author: GEWIN, Circuit Judge:

text:
    CARR STALEY, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
    No. 73-3198.
    United States Court of Appeals, Fifth Circuit.
    July 5, 1974.
    Rehearing and Rehearing En Banc Denied Oct. 3, 1974.

      Harold D. Rogers, Wichita Falls, Tex., for plaintiff-appellant.
    L. Dan Jones, Washington, D. C., amicus curiae, for Independent Petroleum Assoc, of Am.
    Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, Jonathan S. Cohen, Attys., Dept, .of Justice, Tax Div., Washington, D. C., Eugene Sayre, Dept, of Justice, Tax Div., Dallas, Tex., Frank D. McCown, U. S. Atty., William L. Johnson, Jr., Asst. U. S. Atty., Ft. Worth, Tex., William S. Estabrook, III, Atty., Tax Div., Dept, of Justice, Washington, D. C., for defendant-appellee.
    Before GEWIN, THORNBERRY and SIMPSON, Circuit Judges.
   GEWIN, Circuit Judge:

Carr Staley, Inc., the taxpayer, appeals from the district court’s judgment denying its claim for a refund of income taxes which it alleges were unconstitutionally imposed pursuant to 26 U.S.C.A. § 636(b) (Supp.1974). It was taxpayer’s position below, as here, that § 636(b) is unconstitutional because it results in the taking of taxpayer’s property without due process of law in contravention of the fifth amendment. After a careful review of the provisions of § 636(b) and the Congressional purpose underlying its enactment, we concur with the district court’s conclusion that the contested provision is a proper exercise of Congress’s authority to “lay and collect taxes on incomes, from whatever source derived.”

I

A production payment may be defined

. a right to a specified share or production from a mineral property (or a sum of money in place of production) when that production occurs. The production payment is secured by an interest in the minerals, the right to the production is for a period of time shorter than the expected life of the property, and the production payment usually bears interest.” See Joseph, Recent Developments in Oil and Gas Taxation, 22 Oil & Gas Tax Q. 164, 172 (1974).

The retained production payment is a frequently used method for splitting property interests of minerals in place. Before the enactment of the Tax Reform Act of 1969, it was an effective technique for dividing the income which resulted from the extraction of oil or other minerals. Under common practice, the owner of an oil holding will convey his interest to another party for a sum certain. Conjointly he will retain the right to a production payment which entitles the assignor to future income from the oil produced. This payment will be paid out from the oil as it is extracted. The assignor looks to the oil in place as the source for the payment of his reserved interest. We have previously noted that:

“A fundamental characteristic of a production payment is that it is not burdened with any of the operating expenses of a lease. It is payable only out of production, and there is no personal liability on the part of the owner of the production payment. The production payment owner has no possessory interest, no right to drill, no right to the surface, and no claim to possession. . . . His interest is an incorporeal hereditament in the nature of an overriding royalty creating a present interest in land in the payee.” Brooks v. Commissioner, 424 F.2d 116,122 (5th Cir. 1970).

Thus the assignee of mineral lands encumbered by a production payment assumes no personal liability for the payment of the retained production payment. The assignor is completely relegated to and dependent upon the oil in place as the generator of funds for retiring the payment.

On January 1, 1972, Alfred B. Guinn conveyed to the taxpayer an undivided Weth working interest in an oil and gas lease which Guinn owned. The record reveals that under the terms of this assignment, Guinn immediately received from taxpayer $2000. As additional consideration for the transfer, Guinn retained a production payment in the undivided Yieth working interest. This retained production payment was made payable out of 70% of all oil or other minerals produced from the Yie th working interest until Guinn had received an additional $5,000. Further, the agreement provided that Guinn was to receive an amount of interest equal to the rate of 10% per annum on the unliquidated balance owing under the retained production payment plus an amount equal to all the ad valorem taxes assessed against the property represented by the production payments.

In this particular oil venture, the Medders Petroleum Corporation actually conducted the operation and extracted the oil from the leased premises and the Atlantic Richfield Company purchased the oil as it was removed from the gi’ound. Atlantic Richfield paid Guinn and Carr Staley directly for the oil produced from the leased premises an amount which corresponded to Guinn’s retained production payment and Carr Staley’s right to production under the assignment. During the time period in question, January 1, 1972 to July 31, 1972, Atlantic Richfield paid the taxpayer $549.90 for its proportional interest in the leased premises. Additionally, taxpayer was charged $407.76 by Medders Petroleum for the operating expenses incurred in extracting the oil from its ttsth working interest. More important to the problem here posed, Guinn received $1,283.09, which amount equaled his retained production payment in the l^eth working interest. Under the proscriptions of § 636(b) the taxpayer was compelled to include in its gross income the money paid to Guinn.

Several Supreme Court opinions have given favorable treatment to oil property apportioned in this manner. These cases invariably arose because both the assignor and assignee of oil property were seeking the oil depletion allowance on the same interest represented by the retained production payment. The Court held that where the assignor had retained such rights which amounted to “an economic interest in the oil in place,” then he rather than the assignee was entitled to the depletion allowance. See Thomas v. Perkins, 301 U.S. 655, 57 S.Ct. 911, 81 L.Ed. 1324 (1937); Anderson v. Helvering, 310 U.S. 404, 60 S.Ct. 952, 84 L.Ed. 1277 (1940); Commissioner v. Southwest Exploration Co., 350 U. S. 308, 76 S.Ct. 395, 100 L.Ed. 347 (1956).

Relying on the property theories advanced by these cases and the unique features of the retained production payment, taxpayer asserts that it is being taxed for the income of another individual which it asserts is forbidden by the fifth amendment. Taxpayer contends that the income accruing to Guinn as a result of his retained production payment was his alone and any attempt to tax it for that income would be arbitrary and capricious and thus beyond the power of Congress.

Section 636(b) states that: By enactment of Section 636(b), Congress has repudiated “the economic interest test” developed by the Supreme Court in determining whether income attributable to a retained production payment shall be taxed to the assignor or the assignee. Under the new standard, the retained production payment is treated as a purchase money mortgage and the income produced from that retained production payment is taxed to the mortgagor (assignee) as in other cases.

“A production payment retained on the sale of a mineral property shall be treated, for purposes of this subtitle, as if it were a purchase money mortgage loan and shall not qualify as an economic interest in the mineral property.”

The Senate Report issued in support of the new treatment that is given production payments leaves little doubt as to the impetus for the change. The Report noted that a retained production payment is the same thing as a “loan secured by a mortgage on property and the ‘borrower’ [Carr Staley, Inc.] not personally, liable for the loan.” See footnote 5, swpra. Under previous law, the tax consequences of a retained production payment transaction are strikingly different from that accorded an ordinary sale of property with a purchase money mortgage to secure the unpaid balance of the purchase price. Where a retained production payment is utilized, the assignee-Mortgagor is permitted, to exclude from his income that amount necessary to “pay out” the retained production payment. Thus, the assignee is granted in effect the right to acquire a valuable capital asset by using “before-tax” dollars in payment for the asset. In contrast, assume that Guinn had sold taxpayer an apartment building. Conforming the facts established here to our hypothetical, Carr Staley would pay Guinn $2,000 as a down payment with Guinn taking a $5,000 purchase money mortgage on the apartment building without any personal liability on Carr Staley’s part in case of a default. In this similar economic exchange, Carr Staley would receive the income produced by the apartment building, take authorized deductions, pay taxes on the income received (the rentals from the individual apartment units), and use the “after-tax” dollars to retire the outstanding purchase money mortgage. These two similar economic endeavors were previously accorded completely divergent — and as Congress concluded unwarranted — tax treatment.

Furthermore, the Senate Report observed the great loss of revenue to the treasury which had resulted from these favored mineral transactions. Continued differentiation between the retained production payment on the one hand and the normal mortgage situation on the other would result in the perennial loss of millions of dollars in revenue. Accordingly, Congress acted to eliminate what it considered the unjustness which was the inevitable consequence of the disparate treatment accorded these economically similar transactions. The legislative history emphasizes the fact that taxpayers involved in substantially similar business transactions are accorded very different treatment. In one case (mineral transaction) the purchaser pays for an asset with tax free dollars; whereas, another taxpayer (purchase money mortgage transaction) pays for an asset with tax paid dollars.

This the taxpayer contends Congress may not do without violating the fifth amendment. In support of its argument of the constitutional infirmity of Section 636(b), taxpayer relies principally on Hoeper v. Tax Commission of Wisconsin, 284 U.S. 206, 52 S.Ct. 120, 76 L.Ed. 248 (1931); Heiner v. Donnan, 285 U.S. 312, 52 S.Ct. 358, 76 L.Ed. 772 (1932), and Schlesinger v. Wisconsin, 270 U.S. 230, 46 S.Ct. 260, 70 L.Ed. 557 (1926). In each of these cases, the Supreme Court struck down tax provisions which it concluded were arbitrary and capricious and thus violative of fundamental due process.

In Hoeper v. Tax Commission of Wisconsin, supra, the Court held that a Wisconsin statute which taxed the combined total incomes of a wife and husband to the husband alone was a violation of the due process and equal protection clauses of the fourteenth amendment. The state’s family unit taxation was found impermissible because a wife’s separate property and income were hers alone in Wisconsin. The Court stated:

“We have no doubt that, because of the fundamental conceptions which underlie our system, any attempt by a state to measure the tax on one person’s property or income by reference to the property or income of another is contrary to due process of law as guaranteed by the Fourteenth Amendment. That which is not in fact the taxpayer’s income cannot be made such by calling it income.” 284 U.S. at 215.

Taxation of the husband for the wife’s income was found unacceptable because it was inconsistent with the property rights which had been granted the wife in Wisconsin. The Court rejected the proposition that the tax statute was an attempt by the Wisconsin legislature to redefine the property rights of the husband and the wife since that body had left unchanged the previous individual property rights vested in the wife. Therefore, the Court did not answer the question whether the state could have taxed the husband for the wife’s income where the wife’s income was attributable to the husband under applicable property law.

