author: McVICAR, District Judge.

text:
    WM. J. FRIDAY & CO., Inc., v. UNITED STATES.
    No. 6265.
    District Court, W. D. Pennsylvania.
    Feb. 2, 1931.
    Ewing Laporte, of Pittsburgh, Pa., for Wm. J. Friday & Co.
    Louis E. Graham, U. S. Atty., and John A. McCann, Sp. Asst. U. S. Atty., both of Pittsburgh, Pa.
   McVICAR, District Judge.

This is an action to recover part of an overpayment of .taxes by plaintiff, taxpayer, to defendant. The case is before us on defendant’s demurrer to plaintiff’s petition.

The facts alleged in the petition are to be deemed true in consideration of the question now before us. Plaintiff, March 15, 1920, filed its income and profits tax return for the calendar year 1919, which showed a tax due from plaintiff of $24,494.27, which it paid in 1920. The Commissioner of Internal Revenue, after an audit of plaintiff’s' books and accounts by him, found that plaintiff, for the year 1919, had overpaid $22,-952.16 taxes. February 16, 1924, the Convmissioner of Internal Revenue signed a schedule of overpayment and overassessment for the year 1919, which included the overpayment and overassessment above, against plaintiff, and directed the Commissioner of Internal Revenue at Pittsburgh to credit said amount on any taxes due from plaintiff. The collector of internal revenue at Pittsburgh credited plaintiff with the payment of $10,-■351.71, being the amount of an additional assessment against plaintiff for the year 1917, which, both parties admitted, was barred by the statute of limitations.

The suit in this case was brought April 24, 1930, to recover $10,000 of the above amount. Defendant, in support of its demurrer, alleges that the statement of claim does not set forth a cause of action because it fails to allege “that a claim for refund was filed for the recovery of this alleged overpayment for the year 1919, and contains no statement of any executive action whatsoever as having been either applied for or obtained in regard to the alleged overpayment .of $10,351.71.” Plaintiff claims that no claim for refund was necessary.

The applicable statutes are section 1111 of the Revenue Act of 1926, 44 Stat. 115 (26 USCA § 149 note), amending section 3220 of the Revised Statutes, which is the same as section 1011 of the Revenue Act of 1924 (43 Stat. 342), .which reads:

“Except as otherwise provided in sections 284 and 319 of the Revenue Act of 1926,,the Commissioner of Internal Revenue, subject to regulations prescribed by the Secretary of the Treasury, is authorized to remit, refund, and pay back all taxes erroneously or illegally assessed or collected, all penalties collected without authority, and all taxes that appear to be unjustly assessed or excessive in amount, or in any manner wrongfully collected; also to repay to any collector or deputy collector the full amount of such sums of money' as may be recovered against him in any court, for any internal-revenue taxes collected by him, with the cost and expenses of suit; also all damages and costs recovered against any assessor, assistant assessor, collector, deputy collector, agent, or inspector, in any suit brought against him by reason of anything done in the due performance of his official duty, and shall make report to Congress at the .beginning of each regular session of Congress of all transactions under this section.” , . .,.....

Seetion 1113(a) of the Revenue Act of 1926 (26 USCA § 156) re-enaets seetion 3226 of the Revised Statutes, and the same section is contained in the Revenue Act of 1924, § 1014a, 43 Stat. 343. As amended, it reads:

“No suit or proceeding shall he maintained in any court for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected until a claim for refund or credit has been duly filed with the Commissioner of Internal Revenue, according to the provisions of law in that regard, and the regulations of the Secretary of the Treasury established in pursuance thereof; but such suit or' proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. No such suit or proceeding shall be begun before the expiration of six months from the date of filing such claim’unless the commissioner renders a decision thereon within that time, nor after the expiration of five years from the date of the payment of such tax, penalty, or sum, unless such suit or proceeding is begun within two years after the dis-allowance of the part of such claim to which such suit or proceeding relates. The commissioner shall within 90 days after any such disallowance notify the taxpayer thereof by mail.”

In Ritter v. United States, 28 F.(2d) 265, 267 (C. C. A. 3) Judge Davis, in speaking for the court, said:

“But the sovereign government may not be sued, except upon its consent, and then only upon the conditions under which it has consented to be sued, even though they be purely formal. Cheatham v. United States, 92 U. S. 85, 23 L. Ed. 561; Kings County Savings Institution v. Blair, 116 U. S. 200, 6 S. Ct. 353, 29 L. Ed. 657; Rock Island, Arkansas & Louisiana Railroad Co. v. United States, 254 U. S. 141, 41 S. Ct. 55, 65 L. Ed. 188; Baltimore & Ohio R. R, Co. v. United States, 260 U. S. 565, 43 S. Ct. 169, 67 L. Ed. 406; United States v. Richards (C. C. A.) 27 F. (2d) 284.”

In Tucker v. Alexander, 15 F.(2d) 356, 357 (C. C. A. 8), Circuit Judge Stone said:

“This is a suit against the government in connection with the imposition and collection of the general revenue, which is a prime governmental function; such character of actions can be maintained only when permitted by the sovereign and only upon the conditions imposed by the sovereign. Such character of action is permitted by the statute but certain conditions are required as a condition precedent thereto. One of these conditions is that a claim for refund shall first be made to the Commissioner of Internal Revenue and a period of six months allowed for his determination thereof. The evident purposes and objects of this condition are to afford the Commissioner an opportunity to correct errors made by his office and to spare the parties and the courts the burden of litigation in respect thereto.”

In Tucker v. Alexander, 275 U. S. 228, 231, 48 S. Ct. 45, 46, 72 L. Ed. 253, the Supreme Court, speaking by Mr. Justice Stone, said:

“Literal compliance with statutory requirements that a claim or appeal be filed with the Commissioner before suit is brought for a tax refund may be insisted upon by the defendant, whether the collector or the United States. Kings County Savings Institution v. Blair, 116 U. S. 200, 6 S. Ct. 353, 29 L. Ed. 657; Maryland Casualty Co. v. United States, 251 U. S. 342, 353, 354, 40 S. Ct. 155, 64 L. Ed. 297; Nichols v. United States, 7 Wall. 122, 130, 19 L. Ed. 125.”

This suit is for the recovery of an internal revenue tax alleged to have been illegally. assessed and collected. It is also a suit to recover a sum of money wrongfully collected. Under the statute as construed above, a claim for refund was a condition precedent to the bringing of suit.

Plaintiff relied upon the interpretation of the above act in the case of Peerless Paper Box Mfg. Co. v. Routzahn, Collector of Internal Revenue (D. C. N. D. Ohio, E. D.) 22 F.(2d) 459, by Judge Jones. In an opinion by District Judge West of the same court, in the case of Jenkins Steamship Co. v. Routzahn, Collector of Internal Revenue, 46 F.(2d) 548, 549, dated September 8, 1930, Judge West seemingly is of the opinion that Judge Jones did not intend to hold in the Peerless Case that a claim for refund was not necessary as a claim for refund had been made in that case¡. Judge West said:

“I cannot- agree that, where a refund has been misapplied on an ostensible liability for a tax or penalty appearing on the books, a suit to recover is not for a tax or penalty alleged to have been collected illegally or without authority; or that such an action is not controlled by seetion 3226 (26 USCA § 156). That question is presented in the instant case; but in the Peerless Case, where the requirements of the seetion had been complied with by the taxpayer, it could not arise so as to call for a decision. In Brady v. U. S. (C. C. A.) 24 F.(2d) 405 [59 A. L. R. 563], the Peerless decision is cited to the point that a refund cannot properly be applied on a tax the collection of which was then barred by the statute, which, as I have previously said, I think wak the real question adjudicated.”

The demurrer of the defendant is sustained.


source: Caselaw Access Project

author: GODDARD, District Judge.

license: Public Domain

text:
    KERR v. BOWERS. CLEGG v. SAME.
    District Court, S. D. New York.
    Jan. 23, 1931.
    Noble, Morgan & Seammell, of New York City (John W. Davis, W. Osgood Morgan, and Montgomery B. Angell, all of New York City, of counsel), for plaintiffs.
    Robert E. Manley, Acting U. S. Atty., of New York City (Samuel C. Coleman, Asst. U. S. Atty., of New York City, of counsel), for defendant.
   GODDARD, District Judge.

These. two actions were tried together without a jury upon stipulation, and were brought to recover, respectively, $1,677,005.-79 and $1,672,828.77 income tax assessed against the plaintiffs for the year 1920 by the Commissioner of Internal Revenue, and paid in 1927 after the plaintiffs had appealed to the Board of Tax Appeals and the Board had affirmed the, order of the Commissioner. The taxes were paid under protest to the defendant’s testator, Frank K. Bowers, then collector of internal revenue for the Second district of New York, who died' during the pend-ency of'these actions. Upon the abatement of the actions, they were continued against Mr. Bowers’ executor under the provisions of U. S. C., title 28, § 778 (28 USCA § 778).

Statement of Facts.

