author: SOPER, District Judge.

text:
    NORFOLK & W. RY. CO. et al. v. HALL.
    No. 3030.
    Circuit. Court of Appeals, Fourth Circuit.
    April 25, 1931.

      NORTHCOTT, Circuit Judge, dissenting.
    A. W. Reynolds, of Princeton, W. Va., and Joseph M. Sanders, of Bluefield, W. Va. (Bernard MeClaugherty and Sanders, Crockett, Fox & Sanders, all of Bluefield, W. Va., and Albert W. Reynolds, Jr., of. Princeton, W. Va., on the brief), for appellants.
    A. J. Lubliner and John Kee, both of Bluefield, W. Va., for appellee.
    .Before PARKER and NORTHCOTT, Circuit Judges, and SOPER, District Judge.
   SOPER, District Judge.

George W. Hall brought an action at law in the circuit court of Mercer county, W. Va., against the Norfolk & Western Railway Company, a corporation, and American Railway Express Company, a corporation, for personal injuries received by him on board a mail car of the railway company in the state of Virginia on December 14, 1927. The suit was removed from the state court to the District Court of the United States for the Southern District of West Virginia. The plaintiff was an employee of the express company, but on this occasion had been furnished to the railway company, which set him to work in the transportation of the United States mail under an arrangement between the railway company and the United States government. The plaintiff was injured by a heavy iron stanchion which was part of the equipment of the car, and which fell en route, striking him on the head and inflicting a fracture of the skull. The jury found a verdict for the plaintiff in the sum of $18,500 against both defendants, and from the judgment based thereon, the appeal in this case was taken.

The mail car was new and was making its first trip on a regular run from Cincinnati, Ohio, to Norfolk, Va. It was equipped with upright stanchions placed at intervals in two lines which ran lengthwise parallel to the sides of the car. There was an aisle between the two rows of stanchions and likewise a space between each row of stanchions and the side of the car next to it. The stanchions were made of 1%" steel pipe, 20 pounds in weight, and were of two heights 7'5%" and 7'8 1/16" respectively. There were 34 stanchions in all. They were of use in the separation of the mails for various points of destination. When in use the stanchions stood in a perpendicular position, the lower ends resting in slots in the floor of the car, and the upper ends being permanently fastened by swivel joints to the ends of steel brackets which extended inwardly from the sides of the ear. The swivel joints allowed the stanchions, when lifted out of the slots in the floor, to be moved in any direction for the convenient handling of the mail. When not in use, the stanchions were laid in a horiiizontal position near the top of the ear, and when so disposed, were supported at one end by the swivel joints, and at the other, by hooks suspended from the rodf of the car or by grooves on top of the brackets from which the swivel joints were suspended. The hooks and grooves were not provided with safety catches or locks, but the shape of the hooks and of certain ledges in the ends of the brackets were designed to prevent the stanchions from falling out of the receptacles upon the floor of the ear. It will be thus seen that the number of receptacles in which the lower ends of the stanchions could be placed exceeded the number of stanchions. There were in fact 54 hooks and grooves in the brackets, and in addition it was physically possible to place the ends of the stanchions on the brackets outside of the grooves.

The difference between the arrangement of stanchions in the new car above described and that in the ears previously in use, with which the plaintiff had had two years’ experience, was that in the latter the stanchions were detachable at both ends. When in use, they fitted in grooves at the top of the ear and in slots in the floor. When they were not in use, they were separated at both ends and laid out of the way in racks or placed against the walls of the ear.

The car in question was loaded with mail at Cincinnati on the evening of the day before the plaintiff’s injury, and was brought thence, without change of contents, to Blue-field, W. Va., where it arrived on the morning of December 14. The ear was solidly packed with mail at Cincinnati from the rear end of it to the two forward side doors, with the exception of a small passage across the ear at these doors. There was no passage or aisle running longitudinally through the center of the ear. The load extended from the floor nearly up to the bottom of the swivel joints. At each end of the mail, the stanchions were in the sockets in the floor, but the stanchions in between were resting in the receptacles overhead. The employees who loaded the ear at Cincinnati testified that the stanchions detached from the floor were properly placed in the receptacles before the mail was packed in the car beneath them; but that after the car had been loaded, the stanchions were not again examined to ascertain whether they remained in a secure position.

The plaintiff testified that he had never seen a ear of this type before he entered.it at 8:30 a. m. on'the day of the accident for his regular run between Bluefield and Norfolk; and that he reeéived no instructions from any one as to the difference between it and those to which he had been accustomed. He was not able to see the position of all the stanchions in the ear because the mail obstructed his view, and he' did not know in what position they were at the top of the ear. After leaving Bluefield, he put mail off at various stations, took in smaller quantities of mail at divers points, and made separations for the stations and connecting lines en route. As the train proceeded toward Norfolk, the quantity of mail in the car was reduced and the height of the piles was diminished. The train was due at Petersburg at 4:35 p. m. At Blaekstone, Ya. (a point 30. miles west of Petersburg), he received a few sacks of mail, and a shprt time afterward, began to separate it. As he was stooping over to read the label on a sack which he had taken up from the floor, he was struck on the head by a falling stanchion. Prior to the accident he had had no occasion to handle or to move or to examine in any way any of the stanchions in the car. He had moved the mail that was stacked under the stanchion which fell, when he came into the car and had replaced it with other mail. He did not know what caused the rod to fall, or whether it had been resting in a hook or groove or on top of a bracket.

The ease was tried in the court below upon the assumption that the common-law rules relating to the duties and liabilities of master and servant should be applied. The plaintiff relied upon the duties of the master to exercise ordinary care to provide a safe place and sáfe appliances to his employee, and secured an instruction from the court that if the jury believed that these duties had been neglected, and as a result, the plaintiff had been injured without negligence on his part, he was entitled to recover. At the request of the plaintiff, the court also instructed the jury that it was the duty of a master to use due care not to expose his servant to unnecessary risks, and that the master was bound to in struct the servant as to the use and dangers of machinery, when put in charge of dangerous equipment; and that if the equipment of the ear was dangerous and the failure of the defendants to instruct the plaintiff was the cause of his injury, then he was entitled to a verdict. Thus it appears that the plaintiff relied at the trial upon claims of negligence on the part of the defendants — (1) as to an unsafe place and unsafe appliances with which to work and (2) as to the failure of the defendants to instruct the plaintiff in regard to the appliances in the car.

In addition to the plaintiff’s testimony, a fellow railway mail clerk testified that he saw the ear on its maiden trip at Roanoke before the accident and then expressed the opinion that the car was unsafe because the receptacles for the stanchions were not provided with locks or safety catches, and that therefore there was danger that they would fall. This witness -did not say that the appliances themselves were defective or in bad condition, and his testimony was limited to the bare expression of personal opinion indicated, without any explanation of how this could occur, except the suggestion that the stanchions might not be properly .placed in the receptacles, or might be displaced in the storage of mail in the car, by the workmen. The evidence relied on to support the plgintiff’s theory that it was negligence to fail to instruct him, was this opinion of his fellow employee; and his own testimony of unfamiliarity with the appliances already noticed.

On the other hand, the testimony of the defendants showed that the ear was in all respects safe and of proper construction and that there was no occasion, under the circumstances of the employment, to give instructions to the plaintiff. Numerous witnesses testified to their familiarity with appliances of this soft, and expressed the opinion that they were entirely safe. It was proved by uneontradieted evidence that the car was designed and built by a competent contractor in accordance with specifications furnished to the railway company by the Post Office Department of the United States. It was shown that during the interval of two years between the accident and the trial of the case, 23 railway mail ears, equipped in the same manner as the ear in question, had traveled a total mileage of 4,920,808 miles without accident of any kind. Hence the defendants contended that there was no substantial evidence to support the plaintiff’s charges of negligence. Moreover, they advanced the argument, well founded in our opinion, that the doctrine of res ipsa loquitur did not apply, because there were other reasonable explanations of the accident than that of negligence on the part of the defendant. See Thompson on Negligence, § 7635. It was conceivable that the bar might have fallen by reason of negligence of the plaintiff, or of the men who stored the mail in the ear. In short, it was said that the plaintiff had failed to meet the burden of proof resting upon him under the law.