Sehlesinger v. Wisconsin, and Heiner v. Donnan, hold that it is arbitrary and capricious for a state or the federal legislature to create an irrebutable presumption that a transfer made within a certain period of time before the donor’s death is a gift in contemplation of death. In both cases, the Wisconsin legislature in Sehlesinger and Congress in Heiner, had created irrebutable presumptions that transfers made within six years and two years respectively of the donor’s death were made in contemplation of death. Under both statutory schemes, the estate was not permitted to show that a transfer had been motivated by other than the donor’s ensuing death.

In Heiner, the Court noted that the estate tax statute was enacted to levy duties on transfers which occur because of the death of the donor. Estate taxes are imposed to tax one’s right to leave property to his beneficiaries at death. In contrast, a donor may wish to bestow property on another by an inter vivos conveyance without any consideration that his death may be impending. “The ‘generating source’ of such a gift is to be found in the facts of life and not in the circumstance of death.” Heiner, supra, 285 U.S. at 322. Assuming that life motives have impelled the donor to initiate the transfer involved, then the fact that death subsequently occurs does not affect the character of the gift as originally made. A life motivated inter vivos gift once made is complete and “death does not result in a shifting, or in the completion of a shifting, to the donee of any economic benefit of property, which is the subject of a death tax . ” Heiner, supra, 285 U.S. at 323. The essential purpose of a death transfer tax was thus given decisive and controlling weight in resolving the statutory presumption attached to certain life transfers.

The Court concluded that Congress may enact appropriate legislation to prevent the evasion of death taxes by donors who attempt to transfer their property in contemplation of death. Where gifts are made as a result of the donor’s desire to avoid estate taxes and death thereafter ensues, Congress may tax such transfers. Any rule which seeks to tax life transfers must be phrased in language which will permit an appropriate representative of the transferor’s estate to demonstrate that the donor was motivated in fact by circumstances other than his subsequent death. Therefore, the legislative schemes in Heiner and Sehlesinger were condemned because two classes of gifts had resulted from the tax provisions with the tax consequences of each class depending on the fortuitous and conclusive factor that death occurred within a certain period of time. Such a classification was found to be arbitrary since a logical basis for the distinction was lacking. Where the statutory presumption was determined to be applicable, the donee was forced to pay the tax even though he had previously been the beneficiary of a completed inter vivos gift. Moreover, as the Court stated, the motivation to make a gift varies with the individual circumstances of the donor and the donee. Congress had attempted to remove any chance for the estate to establish the actual facts surrounding the gift and thus the estate was denied a fair opportunity of a hearing on the contested issue of fact.

Although the logic evidenced in the cases discussed above is unassailable and enduring, we think the present statutory provision does not fall within any of the proscriptions delineated in those opinions. Where a taxpayer attacks a tax statute on the grounds that it contravenes the fifth amendment, the thrust and focus of his attack must be specific. The underlying and crucial question to be answered must be whether there is a reasonable basis in fact for the legislative scheme or classification drawn into focus. The parameters of a court’s review is limited. We should not second-guess the legislature where there is factual support for the distinctions it has drawn. Judicial intervention should be limited to those situations where the legislative classification under review is so arbitrary and capricious as to amount to a denial of fundamental due process. The Supreme Court set the tone for a reviewing court when a taxing scheme is challenged by enunciating the following principle:

“ . . . [T]he due process clause of the 5th Amendment ... is not a limitation upon the taxing power conferred upon Congress by the Constitution . . . [except]^ in a ease where although there was a seeming exercise of the taxing power, the act complained of was so arbitrary as to constrain to the conclusion that it was not the exertion of taxation but a confiscation of property; that is, a talcing of the same in violation of the 5th Amendment, or, what is equivalent thereto, was so wanting in basis for classification as to produce such a gross and patent inequality as to inevitably lead to the same conclusion.” Brushaber v. Union Pacific R.R., 240 U.S. 1, 24-25, 36 S.Ct. 236, 244, 60 L.Ed. 493 (1915).

Viewing the case, in this light, we think that the enactment under review accords reasonable treatment to taxpayers in similar economic situations.

The Congress by enactment of Section 636(b) has equated a retained production payment with a purchase money mortgage on property. This equation requires that taxpayers be treated identically because the economic reality of both undertakings is substantially similar. The legislative history plainly and unequivocally supports the Congressional classification as a reasonable one. It is well established that while state law determines the legal interests a taxpayer has in property, federal law will determine how those legal interests are to be taxed by the United States, Burnet v. Harmel, 287 U.S. 103, 53 S.Ct. 74, 77 L.Ed. 199 (1932).

Taxpayer has failed to demonstrate to us how this transaction is substantially or significantly different from a purchase money mortgage given to secure the unpaid balance of the purchase price of property even though personal liability for the debt is waived by the mortgagee. Taxpayer is permitted to gain a valuable capital asset by using the property to produce income to retire the production payment, retained by Guinn, the assignor of the working interest. This is the same splitting of interests that occurs when one purchases an apartment building and rents the building to pay off the outstanding mortgage retained by the seller to secure the payment of the balance due on the transaction.

Legal title to the property concerned is not the decisive factor in determining whether the government may tax the income accruing to that property. Anderson v. Helvering, supra. Taxation should be based on the economic realities of the particular commercial transaction involved. By piercing the veil created by the “magic words” which were used in the instant transaction between Guinn and the taxpayer, Congress has accorded taxpayer the same treatment meted out to others similarly situ-, ated. We think the Congressional enactment here involved is consistent with the observation made by. the Supreme Court when it said:

“Refinements of title are without controlling force when a statute, unmistakable in meaning, is assailed by a taxpayer as overpassing the bounds of reason, an exercise by the lawmakers of arbitrary power. In such circumstances the question is no longer whether the concept of ownership reflected in the statute is to be squared with the concept embodied, more or less vaguely, in common-law traditions. The question is whether it is one that an enlightened legislator might act upon without affront to justice. Even administrative convenience, the practical necessities of an efficient system of taxation, will have heed and recognition within reasonable limits. Liability does not have to rest upon the enjoyment by the taxpayer of all the privileges and benefits enjoyed by the most favored owner at a given time or place. Government in casting about for proper subjects of taxation is not confined by the traditional classification of interest or estates. It may tax, not only ownership, but any right or privilege that is a constituent of ownership. Liability may rest upon the enjoyment by the taxpayer of privileges and benefits so substantial and important as to make it reasonable and just to deal with him as if he were the owner, and to tax him on that basis.” Burnet v. Wells, 289 U.S. 670, 678, 53 S.Ct. 761, 764, 77 L.Ed. 1439 (1932). (Citations omitted).

Thus we cannot conclude that the classification here attacked is so lacking in reason as to be arbitrary or capricious. The legislative scheme under review is a reasonable measure by Congress to remove the unequal and unjust treatment of taxpayers which occurs merely from the form of the transaction employed.

Accordingly, Section 636(b) is constitutional at least as applied to the transactions revealed by the record in this case. The judgment of the district court is affirmed.

      . U. S. Constitutional Amendment XYI.

      . The taxpayer hotly contests finding of fact No. 2 by the district court which is as follows:
      “In January of 1972, plaintiff bought an undivided Yleth working interest in an oil and gas lease known as the Petrix D Lease. The consideration for this purchase was $7,000, plaintiff paying $2,000 in cash and the seller reserving a $5,000 production payment, bearing interest at the rate of 10 percent per annum, payable out of 70 percent of the minerals produced and attributable to the t^gth working interest.”
      Taxpayer claims that there is no evidence in the record to establish the fact that $2,000 was initially paid and the additional $5,000 was payable as production progressed. We disagree. Neither the district court nor this court is bound to accept the particular label which a taxpayer attaches to various documentary and oral evidence. The check for $2,000 paid at the time of the transfer does contain the words “purchase of lease.” It is dated the same day the assignment was made. It is obvious that the consideration described in the assignment as “Ten dollars ($10.00) and other good and valuable considerations” refers to the $2,000 payment. The lease then proceeds to set forth the terms as to the $5,000 payment. Moreover, on cross-examination one of the witnesses for the taxpayer was interrogated about the two payments mentioned and the agreement to pay “ten percent interest.” He made a general answer that, “Well it is a price offered and a price accepted for a particular interest.” We find ample support in the record for the quoted finding of the district court.