The facts in the two cases are substantially alike, and the taxable income in each instance, if there was taxable income, was derived from similar transactions under the same circumstances. Henry F. Kerr and Alfred E. Clegg, the plaintiffs, were, in 1920, residents of New York City, although subjects of Great Britain, and had been engaged in the business of operating steamships for a number of years. In September, 1919, there was a reorganization of the Kerr Steamship Company, Inc., in which they were both stockholders. Under the reorganization, Kerr received 11,547 shares of class A and 12,630 shares of class B stock in a new corporation, . the American Ship '& Commerce Navigation Corporation, a New York corporation, in exchange for 57,738 shares of stock which he owned in the old Kerr Steamship Company, Inc., which had cost him $5 a share, or a total of $290,740, and Clegg received 11,547 shares of class A and 12,629 shares of class B stock in the new corporation in exchange for his holding of 57,737 shares of stock in the old corporation, which had also cost him $5 a share, or a total of $290,735.

By virtue of agreements which had been entered into at the time of the reorganization, Kerr and Clegg had, upon the happening of a specified contingency, the option of. selling the stock which each had thus received in the new company to the American Ship & Commerce Corporation, a Delaware corporation, a holding company which already owned the majority of the stock of the American Ship & Commerce Navigation Corporation, which was an operating company. The price which Kerr and Clegg each were to receive for their stock was approximately $2,400,000. On July 24, 1920, the event occurred which gave Kerr and Clegg the right to exercise their option of selling their stock at the specified price to the American Ship & Commerce Corporation. After Kerr and Clegg had held several conferences with William A. Harriman, president of the American Ship & Commerce Corporation, and Mr. Ellis, attorney for the corporation, Kerr and Clegg, on August 27, notified them that they (Kerr and Clegg) would exercise their option to sell their stock to the corporation, and that the tender of this stock would be made to the corporation the next day, Saturday August 28, 1920.

In May, 1920, Walter'B. Wight, an auditor in the Income Tax Unit of the Bureau of Internal Revenue, had been sent to New York to investigate the business affairs of Kerr and Clegg and the companies in which they were interested, and during his investigation, which continued for several months, he learned of the reorganization of the old Kerr Steamship Company, Inc., the exchange of stock, and the option for the sale of their stock to Harriman’s company, and during the early part of the week ending August 28, 1920, he went to see Harriman and Ellis, and requested information regarding the situation, and learned that the sale of the stock was likely to take place shortly. Wight also learned that Kerr' and Clegg, or some one acting in their behalf, had previously requested that the closing of the transaction take place in Montreal or London, and that the purchaser had refused. After keeping in close touch with them, on August 27, he ascertained that the transaction would be closed on the following morning. Wight had also' received information that reservations for steamship passage to Europe had been arranged for so that Kerr could depart on'Saturday August 28, and Clegg a few days later. Subsequently, however, it developed that the reservation was not intended for Clegg, 'the plaintiff, but for his brother. Wight kept in close communication by telephone and other means with the Bureau of Internal Revenue in Washington, transmitting the information he obtained from time to time during the week, and Mr. Harrison B. McCauley, the assistant solicitor of the Bureau, was instructed to do what he could to prevent Kerr and Clegg from leaving, the country with the money from the sale of their stock. When, on August 27th, Wight learned- that the transaction was to be closed the next day, he communicated by- telephone to the Bureau, giving them the figures, upon which the Acting Commissioner of Internal Revenue on that day made a special or summary assessment of income taxes alleged to be due from Kerr and from Clegg. In computing the taxes, Wight took into consideration both the reorganization in 1919 and the proposed sale of the stock on August 28, 1920, and determined that upon the basis of either transaction the amount of tax would be substantially the same. Assessment certificates were accordingly issued by the Acting Commissioner of Internal Revenue on August 27, 1920, and the assessment list attached thereto purported to be an assessment of additional income tax in August, 1920. This assessment list purported to be the August special 1920 list of income tax against the plaintiffs, and showed the amount of tax to he $1,501,288.20 as due from each of the plaintiffs, or' a total of $3,002,576.40 as due from both plaintiffs. Opposite the name of each plaintiff on the assessment list, and under the heading of “Remarks,” appeared the words and figures “1920 Dummy S. A. 8/27/20,” which meant that it was a special assessment of August 27, 1920, made where no return had been filed by the taxpayer. The Commissioner did not declare the taxable period terminated during the year 1920. The said assessment of August 27,1920, was taken from Washington to New York by Daniel B. Priest, an assistant solicitor of internal revenue, and was received in the office of the collector of internal revenue for the second district of New York on the evening of August 27, 1920. On August 28,1920, there was issued by said collector, addressed to each of the plaintiffs, a notice and demand for the tax so assessed, subpoenas to appear before the collector, and notices of a statutory lien for taxes. Said' notices of lien were on the regular government form of “Notice of Tax Lien under Internal Revenue Laws,” and asserted the lien provided for by Rev. Stat., § 3Í86, as amended (26 USCA § 115). A notice of lien was issued as to each of the plaintiff's for the income tax so assessed, and by its terms was a lien asserted against all property of the plaintiffs not exempt under Rev. Stat., § 3187 (26 USCA § 116 note). Certain of said notices recited the “Period of Liability” as the year 1920 and others as the year 1919.

On the morning of August 28, 1920, Kerr and Clegg, accompanied by their attorneys, Mr. Herbert Noble and Mr. Scott Seammell, and some others, went to the office of the American Ship & Commerce Corporation to deliver their stock ahd obtain payment. Mr. Ellis, attorney for the corporation, examined the stock certificates, and, after finding them in order, inquired in what form payment was desired, and in reply was told that certified cheek would not do, and that legal tender was required; whereupon Harriman telephoned to the Chase National Bank and arrangements were made to obtain $4,913,819.60 in cash required to make payment, and also to close the deal at the bank instead óf in Harriman’s office. Accordingly, both groups adjourned to the Chase Bank and gathered about a table in the main banking room. In the meanwhile, having ascertained that Kerr and Clegg had demanded cash and that the closing was to take place at the Chase National Bank, Wight, McCauley, Priest, and Kostant, a deputy collector in the office of the collector' of internal revenue for this district, went to' the Chase Bank, taking with them the notices and other "papers which had been prepared, and stationed themselves in various parts of the bank and the corridor leading to the street in such a manner as to know what was taking place and yet not be observed.

The statements of the several witnesses as to just what occurred and the sequence' of what took place at the bank differ, but the weight of the testimony fully establishes the fact that the completed sale of their respective holdings of the stock by Kerr and by Clegg to the American Ship & Commerce ■Corporation for the agreed price in cash occurred, and that the representative of the corporation received the stock certificates which were tendered to him by Kerr and by Clegg, arid that the cash- in payment therefor was passed over to Kerr and to Clegg and accepted by them.

After the money had been paid over to Kerr and to Clegg and the Harriman group had left the table with the stock certificates and Kerr and Clegg also had started to leave the building after passing the money to Noble, who was counting it and placing it in a bag which Clegg’s brother had brought for the purpose, and when Clegg and Kerr had reached the corridor on their way out of the building, the government officials stepped up to them and served them with the notice and demand for taxes and subpoena to appear before the collector of internal revenue and notice of a statutory lien. Notices of liens for taxes were also served upon Noble, and also pasted upon the bag containing the money.

The government officials refused to allow the plaintiffs to remove the money to their personal safe deposit boxes, and, after discussion, it was mutually arranged to havé the bag containing the money placed in a vault of the Equitable Safe Deposit Company, and the bag was carried by a representative of Kerr and Clegg and by a government official to a safe deposit box of the Equitable Safe Deposit Company which was taken in the name of Clegg’s brother and Noble. Notices of lien were pasted on the box, and the Safé Deposit Company was directed to allow no one to have access to the box except upon consent of either the Commissioner or the collector.

On August 31, 1920, the government filed copies of the notices of lien with the clerk of the United States District Court of this District. On September 7, 1920, the government consented to having the funds placed upon deposit with the Empire Trust Company of New York to be invested and the income paid to the plaintiffs, the principal to remain subject to the government’s alleged lien for taxes. $300,000 of the principal was withdrawn by Kerr and Clegg in 1921 upon consent of the government. During 1920,’ both plaintiffs, in communication to the Ship> ping Board, stated that they desired to invest the funds “received as the gross proceeds of the sale of his interest * * * ” in the building of ships in American ship yards, pursuant to the provisions of section 23 of' the Merchant Marine Act of 1920, 46 USCA § 879 (which provides for exemption of in-, come taxes). In letters of October 13, 1920, to the collector, the plaintiffs referred to the money which had been paid to them on August 28, 1920, as the proceeds arising from the sale of their stock and stated that the sum “was subject to the claim of the Government for an alleged lien on account of the above' mentioned assessment for additional income" tax for 1919.” On September 15,1920, af ter ' an extension of time had been granted, Kerr and Clegg filed with the collector of internal revenue their respective income tax returns' for 1920. They, kept their accounts and filed their returns on the cash basis. Neither included in his returns for 1920 the proceeds' from the' sale of their stock on Augfist 28, ■ 1920, but each filed an exhibit setting forth, the transaction, but alleged that no income had been received by them from the transaction. Claims for the abatement of the taxes-, assessed on August 27, 1920, and designated by the Commissioner as additional taxes for 1919, were allowed, but at the same time they were notified that there were due from Kerr $1,564,400.30, and from Clegg $1,529,190.19, ■ as additional taxes from the sale of their' stock on August 28, 1920. On April 5,1924, Kerr and Clegg each filed a claim for abater ment of the tax assessed against them” for 1920 upon the grounds (1) that no profit was received in 1920 upon the sale of stock on 'August 28, 1920; (2) that prior to the proposed 'assessments they had appealed and had not been granted a hearing’ on their appeals as provided by section 250 (d) of the Revenue Act of 1921 (42 Stat. 265). On December 16, 1924, they were notified that their claims for abatement had been rejected. From the determination of the Commissioner appeals were on February 11, 1925, filed with the United States Board of Tax Appeals, which on January 5, 1927, approved the determination of the Commissioner.