We think that so far as the primary duties of the defendants to furnish the plaintiff with a safe place and safe appliances are concerned, this contention was correct. The mere opinion of the plaintiff’s witness as to the dangerous character of the car, expressed before it had been tested, accompanied as it was with the suggestion that the , danger lay in the possibility of improper use of the appliances by fellow servants, was of too unsubstantial a nature, when viewed in connection with the weighty testimony of defendants’ witnesses, and the successful use, in more than two years’ actual operation, to warrant the submission of this issue to the jury. While it may not be said that the testimony ns to the safe character of the car was literally uneontradieted, it was of so conclusive a character as to put an end to the • dispute. Patton v. Texas & Pacific Ry. Co., 179 U. S. 658, 21 S. Ct. 275, 45 L. Ed. 361, and Gulf, etc., R. R. v. Wells, 275 U. S. 455, 48 S. Ct. 151, 72 L. Ed. 370.

“Nor do we think that it was shown that the failure to instruct the plaintiff was actionable neglect in this case. It is the duty of the master to warn Ms servants of new dangers caused by a change of appliances. Chesapeake & 0. Ry. Co. v. Peyton (C. C. A.) 253 F. 734. But, as we have seen, the equipment was not dangerous. It is true that if the plaintiff had been warned to examine the suspended stanchions, he might have avoided the injury if it be assumed that it was caused by improper handling of the appliances by his predecessors in the car. But this possibility merely tends to show that the dangers flowing from carelessness on their part were not so obvious as to warrant a ruling by the judge that the plaintiff voluntarily assumed them. Since the appliances themselves were safe, if carefully handled, the mere failure to instruct him did not amount to negligence on the part of the defendants. An employer has the right to assume, if his servants be competent, that they will not be negligent, and ordinarily it is not his duty to warn an employee of dangers consequent upon negligence of fellow servants unless repeated acts of negligence by them raise a presumption of knowledge of the dangers on the master’s part. 39 C. J. 498. Whether or not the defendants are responsible to the plaintiff for the negligent handling of the appliances by his fellow employees is a question that will be presently considered.

The defendants prayed the court for a directed verdict, and the foregoing discussion indicates that this action would have been proper, if common-law rules were applicable. For it is obvious that, there being no evidence of an unusual mótion of the railroad ear itself, such an accident could have been produced only by one of three causes, or some combination of them; that is, by faulty equipment, by the negligence of the plaintiff, or the negligence of his fellow employees who packed the ear before it left Cincinnati. The first theory is not tenable, as we have seen. The second was elimihated, so far as the present record is concerned, by the verdict of the jury. Recovery by the plaintiff was conditioned by instructions offered in his behalf and given by the court, upon the absence of negligence on his part contributing to • the accident. In addition, the court of its own motion instructed the jury that it was the plaintiff’s duty to act so that he would not make danger, where danger did not of itself exist; that he must not contribute to his own hurt, and that if he did so, he could not recover; that it was his duty to care for the property committed to his charge, and to act as a reasonably sensible man would do under the circumstances.

There remains only the explanation that the fellow employees of the plaintiff, who packed the- ear before it left Cincinnati on its journey, failed to place carefully the stanchions in the receptacles intended for them so that they were improperly secured and fell during the journey. The evidence of these men was introduced by the defendants, and it shows that at least one-half of the stanchions were removed from the upright position and placed in the overhanging receptacles in order to permit the mail to be stacked solidly in a large part of the car. The mail was then introduced and piled high in the ear. After this had been done, there was a casual examination of the car by the men before it was dosed, but the rods or stanchions were not carefully inspected to ascertain whether they had been in any way displaced from the receptacles, during the storage of the mail. The fact, that the stanchion fell, when considered with the testimony of plaintiff that he had done nothing to dislodge it,, was some evidence that it had not been properly placed in the receptacle in the first instance or that the employees who loaded the ear had negligently dislodged it.

Even on this theory, the defendants would have had no liability at common law. The plaintiff, however, now suggests, apparently for the first time in the case, that the common law should not be applied but either the provisions of the Virginia statute, codified as section 5791 of the Virginia Code of 1930 (because the accident happened in Virginia),- or the Federal Employers’ Liability Act, codified in 45 USCA § 51, should govern; and that under both of said acts, employees may recover not only for the negligence of their employers, but also for the negligence of fellow employees. But it is clear that the Virginia act has no application to this ease, for it is limited to eommon carriers by railroad engaged in intrastate commerce, and injuries to employees while engaged in interstate commerce are expressly excepted. Shumaker’s Adm’x v. A. C. L. R. Co., 125 Va. 393, 99 S. E. 739. The situation is different in our opinion with regard to the federal act, which provides in substance that every common carrier by railroad, while engaged in interstate commerce, shall be liable in damages to any person suffering injury while employed by such carrier in such commerce resulting i/n whole or in part from the negligence of any of the officers, agents or employees of the carrier, or by reason of any defect or insufficiency due to its negligence in its rolling stock or appliances.

The applicability of this statute to the railway company and to the express company in this ease depends upon the character of business in which they were engaged and upon the relationship between them and the plaintiff. The uneontradicted evidence is that the plaintiff was employed and paid by the express company, but that he was loaned or furnished by the express company to the railway company and was engaged upon the latter’s business at the time of his injury. The contract between the two defendants, with relation to the plaintiff’s employment, if any written contract existed, was not introduced in evidence, but the proof shows that the express company merely furnished the men to-operate the mail storage cars, and it had no supervision over the cars or over the work-while it was being performed. On the contrary, the men, while so engaged, were considered “100% railway employees.” While the testimony on the point is not as explicit as it might be, there can be no doubt that for the purposes of this case the plaintiff must be considered as an employee of the railwaj1' company. The defendants prayed the court to instruct the jury that the relation between employer and employee existed between the railway company and the plaintiff at the time of the accident, and the court in its charge gave substantially this instruction to-the jury. These circumstances distinguish-the ease at bar from Robinson v. B. & 0.,. 237 U. S. 84, 35 S. Ct. 491, 59 L. Ed. 849, wherein it was held that a Pullman porter, employed by a corporation which supplied its own facilities, selected its own employees, and supervised the performance of their tasks, was not included amongst those to-whom a railroad company is liable under the-federal statute. In the case at bar, on the other hand, the plaintiff, as an employee of' a common carrier by railroad, engaged in interstate commerce, was entitled to the provisions of the act.

But the express company does not. come within the terms of the act. It was-held in Wells Fargo & Co. v. Taylor, 254 U. S. 176, 41 S. Ct. 93, 65 L. Ed. 205, that an express messenger was not entitled to-sue an express company under the act since the words “common carrier by railroad” do-not embrace an express company conducting its business under an arrangement with a railroad company, whereby the express company was granted the exclusive privilege of conducting the express business over the railway’s lines. The court held that the affairs ■of the two companies were distinct and separate, and that an employee of the express company was not an employee of the railroad company under the terms of the act. The liability of the express company in the instant case must therefore be determined by the common law of Virginia; and under it, the plaintiff has no legál claim against the •express company for the negligence of his fellow servants — even though they be serv-: .ants of the express company itself.

It follows that if it should clearly appear from the record that the verdict of the jury was based on the negligence of the .men who stored the ear with mail, the finding would not support a judgment against the •express company, hut would be sound so far as the railway company is concerned. It is true that the pleadings make no mention of “the federal act, but on the contrary state a case under the local law; for the declaration asserts that the plaintiff was the employee of the express company, and fails to say that he was also employed by the railway company. Moreover, the instructions requested and given by the court indicate that the rules of the common rather than of the federal law were to be applied. But neither •of these circumstances prevents the application of the federal act, as the Supreme Court has repeatedly decided. Thus in Missouri, Kans. & Texas Ry. v. Wulf, 226 U. S. 570, 33 S. Ct. 135, 57 L. Ed. 355, Ann. Cas. 1914B, 134, it was contended that the complaint failed to state a cause of action under the federal act, but was grounded upon the state statute. But it was held that the trial court was presumed to be cognizant of the enactment of the Federal Employers’ Liability Act (45 USCA §§ 51-59), and to know that it had the effect of superseding state laws upon the subject; and that -therefore the pleader was not required to refer to the federal act and his reference to the state statute was immaterial. See also St. Louis, San Francisco Ry. v. Seale, 229 U. S. 156, 161, 33 S. Ct. 651, 57 L. Ed. 1129, Ann. Cas. 1914C, 156; Toledo, St. L. & West. R. R. Co. v. Slavin, 236 U. S. 454, 458, 35 S. Ct. 306, 59 L. Ed. 671; Grand Trunk Ry. Co. v. Lindsay, 233 U. S. 42, 48, 34 S. Ct. 581, 58 L. Ed. 838, Ann. Cas. 1914C, 168; Chicago, Rock Island. & Pacific Ry. v. Wright, 239 U. S. 548, 36 S. Ct. 185, 60 L. Ed. 431; Chicago, Rock Island & Pacific Ry. v. Ward, 252 U. S. 18, 23, 40 S. Ct. 275, 64 L. Ed. 430; Grand Trunk Ry. v. Thrift, 68 Ind. App. 198, 210, 115 N. E. 685, 116 N. E. 756.