      . The full text of the actual assignment by Guinn to Carr Staley, Inc. is as follows:
      ALFRED B. GUINN
      CARR STALEY, INC. ASSIGNMENT OF OIL AND GAS LEASE WITH RESERVATION OF PRODUCTION PAYMENT THE STATE OF TEXAS ]
      COUNTY OF ARCHER J WHEREAS, the following facts presently exist:
      1. Alfred B. Guinn of Wichita Falls, Texas (called “GUINN”), is the owner of an undivided one-sixteenth (Yie) working interest in and to the oil and gas lease described in Exhibit “A” attached hereto and made a part hereof for all purposes (called “LEASEHOLD ESTATE”).
      2. Carr Staley Inc. (called “STALEY”), a Texas corporation, has its offices at 810 City National Building, Wichita Falls, Texas.
      3. Guinn desires to sell to Staley an undivided one-sixteenth (l/ie) of the entire working interest in the above described lease reserving unto himself a production payment.
      NOW, THEREFORE, KNOW ALL MEN BY THESE PRESENTS:
      That Guinn, for and in consideration of TEN DOLLARS ($10.00) and other good and valuable consideration, the receipt of which is hereby acknowledged, and subject to the conditions and reservations hereinafter set forth, does hereby SELL, ASSIGN, TRANSFER and SET OVER unto Staley an undivided one-sixteenth (Yie) interest in the Leasehold Estate, subject, however, to the present overriding royalty interest, restrictions, exceptions and limitations of the original lease and all assignments thereof and subject to the following reservation:
      Guinn excepts and reserves unto himself as a Production Payment seventy percent (70%) of all the oil, gas and other minerals in and under and that may be produced, saved and sold and attributable to the Leasehold Estate including any renewals or extensions of the lease included under the Leasehold Estate, until there shall have been received free and clear from all expenses of operation, development and maintenance (except gross production and severance taxes), the full net sum of FIVE THOUSAND AND NO/100 DOLLARS ($5,000.00) (“PRIMARY SUM”) plus an amount equivalent to interest at the rate of ten percent (10%) per annum on the diminishing unliquidated balance of the Primary Sum from the date this conveyance is executed until such Primary Sum be fully liquidated plus an additional amount equal to all ad valorem taxes assessed against the Production Payment both of which amounts are hereinafter called “ADDITIONAL SUM”.
      Guinn also BARGAINS, SELLS and TRANSFERS to Staley an undivided one-sixteenth (y16) interest in and to the personal properties and equipment situated on or used or obtained in connection with the Leasehold Estate, including a like interest in the productive wells situated thereon.
      If, as and when Guinn, his heirs or assigns, shall have so received the aforesaid Primary Sum together with the Additional Sum thereon from the said reserved Production Payment, then the said interest shall automatically terminate and thereafter that part of the working interest under the lease from which the same is hereby reserved shall be wholly free and clear of Guinn’s reserved Production Payment.
      TO HAVE AND TO HOLD the above described Leasehold Estate in and to the aforesaid property and premises, together with all and singular the rights and appurtenances thereto in anywise belonging, unto Staley, its successors and assigns, forever, and Guinn hereby binds himself, his heirs, executors, representatives and assigns, to warrant and forever defend said interest of Staley against every person whomsoever lawfully claiming, or to claim the same, or any part thereof, by, through and under Guinn only.
      This Assignment shall be effective as of 7:00 a. m. on the 1st day of January, 1972.
      EXECUTED this 14 day of January, 1972.
      (s) Alfred B. Guinn CARR STALEY, INC.
      (s) By Carr Staley, President

      . Under the new treasury regulations, a production payment is defined as a
      “right to a specified share of the production from mineral in place (if, as, and when produced), or the proceeds from such production. Such right must be an economic interest in such mineral in place. It may burden more than one mineral property, and the burdened mineral property need not be an operating mineral interest. Such right must have an expected economic life (at the time of its creation) of shorter duration than the economic life of one or more of the mineral properties burdened thereby. A right to mineral in place which can be required to be satisfied by other than the production of mineral from the burdened mineral property is not an economic interest in mineral in place. A production payment may be limited by a dollar amount, a quantum of mineral, or a period of time. A right to mineral in place has an economic life of shorter duration than the economic life of a mineral property burdened thereby only if such right may not reasonably be expected to extend in substantial amounts over the entire productive life of such mineral property. The term ‘production payment’ includes payments which are commonly referred to as ‘in-oil payments’, ‘gas payments’, or ‘mineral payments’.” 26 O.F.R. § 1.636-3 (a)(1) (1973).

      . Those portions of the Senate Report relevant to the discussion here read in part:
      5. Mineral Production Payments Present law. — A mineral production payment is a right to a specified share of the production from a mineral property (or a sum of money in place of the production) when that production occurs. The payment is secured by an interest in the minerals, the right to the production is for a period of time shorter than the expected life of the property, and the production payment usually bears interest. Depending on how a production payment is created, it may be classified as a carved-out production payment, or retained production payment which may then be used in a so-called A-B-C transaction.
      A carved-out production payment is created when the owner of a mineral property sells — or carves out — a portion of Ms future production. A carved-out production payment is usually sold for cash and, quite often, to a financial institution. Under present law, the amount received by the seller of the carved-out production payment generally is considered ordinary income subject to depletion in the year in which received. The purchaser of the production payment treats the payments received as income subject to the allowance for depletion (almost always cost depletion) and thus generally pays no tax on those amounts (except for that portion of the payments which is in the nature of interest). The amounts utilized to pay the production payment are excluded from income by the owner of the property during the payout period, but the expenses attributable to producing the income are deducted by him in the year they are incurred.
      A retained production payment is created when the owner of a mineral interest sells the working interest, but reserves a production payment for himself. Under present law the owner of the retained production payment receives income for which percentage depletion may be taken during the payout period, or period during which he receives a part of the production (or a payment based on production). The purchaser of the working interest excludes the amounts used to satisfy the production payment during the payout period, but (until recently) deducted the cost of producing the minerals subject to the production payment.
      The so-called A-B-C transaction is the same as a retained production payment case, except that after selling the working interest, the initial owner then sells the “retained production payment.” Thus, in an A-B-C transaction, the owner of the mineral property, A, sells it to a second person, B, and reserves a production payment (bearing interest) for a major portion of the purchase price. He then sells the production payment to a third party, C, which is usually a financial institution, or, perhaps, a tax-exempt organization.

        General reasons for change. — The treatment of mineral production payments under present law has resulted in what are essentially two problems, one relating to carved-out production payments and one relating to retained production payments and A-B-C transactions. In the case of the carved-out payments, by advancing the time income (but not the related expense) is reported for tax purposes, taxpayers, have been able to avoid limitations based on net or taxable income — principally the 50-percent limitation on taxable income from the property for percentage depletion purposes, but also the foreign tax credit limitation, the 5-year net operating loss carryover limitation, and the 7-year investment credit carryover. In the case of A-B-C transactions, taxpayers have been able to amortize or pay off what is essentially a loan with before-tax dollars rather than after-tax dollars.
      In each of the three situations (the carved-out production payment, the retained production payment, and the A-B-C transaction), the transaction is similar, in fact, to a loan transaction with the loan secured by a mortgage on the property and the “borrower” not personally liable for the loan. In a carve-out, the analogy to a loan is the borrowing of money (selling a production payment). In an A-B-C transaction, the analogy is to the sale of a property but subject to a mortgage subsequently sold to someone else.
      The factual similarity between the creation of a production payment and a loan transaction and the disparate tax treatment of production payments and loans can be illustrated by examining two hypothetical A-B-C transactions, one involving an oil payment, amd the other the sale of an apartment.
      Assume that A sells an operating business to B — the business may be an oil well, or it may be an apartment building. However, assume that A retains the right to a production payment — a payment equivalent to the current price of a specified number of barrels of oil — or in the case of the apartment building, a mortgage, which is not much different from the production payment. Then suppose that A sells the production payment or mortgage to C.
      From A’s standpoint, the two transactions are treated the same — they both result in a capital gain-or loss-to A depending upon his cost or other basis whether it is the apartment building or oil well which is being sold.
      However, the similarity between the oil well and the apartment building ends here. In the case of the apartment building, all of the rental income after ordinary expenses and depreciation is taxable income to B and he must pay off the mortgage out of “after tax” dollars.
      In the case of the oil well, however, B is not considered as receiving the production payment at all — which, in the typical case, may well amount to as much as 90 percent of the income from the well. Thus, in this case B is, in effect, paying the production payment out of “before-tax dollars.” This privilege of purchasing capital interests out of tax-free income is not a privilege accorded ordinary taxpayers. At the same time (until recently in the Brooks case), B, in the case of the oil well, claims the right to take the operating expenses for the entire well against his share of the income with the result he is likely to have hardly any taxes to pay while he is acquiring a full interest in the oil well.
      At the same time, B is paying little or no tax in the case of the oil well, 0, who is receiving the production payment is receiving cost depletion on this payment. Thus, he is amortizing his entire cost over the period he receives his payments.
      The O who has the mortgage on the apartment house fares no better than his counterpart with the production payment despite the special advantages of the B with the oil well. The C with the mortgage can spread his cost over the period of the mortgage but, presumably, any excess he receives is interest income and therefore ordinary income.
      The crucial difference between the A-B-C transaction in oil and the mortgage for the apartment, therefore, lies in the treatment of B and the fact that in the A-B-C transaction B can amortize C’s capital interest out of tax-free dollars rather than the “after-tax dollars” he must use in the apartment case.

        In recent years, the use of mineral production payments has increased substantially. In 1965, reported carved-out production payment transactions totaled $214 million. One year later, this amount had more than doubled to a figure of $540 million. This represented a revenue loss to the Federal Government of $70 million. The reported amount of so-called A-B-C transactions in 1966 totaled $1.85 billion. Moreover, the use of the A-B-C transaction has spread to industries where it previously was not used. For example, the use of production payments was almost unknown in the coal industry several years ago. However, within recent years, coal properties have been sold, subject to retained production payments of approximately $800 million.
      The committee agrees with the House that there is no reason why a person, who, in effect, is the borrower in a production payment transaction should be allowed to pay off the loan with tax-free dollars while a borrower of funds in any other industry must satisfy the loan out of taxed dollars. In addition, the committee agrees with the House that Congress did not intend to permit the avoidance of the limitation on depletion deductions and the mismatching of income and expenses which creates artificial tax losses by the use of production payments. Moreover, there is a substantial revenue loss which results from the use of production payments. It is estimated that the combined revenue loss from A-B-C transactions and carved-out production payments is between $200 and $350 million annually. An acceleration of the revenue loss can be expected unless corrective action is taken.

        Explanation of provision.- — -For the above reasons, both versions of the bill, in general, provide that production payment transactions are to be treated as loan transactions; that is, a loan by the owner of the production payment to the owner of the the mineral property. This is the same treatment as provided under present law whenever the payout of a production payment, in the case of a carve out, is in any manner guaranteed by the person who created it, or, in the case of an A-B-C transaction, is guaranteed by B, the purchaser of the working interest.
      * * * * *
      In the case of retained production payments (that is, the sale of mineral property subject to a production payment), the bill provides that the production payment is to be treated as a purchase money mortgage loan (rather than as an economic interest in the mineral property). Accordingly, the income derived from the property which is used to satisfy the payment would be taxable to the owner of the mineral property, subject, of course, to the allowance for depletion. In addition, the production costs attributable to producing the minerals used to satisfy the production payment would be deductible by the owner of the working interest in the year incurred. Thus, the owner of the working interest would be placed in essentially the same position as persons in other industries who purchase business assets subject to a mortgage.
      See Senate Report No. 91-552, 91st Cong., pp. 182-187 (1969) U.S.Code Cong. & Admin.News, pp. 2215-2219.