From the foregoing facts, it is evident that the sale by Kerr and Clegg of their stock to the American Ship & Commerce Corporation was completed on August 28, 1920; also that Ellis, the attorney for the corporation, then received the stock certificates, and that Kerr and Clegg then received the legal title to the money which was paid to them. This much is conceded by counsel for the plaintiffs. However, it is urged in behalf of the plaintiffs that, by reason of the almost immediate intervention of the government officials, “there was no point of time within the year 1920 when Kerr and Clegg had ‘actual possession’ or were able to exercise ‘effective control’ or ‘unfettered command’ over the proceeds of the sale, i. e. there was no point of time in 1920 when such proceeds were subject to their ‘separate use, benefit and disposal’ and consequently they did not realize ‘income’ in 1920.”

The result of this controversy depends solely upon whether Kerr and Clegg received, on August 28,1920, taxable income from the sale of their stoek; whether the purported liens were good or bad, I think is not determinative of the question. These are not suits to dissolve liens.

Kerr and Clegg were paid for their stock, and the price at which they sold it was greatly in excess of its cost to them. Profits derived from a sale of this character are taxable. Merchants’ Loan & Trust Co. v. Smietanka, 255 U. S. 509, 41 S. Ct. 386, 65 L. Ed. 751, 15 A. L. R. 1305. It is clear that the money which was paid to Kerr and Clegg on August 28,1920, included taxable income for 1920, unless the acts of the government officials relieved them from the payment of taxes on the ground that they had' not as yet come into full use of the money because of the interference by the government officials. During the interval, short as it was, between the time when the.sale of their stock was closed by the payment of the money to Kerr and Clegg and the time when the government officials appeared, Kerr and Clegg held the money free of any claim so far as the purchaser of their stock was concerned; they held it without restrictions from any one except in so far as third parties might attempt to reach it to satisfy claims or alleged claims against Kerr and Clegg. The corporation which had paid the stock transferred to Kerr and Clegg full and unrestricted ownership in the money, and Kerr and Clegg accepted this transfer; no limitations being placed upon the use of it by any one until after they had received it. The corporation concedes it has no further right in the money; every one, including Kerr and Clegg, says it belongs to Kerr and Clegg. The government itself contends that it had a lien against the money for the very reason that it was the money of Kerr and Clegg and that they had the unrestricted use of it. The situation, as I see it, is not that Kerr and Clegg did not receive profit and thus income which was subject to tax, but that-they were deprived of the use of it by a stranger to the original transaction after that had been closed; therefore it seems to me that, no matter what happened to the money or to them immediately thereafter, it cannot he denied that they did actually receive the profit or taxable income, even though they were so'soon to be deprived of the use of it.

I think it must he conceded that there was reason for concern and for such vigilance on the part of those charged with the duty of collecting the taxes, in view of all the circumstances, namely, the insistence by Kerr and Clegg, who were not American citizens, that this large amount, should be paid to them in cash, the effort originally made by them to persuade the purchaser to close the transaction in Montreal or London, and, upon the purchaser insisting that the transaction should be closed in New York, the securing of steamship passage for Kerr for the evening of August 28, the day when the deal was to be closed, and for the early departure of Clegg, the plaintiff (as the government official then believed) from the United States to the country of which they were subjects, and where it would be difficult, if not impossible, to enforce the payment of taxes due the United States. See Moore v. Mitchell (C. C. A.) 30 F.(2d) 600, 65 A. L. R. 1354, reversed on other grounds 281 U. S. 18, 50 S. Ct. 175, 74 L. Ed. 673; Colorado v. Harbeck, 232 N. Y. 71, 133 N. E. 357. With the object of securing payment of taxes, the government officials hastily prepared and served papers purporting to impress liens upon the money Kerr and Clegg had received for the sale of their stock.

Proceedings were never brought to have the alleged liens declared invalid, nor have they ever been held to be so. The acts of the government officials and the arrangements entered into with the plaintiffs and their attorneys for the deposit of the funds apparently were based upon the existence of these liens. In their communications of October 13, 1920, to the collector of internal revenue, Kerr and Clegg requested “exemption provided for in section 23 of the Merchant Marine Act of 1920” and stated that on September 7, 1920, there was placed in the hands of the Empire Trust Company of New York, “the sum of, * * *■ such sum representing the gross proceeds arising from the sale of, * * * such sale having been made by selling on the 28th day of August, 1920, certain shares of stock.' * * * The sum above mentioned was subject to the claim of the government for an alleged lien on account of the above-mentioned assessment for additional income tax for the year 1919. * * * I request that as soon as the form of the investment shall have been determined and as soon as the United States Shipping Board shall have advised me as to the rules and regulations made, or to be made by them for setting aside this money in a trust fund for investment for the purposes above mentioned, you will authorize the Empire Trust Company, which now holds the fund, to transfer the same so as to make possible the proposed investment in American Flag Ships. * * * I desire to have a full hearing upon this claim for exemption.” On March 9, 1921, when making application for an extension of time within which to file the income tax returns, the attorneys for the plaintiffs stated: “As you know, Messrs. Kerr and Clegg in August, 1920, sold a large amount of stock. * * * The amount of profit made by Messrs. Kerr and Clegg upon this sale of stock will depend upon whether they will have to pay back any of the proceeds of the stock to the Kerr Navigation Corporation.”

Counsel for plaintiffs apparently take the position that any immediate interference with the use of the taxpayer’s money hy a third party, if involuntary on the part of the taxpayer, relieves him of the obligation to pay tax upon the profit derived from a sale until such limitation is removed. Accordingly, whether the asserted liens were valid or not, or whether the government officials, in their zeal, exceeded their power under the liens which they asserted, is immaterial. I agree with the proposition only to the extent that the test of whether taxable income is received is not whether the liens asserted were good or not. However, if proceedings to dissolve the liens had been brought by the plaintiffs, and they were successful in dissolving them, and the government officials then had prevented the funds from being withdrawn from the Empire Trust Company, redress from the court might well have been granted, but it seems to me the question then would not be whether Kerr and Clegg had received income, but whether they were illegally deprived of their property. In my judgment, the events which took place after Kerr and Clegg were paid the selling price which included taxable profit had no retroactive effect upon the receipt of such income, and the statute when it defines income is not concerned with what happens to it subsequently, although it is conceivable that events might occur subsequently which would entitled them to a deductible loss.

Counsel for plaintiffs refer to Eisner v. Macomber, 252 U. S. 189, 40 S. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570, as supporting their contention that Kerr and Clegg received no taxable income in 1920. In Eisner v. Maeomber, supra, the Supreme Court had under consideration the question whether stock dividends were taxable. Specifically counsel refer to the following statement of Mr. Justice Pitney, on page 207 of 252 U. S., 40 S. Ct. 189, 193: “ ‘Income may be defined as the gain derived from capital, from labor, or from both combined,’ provided it be understood to include profit gained through a sale or conversion of capital assets. * * * A gain, a profit, something of exchangeable value, proceeding from the property, severed from the capital, however invested or employed, and coming in, being ‘derived’ — that is, received or drawn by the recipient * * * for ]}is separate use, benefit and disposal — that is income derived from property. Nothing else answers the description.” The question of profit derived from the sale of property was not involved. Receipt of income arising out of and severed from capital was the only question in the case. It was held that ineome to be taxable, income from property, must be severed from that properr ty before a taxpayer can be regarded as receiving it. There the court held that the taxpayer received nothing, for after the stock dividend he had no more or no less than he had. before. ■ If it had been “severed,” he would have received taxable income. In the case at bar, there was a complete transfer of the money by the purchaser to Kerr and Clegg. There is no question here as to severance. Any interference with the use of the money by Kerr and Clegg arose after they received the money, and came from another source.

I doubt if it would be seriously contended that a person receives no taxable income so long as a lien filed by the government against that income exists and restricts or interferes with his full use and control of it, whether the lien against it is created immediately upon his coming into the money or later; whether the lien is good or bad. The purpose of a lien is to limit the use of the property upon which a lien is placed, so as to provide' security for the payment of a claim. Liens are expressly authorized under the statute.