The judgment of the District Court might be reversed as to the express company and affirmed as to the railway company, if it should appear that the instructions to the jury, although based on the rules of the common law, were not prejudicial to the latter defendant. But we are unable to reach this conclusion. The jury was wrongfully instructed, over the defendants’ objections, that it might base a verdict for the plaintiff on the alleged dangerous character of the devices, or on the failure of the defendants to instruct the plaintiff; and it is impossible to determine whether the verdict rendered was based on one or both of these untenable grounds or on the finding, which would have some support in the evidence, that the stanchion fell because it was improperly placed in a receptacle. By reason of this uncertainty, the judgment must be reversed as to both defendants.

Reversed and remanded.

NORTHCOTT, Circuit Judge, dissents.


source: Caselaw Access Project

author: PER CURIAM.

license: Public Domain

text:
    CHEMICAL FOUNDATION, Inc., v. GENERAL ELECTRIC CO. et al.
    No. 276.
    Circuit Court of Appeals, Second Circuit.
    May 4, 1931.
    The following is the statement and opinion of Thacher, J., in the District Court:
    In Equity. Suit by the Chemical Foundation Inc., against General Electric Company and Victor X-ray Corporation for infringement of Lilienfeld patent on a process and apparatus for producing Roentgen rays —No. 1,132,011, issued December 22, 1914. Defendants do not question plaintiff’s title derived under the Alien Property Custodian.
    The claims in suit are:

      “7. A process for producing Roentgen rays having any desired degree of hardness in a tube having a vacuum sufficient to inhibit the passage of the high tension discharge -which is intended to generate the Roentgen rays, consisting in creating in the tube independently 'to the means for generating Roentgen rays, a conductivity sufficient to permit the passage of said discharge while maintaining the said high vacuum.
    “8. The process for producing Roentgen rays having any desired degree of hardness in a tube having a vacuum sufficient to inhibit the passage of the high tension discharge which is intended to generate the rays, consisting in creating in the tube the conductivity necessary for lowering the resistance in said tube independently to the means for generating the Roentgen rays while maintaining the said high vacuum.”
    The alleged infringing device is the well-known Coolidge X-ray tube, upon which patent No. 1,203,495 issued to Coolidge on October 31, 1916. The defenses alleged are invalidity and noninfringement.
    Opinion.
    To produce an X-ray it is only necessary to bombard a metal target with electrons. The penetrability or hardness of the resulting rays depends upon the velocity with which the electrons strike the target. This was well known long before lilienfeld. The method then employed was gas ionization. The difference of potential between two electrodes in a partially evacuated tube will ionize the atoms of gas and the electronic flow from cathode to anode will continue under the influence of the voltage applied to the terminals of the electrodes so long as ionization persists. Operation of such an X-ray tube depends upon the presence of gas in sufficient quantity to maintain ionization. As such tubes aged in use, they were found to require increasing voltages to pass the current from cathode to anode and it was known that this was due to gas exhaustion which progressively occurred in the operation of the tube. As the gas became exhausted and the voltage was increased, the rays became harder and harder, until a point was reached where no current passed and the tube became inoperative. These old tubes were not only thus limited in the term of their usefulness, but inability to control, or at least to know, the character of the rays, placed serious limitation upon accurate and satisfactory use, and it was to these problems that the patent in suit was addressed.
    In his specification Lilienfeld states the object of his invention as follows:
    “The principal object of this invention is, therefore, to provide a process and apparatus wherein the hardness of radiation is not brought about by the alteration of the density of the gas within the tube, but on the contrary, by means of an auxiliary electrode-actuated independently of the means for producing the Roentgen rays, this independent-electrode being capable of starting a discharge in such a high vacuum that the ordinary anode and cathode would be prevented from operation. It is to be understood that this electrode works substantially independently of the degree of vacuum provided this vacuum is high, for example above the limiting value for the production of Roentgen rays in the ordinary manner.
    “The invention has three distinct purposes to accomplish. The first of these is to proride a novel process and apparatus wherein a tube may be used which is primarily so highly evacuated that the resistance between the cathode and antieathode cannot be overcome by the ordinary tension, and consequently the production of Roentgen rays can not be accomplished.
    “The second object is to provide an improved means for so reducing this resistance that the production of Roentgen rays may.be accomplished with a high degree of evacuation of the tube.
    “The third of these objects is the provision of means for and the process of using an alternating current for the production of Roentgen rays in a tube of this description.
    ' “With the above and other objects in view, the invention consists in general' of a certain novel means for producing these results and. apparatus haring details of construction and combination of parts hereinafter fully described, illustrated in the accompanying drawings, and specifically claimed.”
    He then describes the apparatus he has devised for carrying out the process of his invention: “In carrying out the process used herewith there is employed a Roentgen ray tube haring an anode and cathode. Besides an anode and'cathode there is also employed an electrode which can be raised to a high degree of temperature, such, as ineandeseeney, by the passage of a current therethrough, said electrode acting as a cathode and there may be used a second anode also.” He then says that the tube is to have a vacuum sufficiently high to inhibit the passage of the discharge between the electrodes, but that in operation “the resistance between the anode and cathode is reduced by breaking down said resistance by the activity of the incandescent cathode.”
    Operation of the Lilienfeld device is shown to be dependent upon ionization, and to be subject to definite limitations when subjected to very high voltages. Explanation is that in order to release electrons from the cold cathode the auxiliary hot cathode gives off electrons which ionize the atoms of the residual gas. These ions release the electrons from the cold cathode which are driven to the anode and thus generate the rays. When Lilienfeld’s tube is operated under high potential between the main electrodes, there is a tendency to swamp out the current which heats to incandescence the auxiliary electron producing filament. •
    In his process claims, which are the only claims in suit, Lilienfeld did not limit his invention to any such means, but drew these claims broadly to cover the creation, by any means independent of the generating electrodes, of conductivity sufficient to permit the passage of the discharg-e in a vacuum sufficient to inhibit such passage without such means. Thus, he did not in terms limit his claim of invention far the process disclosed in his specification, which was dependent upon ionization, but extended it to* any device by which the resistance of a high vacuum could be overcome without reducing the vacuum. It need not be decided whether such claims can be saved by reference to the specification, despite their apparent vice in attempting to preempt the solution of this problem by means other than those which constitute the invention disclosed. Assuming that they may be, and giving to them such liberality of construction as will include every means disclosed by Lilienfeld or known to others when his patent issued, it is not shown that these claims have been infringed.
    Instead of employing an auxiliary hot cathode in aid of the electron discharge from a cold cathode, the Coolidge Tube eliminates ionization entirely and by the use of a hot Tungsten cathode succeeds in producing a deluge of electrons which, under the pressure of very high voltages and without any aid from any auxiliary device, are swept across from cathode to anode in a pure electron stream. In order to cover this device^ the process claims, already stretched beyond any conception of means known to Lilienfeld, are stretched still further, and it is claimed that Coolidge has in his tube created conductivity “independently of the means for generating Roentgen rays.” But Coolidge’s hot cathode is clearly not within the meaning of this .language. It is one of the generating means (i. e., the'main cathode) to which the claims refer. Nor can it be said in the sense of the claims that Coolidge has created conductivity in the tube. In a process of ionization the term “conductivity” can refer only to the function which the gas, however rarefied it may be, performs as a conductor in aiding the passage of the discharge, and it must have been in this sense that the words were used. To give the term the meaning now claimed for it would be to reduce the process claims to the statement of an unsolved riddle ■ — i. e., evacuate the tube until the resistance prevents operation, then overcome the resistance without impairing the vacuum. This is not the language a patent claim must speak, and unless the word “conductivity” is used in the sense of the specification, it can be given no meaning which could have been understood by the art when the patent issued.
    On the ground that the Coolidge tube does not infringe the Lilienfeld invention, the complaint must be dismissed, with costs.
    Thomas G. Haight, of Jersey City, N. J., Hugh M. Morris, of Wilmington, Del., John F. Neary, 'of New York City, and Louis W. McKeman, of Philadelphia, Pa., for appellant.
    Charles Neave and Stephen H. Philbin, both of New York City, for appellees.
    Before SWAN, AUGUSTUS N. HAND, and CHASE, Circuit Judges.
   PER CURIAM.