      . The district court found as a conclusion of law the following:
      “3. In the enactment of Section 636(b) of the Internal Revenue Code of 1954, Congress sought to do away with the preferential tax treatment given taxpayers in the oil and gas industry through the use of ‘production payments.’ By eliminating the special status granted to production payments by the Supreme Court in Thomas v. Perkins, 301 U.S. 655 [57 S.Ct. 911, 81 L.Ed. 1324] (1937), Congress intended to place taxpayers in the oil and gas industry on the same basis as all other taxpayers, i. e., paying off what are essentially loans with ‘after-tax dollars,’ rather than with tax-free dollars as had been the case prior to August 7, 1969. The effect of Section 636(b) of the Code was to legislatively overrule the Supreme Court’s decision in Thomas v. Perkins, supra, and extend the rationale of that Court’s opinion in Anderson v. Helvering, 310 U.S. 404 [60 S.Ct. 952, 84 L.Ed. 1277] (1940), to all production payments.”


source: Caselaw Access Project

author: PER CURIAM:

license: Public Domain

text:
    Joyce M. McDONALD, widow of Charles E. McDonald, Individually, etc., et al., Plaintiffs-Appellees, v. FEDERAL BARGE LINES, INC., Defendant-Third-Party Plaintiff-Appellant, v. MANPOWER, INC. OF MISSOURI, Third-Party Defendant.
    No. 73-2040.
    United States Court of Appeals, Fifth Circuit.
    July 15, 1974.

      W. J. Larzelere, Jr., George B. Matthews, New Orleans, La., for plaintiff-appellant.
    John H. Wells, Joe M. Inabnett, New Orleans, La., for Joyce M. McDonald.
    Christopher Tompkins, New Orleans, La., for Manpower, Inc.
    Before RIVES, GEWIN and RONEY, Circuit Judges.
   PER CURIAM:

Charles E. McDonald, spouse of the plaintiff-appellee, fell while working on a barge owned by Federal Barge Lines, Inc., defendant-appellant when the barge was docked in the Mississippi River in New Orleans. The fall resulted in an injury to his right elbow which became infected and led to his untimely death four months later. His wife and two sons filed suit seeking damages for wrongful death. A jury found Federal negligent and its barge unseaworthy. Mrs. McDonald was awarded $55,000, her sons $25,000 and $15,000, respectively, subject to a 35% deduction for the decedent’s contributory negligence.

Federal raises three issues on this appeal: (1) the trial court’s instruction allowing consideration of lost love and affection as an element of damages was erroneous as a matter of law under Canal Barge Co. v. Griffith, 480 F.2d 11 (5th Cir. 1973); (2) the instructions allowing the jury to consider loss of love and affection and loss of nurture and guidance was erroneous because there was no evidence upon which to predicate such considerations; and (3) the jury’s verdict was excessive. Finding the jury’s damage award not to be excessive, that sufficient evidence supports the award, and that the trial court’s instruction as to loss of love and affection was correct under Sea-Land Services, Inc. v. Gaudet, 414 U.S. 573, 94 S.Ct. 806, 39 L.Ed.2d 9 (1974), we affirm.

The principal issue which brought this case to the oral argument calendar was the propriety of damages for loss of love and affection and the Court’s instruction in connection therewith. Any doubt that might have existed at the time this case was appealed and originally briefed has now been resolved by the language in the opinion of the recent Supreme Court decision in Sea-Land Services, Inc. v. Gaudet, 414 U.S. 573 (1974). In Sea-Land, the Court wrote that family members could be compensated for loss of “society” which

embraces a broad range of mutual benefits each family member receives from the others’ continued existence, including love, affection, care, attention, companionship, comfort and protection.

414 U.S. at 585. In a footnote to that passage, the Court was careful to distinguish between the compensable loss of love and affection and the noncompensable mental anguish or grief suffered by the survivors: “The former entails the loss of positive benefits, while the latter represents an emotional response to the wrongful death.” 414 U.S. n. 17 at 585. The family cannot recover as part of the wrongful death action for their grief occasioned by the member’s death.

The District Court’s instruction did not include the nonallowable element of survivor’s grief for consideration by the jury as compensable damages :

These are some of the elements for which you can make allowance if you, in fact, find that the plaintiff is entitled to judgment:
Loss of future support, loss of the father’s love and affection, conscious pain and suffering — that means before death, and loss of decedent’s services. This means the things that husbands and fathers do in the home.

This instruction was correct under Sea-Land and does not present reversible error.

Federal contends that any award for loss of love and affection and loss of nurture and guidance is inappropriate because there was no evidence submitted which would support such an award. Federal complains that no actuarial calculations, income tax returns, or other earning records were introduced to corroborate the meager evidence concerning the decedent’s earnings contained in Mrs. McDonald’s testimony. It asserts that the record is completely void of any evidence concerning the relationship between Mrs. McDonald and her husband and between her husband and the two children.

The jury, as finders of fact, have the exclusive obligation to compute damages and that computation need not conform to strict arithmetical calculations but may be in the form of a lump sum award. Neill v. Diamond M. Drilling Co., 426 F.2d 487 (5th Cir. 1970); Neal v. Saga Shipping Co., S. A., 407 F.2d 481 (5th Cir.), cert. denied, 395 U.S. 986, 89 S.Ct. 2143, 23 L.Ed.2d 775 (1969). We review the jury verdict, whether it be lump sum or itemized, to find if there is sufficient evidence to support the award.

Mrs. McDonald testified as to her husband’s work experience and his approximate wages. It was revealed that the decedent terminated lucrative employment because it required him to be away from his family for long periods. The McDonalds were not separated or divorced and maintained a home together in New'Orleans. Although we agree with Federal that this evidence is not overwhelming, it is likewise not insignificant and is certainly sufficient to support a damage award.

Assuming liability for wrongful death, there is no merit to the claim that the awards are so excessive as to command the attention of an appellate court.

Affirmed.


author: RONEY, Circuit Judge:

text:
    S. D’ANTONI, INC., Plaintiff, v. The GREAT ATLANTIC AND PACIFIC TEA COMPANY, INC., Defendant. UNITED STATES of America, Intervenor-Appellant, v. FRUEHAUF TRAILER DIVISION, et al., Creditors-Appellees.
    No. 73-2357.
    United States Court of Appeals, Fifth Circuit.
    July 5, 1974.

      John R. Schupp, Asst. U. S. Atty., Chief, Civ. Div., Gerald J. Gallinghouse, U. S. Atty., New Orleans, La., for IRS.
    Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwaeks, William S. Estabrook, Jane M. Edmisten, Elmer J. Kelsey, Tax Div., Dept, of Justice, Washington, D. C., for intervenor-appellant.
    Charles L. Chassaignac, New Orleans, La., for Fruehauf.
    Frank J. Stieh, Jr., New Orleans, La., for White Motor Corp.
    William W. Messersmith, III, New Orleans, La., for Int’l Harvester Co.
    Joseph E. Friend, New Orleans, La., for Uniroyal.
    George V. Baus, New Orleans, La., for N. E. England.
    Sam Monk Zelden, New Orleans, La., for Mydland.
    Peter A. Feringa, Jr., New Orleans, La., for creditors-appellees.
    Harvey J. Lewis, New Orleans, La., for S. D’Antoni, Inc.

      Carl J. Schumacher, Jr., New Orleans, La., for The Great Atlantic & Pac. Tea Co.
    Before RIVES, GE WIN and RONEY, Circuit Judges.
   RONEY, Circuit Judge:

In this contest between judgment lien creditors and a United States tax lien, we are called upon to determine the correct place for filing a notice of tax lien in Louisiana to ensure a priority claim as to the personal property of a corporate tax debtor over the corporation’s judgment lien creditors. The controlling statute, 26 U.S.C.Á. § 6323, requires such tax notice to be filed where “the principal executive office of the business” is located. In this case, the Government filed in the Louisiana parish in which the only business office of the debtor was located. The District Court held that the Government’s notice should have been filed in the parish containing the debtor corporation’s “registered office” — the address designated in its incorporation papers. We reverse.

The personalty at stake in this case is the money paid into the registry of the District Court by the Great Atlantic & Pacific Tea Company, Inc. in settlement of a breach of contract action brought by S. D’Antoni, Inc., the debtor corporation. Before suit was filed, and before the other creditors involved in this case reduced their claims against D’Antoni to judgment, the United States recorded a series of notices of federal tax liens in the mortgage records of the office of the Clerk of Court of Jefferson Parish. Subsequently, the judgment creditors caused D ’Antoni’s interest in the suit against A & P to be seized by writs of Fieri Facias. The United States intervened, claiming priority based on the notices recorded in Jefferson Parish. Fruehauf Trailer Division, Fruehauf Corporation (representing the other judgment lien creditors under an agreement to prorate the fund should Fruehauf prevail) argued that the Government had filed in the wrong place and should have filed the notices either in Orleans Parish or with the clerk of the federal district court.

The general tax lien of the Government, which arises as soon as taxes are assessed and which attaches to all property and rights to property of the tax debtor, prevails against all other unperfected liens with a few statutory exceptions, including judgment lien creditors. Whenever the lien of the United States competes with that of such a protected party, it must be determined whether the United States filed notice of its lien in the proper place prior to the time the competing lienor established his status as a judgment lien creditor. If the tax lien notices, filed before Fruehauf et al. established their status as judgment lien creditors, were filed in the appropriate office, the Government is entitled to priority under the first in time, first in right doctrine. See United States v. Pioneer American Insurance Co., 374 U.S. 84, 83 S.Ct. 1651, 10 L.Ed.2d 770 (1963); United States v. New Britain, 347 U.S. 81, 74 S.Ct. 367, 98 L.Ed. 520 (1954). If filed in the incorrect place, the notices are without effect and Fruehauf obtains priority.