Following plaintiffs’ theory to its logical conclusion, let us assume that Kerr had gone to the steamship pier on the night of August 28, 1920, for the purpose of departing for foreign lands as he had planned to do, and had the cash received from the sale of his stock in his pocket, and that the government óffieials had, pursuant to a prearranged plan by them in an effort to secure payment of taxesj served papers upon him and prevented him from taking the money out of the country. Would it be said that he had received no income because of their interference with his “unfettered use or control of the money”? Or assume that the same thing had happened to Clegg if he had departed somewhat later.

Counsel for plaintiffs contend that Kerr and Clegg received no taxable income on August 28, 1920, from their sale of stock, as they were deprived of the use of it, and refer to. the following as a similar illustration: Suppose that a band of marauders had reached over the shoulders and lifted this money from the table after the owners of it had merely the same transitory possession of it that is asserted here, and disappeared with it, “and suppose that the Government had then come down on these people with an assessment of three million dollars, with no assets out of which it could be paid, is it conceivable that they could be held to have received income to have gained out of that transaction. Now, that we think, is precisely what happened here.” My understanding, however, of such a situation is that under the-taxing statutes the money so received is regarded as taxable income and is to be accounted for by the taxpayer in his income tax report, but the relief for the taxpayer is found in section 214 (a) (6) of the Revenue Act of 1918 (40 Stat. 1067), which provides that if such a loss occurs, it may be deducted from his total income in that taxable year including the profit from the sale; the amount of the deduction to which he would be entitled being not merely the profit he was deprived of, but the entire amount so lost. While this may be a technical distinction, nevertheless it, I am quite sure, would be the correct treatment of such a situation under the statute and is a fair rule, and it must be conceded that the position taken by the eminent counsel for plaintiffs is a technical one. The question as to whether the plaintiffs did sustain a deductible loss of such character is not before the court, but in this connection all the circumstances should be borne in mind, including the fact that they at least had legal title to the fund and received the income from it. •

Corliss v. Bowers, 281 U. S. 376, 50 S. Ct. 336, 337, 74 L. Ed. 916, is also cited by counsel for plaintiffs as supporting their contention, in which the Supreme Court held that, where one had transferred a fund to trustees to pay the income to his wife and for life, with remainder over to their children, but retained the power to abolish or revoke the trust at any time, the income was under the statute taxable to him, and Mr. Justice Holmes said: “The income that is subject to a man’s unfettered command and that he is free to enjoy at his own option may be taxed to him as his income, whether he sees fit to enjoy it or not.” 281 U. S. page 378, 50 S. Ct. 336, 74 L. Ed. 916. The court said, whether he had title to the property or not, he did have the power to regain the title, and that income which is subject to a man’s unfettered command which he is free to enjoy at his own option may be taxed to him as income whether he sees fit to enjoy it or not. In the case at bar, there passed to the plaintiffs full title to the money without limitation upon its use. All restrictions were initiatéd by a third party, and came into existence after title and use of the money had passed to Kerr and Clegg and was based upon this fact.

Accordingly, I think the defendant is entitled to judgment in both eases.


author: ANDREW M. J. COCHRAN, District Judge.

text:
    FREEMAN v. UNITED STATES.
    District Court, E. D. Kentucky.
    Feb. 17, 1931.
    Perry B. Miller, of Louisville, Ky., for plaintiff.
    Sawyer A. Smith, U. S. Atty., of Covington, Ky., Errol Draffen, Asst. U. S. Atty., and George R. Brown, Jr., Regional Atty., U. S. Veterans’ Bureau, of Louisville, Ky., for the United States.
   ANDREW M. J. COCHRAN, District Judge.

This cause is before me on final hearing. It is an action on an insurance policy issued under* the World War Veteran’s Act (38 USCA § 421 et seq.), after the end of such war, to an enlisted man employed in active service under the Navy Department. He enlisted April 17, 1919 and was honorably discharged April 8, 1921. The claim is that at the time of his discharge he was totally and permanently disabled and by reason thereof his policy was then matured, and hence did not lapse by his failure thereafter to pay the premiums on it. I find in the decisions stater ments as to policies so maturing thereafter so lapsing. As I view it a policy which matures never lapses.- In order to the existence of such disability at that time he. must then have been suffering from a personal injury or disease which incapacitated him permanently from following continuously any substantially gainful occupation. The matter is thus put in the last reported decision dealing with cases of that character, to wit .United States v. Meserve (C. C. A.) 44 F.(2d) 549, 550; “Total disability within the meaning of, the policy is any disability of mind or body, which renders it impossible for the disabled person to follow continuously any substantially gainful occupation, and such disability is deemed to - be permanent whenever it is. founded upon conditions which render, it reasonably certain that it will continue throughout the life of the person suffering from it.”.

As I make it, the occupation which he is disabled from following continuously must be one that he is adapted to follow. It is immaterial that he is physically able to follow such an occupation if he is not otherwise' adapted to so do. The question may arise in a given ease where the disability is rested on a* certain disease whether such disease must then be existent, or will it be sufficient that the seed of the disease is then in his body. It would seem that, if, in any case, it would be sufficient that the seed of the disease so existed, it is essential that necessarily and inevitably the disease must thereafter develop from; such disease so that it can then be said that-he is potentially so diseased, and hence po-. tentially so disabled. * i

The burden is on the plaintiff to establish by a preponderance of the evidence.the existence of such disease or seed and eonse-i quent disability -at the time of the discharge.. In order to do this the plaintiff must intro-,’ duce substantial evidence to this effect, and, even though he may do so, he cannot recover, if it is overcome or equalized by substantial! evidence introduced by the defendant. The plaintiff’s failure to so establish cannot be supplied by grace. This court is not the government passing on the question whether the-, plaintiff should have a pension. The question before it is whether plaintiff is entitled to recover on his policy of insurance and- to this end he must bring himself within its terms. Hence it is that it is not sufficient for.plaintiff to establish the subsequent incurrence or existence of such disease ox' seed; thereof and consequent disability.;. It mjisjt; have existed at the time of the-discharge.

Coming then to the ease in hand, what do we find? In argument the disease on which plaintiff’s ease is rested is goiter. There is no direct evidence of his having it before March 23,1923, nearly two years after his discharge. A Bureau examination was made on that date, because, no doubt, of a pending application for compensation and the diagnosis was “Exopthalmie Goiter.” In the report thereof it is said that the thyroid gland was “moderately enlarged,” and that exopthalmos was “moderate.” On a subsequent examination made October 13, 1923, the diagnosis was “Exopthalmie goiter toxic” and prognosis “poor.” Not a solitary witness testifies to his having goiter before March 23,1923. Of course he must have had it for some time before that, but how long does not appear. The plaintiff himself'gave no testimony as to when he first took notice of it. It is said in brief for defendant that he made an application for compensation in December, 1922, and that he made no mention therein of his then having a goiter, but that he testified that he then had it. I find no such testimony, and the application or any testimony in relation thereto is not in the record. It is certain that he did not have the goiter at the time of his discharge because he testified as. to his then condition and he makes no mention of it. Nor is there any other evidence of his then having it. If then the plaintiff is to recover, it is essential that the evidence establishes that he then had the seed of it, and that it was the necessary and inevitable outcome of it, or he must have then had some other disease which not only then totally but also permanently disabled him.

The plaintiff testified that shortly after he went into the service he was subject to disciplinary double timing. This was followed by nervousness and violent headache. He felt bad, was very nervous, could not sleep at nights like he once did, and had cramps in his sleep. He was placed in the hospital and' remained there for 22 days. Whilst there it was diagnosed that he had appendicitis, and an operation was proposed, to which he refused to submit and after results showed that he did not have appendicitis. It was on June 30, 1919, that such diagnosis was made, and he was dismissed from .the hospital and went back to duty July 14,1919. This is his sole testimony as to his condition whilst in the service except at the time of his discharge. As to his then condition he testified that his health was bad — that he was affected with nervousness, heart seemed like it was going to stop beating — that he had severe headaches, séemed to smother, and had pain in his back, knees, back of his shoulder blades, and that he had been gradually losing weight, and that just after he came out of the service he weighed 127 pounds as against 174 in the last part of 1919. It will.be noted that he weighed 174 pounds long after his hospitalization in the summer of 1919. Seemingly whatever was the matter with him then had no effect on his weight, except that when he came out of the hospital, as he testified, he had lost 10 pounds, and the subsequent reduction to 127 pounds could not have been due to it. The evidence is silent as to what could have caused this reduction. This reduction came about, notwithstanding his appetite was extremely good. He just got right on down until he was not able to get out of bed without being helped. He had nausea and stomach trouble and vomited. He consulted a physician, who has since died, in June, 1921, and he told him that he had heart trouble, stomach'trouble, liver trouble, kidney trouble, and rheumatism. Four of his acquaintances testified on his behalf. One testified that after his return he was thinner and since then the condition of his health has not been very good. He said that he noticed a difference in the appearance of his eyes and nervousness about him, but he did not say when he first noticed this. Another testified that the condition of his health eight or ten days after his return was not near as good in looks appearance, and weight. He seemed to be nervous and shaky and to be weak and short of breath. Another testified that when he got home he was not as fleshy as he was and was very weak and nervous. The fourth one testified that he looked like he had a pretty good spell of sickness and did not look like he did when he went away. When asked whether he noticed any difference in the appearance of his eyes, he first said that he did not believe he did and then said “Yes, in a sense of the work (word?) I noticed that.” I am unable to make out what this means. Then when prodded he said that he noticed a change in his disposition, and that he was morbid, and a difference in his nervous condition, and that his appearance or morbidness was worse after he came back, which words were put in his mouth by the examination. His brother testified that he looked quite bad when he got home, and was underweight. A picture of a family or neighborhood gathering taken shortly after his return in which he appeared was introduced in evidence and its showing is stressed. But I am unable to make out of it that he was then in a serious condition. He seems to have been able-to participate in such a gathering.