Decree affirmed on opinion of Thaeher, District Judge.


author: L. HAND, Circuit Judge.

text:
    COMPANIA GENERAL DE TABACOS DE FILIPINAS v. UNITED STATES. THE ELKTON.
    No. 362.
    Circuit Court of Appeals, Second Circuit.
    May 4, 1931.
    Qeorge Z. Medalie, U. S. Atty., and William E. Collins, Sp. Asst. U. S. Atty., both of Hew York City, for appellant.
    Bigham, Englar, Jones & Houston, of New York City (Henry N. Longley and James N. Seneeal, both of New York City, of counsel), for appellee.
    Before L. HAND, SWAN, and CHASE, Circuit Judges.
   L. HAND, Circuit Judge.

The libellant shipped a parcel of bagged sugar at Manila and Iloilo in the Philippines upon the respondent’s steamer, “Elkton.” Part was stowed in the steamer’s forehold, and on the outturn at Baltimore and New York was found to have been damaged by fuel oil leaking from the tank top. The sugar had been stowed over the top, and some of the oil had reached it from the rivets and the seam of the tank, but the greater part from a broken vent pipe, leading from the tank through the hold to the deck. This pipe was cased in wood and was broken a few inches above its connection with the tank; at the trial it showed some rust in the threads by which it had been fastened in place, most, of which had however probably occurred after it was taken out. The only explanation of the injuries offered by the respondent was that while the ship was lying at Moji, Japan, some of the stevedores had let a strongback fall through the hatch upon the tank, which struck some twenty-five feet abaft the vent pipe.

At Shanghai, a later port of call, a survey was had, and the surveyor reported that though the tank showed no leaks, it should be kept empty or slack, while the ship was homeward bound, and should be tested and repaired, if necessary, at the home port. In New 'York four hundred rivets were found' leaking and about thirty feet of seam, besides the vent pipe just mentioned. The master knew of the report, and perhaps the chief engineer also, and the tank was kept empty from Manila to Honolulu. At that port, however, the engineer for some unknown reason gave orders to fill it, which was done with the resulting damage to the sugar. It did not appear that the fall of the strongback broke the vent pipe, and such evidence as there was indicated the contrary; but equally it did not appear how recently the easing had been removed and the pipe examined, nor did the respondent show what other diligence it had used to" examine it.

The defence was that the ship was in all respects seaworthy when she left Manila except for the defective tank; that the master at any rate knew of the injury; and that if he did not tell the chief engineer, or if the engineer was negligent in giving the order to fill at Honolulu, it was an error of management for which the owner was not liable under section three of the Harter Act (46 USCA § 192). Judge Campbell found that the “Elkton” was not seaworthy, regardless of the knowledge of the master or the engineer, and that the cause of the damage was the tank. From his decree the respondent appealed.

A ship may be seaworthy, though not in all respects fit for her service, when she breaks ground. The Silvia, 171 U. S. 462, 19 S. Ct. 7, 43 L. Ed. 241; International Navigation Co. v. Farr, 181 U. S. 218, 21 S. Ct. 591, 45 L. Ed. 830; The Steel Navigator, 23 F. (2d) 590 (C. C. A. 2); The President Polk, 43 F.(2d) 695 (C. C. A. 2); The Manitoba (D. C.) 104 F. 145. The theory is that if she be well found in hull and gear, but the master and crew know that she is not made ready as she rides, and expect to fit her with what is at hand, when the occasion arises, the owner is discharged; it is an error of management if they fail to do so. But existing unfitness, though it arise only from ill handling of adequate equipment, must be so known at the outset; else she is unseaworthy, not being herself suited for her service, and not carrying a crew properly advised as to her needs. The Schwan, L. R. [1909] App. Cas. 450; Standard Oil Co. v. Clan Line, L. R. [1924] App. Cas. 100. Thus seaworthiness may depend upon the knowledge of the ship’s company as to how far she has been in fact made ready. The case af bar is an effort to extend this doctrine to a ease where the ship is not sound in hull, on the ground that her fault was known. It is argued that the error is still only one of management, provided of course that, if properly handled, she can be made to serve her purposes.

The gloss thus put forward — without the support of any’authority — would extend the doctrine to cases where a crippled ship is turned over to a crew with instructions so to use her as to avoid the consequences. She will be seaworthy if the crew prove duly attentive. For instance, if the rudder be bent, the quartermaster may be instructed to make proper allowance in his helm; if the boilers be weak, the engiheer, to keep a low head of steam. We should scarcely suppose that the argument would be pressed to defects which affected the ship’s ability to withstand wind and sea, and indeed it is not necessary here to go so far, unless we regard the tank to]) as part of the shell. There is some evidence to that effect, but we may disregard it, because the same considerations control the seaworthiness of her holds as of her bottom. These were suitable for sugar only if the tank was not filled, that is, in the event that the engine-room took care not to use the ship for her normal purposes.

Section three of the Harter Act (46 USCA § 192) gives a privilege to the owner, an immunity dependent upon the condition that he use due diligence to make his ship “in all respects” seaworthy, within as well as without. When he does, he is excused from what would otherwise be a breach of his contract, a liability in tort, if one choose, in any event a wrong under the maritime law. By hypothesis he stands at fault but for his compliance with the statute, which then imposes. upon the shipper the risk of those' lapses in duty of the owner’s servants for which he is ordinarily responsible. When the owner accepts cargo in an unseaworthy ship, though the defect be such as may be neutralized by care, he imposes on the shipper an added risk; not merely that his servants may fail, in so far as she is sound and fit, but that they may neglect those added precautions which her condition demands. That risk the statute, does not impose upon the shipper; he bears no loss until the owner has done his best to remove all risks except those inevitable upon the seas. It makes no difference whether the defect is in shell or hold; with her whole management the owner is charged unless he does his part. In the ease at bar it is therefore immaterial whether the engineer knew that he should not fill the tank. If he did, his forgetfulness, or supposition that the oil would not reach the sugar, was a fault, in management it is true, but in the management of a ship which required more care than the owner could exact at the shipper’s peril. If the engineer did not know, at least the master did, and his fault is also the owner’s. Also it is not necessary to determine whether the strong-back broke the vent pipe, and whether the master should have foreseen that possibility as well. If he should, the resulting damage falls within the same class; if not, the respondent made no effort to prove what diligence had been used to discover the break. In either event, it was liable also for so much of the leakage as came from that source.

The facts do not raise a question argued at the bar; whether a ship’s unseaworthiness in a respect which has nothing to do with the loss, will deprive the owner of recourse to the section. The finality of onr dictum to the contrary in Hartford & N. Y. Transportation Co. v. Rogers & Hubbard Co., 47 F.(2d) 189, 192, we need not therefore consider, except to observe that it is - contrary to In re O’Donnell (C. C. A.) 26 F. (2d) 334; Id., 34 F.(2d) 925 (C. C. A. 2), and to a dictum in The Waalhaven, 36 F.(2d) 706 (C. C. A. 2). Apparently this court has not finally committed itself, and it is not desirable to add any further obiter discussion. Here at any rate the unseaworthiness directly caused the loss, and that disposes of the case.

Decree affirmed.


author: AUGUSTUS N. HAND, Circuit Judge.

text:
    JOHN T. STANLEY CO., Inc., v. LAGOMARSINO.
    No. 363.
    Circuit Court of Appeals, Second Circuit.
    May 4, 1931.
    Hardy, Staneliffe & Hardy, of New York City (Noah A. Staneliffe and George T. Barker, both of New York City, of counsel), for appellant.
    Fogarty, Quel & Devlin, of New York City (Seymour B. Quel, of New York City, of counsel), for appellee.
    Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges.
   AUGUSTUS N. HAND, Circuit Judge.

This is an appeal from an order granting a preliminary injunction, and the question is whether it was properly allowed on the record before the District Court.

The defendant was for a'time engaged on his own account in collecting grease and fat from restaurants for sale to soap makers. His business was conducted in the states of New York and New Jersey under the name of Jersey Fat Corporation.

The complainant was a corporation engaged in buying fats, grease, bones, and similar materials suitable for the manufacture of soap and certain other by-products which it sometimes rendered into soap and at times sold. It had been in business many years, and had built up a large trade and good will.

The story as told in complainant’s affidavits is that the defendant in August, 1926, sold his business good will and two trucks to one James Carty under a written agreement whereby defendant was to receive $10,000 therefor, and was not to engage in the same or a similar business within the states of New York or New Jersey, or to solicit customers in such a business on his own account, for a period of ten years, and was to work for Carty for that period at $50 per week. The written eontraet contained no promise by Carty to employ the defendant. It provided that the covenants should inure to the benefit of any assignee of Carty who transferred to the complainant all his rights under it.

