of TRG’s stock. This court affirmed a judgment for defendant entered on a special jury verdict that defendants did not have material information as to a reasonably possible merger at the time the commitments for the sale were made.

Neither case supports appellant’s argument. In each case the court stated the definition of materiality of non-public information and then applied the definition to the facts before it. In neither case did the court purport to create a specific rule as to when information respecting a merger becomes material. Indeed, when plaintiff in Radiation Dynamics suggested such a rule the court responded, citing SEC v. Texas Gulf Sulphur Co., supra, 401 F.2d at 849, that “such ‘materiality’ must be determined on a case-to-case basis according to the fact pattern of each specific transaction.” 464 F.2d at 888. An examination of the facts here shows that they differ considerably from the facts in List and Radiation Dynamics.

Appellant quite properly contends that his numerous purchases of Harvey’s stock must be analyzed individually. He argues that even if the information about the merger was material when he made his later purchases, it was not when he made his first purchases. We turn, therefore, to the purchases of January 6, appellant’s first purchases of Harvey’s stock.

In applying the test of Texas Gulf Sulphur, supra, we find that two significant events occurred shortly prior to Berman’s January 6 purchases. The first was Friedland’s giving to Shapiro non-public information about Ridge Manor’s earnings for 1970. Using this information to construct a pro forma consolidated balance sheet, Shapiro and Berman projected that if the merger were consummated Harvey’s earnings per share would climb from 290 to at least $2.24. Second, negotiations between Harvey’s and Ridge Manor recommenced and Rosenbloom, a director of Harvey’s, reacted favorably to the merger and promised to propose the merger to Harvey’s board. Appellant already knew that Friedland, president of Ridge Manor, desired a merger with Harvey’s. Although the negotiations had not jelled to the point where a merger was probable, the possibility was not so remote that, when considered in the light of a projected increase of at least 600% in Harvey’s earnings per share, it might not have influenced a reasonable investor.

But we need not merely speculate as to how a reasonable investor might have received this information. The behavior of appellant, his partner Shapiro, and others who knew of the merger, all of whom were sophisticated investors, demonstrates empirically that the information was material. Almost immediately after the January 6 luncheon at which Rosenbloom responded favorably to the merger proposal, Shapiro and Berman purchased substantial amounts of Harvey’s stock. In Texas Gulf Sulphur, supra, 401 F.2d at 851, the court found this type of evidence “highly pertinent” and “the only truly objective evidence of the materiality” of the inside information.

Appellant testified that he purchased Harvey’s stock on January 6 and subsequently not because of his knowledge of the merger but because the stock “was fairly priced', it was cheap.” However, neither Shapiro nor Berman had previously bought the stock, even though, as appellant conceded, the market conditions for it had been the same the previous November and December. In Texas Gulf Sulphur, supra, the court found that purchases by persons who had never previously bought stock in the company “virtually compel [led] the inference that the insiders were influenced by” the corporate secret. 401 F.2d at 851. However, we need not decide whether the facts here establish such an inference as a matter of law because the district court found that inside information had influenced appellant, 349 F.Supp. at 54-55, and that finding was certainly not clearly erroneous.

We therefore affirm the finding that on January 6 appellant traded on the basis of material, non-public information. It follows that appellant also based his subsequent trades prior to public disclosure on February 18 on material, nonpublic information. Subsequent events brought a merger nearer, and nothing occurred to diminish its potential significance. The continuing purchases of Harvey’s stock at increasing prices, not only by appellant and Shapiro but also by others who became privy to the inside information, amply demonstrates that reasonable investors continued to find the information material. Appellant has advanced no persuasive explanation for his purchases other than reliance on inside information. We therefore affirm the finding that all appellant’s subsequent trades also violated section 10(b) and Rule 10b-5.

The SEC also charged appellant with violating the securities laws by “tipping” others about the merger negotiations. Appellant conceded that he may have told Unschuld of the merger negotiations. The district court found that appellant had passed such information. We affirm the holding that in this manner, too, appellant violated section 10(b) and Rule 10b-5.