Plaintiff and these witnesses were testifying as to conditions nearly ten years before with nothing to lead them to keep them distinctly in mind in the meantime. The weight of his testimony is affected by his interest in the outcome of this action and by his condition at the time of testifying. Dr. Sievers testified that when plaintiff visited him he wanted to talk about his condition all the time and did not want to talk about anything else.

It took a long time to get away from him. He seemed to worry and to be .afraid of an early death which was calculated to make him to imagine things and to talk himself into believing them. Then, as to his acquaintances and brother, naturally they would be disposed to help him all they could. But taken by itself this may be said to be substantial evidence to the effect that he was then in a bad condition physically. This, however, is not the whole case. At the time of his discharge, he signed a certificate, contained in it, which was in these words: “This is to certify that I have no physical disability entitling me to compensation, under the War Risk Insurance,” and it is stated therein that he was “examined for discharge, no defects noted.” This is not to be brushed aside by his testimony that he did not read anything to the effect that he had no physical disability, and that he was just told to sign the paper and did so without knowing what was in it. He further testified that on that occasion the doctor asked him if he felt all right, and that he told him that he did. This he says he did, notwithstanding he was not then feeling all right, but was actually sick, and that he did so in order to get home. This is an admission that to accomplish an ulterior purpose he deliberately told what was not so. This is not like a case where a soldier or sailor about to be. discharged may not have realized his condition. He did realize it and told an untruth about-it. And it does not readily appear to me how such a statement would help him to get home. Then there is no reason to think that the examination made of-him was superficial. There is no indication that a great number of sailors were being discharged at that time which might lead to a more or less superficial examination. Then according to plaintiff’s testimony he was treated by three physicians after his return home, apparently in succession, the first of whom is dead. The testimony of the other two was not taken, and no explanation is given why it was not. Circumstances which may be said to make against plaintiff are that after his return he married and has had six children, and the assertion of the claim is an afterthought. Of course he had a right to marry, and it may be that he was not advised at the time of his discharge or until after the enactment of legislation allowing him, at the time he filed his petition herein, to assert his claim as to his rights. And neither circumstance may be said to have much weight. Yet they have some and are entitled to be weighed in marshaling the considerations pro and con as to plaintiff’s rights.

The result is that I do not feel sure as to just what was plaintiff’s physical condition at the time of his discharge. If it be conceded that it was such as to render it impossible for him then to follow continuously substantially gainful occupation, so that it may be said that he’ was then totally disabled, apart from the tendency of the evidence to make out that he then had in his body the seed of his subsequent goiter, it cannot be said that his condition was such as to render it reasonably certain that such condition would continue throughout his life.

As to whether the evidence has any such tendency, I am unable to make out and I have not had the benefit of any expert opinion to help me form an opinion as to this. It is true that plaintiff testified that he first began to notice the condition of his eyes as protruding whilst in the service, the date not remembered, and that when he was discharged, though he was falling off in weight, his appetite was extremely good, which Dr. Sievers testified was a symptom of goiter condition. But in the state of the evidence I cannot act on this testimony of plaintiff as to the protrusion of the eyes. No one else took notice of this at the time of the discharge or shortly thereafter. It must be accepted that it did not appear until sometime after his discharge, just when not appearing. Then as to whether a good appetite accompanied by loss of weight is a symptom of goiter condition, Dr. Davis on behalf of defendant testified that it was not, and that on the contrary such condition- would cause a loss of appetite.

In addition to what has already been said as to the evidence bearing on the question as to when plaintiff’s goiter first developed, it is to be noted that plaintiff never went to any physician about his condition in this respect until the spring of 1923, and he was then suffering also from stone in the kidney, and that Dr. Davis testified that in October, 1923, when he examined plaintiff on behalf of the Bureau, his goiter was in its early stages. So far as there was any expert opinion introduced on the subject, it was to the effect that there is no way of telling when a goiter originates or starts. I cannot, therefore, see my way clear to hold that at the time of plaintiff’s discharge the seed of goiter was then in his body. The evidence does not warrant it.

There is another feature of the ease that would call for consideration and determination if I had not come to this conclusion. The risk of an operation for goiter is slight. The Bureau in October, 1923, through its examining physician, advised plaintiff to undergo an operation for his affliction and offered to provide it without expense to him. This he refused. His refusal was unreasonable from his own standpoint. No reasonable man would be willing to endure the affliction of goiter rather than incur the risk of an operation for its removal. It is open" to say, therefore, that plaintiff’s incapacitation on account of his goiter was not permanent, inasmuch as it was reasonable for him to undergo an operation for its removal. The necessities of this ease do not require that I determine this question.

I am constrained to hold that plaintiff’s petition must be dismissed.


author: KERRIGAN, District Judge.

text:
    RED TOP CAB CO. v. HANCHETT et al.
    No. 2640.
    District Court, N. D. California, S. D.
    March 21, 1931.
    John L. McNab and J. C. McKinstry, both of San Francisco, Cal., for plaintiff.
    William H. Hunt and Maxwell McNutt, both of San Francisco, Cal., and Hugh McCurdy, of San Mateo, Cal., for defendants.
   KERRIGAN, District Judge.

Plaintiff herein, Red Top Cab Company, seeks relief in equity against defendant Hanchett, its former president, general manager, and sole stockholder of record, because of the fact that during the period when he was connected with the Red Top Cab Company in these various relationships he organized and operated a. competing company, the Green Top Cabs, Limited, to the injury of plaintiff. Green Top Cabs, Limited, is also a defendant of record, but, for purposes of convenience in discussion, Hanehett may be regarded as the sole defendant.

To make the position of the parties clear, the. history, .of the various transactions. involved must be stated somewhat in detail.. In 1929, Red Top Cab Company was operating light taxicabs on a low fare basis in San Francisco in competition with other companies, and had secured a considerable amount of business and an extensive good will. Yellow and Checker Cab Company, Cons., operating heavier cabs at a higher rate, was a competitor. Officers and directors of that company, desiring to effect what amounted to a consolidation of their company with Red Top Cab Company, without impairing such part of its good will as arose from its position as a competitor with their own larger company, determined to buy all of the stock of Red Top Cab Company, for the benefit of the Yellow and Checker Cab Company, Cons., but to do so using the name of another. Upon inquiry they learned that defendant would be a satisfactory person for this purpose. He had operated an automobile stage line, which he had just sold, had independent means, and was such a perspn as might reasonably be expected to buy such a company as the Red Top Cab Company. Accordingly, in October, 1929, after negotiations, defendant bought all of the stock of the Red Top Cab Company (the funds being furnished by the Yellow and Checker Company), and became a director, president of the company, and sole stockholder of record, except for such shares as were necessary to qualify the other directors. The stock was indorsed over to Yellow and Checker Cab Company, Cons., and deposited with its attorney. At about the same time a contract of employment was entered into between defendant and the Yellow and Checker Cab Company, Cons., by its president, by which defendant became the manager of the Red Top Cab Company for one year at a salary of $1,000 per month, it being agreed that, in the event that the contract was terminated by the cab company prior to the expiration of the year, defendant should be paid salary due for the remainder of the term.

At the time when defendant assumed control of plaintiff corporation, permits to operate taxicabs in San Francisco were available to all, no certificate of public convenience and necessity being required. In November, 1929, steps were taken to secure the passage of an ordinance, finally enacted December. 20, 1929, making such certificates necessary, and giving a new value to permits outstanding and available for use at'the time when the ordinance was passed.

After the passage of the ordinance, and about the first week of February, 1930, defendant arranged .for .the purchase, for his own account, of sixty outstanding permits. March 11, 1930, he caused Green Top Cabs, ■Limited, to be incorporated, he being substantially the sole stockholder and president of the new corporation. March 22, 1930, after a newspaper advertising campaign, Green Top Cabs, Limited, commenced operations. The evidence shows that the personnel of the new corporation included the assistant general manager, assistant garage superintendent, a dispatcher, a receiver, and upwards of fifty drivers, all formerly employed by Red Top Cab Company. It also appears that defendant caused a bulletin to be posted upon the bulletin board, maintained to notify Red Top drivers of matters of general interest to them, announcing the organization of Green Top Cabs, Limited, and containing the phrase “You, too, may graduate to Green Top.” In the early stages of organization of Green Top Cabs, Limited, it further appears that the garage and shops of Red Top Cab Company were used to some extent for the storage and servicing of Green Top cabs. At a later date, and while efforts were being made to procure a. transfer of the stock on the books, to the Yellow and Checker Cab Company, Cons., and to secure defendant’s resignation as director and his ouster as manager, defendant procured payment to himself from the Red Top treasury of the balance of the yearly salary agreed upon in the contract referred to above, this balance being $4,000. '

The records of business done and receipts therefrom of the Red Top Company show an immediate and significant decrease following the entry of Green Top Cabs, Limited, into the field as a competitor.