The written agreement contained the following clause specially bearing upon the negative covenants on the part of the defendant not to engage in the business referred to:

“It is however understood and agreed that this agreement and the covenants herein contained shall in no wise be affected by reason of the fact that the undersigned shall be employed by the said James L. Carty, his legal representatives or assigns, it being intended that this agreement shall be in full force and effect in any event during the said period and time and within said territory at any time after the undersigned shall leave the employ of the said James L. Carty, his legal representatives or assigns.
“The undersigned has agreed to be employed by the said James L. Carty and said employment shall in no wise affect the operation of this agreement.”

The defendant was paid the $10,000 for his trucks and good will and worked for the complainant at wages of $50 per week until October 24, 1930, when the latter terminated the employment. The defendant then began to do business in New York and New Jersey on his own account and to solicit complainant’s customers. Thereupon complainant filed its bill to enjoin defendant from doing business contrary to the terms of the agreement and obtained a preliminary injunction. It is from the decree granting such injunction that this appeal has been taken.

The written contract is part of the moving papers, and the only issue of fact raised by the defendant is that it did not represent the real agreement between the parties.

The defendant filed an affidavit in opposition to the motion for an injunction in which he said that the contract which he signed was prepared by a lawyer at the instance of one Harry Daiber, who was the general manager of the collection and rendering department of the complainant; that the latter told him that he would be employed by the complainant for ten years at a salary of $50 a week and that he did not need any lawyer or anybody else to attend with him at the time the contract was to be signed. The affidavit also stated that the defendant did not read English very well and did not read the contract at all; that Daiber had the papers in front of him and professed to read parts of them, or rather to paraphrase parts of them to him; that Daiber repeatedly assured defendant that by the papers he was selling the trucks and business to a person named Carty for the sum of $10,000, and that by the contract he was to be employed by the complainant for a period of ten years at a salary of $50 a week, and that for the next ten years he “was all fixed and would have nothing to worry about.” The affidavit also said that upon the strength of this statement the defendant signed the papers presented to him by Daiber; that he asked the latter for a copy of the papers which he had signed, but was told that it was not the practice to allow copies of papers of that kind to leave the office, and that it was not necessary for Mm to have a copy of the papers because the arrangement was just as had been explained. The defendant swore that he never saw either the original papers which he had signed, or a copy, from the time of signing until November, 1930, when he was discharged, without any cause except that lower priced workmen could be obtained. No affidavit was filed by complainant denying the foregoing statements.

The affidavit of the defendant read upon the hearing for the preliminary injunction thus indicates (1) that he was an illiterate man who was misled ’by the complainant’s agent as to the contents of the writing; and (2) that there was an oral agreement to employ him for ten years.

It may well be that the facts stated in defendant’s affidavit will be disproved at the trial, but, inasmuch as they were not answered on the motion, tlie decree for the preliminary injunction should not have been granted.

If the uncontradieted story of the defendant was true, the negative covenants not to engage in business in competition with the complainant, or to solicit its customers, ought not to be enforced in equity where the complainant had broken its agreement to employ him for ten years. Whether or not defendant might still be bound at law to perform the negative covenants so that an action for a breach of his promise to observe them would lie, it would be unconscionable to grant a preliminary injunction restraining him from the breach, where such an important part of the consideration exchanged for his agreement to surrender his right to do business as the promise to employ him for ten years was not to be performed. Pope Mfg. Co. v. Gormully, 144 U. S. at page 237, 12 S. Ct. 632, 36 L. Ed. 414.

It may be argued that all oral agreements between the parties had become merged in the written instrument, so that proof of a promise to employ defendant for ten years could not be considered. But the defendant relied on fraud or mistake as a defense to what is in effect a suit by complainant to enforce specific performance of .the written agreement. A defense that a writing does not represent the real agreement of the parties and has been executed through fraud or mistake can always be interposed in a suit in equity to enforce performance of the signed instrument, and a cross-bill to reform it is no longer necessary. Bradford v. Union Bank, 13 How. 57, 14 L. Ed. 49; Cathcart v. Robinson, 5 Pet. at page 276, 8 L. Ed. 120;. Northern R. R. v. Ogdensburg, etc., R. Co. (C. C.) 18 F. 815; Lockwood v. Cleaveland (C. C.) 6 F. 721; Daniell’s Chancery (Sixth Ed.) 1531, 1532. On the face of the showing in defendant’s affidavit the record may therefore he treated as though the agreement contained a promise to employ the defendant for ten years. Viewed as such, and prior to development of the facts at final hearing, an injunction pendente lite ought not to be allowed. Carpenter v. Southern Properties (Tex. Civ. App.) 299 S. W. 440; Fries v. Parr (Sup.) 139 N. Y. S. 220; Telegraph Despatch, etc., Co. v. McLean, L. R. 8 Ch. App. 658.

Decisions of the New York Court of Appeals and the Appellate Division are relied upon as showing that a preliminary injunction to enforce such negative covenants as are embraced in the written contract here ought to be granted itrespeetive of the manner of the termination of defendant’s employment.

In McCall Co. v. Wright, 198 N. Y. 143, 91 N. E. 516, 519, 31 L. R. A. (N. S.) 249, the defendant voluntarily left the plaintiff’s employ-and surreptitiously engaged in a similar business with a rival concern in violation of the terms of his covenant. The only question discussed by the court was the lack of mutuality of obligation because of a provision in the contract giving the plaintiff a right to terminate the employment at any time on thirty days’ notice. The Court of Appeals held that an injunction should be granted and that it was no excuse for denying it that the plaintiff had an option to terminate the employment. Hiseoek, C. J., said: “One party has furnished a good consideration for which the other has agreed to refrain from doing certain things, and it is no excuse for a violation of the agreement while it lasts that the beneficiary may at some time terminate it.”

The foregoing case seems to rest upon the fact that the employee abandoned his work for the plaintiff and entered into a competitive business while the latter was willing to continue the employment.

In Eastern, etc., Co. v. Abrahams, 173 App. Div. 788, 160 N. Y. S. 69, an employee had agreed that, for a period of eighteen months after the termination of his employment, he would not engage in a competitive business. The opinion states that he remained in plaintiff’s employ about a year and a half, during which time he filled various positions. Thereupon his employment was terminated and shortly thereafter he entered upon a competitive business and solicited plaintiff’s customers for a rival concern. While the defendant contended that he was wrongfully discharged, the facts set up ‘in the moving and answering affidavits are not mentioned, and, so far as appears, there may have been adequate proof that the discharge was justifiable either in law or fact. The judge writing the opinion said that the question was one which must be determined at the trial, and the court doubtless allowed the injunction because it was satisfied that the plaintiff on its motion had sustained the necessary burden of proof.

In Amalgamated Industrial Corporation v. Teichholtz, 177 App. Div. 456, 164 N. Y. S. 289, a stockholder had sold all his stock in a corporation which amalgamated with others to form the plaintiff company in return for stock of the new corporation and for a contract of employment for ten years. The contract provided that he should not engage in a competitive business within a specified territory. His employment was terminated —whether by his act or that of his employer was a matter of dispute. The court held that under the terms of the agreement it was not material which was the ease, and that an injunction should issue to restrain the violation of the negative covenants. This is the only ease to which we are referred where any appellate court suggests that a negative covenant not to engage in a competitive business may be enforced by injunction irrespective of whether the plaintiff has broken its contract with the defendant or otherwise acted inequitably. It is not indicated in the.opinion whether the termination of the defendant’s employment was wrongful or not. If it was justifiable, there would, of course, he no defense to the enforcement of the negative covenants.

It seems clear from the above that in none of the three-New York decisions relied on was an injunction to enforce negative covenants granted where the defendant’s affidavits showed a wrongful discharge and his story was not disputed.

For the reason that the decision of the issues raised by the affidavits should await final hearing, the decree granting a preliminary injunction is reversed.


text:
    COMMISSIONER OF INTERNAL REVENUE v. CITY BUTTON WORKS.
    No. 308.
    Circuit Court of Appeals, Second Circuit.
    May 4, 1931.
    G. A. Youngquist, Atty. Gen., and Se-wall Key and John H. MeEvers, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Percy S. Crewe, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for petitioner.
    Donald Horne, of New York City, for respondent.
    Before L. HAND, SWAN, and CHASE, Circuit Judges.
   L. HAND, Circuit Judge.

The sole question at issue is whether the respondent, City Button Works, was affiliated with another corporation, Rothschild Brothers & Co. The Commissioner held that it was not and taxed it accordingly. The Board held otherwise and the Commissioner has appealed. The facts are as follows:

One, Ludwig Rothschild, organized and held substantially all the shares of stock in the City Button Works, a manufacturing company of New York. He also had a mercantile business, unincorporated, which he conducted under the name of Rothschild Bros. & Co., and which took most of the output of the City Button Works; though the corporation made some things he did not buy, and he bought some things it did not make. Upon his death his wife and children, who were his legatees, received all the shares of the City Button Works, and organized the mercantile business as a corporation under the old name.