B. Injunctive Belief.

The SEC sought, and the district court granted, an order enjoining appellant from further violations of section 10(b) and Rule 10b-5. Berman appeals from this order.

The critical question before the district court in considering injunctive relief was whether there was a reasonable likelihood that appellant would commit future violations. SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1100 (2d Cir. 1972). The court concluded that a reasonable likelihood did exist. In attacking this conclusion appellant points to many factors weighing against injunctive relief. However, we do not review the decision of the district court de novo. In Manor Nursing Centers, supra, 458 F.2d at 1100, we stated that:

“a district court has broad discretion to enjoin possible future violations of law where past violations have been shown, and the court’s determination that the public interest requires the imposition of a permanent restraint should not be disturbed on appeal unless there has been a clear abuse of discretion.”

Applying this standard of review, we affirm the grant of the injunction. Berman asserts that as he had never previously violated the securities laws the SEC could not show a “reasonable likelihood” of future violations. However, “first offenders” are not immune from injunctive relief. Two countervailing factors do indicate a likelihood of future violations. First, appellant made not one but seven purchases in the space of six weeks. Second, Berman is not an incidental or occasional investor. The violations occurred in the context of his regular business as a “corporate marriage broker.” The same circumstances as occurred here, with the same enticements, may well crop up again. One who has displayed such frailty in the past and faces so many temptations in the future may well need the admonition of an injunction to obey the law.

Appellant next argues that an injunction was inappropriate because he could not have known he was violating the securities laws. More specifically, he first claims that our decision extends the prior law in this area. Cf. Hecht Co. v. Bowles, 321 U.S. 321, 329, 64 S.Ct. 587, 88 L.Ed. 754 (1944); Electronic Specialty Co. v. International Controls Corp., 409 F.2d 937, 947 (2d Cir. 1969). He contends that no court has found violations in any case where a merger was as remote as it was here. Even if that is true, no court has held a defendant guiltless in a similar case, and we have reached our conclusions here by applying well-established principles. Appellant argues that the securities laws are complex and confusing and should not be strictly applied against a layman like himself. Appellant is no stranger to the securities markets. He is a professional who should know the law of his profession or pay the consequences of his ignorance.

Appellant next contends that he should not be enjoined because it was not shown that he acted in bad faith. It is not necessary to show bad faith, SEC v. Manor Nursing Centers, supra, 458 F.2d at 1096, especially where the SEC seeks injunctive relief. Compare Lanza v. Drexel & Co., 479 F.2d 1277, 1304 (2d Cir. 1973) (en banc). If it were, the lower court’s finding that appellant exhibited “driving cupidity and lack of principle and restraint” would satisfy the need.

In view of the foregoing, the district court was justified in finding an injunction necessary to protect the public interest. The SEC cannot keep constant surveillance over appellant. The deterrence of an injunction is clearly warranted.

C. Disgorgement of Profits.

Finally, appellant attacks the district court’s computation of damages and appointment of a trustee.

The district court required appellant to disgorge not the actual profits realized when he sold shares in Harvey’s after February 18, but the “paper” profits which had accrued as of February 18. Since the price of Harvey’s stock dropped after February 18 appellant had to surrender more than he actually made.

The district court’s approach was reasonable. A violator of the securities laws should disgorge profits earned by trading on non-public information. Once public disclosure is made and all investors are trading on an equal footing, the violater should take the risks of the market himself.

Moreover, a contrary holding would create a serious anomaly that might encourage insider trading. To require disgorgement only of actual profits in cases where the price of the stock subsequently fell would create a heads-I-win-tails-you-lose opportunity for the violator: he could keep subsequent profits but not suffer subsequent losses. Such a rule would emasculate the deterrent effect of Rule 10b-5.

This discussion should adequately answer appellant’s argument that the disgorgement ordered here constituted a penalty. Appellant disgorged only unfair profits. His additional losses resulted not from any penalty imposed by the court but from his unwise investment decision to keep the stock after February 18. Furthermore, those Harvey’s stockholders who sold their shares to appellant might, absent his fraud, have retained and sold their shares on February 18 when the price was much more attractive rather than during the later period. The effect of appellant’s fraud was to deprive them not only of the profits actually realized by appellant but also of the opportunity to sell when the price was much higher. We see no reason why the injured shareholders should not be compensated for this “lost opportunity.”