Under section 6323(a), a federal tax lien is not valid as against a judgment lien creditor until notice thereof has been filed in accordance with the requirements of subsection (f). Subsection (f) requires notice of a tax lien against personal property to be filed in the one office designated by state law for the governmental subdivision in which the personalty is situated. Personal property is deemed to be situated at the residence of the delinquent taxpayer and the residence of a corporate taxpayer is deemed to be “the place at which the principal executive office of the business is located.” 26 U.S.C.A. § 6323(f)(2). If a state has not designated an appropriate office, the notice is to be filed with the clerk of the federal district court for the district in which the property is situated. Louisiana law provides that federal tax lien notices are to be recorded in the mortgage records of the parish “within which the property subject to such lien is situated.” La. Stat.Ann., Rev.Stat. § 52:51. The controlling question before us is, therefore, whether D’Antoni’s “principal executive office” was located in Jefferson or Orleans Parish.

The facts are not in dispute. D’Antoni conducted all of its business from its Jefferson Parish location. Its Orleans Parish address, on the other hand, was the “registered office” designated in its incorporation papers and the home address of its president and vice-president, who were also incorporators, directors, and major stockholders.

The District Court held that “principal executive office” referred to D’Antoni’s registered office in Orleans Parish, relying heavily on Gill Trailer & Equipment Rentals, Inc. v. S. D’Antoni, Inc., 267 So.2d 242 (La.Ct.App.1972). That case concerned the same issue and the same debtor involved herein. The Louisiana Court of Appeal held that notice had to be filed in Orleans Parish, concluding from legislative history that

when Congress used the term “principal executive office” to designate the residence of a corporation for purposes of 26 U.S.C. § 6323, they intended to refer to the statutory residence which varying state statutes assign to corporations. In Louisiana the statutory residence of a corporation is its registered office.

267 So.2d at 246 (footnote omitted).

After the District Court decided this case, however, and subsequent to the filing of the appeal, the Supreme Court of Louisiana reversed the Court of Appeal on the ground that the clear and unambiguous letter of the law should not be disregarded “under the pretext of pursuing its spirit” through the legislative history. La., 282 So.2d 714, 716 (1973), cert. denied, 415 U.S. 957, 94 S.Ct. 1485, 39 L.Ed.2d 572 (1974).

Although we are not bound by the Louisiana Supreme Court’s decision, as indeed the District Court correctly recognized, and conversely the state supreme court did not consider itself bound by the federal District Court’s decision, it may be of some relief to those who cherish predictability in the law to find that we agree with the reasoning of the Louisiana Supreme Court so that henceforth, the law in this particular can be similarly administered in both federal and state forums.

Inasmuch as Fruehauf was not in the state litigation and it asserts an additional argument not considered by the state tribunals, it is in order that we discuss briefly the arguments made before us.

Fruehauf relies, as did the Louisiana Court of Appeal, on the legislative history of the Federal Tax Lien Act of 1966 which enacted the “principal executive office” test. The Senate Finance Committee reported that the purpose of revision was to benefit both creditors and the Government by eliminating, through specific rules, existing uncertainty over the proper filing location. To that end

[t]he amendment requires notice of a tax lien to be filed where a taxpayer resides, and not at his domicile, as presently contended by the Internal Revenue Service, because of the difficulty in determining a person’s domicile, based as it is on (among other things) his state of mind. On the other hand, for purposes of determining the residence of corporations and partnerships, the amendment provides specific rules for determining their residence. Under the amendment, the residence of a corporation or a partnership is deemed to be the place at which its principal executive office is located. This is the most readily identifiable of all the offices that a business may maintain, appearing, as it does, on the annual reports filed with most States and on similar returns, and avoids the uncertainty of determining which of the many business offices that a taxpayer may maintain is its principal one.

S.Rep.No.1708, 89th Cong., 2d Sess. (1966), 1966 U.S.Code Cong. & Admin. News, pp. 3722, 3732.

There is substantial merit in Fruehauf’s argument that the address listed in the incorporation papers presents an objective standard which would avoid uncertainty and might increase the likelihood of actual notice to creditors of federal tax liens. In the case of a corporation with multiple offices, any test directed at determining the most important office is to some extent subjective. Creditors and the Government could in good faith reach different conclusions as to the appropriate location for filing of federal tax liens. The difficulty with this argument is that, despite the legislative history, it contravenes the plain words of the statute. Section 6323 does not refer, as it easily could have, to the address used to incorporate the business; it speaks of “the principal executive office of the business.” The natural import of the statutory language is the headquarters of the business — the office at which the major executive decisions affecting the business are made.

Further, the passage from the legislative history quoted above reveals that Congress rejected the concept of domicile as determinative of the proper place for filing of tax lien notices. A corporation’s domicile is determined by the place in which it incorporates, which may bear no relation to the location of the company’s business operations or its decision-making activities. The Louisiana concept of “registered office” is one of domicile, see La.Stat.Ann., Rev.Stat. § 12:104(B), and the state corporation statute clearly contemplates the possibility that a company’s principal business activities may be carried on elsewhere. See id. § 12:103.

The Supreme Court of Louisiana noted an additional argument against Fruehauf’s assertion that Congress intended D’Antoni’s “registered office” to be its residence for federal tax lien purposes. Congress applied the “principal executive office” test to both corporations and partnerships. Use of the “registered office” interpretation would prevent the application of the test to partnerships. See 282 So.2d at 716. Statutes should be so construed as to give effect to all their parts. 2A Sutherland, Statutory Construction § 46.06 (4th ed. 1973).

We therefore hold that the tax lien notice filed by the Government in the Jefferson Parish mortgage records satisfied the requirements of section 6323(f).

Fruehauf contends in the alternative that the Louisiana provision for recordation of tax lien notices, La.Stat.Ann., Rev.Stat. § 52:51, is invalid and that the proper place to file the notices in this case was the clerk’s office of the United States District Court. The basis of Fruehauf’s argument is that the Louisiana Recordation Act was enacted prior to the Federal Tax Lien Act of 1966 and was not amended to conform to the 1966 federal law. As Fruehauf reads the Louisiana provision dating from 1940, it allows tax lien notices to be filed in each parish in which personal property of a corporation is situated. Federal law, however, now requires notice to be filed only where the corporation’s “principal executive office” is located. Thus, the argument runs, Louisiana “has not by law designated one office which meets the requirements of subparagraph (A)” and tax lien notices must accordingly be filed with the clerks of the federal district courts in Louisiana as provided in section 6323(f)(1)(B).

This argument casts doubt upon tax lien filings in Louisiana and a substantial number of states, which have similarly worded statutes. Nothing in the legislative history of the Federal Tax Lien Act of 1966 indicates that Congress intended or expected the Act to invalidate existing state legislation. The change in the place of filing rules was designed to do away with conflicting court rulings as to where personal property was situated. S.Rep.No.1708, supra, at 3732. Section 6323(f)(1)(B) merely limits the authority of the states by ignoring their enactments if they designate more than one office for filing within a given governmental subdivision. Id. The Louisiana statute designates the one office within the parish where the filing is to be made.

Nor can the Louisiana provision, simply because it tracks the language of the pre-1966 federal law, be said to conflict with the new federal requirement that the state designate an office in the place where the taxpayer resides. The purpose of Louisiana’s federal tax lien recordation provision was to authorize filing of lien notices in accordance with the provisions of existing federal law and “any acts or parts of acts amendatory thereof.” La.Stat.Ann., Rev.Stat. § 52:55. The Louisiana statute designates appropriate offices for filing tax lien notices, specifying recordation in “the office of the parish recorder of mortgages of the parish within which the property . is situated.” But federal law governs questions bearing on the operation and enforcement of federal tax liens. United States v. Brosnan, 363 U. 5. 237, 240, 80 S.Ct. 1108, 4 L.Ed.2d 1192 (1960). Federal law, thus, determines where the property is situated for purposes of section 6323. Walker v. Paramount Engineering Co., 353 F.2d 445 (6th Cir. 1965); see Grand Prairie State Bank v. United States, 206 F.2d 217 (5th Cir. 1953). The federal statute fixes the situs of personal property at the residence of the taxpayer. Thus, section 52:51 complies with the requirements of section 6323(f)(1)(A). Sub-paragraph (B) of that section, concerning filing in federal district courts, therefore, does not apply.

The proper place in Louisiana for filing tax lien notices against personal property is the office of the parish recorder of mortgages for the parish in which the taxpayer resides, which is deemed to be, in the case of a corporation, the location of its principal executive office. That is where the Government filed in the instant case. Its tax lien is therefore entitled to priority over subsequently perfected judgment liens. Accordingly, the judgment of the District Court is

Reversed and remanded.

      . Section 6323 provides in pertinent part:
      (a) Purchase[r]s, holders of security interests, mechanic’s lienors, and judgment lien creditors. — The lien imposed by section 6323 shall not be valid as against any purchaser, holder of a security interest, mechanic’s lien- or, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate.
      (f) Place for filing notice; form.—
      (1) Place for filing. — The notice referred to in subsection (a) shall be filed—
      (A) Under State laws.—
      (ii) Personal property. — In the case of personal property, whether tangible or intangible, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated ; or
      (B) With clerk of district court. — In the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated, whenever the State has not by law designated one office which meets the requirements of subparagraph (A) ;
      (2) Situs of property subject to lien. — For purposes of paragraph (1), property shall be deemed to be situated—
      (B) Personal property. — In the case of personal property, whether tangible or intangible, at the residence of the taxpayer at the time the notice of lien is filed. For purposes of paragraph (2) (B), the residence of a corporation or partnership shall be deemed to be the place at which the principal executive office of the business is located ....

      . La.Stat.Ann., Rev.Stat. § 52 :51 reads: Notices of liens for taxes payable to the
      United States and certificates discharging such liens shall be filed for record in the office of the parish recorder of mortgages of the parish in this state within which the property subject to such lien is situated.