During all of this period, and up to May 17, 1930, defendant was still chief stockholder of record, director, president, and general manager of plaintiff corporation, and it is plaintiff’s claim that defendant’s organization of Green Top Cabs, Limited, and his operation of that company under the circumstances . and in the manner related, was in violation of the, fiduciary relationship existing,- and that plaintiff is entitled to all of the benefits arising out of defendant’s operations, as well as to damages for the injury suffered. Defendant, on the other hand, urges three defenses: First, that he was not precluded from entering into business in competition with plaintiff, and that there is no basis for the intervention of equity to protect any interest of plaintiff in defendant’s business or the profits therefrom; second, that all of defendant’s acts .were in pursuance of an understanding had between himself and officers of the Yellow and Checker Cab Company, Cons., prior to his entry into Red Top Cab Company, and that they were acquiesced in by these officers so that plaintiff is now estopped to object; third, that plaintiff does not come into equity with clean hands.

The theory of the last defense seems to be that, because the Yellow and Checker Cab Company, Cons., the beneficial owner of the stock of plaintiff, placed defendant in a position of apparent ownership and control of plaintiff corporation as a “dummy,” to preserve the good will of Red Top as an independent company, equity will not intervene to give Red Top Cab Company relief on account of whatever wrong defendant may have done that company. There is no evidence that the virtual consolidation of the two companies created a monopoly; the only charge is that the real ownership of the stock of plaintiff and the identity of the controlling interests were concealed from the public.

The maxim that he who comes into equity must come with clean hands is applicable only where the party charged has been guilty of misconduct which relates directly to the very transaction concerning which complaint is made. “The misconduct must have infected the cause of action so that to entertain it would be violative of conscience.” 21 C. J. 187; Kinner v. Lake Shore & M. S. Ry. Co., 69 Ohio St. 339, 69 N. E. 614. Here, the complaint is based upon a violation of the fiduciary relationship undoubtedly existing between plaintiff corporation and defendant, alleged to have greatly injured the business of the corporation. I can see no such relationship between a possible deception of the public as to the controlling interest in the plaintiff and plaintiff’s right to invoke the aid of equity to secure relief .against a breach of trust as would warrant the application of this maxim to this ease.

Upon the issue raised by the defense that defendant’s acts were in accord with an understanding had prior to his entry into the Red Top Cab Company, and that this understanding and subsequent acquiescence estop plaintiff from now objecting to defendant’s conduct, the evidence is in conflict in many particulars. An extended review of the evidence in this regard is not necessary; it is sufficient to say that, after a careful consideration of the testimony, and assuming without deciding that understandings with and acquiescence of officers of Yellow and Checker Cab Company, Cons., can raise an estoppel against plaintiff, I find that the conflicts must be resolved in favor of plaintiff. I do not find either prior agreement or subsequent acquiescence from which an estoppel can be raised to preclude plaintiff from securing the relief to which it may be entitled.

The question as to whether plaintiff has established a right to relief in equity against defendant remains to be considered.

It is true, as contended by defendant, that the directors or officers of a corporation are not, by reason of the fiduciary relationship they bear toward the corporation, precluded from entering into an independent business in competition with the corporation. Barr v. Pittsburgh Plate Glass Co. (C. C.) 51 F. 33; New York Auto. Co. v. Franklin, 49 Misc. Rep. 8, 97 N. Y. S. 781; Carper v. Frost Oil Co., 72 Colo. 345, 211 P. 370; Greer v. Stannard, 85 Mont. 78, 277 P. 622, 64 A. L. R. 772. This general statement, however, is subject to the proviso that directors or officers entering into such competing enterprises must act in good faith and may not cripple or injure the corporation which they serve. Hussong Dyeing Mach. Co. v. Morris (N. J. Ch.) 89 A. 249; Coleman v. Hanger, 210 Ky. 309, 275 S. W. 784; Cook v. Deeks, [1916] 1 A. C. 554. And where the director or officer has breached his trust to the corporation in this regard, equity will intervene to impress a trust for the benefit of the corporation upon the profits arising from the competitive business, or upon the competitive business itself. See cases cited, supra.

The evidence in the present case leaves no room for doubt that defendant, in organizing his .competing business, knowingly crippled and injured the plaintiff company, depriving it of selected personnel and using its facilities in the launching of his own project. Plaintiff is entitled to a decree, and in ordering such decree I believe that elective provisions should be made therein. See Coleman v. Hanger, supra.

Accordingly, let a decree be entered ordering that:

1. Defendant shall pay to plaintiff the sum of $4,000, paid to himself as salary for his uncompleted term as manager of plaintiff with interest from the date of payment to himself.

2. Plaintiff may, at its election (a) have an accounting as to and recover profits of defendant Hanehett and defendant Green Top Cabs, Limited, reference to be made to a special master for this .purpose in the event that this election is made; or (b) upon payment of $10,000, on account of the permits purchased by defendant Hanchett, plus the fair appraised value of the' properties and the capital stock of Green Top Cabs, Limited, and the capital stock owned and held by defendant Hanchett, may have the right to purchase said* properties and capital stock, a reference to be made to a special master for the purpose of making appraisal in the event that this election is made.

3. Plaintiff shall recover such damages as it may prove against defendant Hanchett, reference to be made to-a special master to make an assessment of such damages.

4. Plaintiff shall recover its costs.


author: PARKER, Circuit Judge.

text:
    ATLANTIC COAST LINE R. CO. et al. v. UNITED STATES.
    No. 278.
    District Court, W. D. South Carolina.
    March 9, 1931.

      F. B. Grier and Carl H. Davis, both of Wilmington, N. C., and M. G. McDonald, of Greenwood, S. C., for plaintiffs.
    Elmer B. Collins, Sp. Asst, to Atty. Gen., for the United States.
    Daniel W. Knowlton and H. L. Underwood, both of Washington, D. C., for Interstate Commerce Commission.
    W. S. O’B. Robinson, Jr., of Charlotte, N. C., for Piedmont & N. Ry. Co.
    W. H. Nicholson, of Greenwood, S. C., and Hull, Barrett & Willingham, of Augusta, Ga.. (James M. Hull, Jr., George B. Barrett, and J. J. Willingham, all of Augusta, Ga., on the brief), for Georgia & F. R. Co.
    Before PARKER and NORTHCOTT, Circuit Judges, and WATKINS, District Judge.
   PARKER, Circuit Judge.

This is a suit instituted by the Atlantic Coast Line Railroad Company, the Louisville & Nashville Railroad Company, and the Charleston & Western Carolina Railway Company, against the United States, to enjoin the enforcement of an order of the Interstate Commerce Commission which requires complainants to cancel certain restrictive schedules filed as amendments to joint tariffs theretofore filed with the commission; The commission has intervened in defense of its order, as have also the Piedmont & Northern Railway Company and the Georgia & Florida Railroad, who are interested in maintaining it. These various railroad companies are commonly refereed to by the initial letters of their corporate names, and we shall so designate them in this opinion. The effect of the restrictive schedules which have been suspended and ordered canceled by the commission was to deny the benefit of through routes and rates, which had been theretofore established, to shipments passing over the Greenwood extension of the Georgia & Florida between Greenwood, S. C., and Augusta, Ga.

Complainants urge as justification of the restrictive schedules that the Carolina, Clinehfield & Ohio Railroad between Elk-horn, Ky., and Spartanburg, S. C., over which the through traffie in question moves, is operated under a common control with the A. C. L. and the L. & N. within the meaning of section 15 (4) of the Interstate Commerce Act as amended by the Transportation Aet of 1920, § 418 (49 USCA § 15 (4); that the C. & W. C., which is operated as a part of the A. C. L. system, has a line between Spartan-burg, S. C., and Augusta, Ga.; and that to allow the P. & N. between Spartanburg and Greenwood and the G. & F. between Greenwood and Augusta, to participate.in the hauling of through traffic passing over the C., C. & 0. under the through routes and rates theretofore established is to require complainants without their,consent to accept a shoi’t haul on such traffic in violation of the provisions of section 15 (4). Defendants contend that complainants cannot invoke the provisions of section 15 (4) because of conditions 3 and 4 imposed by the commission and consented to by the A. C. L. and the L, & N. in their lease of the lines of the C., C. & O., by the terms of which it was stipulated that the line of the C., C. & O. should be maintained as an open route equally available to all connecting carriers. Complainants reply that a proper interpretation of. the conditions of the lease does not require that they short haul themselves as to traffic passing over the C., C. & O., and that, if the conditions be so interpreted, it was beyond the power of the commission to impose them.