On January 1,1921, the shares in the City Button Works were all still held by his wife and children, except a single share of one, Heiden, his brother-in-law. The shares of the Rothschild corporation were also held by the wife and children in the same proportion as those of the City Button Works, but Heiden had one hundred shares and employees two hundred and ten. The total shares of the City Button Works were one thousand and of the Rothschild corporation, twenty-five hundred and sixty, so that the shareholders of the first held eighty-eight per cent, of the shares of the second. Thereafter the family determined that the wife and daughters should surrender their common shares in the Rothschild Company and take preferred shares. These were to have the first five per cent, out of the income, as a preferred dividend, the common shares the next five per cent., then the common and preferred shares were to share equally up to ten per cent., and the common to receive any remainder. The preferred shares had no power to vote.

The change was completed by February twenty-first, at which time the wife and daughters had all the preferred shares, except fifty, held by Heiden, and one hundred and ninety-nine held by employees. The two sons and Heiden had all the common shares except one hundred and fifty-five held by employees. If thé common shares alone of the Rothschild Company are counted, the shareholders of the City Button Works holding shares in the Rothschild Company held eighty-six and a half per cent, of those shares, but less than twenty-eight per cent, of the City Button Works shares. If the preferred shares are counted, the shareholders of the City Button Works holding shares in the Rothschild Company held ninety-one per cent, of those shares, and while the percentages were different in the ease of Heiden, they were substantially the same in the ease of the wife and children. One of the sons, Leo, managed both companies and by oral agreement the wife and daughters had agreed that he should vote their shares in the City Button Works at his pleasure, an agreement invalid by the law of New York. In practice he exercised this right, treating the interests of each corporation as separate, and, at least in the year 1921, throwing no burdens on one to the profit of the other.

We have three times held that the possession of such power by acquiescence of the shareholders does not constitute “control” within the meaning of section 240 (e) of the Act of 1921, 42 Stat. 260. Ice Service Co. v. Com’r (C. C. A.) 30 F.(2d) 230; Commissioner of Internal Revenue v. Hirsch & Co. (C. C.. A.) 30 F.(2d) 645; Handy & Harman v. Com’r (C. C. A.) 47 F.(2d) 184. While the last case is now before the Supreme Court on certiorari, 51 S. Ct. 353, 75 L. Ed. -, we adhere to the doctrine until otherwise advised. Therefore, if the preferred shares of the Rothschild Company be ignored in the count there was no sufficient common control between the two companies and of course no common ownership. The decision must rest upon whether these shares shall be included.

The preferred shares being owned by the wife and daughters, who also owned their common shares in the City Button Works, the only question which can arise is whether they are not to be counted because they had no voting power. They would not be so counted under the Revenue Act of 1924, § 204 (e), 26 USCA § 993 note, which credits only “voting” shares in the reckoning; nor would they under the Revenue Act of 1926, § 204 (d), 26 USCA § 993 (d), which does not count non-voting shares, if the dividends are “limited and preferred.” The act of 1921 leaves the question open and without any cue, except such as may be found from its general purpose. So far as the decisions have gone they are apparently not in accord. It was held in Schlafly v. U. S., 4 F.(2d) 195 (C. C. A. 6), that companies could be affiliated in spite of outstanding non-voting shares, and the same was said obiter in Commissioner v. Shillito Realty Co., 39 F. (2d) 830, 69 A. L. R. 1266 (C. C. A. 6). On the other hand, Lavenstein Corporation v. Com’r, 25 F.(2d) 375 (C. C. A. 4), held two companies affiliated though the shares of one were held in pledge by an outsider. It is hard to believe that the same court would have held that there was affiliation in Schlafly v. U. S., though the apparent conflict may perhaps be ■ theoretically reconciled.

In any event we need not in this case hold that under no circumstances can common ownership without common voting power residí' in affiliation. For example, one might suppose two companies whose shareholders held all the common shares of each in equal proportions, but part of the issue of one had no voting power. Perhaps that circumstance ■would not alone be enough to keep the companies separate, in view of the fact that the income must surely be distributed in equal proportions among all the shares of both companies. However that may be, when an here the distribution is unequal, it appears to us that the section does not apply, for it is not enough that the gross income of each company goes tó' the same persons. That condition would be fulfilled in a ease where - half the shareholders held ninety per cent, of the shares in one company and ten per cent, in the other, and the other half, vice versa. It would be a forced construction which should, regard such a pair as a single “business unit”; the phrase used in the Senate Committee report upon the section. Not only would the management of each company be in a different group, but the interest of each majority in the respective incomes would be different. On neither score would it accord with general notions to think of the two companies as one.

For this reason the regulations under the Act of 1918 (article 633, Regulations 45) provided that the holdings must be substantially in the same proportions in each company, and the same was repeated under the act of 1921 (article 633, Regulations 62). The enactment of the second statute was a legislative recognition of this regulation. National Lead Co. v. U. S., 252 U. S. 140, 146, 40 S. Ct. 237, 64 L. Ed. 496; Brewster v. Gage, 280 U. S. 327, 337, 50 S. Ct. 115, 74 L. Ed. 457. Non-voting preferred shares also result in a similar divorce between the two companies and probably this was the ground for the amendment of 1926. Having no voting power, they cannot be a means of controlling the two companies, though the shares be held in the same proportions. Perhaps this alone would not be enough, were it not for their divergent interest in the income; as before, we may assume as much arguendo. But, being entitled to a preferred share in the income, they stand on the same footing as though the shares were themselves held disproportionately. . The relative interests in the income do not correspond with the share distribution. Thus, neither of the possible conditions determining affiliation are realized in the ease of non-voting preferred shares.

Decision reversed.


author: MANTON, Circuit Judge.

text:
    COMMISSIONER OF INTERNAL REVENUE v. JAMES.
    No. 161.
    Circuit Court of Appeals, Second Circuit.
    May 4, 1931.
    G. A. Youngquist, Asst. Atty. Gen., and Sewall Key, Andrew D. Sharpe, and S. Dee Hanson, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, of Washington, D. C., and R. N. Shaw, Sp. Atty., Bureau of Internal Revenue, of Washington, D. C., of counsel), for petitioner.
    Robert E. Coulson, of New York City (Oscar W. Underwood, Jr., of Washington, D. C., and Henry Jaffe, of New York City, of counsel), for respondent.
    Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges.
   MANTON, Circuit Judge.

Respondent during 1918 owned a large block of stock in the Phelps Dodge Corporation. He received a large sum through a distribution made by that corporation to its stockholders in 1918, and in his report for income tax he' claimed the right to deduct from the earnings and profits available for distribution to stockholders, the federal income tax of the corporation. The petitioner claims the tax of the corporation ought not to be taken out as an expense until the end of 1918.

Section 201 of the Revenue Act of 1918 (40 Stat. 1059) expressly provides that distributions made to a stockholder by a corporation are taxable as dividend income to the stockholder only to the extent that they are paid from earnings and profits of the corporation accrued subsequent to February .28, 1913. Section 201 provides:

“(a) That the term 'dividend’ when used in this title (except in paragraph (10) of subdivision (a) of section 234) means (1) any distribution made by a eorporhtion, other than a personal service corporation, to its shareholders or members, whether in cash or in other property or in stock of the corporation, out of its earnings or profits accumulated since February 28, 1913, or (2) any such distribution made by a personal service corporation out of its earnings or profits accumulated since February 28, 1913, and pri- or to January 1, 1918.
“(b) Any distribution shall be deemed to have been made from earnings or profits unless all earnings and profits have first been distributed. Any distribution made in the year 1918 or any year thereafter shall be deemed to have been made from earnings or profits accumulated since February 28, 1913, or, in the ease of a personal service corporation, from the most recently accumulated earnings or profits; but any earnings or profits accumulated prior to March 1, 1913, may be distributed in stock dividends or otherwise, exempt from the tax, after the earnings and profits accumulated since February 28, 1913, have been distributed. * * *
“(e) Any distribution made during the first sixty days of any taxable year shall be deemed to have been made from earnings or profits accumulated during the preceding taxable years; but any distribution made during the remainder of the taxable year shall be deemed to have been made from earnings or profits accumulated between the close of the preceding taxable year and the date of distribution, to the extent of such earnings or profits, and if the books of the corporation do not show the amount of such earnings or profits, the earnings or profits for the accounting period within which the distribution was made shall be deemed to have been accumulated ratably during such period.”