      . The District Court stated in an unpublished Minute Entry, Civ. No. 68-1916 (E. D.La., January 23, 1973) :
      “Both parties are agreed that the Internal Revenue Code, 26 U.S.C.A. § 6321, gives the government preferential right to the assets of its debtor taxpayer as against any judgment lien creditor from the date of the filing of notice which meets the requirements of § 6323(f). In addition, the government has not questioned the status of Fruehauf as a judgment lien creditor. The sole issue which has been raised, briefed and argued is whether the government’s recording of notice of the tax lien in the mortgage records of Jefferson Parish does in fact meet the requirements of § 6323(f).
      “There appears to be little, if any, reason for this Court to go into a detailed analysis of the issue involved here as the same issue, involving in fact the same debtor — S. D’Antoni, Inc. — has been decided by the Fourth Circuit Court of Appeal of Louisiana in Gill Trailer & Equipment Rent., Inc. v. S. D’Antoni, Inc., 267 So.2d 242 (La.App.1972). While we are not, of course, bound by this decision, this Court is in complete accord with the Louisiana’s Court’s interpretation of 26 U.S.C.A. § 6323, with special emphasis on the quotation from the Senate Finance Committee at pages 245-246 and the cases cited in footnote 1 at page 246. The evidence presented at the hearing on this matter indicated that S. D’Antoni, Inc.’s registered office is in Orleans Parish, which the Louisiana court also found to be a fact. Therefore, we hold, as did the court in Gill Trailer & Equipment Rent., Inc. v. S. D’Antoni, Inc., supra, that ‘[s]ince no notice of lien was filed by the United States in the parish in which the corporation’s principal executive office was located, the lien is not valid against judgment lien creditors.’ ”

      . The Louisiana Court stated:
      “It has been called to our attention that the United States District Court, Eastern District of Louisiana, Section B, in a proceeding arising out of a dispute between the United States Government and Fruehauf Corporation relative to the ranking of claims to proceeds in another matter but involving the same tax debtor, S. D’Antoni, Inc., concluded that it was in accord with the decision of the Fourth Circuit Court of Appeal in the present case. See S. D’Antoni, Inc. v. The Great Atlantic and Pacific Tea Company, Inc., Civil Action No. 68-1916, January 23, 1973. That matter is presently on appeal to the Fifth Circuit Court of Appeal. We do not consider that we are bound by any expression of that court in a consideration of the matter herein.”
      282 So .2d at 717.

      . See Alas.Stat. § 43.10.090; Ark.Stat.Ann. § 51-101; Del.Code Ann. tit. 25, § 3101; 111. Ann.Stat. ch. 82 § 66 (Smith-Hurd Supp. 1974) ; Ind.Stat.Ann. § 49-3221 (Burns), IC 1971, 17-3-50-1; Ky .Rev.Stat. § 382.480; Me.Rev.Stat.Ann. tit. 33, § 664; Miss.Code Ann. § 89-5-47; Ann.Mo.Stat. § 14.010 (Vernon) ; N.J.Stat.Ann. § 46:16-13 (Supp. 1974) ; Ohio Rev.Code § 317.09 (Page Supp.1973) ; S.C.Code § 65-2722; Tenn. Code Ann. § 64-2110; Utah Code Ann. § 38-6-1; Vt.Stat.Ann. tit. 9, § 2051; Rev. Code Wash.Ann. § 60.68.010; Wyo.Stat. § 29-111.

      . Section 52:55 reads:
      This Chapter is passed for the purpose of authorizing the filing of notices of liens in accordance with the provisions of Section 3186 of the Revised Statutes of the United States, as amended by the Act of March 4, 1913, 37 Statutes at Large, page 1016, and any acts or parts of acts amendatory thereof.


author: CLARK, Circuit Judge:

text:
    Mr. R. H. CROSBY and Mrs. V. Ethel Crosby (Mrs. V. Ethel Crosby, as Executrix of the Estate of R. H. Crosby, substituted in the place and stead of R. H. Crosby, Deceased), Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.
    No. 73-2928.
    United States Court of Appeals, Fifth Circuit.
    July 5, 1974.

      Robert E. Hauberg, U. S. Atty., Joseph E. Brown, Jr., Asst. U. S. Atty., Jackson, Miss., Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, Jack D. Warren, Bennet N. Hollander, Louis A. Bradbury, Attys., Tax Div., Dept, of Justice, Washington, D. C., for defendant-appellant.
    Floyd J. Logan, Gulfport, Miss,, for plaintiffs-appellees.
    Before COLEMAN, CLARK and GEE, Circuit Judges.
   CLARK, Circuit Judge:

Did expenditures by a family corporation allegedly made for the personal benefit of the chairman of the board of directors and his wife constitute constructive dividend income to them ? The district court’s answer was in the negative. Finding a portion of that answer tainted by its erroneous construction of a deed instrument which establishes the legal relationship between these parties, we vacate and remand in part and, in part, affirm.

I.

Crosby Chemicals, Inc. (the corporation) was founded by taxpayer, R. H. Crosby, and is engaged in the production of industrial chemicals from forest products, with plants in Picayune, Mississippi and DeRidder, Louisiana. During 1965 and 1966, the taxable years in question, all of its stock was owned by the taxpayers, other family members, trusts created for the benefit of family members and charitable organizations controlled by family members, and taxpayer served as chairman of a board of directors which was composed entirely of family members. Additionally, all corporate offices were family members.

In 1937 the taxpayers purchased for approximately 36,000 dollars a one-story antebellum residence in Picayune, and an estate of 222 surrounding acres. The estate included a golf course, tennis court, and many other pleasant appurtenances. After their purchase the taxpayers reversed a process of deterioration which had begun on the property by making such improvements as landscaping, restoration of the golf course, conversion of the tennis court into a swimming pool, and the addition of a basement to the house. In 1944 for 38,100 dollars, the taxpayers executed a deed which purported to convey the house and surrounding acreage to the corporation, but contained the following reservation:

“Grantors reserve unto themselves, or the survivor of them, or unto the heirs at law of the grantors, the full, complete, unqualified right to the exclusive use, occupancy and possession of the property herein described and hereby conveyed, so long as said property is owned or held by the grantee herein named.”

Not only did the “deed” thus reserve the exclusive use of the estate it initially stated was conveyed, but it also placed the following limitation on the corporation’s other actions regarding any rights it might exercise in the property it had “acquired”:

“This conveyance and deed is made on the condition that the grantee is not to sell, convey or mortgage, or in any way or to any extent encumber the property herein described and hereby conveyed until said property has first been offered to grantors, or the survivor of the grantors, or the heirs at law of the grantors, at the price not to be in excess of the then value of said property as shown and disclosed by the books of the grantee.”

After this conveyance the taxpayers continued to live in the house. Subsequently, between 1953 and 1955, the corporation purchased from parties other than taxpayers 275.9 additional acres that were contiguous to the 222 acre estate. In this same period the corporation spent 660,553 dollars for improvements to both properties. The amount of these expenditures was entered in and depreciated on the corporation’s books. Of this amount some 147,770 dollars was spent on improving the main house. Substantial sums were spent for the construction of a greenhouse, barbecue house, pool house and the remodeling of the guest house on the original 222 acres. Additionally, the corporation paid for extensive landscaping, including a sprinkling system, walkways and gardens.

In 1965 and 1966 the corporation bought 6,188.19 and 2,900.46 dollars worth of flowers and gardening supplies for the land surrounding the residence and expensed these items currently. In both of these years, while taxpayers were living in the residence, the corporation paid their electricity bill, gas bill, telephone bill and the salary of a part-time cook.

The Commissioner determined that taxpayers had received as constructive dividend income in the 1965 and 1966 taxable years, the fair rental value of the residence, the total amount of the 1965 and 1966 gardening expenditures, the utility bills, and the cook’s salary. After paying the assessed deficiency, taxpayers brought this suit for refund of the amount paid. The district court held that since the taxpayers had reserved a “life estate in themselves and their heirs” in the property, they received no constructive dividend income from being able to live on it rent free in 1965 and 1966. Alternatively the court held that in the event taxpayers’ retained interest in the property was invalid, its rental value was excludable from taxpayer’s income under Section 119 of the Internal Revenue Code as lodging furnished for the convenience of taxpayer’s employer, the corporation. The utility bills were also excludable under Section 119 as a part of this lodging. Finally, the court held that there was no constructive dividend due from the corporation’s 1965 and 1966 gardening expenditures or from the services of the parttime cook since these payments resulted in no personal economic benefit to taxpayers.

II.

Section 61(a) of the Internal Revenue Code includes dividends in gross income. Section 316(a) defines a dividend as any distribution of property by a corporation to its shareholders oujt of post-1913 earnings and profits or earnings and profits of the taxable year. In accord with this broad definition, a taxpayer can be charged with disguised or constructive dividend income even though the corporation has not observed the formalities of dividend declaration, and has not made a pro rata distribution to the entire class' of stockholders, and even though neither the corporation nor the shareholder intended a dividend and the corporation did not record the distribution as a dividend for bookkeeping purposes. See Paramount-Richards Theatres v. Commissioner of Internal Revenue, 153 F.2d 602 (5th Cir. 1946); United States v. Smith, 418 F.2d 589, 593 (5th Cir. 1969); and Gibbs v. Tomlinson, 362 F.2d 394, 397 (5th Cir. 1966). In filling the interstices of Section 316’s definition for constructive dividends, this circuit has held: “the crucial concept in finding a constructive dividend is that the corporation conferred an economic benefit on the stockholder without the expectation of repayment.” Gibbs v. Tomlinson, supra, 362 F.2d at 397; United States v. Smith, supra. In the instant case our concern is exclusively with the question of economic benefit. Not every corporate expenditure incidentally conferring economic benefit on a shareholder is a constructive dividend. See B. Bittker & J. Eustis, Federal Income Taxation of Corporations and Shareholders [Bittker and Eustis] H 7.05, at 7-27 (3d ed. 1972). Of determinative significance is whether the “distribution was primarily for shareholder benefit.” Sammons v. Commissioner of Internal Revenue, 472 F.2d 449 (5th Cir. 1972). The line between primarily for shareholder benefit and primarily for corporate benefit is often a difficult one to draw, see Bittker and Eustis, supra, f 7.05 at 7-27, varying with the myriad circumstances which different transactions may present; see Hardin v. United States, 461 F.2d 865 (5th Cir. 1972).