The through routes and rates.in question, 304 in number, were established by joint tariffs in which complainants,- the P. & N. and the G. & F. participated, and which were filed prior to the completion of the Greenwood extension of the G. & F. between Greenwood and Augusta. They applied to traffic passing over the C., C. & 0. between points at and beyond the Ohio river on the one hand and points in southeastern and Carolina territory on the other. Prior to the completion of the Greenwood extension, the natural course of this traffic between Spartanburg and Augusta was over the line of the C. & W. C. The Greenwood extension was completed and opened to traffie on June 1, 1929; and a route via the P. & N. from Spartanburg to Greenwood and via the G. & F. from Greenwood'to Augusta thereupon became automatically available for this through’ti’affie passing over the C„ C. & 0.' under the through routes and rates theretofoi’e established. It wás to exclude this route from the provisions of the tariffs establishing the through routes and rates that the restrictive schedules were filed by complainants. The commission, acting under section 15 (7) of the Interstate Commerce Act, as amended by the Transportation Act of 1920, § 418, as amended by Act March 4, 1927, § 2 (49 USCA § 15 (7), suspended the operation of these restrictive schedules, and after hearing ordered that they be canceled as violative of conditions contained in the order authorizing the lease of the C., C. & 0. by the A. C. L. and the L. & N. Condition 1 of the order approving the lease required the lessees to maintain a separate organization for operating the leased property. Conditions 3 and 4, which are the ones of particular importance' here, are as follows:

“3. So far as lieswithin the power of the applicants, existing routes and channels of trade and commerce heretofore established by other carriers in connection with the Clinch-field shall be preserved, existing gateways for the interchange of traffic with such other barriers shall be maintained, and the present neutrality of handling traffic inbound and outbound by the Carolina>, Clinchfield & Ohio Railuwy and its subsidiary, the Garolmq, Clinchfield & Ohio Railway of South Caror lina, shall be continued so as to permit equal opportunity for service and routing or movement of traffic which is competitive with trafr "fie of the applicants, or either of them, to and from all connecting lines reached by the line of the Clinchfield companies, without discrimination in service against such competitive traffic.
“4. The applicants shall permit the line of the Clinchfield and its subsidiaries to be used as a link for through traffic, via existing gateways of interchange, or via such gateways as may hereafter be established under authority of the commission by means of the connecting lines which the Louisville & Nashville Railroad Company proposes to build, equally available to such other carriers, now connecting, or which may hereafter connect, with the line of the Clinchfield and its subsidiaries, as may desire to participate in through routes and joint rates between points in territory north and west of the line of the Clinchfield and points at and beyond the Ohio River on the one hand and points in the southeastern and Carolina territory on the other, under divisions to be agreed upon by the applicants, or either of them, and/or the •Clinchfield organization, ’on the one hand, and by the.other, participating carrier or carriers on the other, and shall not discriminate as to rates, fares, and charges against such participating carrier or carriers as compared with the applicants, or either of them; the intention of this provision being that the line of the Clinchfield and its subsidiaries shall be maintained as am open route equally mailable to all carriers connecting with the Clinch-field for traffic between the points designated.” (Italics ours.)

The A. C. L. owns 51 per cent, of the L. & N. stock and controls its policy. The C. & W. C. is operated as a part of the A. C. L. system. The C., C. & 0. is leased to the A. C. L. and L. & N. and is operated by officials appointed by them. It would seem clear, therefore, that the C., C. & 0. is operated under a common control with the lines of complainants within the meaning of section 15 (4) of the Interstate Commerce Act as amended by the Transportation Act of 1920, •and that complainants would be entitled to the long haul on the traffic in question and to exclude the P. & N. and the G. & E. from participating therein, as they have1 sought to do by the restrictive schedules, unless they are precluded from so doing by the conditions of the C., C. & 0. lease. Two questions arise, therefore: (1) Whether the conditions of the lease require that the line of the C., C. & 0. ¡be maintained as an open route for this' traffic; and (2) whether these conditions are valid and binding upon complainants. ■ We think that both of these questions must be answered in- the affirmative.

It is argued that. condition 3 merely requires that the existing neutrality in the handling of traffic over the C., C. & 0. be continued so as to preserve equal opportunity for service and routing and movement' of traffic, competitive with traffic' of applicants via existing routes and gateways, without discrimination in service against such competitive traffic; and. that condition four merely requires that the line of the C., C. & 0. be maintained as an open route for the carriers then directly connecting therewith or, at the most, for carriers whieh might under the approval of the commission be allowed to make such, direct connection thereafter. We think, however, that this gives too narrow and restricted a meaning to the conditions. As thus interpreted, condition 3 would require nothing not already required by sections 3 (3) of the Interstate Commerce Act as amended' by the -Transportation Act of 1920,v§ 405 (49 US CA-§ '3 (3). And, as to condition 4, it certainly could not have been intended tó restrict ■the-requirement of neutrality ¡for the benefit of those roads having direct connection with the C., C. & 0. when, as said by the commission, the term “connecting lines” is commonly used “in referring to the lines in general making np a through route.” The purpose of the conditions was to withhold from the lessees a partisan control of the C., C. & 0. so that its line would remain available on equal terms to their competitors; and we think that this purpose was clearly expressed in the language of the conditions. The plain meaning of that language is that the existing neutrality of the C., C. & 0. is to be continued “so as to permit equal opportunity for service and routing or movement which is competitive with traffic of applicants” and that the line of the C., C. & 0. is to be maintained “as an open route equally available to all carriers connecting with the Clinehfield for traffic between the points designated.” 1

When the lease was before the commission, the L. & N. urged that same be approved to enable it to relieve an intolerable car supply condition on certain of its lines. 90 I. C. C. 118. The A. C. L. put forward the plea that it had no coal on its own rails and desired access over controlled lines to the coal fields of Kentucky and southwestern Virginia. 90 I. C. C. 122. It was urged in addition that the opening of the new route which the lease would make available would enable the L. & N. to get into the Western Carolinas in competition with the Southern and that sundry benefits would accrue to the entire territory affected as a result. 90 I. C. C. 127 and 128. Those opposing the lease, including the G. & F., contended that its approval would destroy certain existing and potential routes, withdraw effective competition as to large areas reached by the A. C. L., and give the A. C. L. an undue advantage in transportation in the southeast. The G. & F. objected on the specific ground that it intended to seek permission to build its Greenwood extension, and that, if the A. C. L. were permitted to lease the C., C. & O., this extension would be discriminated against in favor of the C. & W. C. by means of restrictions of joint rates. After considering all of these' matters, the commission summed up the situation as follows (90 I. C. C. 131,132):

“Because of its isolation and the policy of its connections in preferring the longer hauls by more circuitous routes, the Clinehfield is not rendering the service for which it was designed and of which it is capable. The testimony is that its influence on the rate structures of the Carolinas, where its maximum influence, should be felt, is-practically nothing, and that so long as it continues as an independent property its usefulness to the public will be circumscribed. Control of the Clinehfield by the applicants, when the proposed connections are made between the L. & N. and the Clinehfield, especially the connection with the Harlan County branch, should result in added competition among the coal operators serving the Carolina markets; should give the Carolina territory an additional source of fuel in times of emergency; and should result in added competition with the Southern for traffic between the Carolina territory and the Northwest, at least between the western portion of the Carolinas on the one hand, and Kentucky and points beyond the Ohio River, west of the Cineinnati-Benton Harbor Tine, on the other. Without some provision, however, for its use by other carriers as a link in through routes, control of the Clinehfield by the applicants would probably result in the abandonment of existing routes, especially the one via Elkhom City and the Chesapeake; and would doubtless result in placing the Seaboard and other carriers of the Southeast at a disadvantage as compared with the Southern and Coast Line in competing for traffic between the Northwest and certain sections of the Southeast. * * * Those opposing the lease urge that the interest of each of the interveners and of the public in general will be best served if the Clinehfield is maintained as an independent line supported by its connections at each end. They request that any approval of the proposed acquisition be under condition that the Clinehfield be maintained as an open route, neutral or impartial, and equally available to all connections.”

The commission then referred to its having sent out notices of proposed conditions of the lease and of having received representations from the interested parties with regard thereto, and announced the conclusion that approval and authorization of the' lease would be in the public interest only under five conditions, to 1, 3, and 4 of which we have already referred. With reference to conditions 3 and 4, which are of special importance here, the commission used this very pertinent language (90 I. C. C. 134):

“The applicants have protested vigorously against the imposition of conditions 3 and 4. We have considered fully their representations, however, and have reached the conclusion that without the observance of these conditions by the applicants we are unable to find that the proposed acquisition of control would be in the public interest.” .