Appointment of a trustee to receive the disgorged profits was discretionary with the district court. In this case it involved no abuse of discretion.

Affirmed.

      . Defendants Unschuld, Kaplan, Frederick Robinson, Elliot Robinson, Zises, Rosenbloom, and Rothberg consented to injunctions against them and to disgorgement of profits from their transactions in Harvey’s stock.

      . Appellant also relies on James Blackstone Memorial Library Ass’n v. Gulf, Mobile & Ohio R.R., 264 F.2d 445, 450 (7th Cir.), cert, denied, 361 U.S. 815, 80 S.Ct. 56, 4 L.Ed.2d 62 (1959) ; Alameda Oil Co. v. Ideal Basic Industries, Inc., 337 F.Supp. 194 (D.Colo.1972) ; and Mills v. Sarjem Corp., 133 F.Supp. 753 (D.N.J.1955). Assuming that these cases still represent good law, they do not bind this court. Morever, each presented a very different factual situation from the case now before us.

      . How important the merger might have been to Harvey’s is demonstrated by the fact that the trading of appellant and others who knew of the merger pushed the price of Harvey’s stock by February 18 to nearly tliree-and-one-half times what it had been at the beginning of the year.

      . Appellant’s purchase of February 18 took place before investors had an opportunity to receive and react to the disclosures. See SEC v. Texas Gulf Sulphur Co., supra, 401 F.2d at 853-854 & n. 18.

      . The SEC also claims that appellant committed violations by passing information of the merger to Frederick Robinson. Appellant concedes that he did discuss the merger with Robinson. He pursued these discussions in order to find a purchaser for Harvey’s restricted shares, as Harvey’s had demanded. Certainly Robinson violated the securities laws by trading on this information. Appellant initiated the negotiations for a proper purpose, however. The district court did not specifically decide whether appellant violated Rule 10b-5 in these discussions. Since the resolution of this question does not affect the relief granted, we decline to decide it.

      . Appellant relied on SEC v. Texas Gulf Sul-phur Co., 312 F.Supp. 77, 90 (S.D.N.Y. 1970), aff’d, 446 F.2d 1301, 1306 (2d Cir.), cert, denied, 404 U.S. 1005, 92 S.Ct. 561, 30 L.Ed.2d 558 (1971). In that case, however, the district court: had other evidence indicating no reasonable likelihood of future violations, including over five years of good be-liavior by the defendants. Moreover, Terns Q-ulf Sulphur was an extraordinarily innovative case, as everyone connected with the securities field well knows. Finally, the denial of an injunction there was, as always, discretionary. Our affirmance in no way implied that denial of the injunction was required as a matter of law.


author: MERRILL, Circuit Judge:

text:
    Lee R. McNAIR, Plaintiff-Appellant, v. The HEARST CORPORATION, Defendant-Appellee.
    No. 71-2839.
    United States Court of Appeals, Ninth Circuit.
    April 4, 1974.
    Rehearing Denied May 3, 1974.

      Gerald F. Collier (argued), Seattle, Wash., for plaintiff-appellant.
    Daniel J. Riviera (argued), Ashley, Foster, Pepper & Riviera, Seattle, Wash., for defendant-appellee.
    Before MERRILL and KOELSCH, Circuit Judges, and JAMESON, District Judge.

       Honorable William J. Jameson, United States District Judge for the District of Montana, sitting by designation.

   OPINION

MERRILL, Circuit Judge:

This appeal is taken from a grant of summary judgment in favor of the ap-pellee in a libel suit brought by appellant with jurisdiction founded on diversity of citizenship. Upon this appeal the question is whether issues of fact remained for resolution at trial. In our judgment they did. Accordingly, summary judgment was premature.