III.

At the threshold of deciding the case sub judice, we must establish what interests were created by the 1944 conveyance. The starting point of the district court’s decision was the assumption that it created corporate ownership of the property subject to the retained life estate of taxpayers-grantors and their heirs. Our disagreement creates such a fundamental difference that all else takes on secondary importance on the present review.

The basic tenet of tax law requires that the 1944 conveyance be given a substance-over-form practical construction — “it is the underlying essence of a transaction that determines its tax-ability”; International Trading Co. v. Commissioner of Internal Revenue, 275 F.2d 578, 583 (7th Cir. 1960). See also, e. g., American National Bank of Austin v. United States, 421 F.2d 442, 452 (5th Cir. 1970), citing United States v. Snyder Brothers Co., 367 F.2d 980, 982-983 (5th Cir. 1966), cert. denied, 386 U.S. 956, 87 S.Ct. 1021, 18 L.Ed.2d 104 (1967). Moreover, the district court’s treatment of this deed transaction for tax purposes is not a factual determination reviewable only under the clearly erroneous standard of Fed.R.Civ.P. 52(a). That court’s characterization of the 1944 instrument was based solely on its construction of the effect of the deed for tax purposes. See Illinois Central Railroad Co. v. Gulf, Mobile & Ohio Railroad Co., 308 F.2d 374 (5th Cir. 1962); and 9 Wright & Miller, Federal Practice & Procedure, J[ 2588.

An analysis of the entire conveyance discloses that the only property right which the corporation obtained was a limited right to sell the property. During the lifetimes of the taxpayers and their heirs, they retained “the full, complete, unqualified right to the exclusive use, occupancy and possession of the property.” The corporation could not even mortgage the property without first offering to sell it to taxpayers. The corporation’s tenuous “remainder” interest would only vest upon the death of all of taxpayers’ heirs at law. The only right of any significant value which the corporation acquired was the ability to seek a prospective purchaser and, if successful, to then tender the property first to the taxpayers or their heirs at its present depreciated book value. The result of the 1944 conveyance was such that in practical effect ownership of the property remained in the taxpayer-grantors, except for the very restricted right vested in the corporation to recoup the book value of its “purchase” and any sums spent on improvements.

IV.

The district court’s alternative application of Section 119 to the 1953 through 1955 improvements is limited to the contingency that the taxpayers’ retained interest was somehow destroyed, and the corporation in fact became the outright owner of the property. Under our construction of the deed this contingency is completely negated. In addition, when taxpayers’ substantial ownership is recognized, the essential requirement of Section 119, that the lodging be furnished “by the employer,” disappears. The district court’s opinion also indicates that the utilities furnished by the corporation are excludable under Section 119 as an inseparable part of lodging furnished by the corporation. Exclusion of these items however should have been dependent upon the subsequent invalidity of the taxpayers’ retained interest. Since we have held that the retained interest was indeed effective and, in fact, the equivalent of ownership, these items similarly are not ex-cludable under Section 119.

V.

The taxpayers’ burden in a refund suit in the district court is to prove not only that the Commissioner erred in his determination of tax liability but also to establish the correct amount of the refund due. See, e. g., Helvering v. Taylor, 293 U.S. 507, 55 S.Ct. 287, 79 L.Ed. 623 (1935), and Bar L Ranch, Inc. v. Phinney, 426 F.2d 995 (5th Cir. 1970). Thus, if insufficient evidence is adduced upon which to determine the amount of refund due, the Commissioner’s determination of the amount of tax liability is regarded as correct.

Though the taxpayers retained substantially all the ownership rights in this property; the amount of the dividend constructed must be limited to the fair rental value of the improvements which were made primarily for shareholder benefit. The corporation did acquire the right to recover its book value of the property and improvements from taxpayers or in lieu of such payment, to sell the property to a third person. When the deed is thus construed, it becomes apparent that the taxpayers must have received constructive dividend income in the amount of the fair rental value of such of the 1953-55 improvements as were intended and used primarily for their personal benefit. See Sammons v. Commissioner of Internal Revenue, supra. To ascertain the amount of such dividend, a determination of which of the 1953-55 improvements were primarily intended and used for corporate profit-making purposes and which were primarily intended and used for taxpayers’ personal benefit is required. See, e. g., International Trading Co. v. Commissioner of Internal Revenue, 275 F.2d 578, 587 (7th Cir. 1960); United Aniline Co. v. Commissioner of Internal Revenue, 316 F.2d 701 (1st Cir. 1963), and International Artist, Ltd. v. Comm’r, 55 T.C. 94 (1970). Improvements having a corporate purpose might include those which were primarily made to facilitate the entertainment of corporate customers and to have a place in which to hold corporate meetings. Additionally, expenditures on the outlying 275.9 acres owned outright by the corporation would be legitimate expenses to enhance the value of a corporate investment and of only incidental benefit to taxpayers.

VI.

Based upon the assumption that the deed created ownership in the corporation and a life estate in taxpayers, the government argued below that the improvements in 1953-55 changed “the residence to such a degree that it cannot fairly be said that the residence in which the plaintiffs resided in 1966 was one and the same residence as that [in which they had] reserved the right to live in for the rest of their lives.” Therefore, it urged that the rent free use of the property was an economic benefit and taxpayers were chargeable with constructive dividend income for the full fair rental value of the property. On this appeal, the government now argues that there is an effective “life estate” as to the residence sans improvements but urges that the measure of the constructive dividend is the fair rental value of the improvements, as they are not subject to the retained interest and were gratuitously furnished by the corporation for taxpayers’ personal benefit.

The taxpayers argue that the government is bound by its theory below, and urge us not to consider its reconstructed appellate position, or not to apply the usual burden of proof rule. Additionally, they argue that the testimony of their expert witness, a qualified appraiser of Picayune real estate, shows that these costly improvements did not increase the fair rental value of the property, and thus, in any event, no economic benefit was realized by taxpayers from such improvements.

In his primary holding the district judge did no more than reject the government’s argument that the 1953-55 improvements had the effect of eliminating the taxpayers’ retained interest. The taxpayers argue that since there is testimony in the record indicating that these improvements did not increase the fair rental value of the property, we should decide the issue now. However, in view of the inconsistency between the government’s position below and on this appeal, and the trial court’s erroneous construction of the property interest created by the deed, the cause must be remanded so that further evidence may be adduced upon which to base an allocation. On remand, the burden will be on taxpayers to prove which improvements were for a corporate purpose and which were not.

Furthermore, since Section 119 is inapplicable here, the district court should allocate the utility bills between the portion which was spent primarily for taxpayers’ personal benefit and the portion which was spent primarily for corporate benefit. To the extent that there is an implicit finding in the district court’s opinion that the taxpayers received no personal economic benefit from payment of all of their utility bills, we hold that finding to be clearly erroneous. An allocation should be made, and that part of the utility bills which was paid by the corporation primarily for the personal benefit of taxpayers must be treated as constructive dividend income. In the absence of evidence upon which to base an allocation, the total amount assessed by the commissioner must be so treated.

As to the 1965-66 gardening expenditures, the district court should reconsider its holding that the taxpayers “received no economic benefit” from these expenditures in light of our determination that taxpayers, in effect, remained the owners of the 222 acre plot. The entire amount of such gardening expenditures as were made on the 222 acres in which the taxpayers retained exclusive use and which were currently expensed on the corporation’s books, would be constructive dividend income to the taxpayers. See Greenspon v. Commissioner of Internal Revenue, 229 F.2d 947 (8th Cir. 1956). If the evidence is insufficient to permit a reliable allocation, the government’s determination of the amount of dividend is due to be accorded correctness.

Finally, the district court’s determination that “the salary paid Alice Wells (the cook), was an expenditure by the corporation for a valid corporate purpose from which plaintiffs received no personal economic benefit” is a finding untainted by our construction of the deed. We cannot say it is clearly erroneous and it is affirmed.

Vacated and remanded in part, affirmed in part.

      . Taxpayers are R. H. Crosby and wife, V. Ethel Crosby, who, for the years in question, filed a joint return. When used in this opinion in the singular, “taxpayer” will refer only to R. H. Crosby. Mr. Crosby is now deceased.

      . The name of the corporation at that time was Crosby Naval Stores, Inc.

      . The only exception to this continuous occupation occurred in 1957 when the taxpayers moved to New Orleans for a period of about two years.

      . The Commissioner considered the full amount of the electricity and gas bills to be constructive dividends, but determined that only one-half of the telephone bill should be so considered.

      . The Commissioner also challenged certain charitable contribution deductions by the taxpayers and sought to tax the Crosbys with income from sales of the corporation’s stock by a controlled charity to a trust created for the benefit of taxpayers’ grandchildren. The district court’s decision in favor of the taxpayers on these issues was not appealed by the Commissioner. Additionally, the government sought to include as constructive dividend income the salary of a chauffeur and the use of a Cadillac automobile. Taxpayers do not appeal the district court’s ruling in favor of the government on these latter issues.

      . 26 U.S.C. § 119 provides:
      § 119. Meals or lodging furnished for the convenience of the employer

      There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him by his employer for the convenience of the employer, but only if—
      (1) in the case of meals, the meals are furnished on the business premises of the employer, or
      (2) in the case of lodging, the employee is required to accept such lodging on the business premises of his employer as a condition of his employment.
      In determining whether meals or lodging are furnished for the convenience of the employer, the provisions of an employment contract or of a State statute fixing terms of employment shall not be determinative of whether the meals or lodging are intended as compensation.

      . The district court found that “the policy of the Board of Directors of Crosby Chemicals, Inc. and the nature of the manufacturing process used by the company required that plaintiff, R. H. Crosby, Sr., be constantly and immediately available for duty at the plant site at all times.”