The Board found that the earnings and profits of the taxable year, after the deduction of federal taxes for the taxable year, should be prorated to each distribution date to . determine the amount of actual earnings and profits available for distribution to stockholders on sueh day, and the contention of the Commissioner, presented on this appeal, is not that the earnings or profits available for distribution to stockholders are to be determined without deducting federal income tax of the corporation, but only that the federal taxes of the corporation ought not to be taken out as an expense until the end of 1918. In employing the phrase “earnings and profits” in section 201, we think Congress intended the use of the term in the ordinary accounting understanding, and, by that practice, a corporation cannot be expected to have calculated any net income in any year until provision is made for taxes accrued and payable to the United States based on net income for the same year. Montgomery & Stout Accounting Principles 1923, p. 308. The Phelps Dodge Corporation and its subsidiary at all times and including the year 1918 kept their books of accounts and rendered their tax' returns upon the accrual basis of accounting, and consistently at all times accrued upon sueh books of account for each calendar year, including 1918, all taxes for the year, which included the federal income and excess profits taxes imposed on the basis of the earnings of sueh calendar year, although sueh taxes were not payable until the succeeding calendar year; and, in determining their earnings and profits available for distribution to stockholders for each calendar year, they deducted, as an expense of operation, the federal income and excess profits taxes accruing on account of such operation for sueh calendar year, even though not paid until the succeeding calendar year. The Board of Tax Appeals, in interpreting section 201, recognized this principle of accounting, and it is admitted to have been the consistent practice of the Commissioner. Regulation 45, art. 1542. Sueh statutory construction by the Commissioner, an administrative authority charged with the enforcement of the statute, has given it a practical interpretation and therefore created weighty reasons for following sueh long-continued administrative construction. Brewster v. Gage, 280 U. S. 327, 50 S. Ct. 115, 74 L. Ed. 457; Edwards v. Wabash R. Co., 264 F. 610 (C. C. A. 2). Moreover, the Board has thus adopted the principles of accrual accounting approved in United States v. Anderson, 269 U. S. 422, 46 S. Ct. 131, 70 L. Ed. 347. See Bowers v. Max Kaufmann & Co., 18 F.(2d) 69 (C. C. A. 2). As the Anderson Case would indicate, the true income for the year 1918 could not have been determined without deducting from the corporation’s gross income for the year the total costs and expenses attributable to the production of that income during that year, and a reserve for income taxes set up in the books for the year must be deducted from the gross profits for the year before the net results of operation can be ascertained. The tax does not stand on any different footing from other accrued expenses appearing on the taxpayer’s books.

What the Commissioner was concerned with was the ascertainment of the real earnings and profits of the Phelps Dodge Corporation, which were available for distribution to stockholders on the date of each distribution. Since the earnings and profits to each of the dates of distribution were unknown, the Commissioner was compelled to ascertain the available earnings and profits for the entire year and prorate them. Fawcus Machine Co. v. United States, 282 U. S. 375, 51 S. Ct. 144, 75 L. Ed.-, involved a determination of invested capital in connection with the excess profits taxes, and in that determination the Supreme Court gave support to the principles of accrual accounting in so far as they apply to the income and excess profits taxes for the year 1918.

But the petitioner argues that, while it is true that a corporation keeping its books on an accrual basis cannot be said to have accumulated true income until taxes for the period are deducted, the taxable income of the Phelps Dodge Corporation could not be determined until the end of 1918, and its taxes would not be known until then. The petitioner then says that the income before the deduction of taxes should be prorated to the distribution dates, but that earnings and profits, after deducting taxes, should not be prorated, although in each ease the amounts can only be determined at the end of the year. Income taxes, when determined at the end of the taxable period, can and should be prorated to a date within the taxable year. Rouss v. Bowers, 30 F.(2d) 628 (C. C. A. 2); Edwards v. Douglas, 269 U. S. 204, 46 S. Ct. 85, 70 L. Ed. 235; Mason v. Routzahn, 275 U. S. 175, 48 S. Ct. 50, 72 L. Ed. 223. These cases recognized that undivided surplus and profits can only he determined after federal income tax for the period had been deducted.

Nor do we think the invested capital cases [Commissioner of Internal Revenue v. Pittsburgh Knife & Forge Co., 30 F.(2d) 522 (C. C. A. 3), and Blair v. W. Gr. Ragley Lumber Co., 30 F.(2d) 683 (C. C. A. 5)] require a different rule from that adopted by the Board in construing section 201 of the 1918 act (40 Stat. 1059). For in such construction, the question is presented of how much the corporation has available, at the time of its various distributions to stockholders, representing earnings and profits accumulated since February 28, 1913. In that determination it is necessary to deduct the expense of taxes. The amount available for distribution periods throughout the year then becomes known. At bar the taxable income before distribution of taxes and the earnings and profits after distribution of taxes were fixed definite amounts, and the prorating consisted merely of dividing the available income and profits for the year by 365 and treating as available on.the date of each dividend distribution an amount arrived' at by multiplying 1/365 of the total by the number of days between January 1, 1918, and the date of such dividend distribution. Having regard for the method of bookkeeping and pursuing this principle, the Commissioner in no sense would be dealing with a tentative tax, but rather with the actual tax. On the other hand, the invested capital computations used in the excess profits tax cases estimated a tentative tax and prorated. This was made the basis of reduction in those cases, and the reduction in invested capital necessarily resulted in a change of tentative or estimated taxes.

The tax was properly deducted by the Board.

A question is submitted by the petitioner, but not argued, as to the treatment of sums paid by Moctezuma Copper Company to the Phelps Dodge Corporation during 1918. The 1918 earnings of the Phelps Dodge Corporation included dividends received from this corporation, and the Board included as profits from this item the amount of $2,688,-370.71. This was part of the total distribution by that subsidiary to the Phelps Dodge Corporation which was paid from earnings and profits during the year 1918 and earnings and profits accumulated sinee February 28,1913. It excluded the sum of $431,629.29 paid from sources other than earnings and profits accumulated sinee February 28, 1913. The Board affirmed the exclusion of this item of $431,629.29 in computing the 1918 earnings and profits of the Phelps Dodge Corporation. This was in conformity with the provisions of article 1543, Regulation 65, promulgated by the Commissioner. It provides that, where one corporation receives from another distributions out of earnings or profits accumulated by such other corporation prior to March 1, 1913, or out of an increase in capital, of its property accrued prior to March 1, 1913, and the receiving corporation, after having first distributed all the earnings accumulated since February 1, 1913, distributes to its shareholders the amounts so received by it from such other corporation, the distribution by the receiving corporation to its shareholders is not a dividend within, the meaning of title II, and is exempt from tax.

We need not decide the question of the legality of this ruling. The Commissioner does not wish to argue it, and the taxpayer is content with the result.

Order affirmed.


text:
    HADDEN v. COMMISSIONER OF INTERNAL REVENUE.
    No. 236.
    Circuit Court of Appeals, Second Circuit.
    May 11, 1931.

      Lyle T. Alverson, of New York City (Wayne Johnson, of New York City, of counsel), for petitioner.
    G-. A. Youngquist, Asst. Atty. Gen., and Sewall Key and Andrew D. Sharpe, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and William E. Davis, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for respondent.
    Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges,
   MANTON, Circuit Judge.

The United Thacker Coal Company began business in January, 1994. From that time until April 39, 1917, its expenses exceeded its income by $833,862.92, and from March 1, 1913, to April 39, 1917, the excess was $329,549.22. It had no profits from its organization until March 1, 1913. The net earnings or profits from April 39, 1917, to December 29, 1917, were $495,949.97, which resulted from the sale of capital assets. The amount of the gain, basing it upon the value of March 1, 1913, from the sale of its capital assets in September, 1917, stated separately from their income and disbursements of the period, was $735,399.

Petitioner’s testator, Luther Kountze, on December 22, 1917, owned 11,145.155 shares of the capital stock of the United Thacker Coal Company, and at the time there was outstanding 49,998 shares. Thus he had 27.857 per cent, of the stock. On December 22, 1917, the United Thacker Coal Company made a distribution of $75 per share, resulting in Kountze’s receiving $835,886.63. In fixing the taxable income for 1917, the Commissioner determined that Kountze’s taxable income out of this distribution was $295,145.-99, this representing a distribution of profits accrued and accumulated since March 1,1913. Petitioner’s contention is that there were no earnings or profits accumulated on March 1, 1913; that there was a loss from March 1, 1913, to April 39, 1917, amounting to $329,-549.22, which represented carrying charges. But from April 39, 1917, to December 29, 1917, as a result of the sale of the real estate, there was a profit of $735,399, from which should be deducted a loss of $329,350.91, leaving a net profit before taxes of $405,-949.09. From this petitioner contends there should be deducted the federal taxes thereon calculated to he $54,550.28, leaving a balance of $351,398.81. From this should be subtracted the losses sustained, petitioner says, prior to April 30, 1917, of $329,549.22 leaving an amount available, on December 22, 1917, for distribution as profits accrued and accumulated since March 1, 1913, of $21,-849.59. Kountze’s share of this as profit would be $6,086.64. The Commissioner having fixed the profit at $295,145.99, the petitioner contends the income has been overstated by $289,059.35.