In its July 28, 1970, issue the Seattle Post-Intelligencer carrier a news article on its front page, the headline and first two paragraphs of which read:

“THE HIGH COST OF A DIVORCE
Five years ago, Barbara Evans hired a lawyer to represent her in a divorce action.
Today the lawyer owns the home, worth between $55,000 and $65,000, which Mrs. Evans received as part of the 1966 divorce settlement * * *.”

A reasonable reader might well have read this portion of the article as stating that Barbara Evans had, as the hire of a divorce lawyer, parted with property worth to her between $55,000 and $65,000. This was not the fact. Appellant is the lawyer about whom the article was written. He had acted for an agreed fee of $3,000. The wife’s loss of her property was due not to the cupidity of her attorney but the failure of her divorced husband to meet his financial obligations to her. All this would have appeared to the reader had he read the article through to its conclusion. It continued on from the quoted portion for about fifty more paragraphs and on three different pages of the newspaper. Appellant was not mentioned in the first nine paragraphs nor on the first page at all. However, his name was given and repeated twenty-six times throughout the balance of the article. Regarding the article as defamatory he brought this suit for libel.

Summary judgment for appellee was based on the proposition that the article read in its entirety was actually true. In our judgment this does not suffice. Under Washington law whether an article is true will depend on what it is read to say — on how it would ordinarily be understood by persons reading it. Tilton v. Cowles Publishing Company, 76 Wash.2d 707, 459 P.2d 8, 18 (1969). The question here, as we view it, is whether the article as a whole can be said effectively to have eliminated the impact of any false impression created at the outset. In our judgment this question cannot here be answered as matter of law and remains a question for the jury.

Appellee contends that even so, the subject-matter of the article — divorce and its cost — is a matter of general public concern, and, under Rosenbloom v. Metromedia, Inc., 403 U.S. 29, 91 S.Ct. 1811, 29 L.Ed.2d 296 (1971), the publication must have been with actual malice if liability is to follow. Appellee contends that the record is wholly devoid of evidence of malice. We cannot agree.

The question as we view it is whether appellee, knowing of the falsity of the impression the headline and first two paragraphs would make upon the reader, actually intended that the article should leave that impression. In our judgment an inference to this effect is available to the jury. After all, what a newspaper regards as newsworthy usually makes its appearance in the headline and lead paragraph. This is what is intended to compel the reader’s attention. A jury, we feel, might well conclude that this was the impression that appellee intended should prevail.

Reversed and remanded for further proceedings.

      . From the newspaper account it appears that in 1965 appellant represented one Barbara Hughbanks in an action for divorce for an agreed fee of $3,000. The divorce was granted. The settlement gave the wife the couple’s equity in their home. The home bad been purchased three years earlier for $56,500. It had a balance due in the sum of $32,000, covered by a first mortgage together with an additional approximately $8,000 owing and secured by second and third mortgages. Under the divorce decree the husband was to pay off the second and third mortgages while the wife was to be responsible for the first mortgage. The decree also directed that the husband pay one half ($1,500) of appellant’s fee for representing the wife. The husband made no payment on the second or third mortgages, nor did he pay any part of appellant’s fee. Shortly after the divorce the holders of the second and third mortgages brought suit to foreclose. The following year Mrs. Hughbanks remarried. On her wedding day she gave a further mortgage on the home to appellant as security for the unpaid balance of counsel fees ($2,768.28), and deeded the fee to her new husband. Later that year the home was sold at sheriff’s sale to the holder of the second and third mortgages for the amount of foreclosure judgment; $7,286.33. The wife and her new husband filed a homestead on the property which gave them the right to occupy the house during the one-year redemption period. Appellant then, as holder of a fourth mortgage, redeemed the property for the purchase price, plus interest, and in January, 1969, received a deed to the property still subject to a first mortgage in the sum of approximately $31,000.

      . Here the record even suggests a negative' answer to this jury question. In deposition the publisher of the Seattle Post-Intelligen-cer testified that he had read the article some time ago (prior to the deposition date) and as he recalled the article what struck him as unusual was that it involved a “pretty hefty fee” for a divorce, “something like $65,000.” It was, then (in the memory of this witness at least), the false impression that prevailed over the truth.