      . The taxpayers have not argued that the corporation’s earnings and profits in this period were insufficient to cover any of the alleged constructive dividends.

      . Even the strength of this corporate right is mitigated by the fact that the corporation was controlled by family members.

      . The Commissioner had argued that the extensive improvements to the property so changed its nature that the taxpayers’ “life estate” was defeated. See in-fra, part VI.

      . There is no room to argue that, notwithstanding the inapplicability of Section 119, these improvements were made primarily for the corporate purpose of keeping the taxpayer near the plant and available for duty. In view of taxpayers’ preemptive purchase option, neither do we think that it can be soundly argued that these improvements were for the corporate purpose of enhancing its salability. Moreover, these improvements were in the nature of residential improvements and if the Picayune market is as limited as taxpayers urge, there would seem to be a strong likelihood no buyer could be found who would pay for them.

      . The district court found that the fair rental value of the entire property was 250 dollars per month, based on testimony of taxpayers’ witness. This was the only evidence as to rental value in the record. Such proof is a two-edged sword. While denigrating the market value of what taxpayers “received”, the overall economic impracticality of these large expenditures reinforces the likelihood that the corporation’s purpose was primarily to confer an economic benefit upon taxpayers from the corporate coffer.


author: DYER, Circuit Judge:

text:
    EQUAL EMPLOYMENT OPPORTUNITY COMMISSION, Plaintiff-Appellant, v. STANDARD FORGE AND AXLE COMPANY, INC., Defendant-Appellee.
    No. 73-3580.
    United States Court of Appeals, Fifth Circuit.
    July 15, 1974.
    William A. Carey, Gen. Counsel, Charles F. Wilson, Associate Gen. Counsel, E. E. O. C., Washington, D. C., Roger J. Martinson, Acting Reg. Atty., E. E. O. C., Earl Harper, Jr., W. L. Williams, Jr., Attys., Atlanta, Ga., Charles L. Reischel, Richard A. Gladstone, E. E. O. C., Washington, D. C., for plaintiff-appellant.
    William W. Alexander, Jr., C. Lash Harrison, Atlanta, Ga., M. Roland Nachman, Jr., Montgomery, Ala., for defendant-appellee.
    Before DYER and MORGAN, Circuit Judges, and KRAFT, District Judge.
   DYER, Circuit Judge:

We are called upon to untangle what should have been a relatively simple pleading problem. The district court dismissed this action because the Equal Employment Opportunity Commission declined to comply with the court’s order requiring it to allege in detail that the Commission had fulfilled each of the administrative steps established by section 706 of Title VII of the Civil Rights Act of 1964 as amended, 42 U.S.C.A. § 2000e-5. Finding that a general averment in the complaint that all conditions precedent had been satisfied was sufficient for pleading purposes, we reverse.

The EEOC brought this action against Standard Forge on a charge that the company had engaged in discriminatory employment practices. After the invocation of jurisdiction under the appropriate statutes, the complaint alleged that the action was expressly authorized by section 706(f). In the Commission’s view, only the provisions of section 706(f) could be considered conditions precedent, hence its complaint contained the following allegations:

Charges have been filed with the Equal Employment Opportunity Commission, by a former Commissioner (Alexander) and by a person claiming to be aggrieved, more than thirty (30) days prior to the institution of this suit alleging a violation of Title VII by Standard Forge.
All conditions precedent to the institution of this lawsuit have been fulfilled.

Disagreeing with the EEOC’s position that the only conditions precedent were those embodied in section 706(f), Standard Forge moved that the Commission “be required to state completely and exactly compliance with each statutory jurisdictional requirement — -timely charge, notice, investigation, reasonable cause determination, conciliation and timeliness of suit.” This motion for a more definite statement pursuant to Rule 12(e) of the Federal Rules of Civil Procedure was based on the company’s assertion that Rule 8(a) (1) requires a factual allegation of all the “jurisdictional prerequisites” of section 706, including those specified in section 706(b). The district court granted the motion for a more definite statement.

Although the Commission maintained that section 706(b) merely delineated the administrative process to be followed by the EEOC prior to the commencement of a civil action, it attempted to comply with the district court’s order by substituting the following allegation for the general averment that all conditions precedent had been fulfilled:

The Commission, after investigating and finding reasonable cause to believe the truth of the charges, has been unable, through informal methods of conference, conciliation and persuasion, to eliminate the unlawful practices or to secure a conciliation agreement acceptable to it.

The district court, however, was unsatisfied with the amended pleading. It seemed to frown upon “conclusory allegations of matters such as jurisdictional conditions precedent,” and concluded that the EEOC’s failure to state “what facts constitute the conditions precedent” made the complaint vague and ambiguous and thus subject to a motion for a more definite statement. The court ordered the Commission to provide the following information which would reveal whether the provisions of section 706(b) had been met:

In regard to the individual charge (a) the date of the alleged unlawful employment practice and the date the charge was filed; (b) that the charge was properly sworn; (c) that proper notice was issued to Standard Forge & Axle Company, Inc., and the date of said notice; (d) that an adequate investigation was made, the name of said investigator, and the dates the said investigation started and ended; (e) that a legitimate reasonable cause determination was made and a brief statement of the evidence alleged to constitute reasonable cause; (f) that a conciliation took place between the parties, specifying the name of the conciliator(s), the date or dates of conciliation and that the Plaintiff made a good faith reasonable effort; and (g) the date the charge was filed and the date the suit was filed.
In regard to the Commissioner’s charge (a) the basis of the Commissioner’s reasonable cause to believe the Defendant was in violation of the applicable act and the facts upon which the charge was premised; (b) the date the charge was filed and the bases for alleging the alleged offense to be continuing; (c) that proper notice was issued to Defendant and the date of said issuance; (d) that a proper investigation was made, the name of said investigator, the place and the manner of the investigation, and the dates the said investigation started and ended; (e) that a legitimate reasonable cause determination was made and the date and basis of the determination; (f) that a conciliation took place between the parties, specifying the name of the conciliator (s), the date or dates of conciliation and that the Plaintiff made a good faith reasonable effort; and (g) the date the charge was filed and the date the suit was filed.

The EEOC declined to comply with the district court’s order, and as a consequence the suit was dismissed with prejudice pursuant to Rule 41(b).

In this appeal the Commission asserts first that the lower court erred since its order implicitly assumed that each of the steps in section 706 was a condition precedent to bringing suit. Second, the Commission contends that the court improperly inquired into matters over which the judiciary has no power of review, for example, whether the EEOC made a “good faith reasonable effort” at conciliation. Finally the Commission argues that regardless of whether compliance with each step specified in section 706(b) is a condition precedent, the district court erred in employing Rule 12(e) to require a highly detailed allegation of satisfaction of the conditions precedent.

We easily dispose of the Commission’s first argument since the district court explicitly disclaimed any attempt at resolving the question of whether any or all of the procedures set out in section 706 are conditions precedent. We decline to reach the merits of an issue on which the district court has not ruled. See, e. g., Hormel v. Helvering, 1941, 312 U.S. 552, 61 S. Ct. 719, 85 L.Ed. 1037.

Similarly, we are unwilling to address the merits of the Commission’s contention that the lower court exceeded the scope of permissible judicial review by inquiring into matters which are solely within the administrative discretion of the EEOC. Determination of this issue is pretermitted by our conclusion that the court abused its discretion by granting the motion for a more definite statement and by formulating highly detailed inquiries which were inappropriate at that stage of the action.

No challenge is made to the district court’s having subject matter jurisdiction over this controversy. The complaint specified the statutes which conferred jurisdiction on the court, and the factual allegations are not attacked as being immaterial or insubstantial. Bell v. Hood, 1946, 327 U.S. 678, 66 S.Ct. 773, 90 L.Ed. 939. While Standard Forge does not contest the district court’s subject matter jurisdiction, it argues that the EEOC cannot invoke the court’s jurisdiction until it has factually alleged compliance with each provision of section 706. We disagree.

What may or may not be conditions precedent to the Commission’s right to seek judicial redress of a Title VII grievance, cf. Sanchez v. Standard Brands, Inc., 5 Cir. 1970, 431 F.2d 455; Miller v. International Paper Co., 5 Cir. 1969, 408 F.2d 283; Dent v. St. Louis-San Francisco Railway Co., 5 Cir. 1969, 406 F.2d 399, cert. denied, 1971, 403 U.S. 912, 91 S.Ct. 2219, 29 L.Ed.2d 689, must be determined by the district court after the issue is properly presented under the rules of pleading. Rule 9(c) delimits the requirements of specificity concerning conditions precedent: “In pleading the performance or occurrence of conditions precedent, it is sufficient to aver generally that all conditions precedent have been performed or have occurred.” Should a defendant desire to join issue on the existence or satisfaction of conditions precedent, his burden is clearly specified by the second sentence of the same rule: “A denial of performance or occurrence shall be made specifically and with particularity.”

In the case now before us, the original complaint fully complied with the requirements of Rule 9(c). Standard Forge was not entitled to further information in framing its response to the EEOC’s complaint, and the motion for a more definite statement should have been denied. The district court erred in dismissing the complaint.

Reversed and remanded.

      . 28 U.S.C.A. §§ 451, 1343 and 1345.

      . This section provides in pertinent part: “If within thirty days after a charge is filed with the Commission . . . the Commission has been unable to secure from the respondent a conciliation agreement acceptable to the Commission, the Commission may bring a civil action against any respondent. a

      . The pertinent part of that subsection provides :
      Whenever a charge is filed by or on behalf of a person claiming to be aggrieved, or by a member of the Commission, alleg-
      ing that an employer . . . has engaged in an unlawful employment practice, the Commission shall serve a notice of the charge (including the date, place and circumstances of the alleged unlawful employment practice) on such employer . within ten days, and shall make an investigation thereof. * * * If the Commission determines after such investigation that there is reasonable cause to believe that the charge is true, the Commission shall endeavor to eliminate any such alleged unlawful employment practice by informal methods of conference, conciliation, and persuasion.