In the light of this record, we think there can be no doubt of the correctness of the conclusion that the line of the C., C. & 0. was to be continued as a neutral route and that in a case such as this roads handling through traffic passing over it were to be treated just as though the lease were not in existence and the C., C. & 0. were an entirely independent road independently operated. Point is given to this conclusion when it is remembered that the G. & F. was one of the protestants at the time of the approval of the lease, and that one of the “potential” routes which it was sought to save from destruction, and which the conditions of the lease were evidently inserted to save, was the route to be provided by the connection of the Greenwood extension with the P. & N. After the lease was approved, the commission approved the building of the Greenwood extension by the G. & F. at a cost of $3,300,000. And, while we do not think that the A. C. L. is estopped from making its present contention by failing to protest when the G. & F. sought a certificate of public necessity and convenience for the building of this extension, the fact that it did not do so although invited to appear by the commission is a pertinent matter for consideration in determining the meaning of the conditions under which the C., C. & O. lease was approved; for only on the assumption that the extension was to participate in the through traffic passing over the C., C. & O. could the building of the extension be justified as'a matter of public necessity and convenience. In authorizing the extension the commission said:

“As an aid in securing better connections for the interchange of traffic it has been planned to extend the line from Augusta in a northerly direction to Greenwood, S. C., a distance of about 56 miles. By this extension connection would be effected with the Seaboard Air Line and the Piedmont & Northern, the latter a strong independent electric line. Through these connections the Georgia & Florida will have direct access to the very important traffic-producing territory of northern South Carolina and central North Carolina, known as the Piedmont district. Through the medium of the Piedmont & Northern it will also have an advantageous connection with the Clinehfield Railroad at Spartanburg, S. C., and through this connection it expects to realize a substantial participation in the tonnage of coal and other commodities moving southbound over the Clinehfield destined to southern Georgia and Florida, and in the northbound movement, of freight, principally citrus fruits and vegetables, from southern territory. The lines of the Southern Railway and the Charleston & Western Carolina, the latter a part of the Atlantic Coast Line system, also extend between Greenwood and Spartanburg, connecting with the Clinehfield, but as both of these lines have their own connections to the south the'Georgia & Florida must look principally to the Piedmont & Northern for its interchange with the Clinehfield.” 117 I. C. C. 473, 475.

We agree with what was said by the commission, in passing the order which we are asked to enjoin, where, in construing the conditions here under consideration, the following language was used:

“The respondents construe the conditions of the Clinehfield lease too narrowly. In authorizing that lease we said in reference to the Georgia & Florida and other opponents of the application — Those opposing the lease urge that the interest of each of the interveners and of the public in general will be best served if the Clinehfield is maintained as an independent line supported by its connections at each end. They request that any approval of the proposed acquisition be under condition that the Clinehfield be maintained as an open route, neutral or impartial, and equally available to all connections. They generally urge that unconditional approval of the application be refused.
“The conditions imposed, and accepted by the Coast Line and the L. & N., were intended to provide in substance for the advantages thus requested, and fairly construed should have that effect. Their purpose was to preserve the relationships then existing between the Clinehfield, on the one hand, and the public and connecting lines of railroad, on the other hand, which were the relationships usually and normally existing between independent railroads and those whom it serves. This purpose is clearly indicated by the language, particularly the closing portion of condition 3, reading: The present neutrality of handling traffic inbound and outbound by the Carolina, Clinehfield & Ohio Railway and its subsidiary, the Carolina, Clinehfield & Ohio Railway of South Carolina, shall be continued so as to permit equal opportunity for service and routing or movement of traffic which is competitive with traffic of the applicants, or either of them, to and from aU connecting lines reached by the line of the Clinehfield companies, without discrimination in service against such competitive traffic.
“And by the corresponding portion of condition 4, reading: The intention of this provision being that the line of the Clinch-field and its subsidiaries shall be maintained as an open route equally available to all carriers connecting with the Clinchfield for traffic between the points designated. (The points here referred to are points in territory north of the Ohio and points in southeastern territory.)
“While our immediate concern was to prevent the closing of any gateways and routes then existing, there was no thought of excluding such changes or additions as would further the general purpose. The proposed restriction of routing would not preserve the ‘present neutrality’ of the Clinchfield, but on the contrary would seriously impair it. There can be no doubt that, as an independent carrier, the Clinchfield would welcome an additional competing route for the movement of its traffic to and from the territory served by the Georgia & Florida, and it is equally apparent that such a route would benefit the Georgia & Florida and the public it serves. There is no warrant for limiting the meaning of ‘connecting lines’ to the direct connections of the Clinchfield. The term is commonly used in referring to the lines in general making up a through route. There is in fact no other convenient term. The technical nature of this contention of respondents becomes apparent when it is considered that under their construction the conditions would necessarily apply to any extension of operations by the Piedmont, regardless of effect in short hauling the Coast Line.” 165 I. C. C. 3, 15.

For the reasons stated, we think there can-be no question that the commission was correct in its interpretation of the conditions of the C., C. & O. lease. The question remains as to whether it was within the power of the commission to impose these conditions. We think that it was. Section 5 (2) of the Interstate Commerce Act as amended by the Transportation Act of 1920, § 407 (41 Stat. 481, 49 USCA § 5 (2), provides as follows:'

“(2) Acquisition of control of one carriér by another. Whenever the commission .is of opinion, after hearing, upon application of any carrier or carriers engaged in the transportation of passengers or property subject to this chapter, that the acquisition, to the extent indicated by the commission, by one of such earners of the control of any other such carrier or carriers either under a lease or by the purchase of stock or in any other manner not involving, the consolidation of such carriers into a single system for ownership and operation, will be in the public interest, the commission shall have authority by order to approve and authorize such acquisition, under such rules and regulations and for such consideration and on such terms and conditions as shall be found by the commission to be just and reasonable in the premises.” (Last italics ours.)

It will be noted that the commission was authorized, by the section quoted, to approve the acquisition by one carrier of the control of another by lease or otherwise “on such terms and conditions as shall be found by the Commission to be just and reasonable in the premises.” It is not only the right but the duty of the commission to impose such conditions as will make the acquisition in the pub-lie interest; for, unless the acquisition is found to be in the public interest, the commission cannot authorize it. Chicago Junction Case, 264 U. S. 258, 265, 44 S. Ct. 317, 68 L. Ed. 667. In this case the commission found that the lease would not be in the public interest unless the conditions in question were imposed; and consequently without them the lease could not have been authorized. If they were beyond the power of the commission, it results, not that they are void and the lease unconditional, but that the lease itself is unauthorized. We think, however, that it was clearly within the power of the commission to impose them.

Complainants rely upon the recent decision of the Supreme Court in U. S. v. Chicago, M., St. P. & P. R. Co., 282 U. S. 311, 51 S. Ct. 159, 75 L. Ed.-. That case, however, is not remotely in point. There the condition imposed related, not to the control of interstate commerce, but to the disposition of a fund subscribed for a special purpose; and ■it was held that the condition was void because imposed without authority of law, in that it related to a contract which “was not one in respect of commerce but involved a transaction distinct and complete in itself without regard to its results; and, whether succeeded by commerce or not, was no part of it.” Here the conditions relate directly to interstate commerce, prescribing how a line of railroad engaged in interstate commerce is to be operated with relation to other interstate carriers, and the manner in which interstate traffic over such line is to be handled. Their effect was to authorize the acquisition of the C., C. & O. by the A. C. L. and the L. & N. in such Way as to enable those roads to serve the purposes which they put forward as reasons for the acquisition and at the same time to preserve the independent status of the C., C. & O. for the benefit of the public and the protection of connecting carriers.

It is argued that as construed by the commission, the conditions in question are violative of section 15 (4) of the Interstate Commerce Act as amended by the Transportation Act of 1920, § 418 (49 USCA § 15 (4), in that they require the A. C. L. and the L. & N., without their consent, to embrace in through routes substantially less than the entire length of their lines and the lines of intermediate roads operated under a common management or control. The answer is that these carriers gave their consent to this when they accepted the C., C. & 0. lease, one of the provisos of the order which approved the lease being as follows:

“That the making of said lease and exercise of any of the rights conferred by this order shall in all future proceedings, judicial as well as administrative, to which the carriers above named or any of them may be parties, be deemed and taken as conclusive evidence of their acceptance of, and agreement to abide by, the conditions enumerated in said report, and numbered from 1 to 5, inclusive.”

It is argued that the commission was without power to enter the order in question ; because it is said that the order was in effect the establishment of new and additional through routes without affording a hearing as required by section 15 (3) of the Interstate Commerce Act as amended by the Transportation Act of 1920, § 418 (49 USCA § 15 (3). This point was made before the commission and was sustained as to 33 of the 337 schedules originally involved, on the ground that these 33 schedules related to tariffs to which the Cr. & F. was not a party. As pointed out by the commission, however, it had jurisdiction as to the remaining 304 restrictive schedules because their purpose was to restrict the joint rates that would automatically become applicable over the Greenwood extension upon its completion without the filing of additional tariffs or further action by the commission. These 304 restrictive schedules, therefore, affected existing rates, fares, and charges applicable on traffic, to, from, or over the G. & F. within the meaning of section 15 (7) of the Interstate Commerce Act as amended by the Transportation Act of 1920, § 418, as amended by Aet March 4,1927, § 2 (49 USCA § 15 (7).

For the reasons stated, we think that the injunction prayed should be denied and that the motion to dismiss the bill of complaint should be allowed.

Bill dismissed.