The first question presented is whether profits which accrued since March 1, 1913, shall be determined by measuring the difference between the value, at that date, of the property sold and the amount received therefor. The Board based its decision upon the failure to show by the record the number of shares outstanding at distribution. But this is now conceded by the Commissioner to have been established at 40,008 shares outstanding.

Section 31 (a) of the Revenue Act of 1916, as added by Revenue Act of 1917, § 1211 (40 Stat. 337), provides that distributions received by corporate stockholders in 1917 out of “earnings or profits accrued since March first, nineteen hundred and thirteen” shall be considered income to the amount of the earnings or profits so distributed. The profit on 40,000 acres of land, which were sold in September, 1917, but purchased pri- or to March 1, 1913, should be determined by ascertaining its value on March 1, 1913, and deducting that from the net sales price received. This is in conformity with the Commissioner’s regulation (article 1543, Regulation 65), and is in conformity with section 31 of the Revenue Act of 1916 (as added by Revenue Act 1917, § 1211). It must be given effective consideration. Maryland Casualty Co. v. United States, 251 U. S. 342, 40 S. Ct. 155, 64 L. Ed. 297. In Southern Pacific Co. v. Lowe, 247 U. S. 330, at page 335, 38 S. Ct. 540, 542, 62 L. Ed. 1142, the court said: “We are bound to consider accumulations that accrued to a corporation prior to January 1, 1913, as being capital, not income, for the purposes of the act. And we perceive no adequate ground for a distinction, in this regard, between an accumulation of surplus earnings, and the increment due to an appreciation in value of the assets of the taxpayer.”

The profit of the sale of the lands in September based on the value of March 1, 1913, was $735,300. There were other expenses in the 1917 period amounting to $329,350.91,. so that the net for the period was $405,949.-09. The principal outlay of the coal company which held the real estate was for interest and taxes or carrying charges. The excess of all expenses over their income during this taxable period was the sum of $329,-350.91. When it sold two-thirds of its land in 1917 at a profit, in order to ascertain its profit, it was proper to deduct these expenses. Willcuts v. Milton Dairy Co., 275 U. S. 215, 48 S. Ct. 71, 72, 72 L. Ed. 247.

The taxable year may not be divided between periods so as to state separately and segregate the profitable times from the unprofitable times. Sweets Co. of America v. Commissioner, 40 F.(2d) 436 (C. C. A. 2). The coal company had no profits before April 30, 1917, and the profits accumulated in December, 1917, were no more than the net income of the period between April 30, 1917, and December 20, 1917, $405,949.09. The operating loss sustained by the company between March 1, 1913, and April 30, 1917, amounting to $329,549.22, should be subtracted from the earnings or profits for the period when profits were received in order to determine the profits which accrued and accumulated since March 1, 1913. In Willcuts v. Milton Dairy Co., supra, the court said: “We do not think Congress intended that a corporation whose capital was impaired should be entitled to treat profits that, though earned, were insufficient to make good the impairment and create a surplus, as 'undivided profits.’ ”

Congress did not intend that a corporation should be held to accumulate profits for one tax purpose only and not for another. No earned surplus can be accumulated until the deficit or impairment of paid-in capital has been made good. Dividends paid while there is an operating deficit should be deemed to be from capital or paid-in surplus even though there are earnings of the taxable year sufficient to pay the dividend in whole or in part. Operating losses sustained after March 1, 1913, must be deducted from, profits realized after that date before they can be a taxable profit on the sale of the land, and the accumulated profits since March 1, 1913, must necessarily mean the net excess of all profits between March 1, 1913, and the date of distribution, less all losses sustained: between the same dates, and, in fixing the-profit, the valuation of March 1, 1913, is tc be deducted from the net sales price.

The appellant contends that it may deduct the income or profits taxes of the United 'Thacker Coal Company for the period from April 30, 1917, to December 20, 1917, amounting to $54,550.28, when determining the amount of the accrued and accumulated profits of that period available for distribution. The coal company maintained its books and accounts and made its tax returns on the basis of cash receipts and disbursements. The question presented is as to what was the amount of earnings or profits accrued and accumulated since March 1, 1913. The argument is that the statutory words “accrued profits” necessarily require the deduction of all accrued charges, particularly including the taxes on the profits in question, and it is argued that so much of the earnings or profits as were necessary to satisfy the federal tax accrued not to the corporation, but to the United States, and such amount therefore was not part of the net earnings or profits available for distribution to stockholders as dividends.

Section 31 of the Revenue Act of 1916 (as added by Revenue Act 1917, § 1211) defines, in subdivision .(a), a taxable dividend as a distribution made by a corporation out of earnings and profits accrued since March 1, 1913; subdivision (b) sets up a presumption that distributions are made out of earnings or profits accumulated since March 1, 1913, but expressly provides that any earnings or profits accumulated prior to March 1, 1913, may be distributed to stockholders exempt from tax, after earnings and profits accumulated 'since that date have been distributed.

The Commissioner’s position is that earnings or profits available for distribution to stockholders are to be determined without deducting federal income taxes of the corporation, and that such taxes are not to be taken out as an expense -for the- taxing year. Regulation 45 provides in article 1542 that “in ascertaining whether or not a distribution was made out of earnings or profits of the taxable year there should first be set aside a proper reserve for the payment of accrued income and war profits and excess profits taxes.” The Board of Tax Appeals In Appeal of L. S. Ayers & Co., 1 B. T. A. 1135, pointed out the distinction between the right of deduction of income tax and the deduction in ascertaining invested capital as referred to in the cases. See Commissioner v. Pittsburgh Knife & Forge Co., 30 F.(2d) 522 (C. C. A. 3), and Blair v. Ragley Lumber Co., 30 F.(2d) 683 (C. C. A. 5). It treated invested capital of corporations as a statutory concept, and, in construing the statutory definition, held that earnings of the current year available for dividends should not be decreased on account of an estimated tax later to accrue, on the ground that to do so would be to take into account in the computation of invested capital an element of expense or outgo of that current year while forbidden by the statute to offset that element by the income of the year. But in a proceeding such as this, there is no concern with the statutory concept of invested capital. What must be determined is the amount of earnings and profits of the coal company which was available for distribution to stockholders on the date of distribution. Since the earnings to each of these dates is unknown, the Commissioner is compelled to ascertain the earnings for the entire year and prorate them. This would logically follow from the reasoning of United States v. Anderson, 269 U. S. 422, 46 S. Ct. 131, 70 L. Ed. 347. In applying section 31 of the Revenue Act of 1916 (as added by Revenue Act 1917, § 1211), the court is concerned with ascertaining the amount of real earnings and , profits which are available for distribution to stockholders on the date of each distribution.

There appears to be no sound reason why the current earnings or profits should not first be reduced by the amount of the tentative tax in determining the amount of the current or post March 1, 1913, earnings available for distribution of dividend. Commissioner of Int. Rev. v. James (C. C. A. 2) 49 F.(2d) 707, decided May 4, 1931.

The taxpayer was executor of his brother’s estate, and on June 20, 1907, was made an allowance as executor’s commissions. He did- not collect all of this at the time, but in 1917 received $12,500 on account of the commission awarded him in 1907. The Board held that this sum was subject to an income tax in 1917. The fact that the taxpayer withheld sufficient sums to assure payment of his commission does not change the character of the sum due to him. The estate might have acquired additional assets, but it appears that there was sufficient in the estate to have paid the commission prior to 1917. There was in the estate on March 1, 1913, an undistributed estate of $61,503.52 including assets of respective values of $23,-691.80 and $24,200, which were subject to the widow’s life estate. The value of the estate not so subject was $13,611.72. In addition, the executor held subject to the same life estate 1,000 shares of the Colorado National Bank of Denver, and 1,000 shares of stock of the First National Bank of Omaha. It is not shown how old the widow was, and therefore a computation may not he made of this reversionary interest. The estate left hy the taxpayer’s brother amounted to $2,963,920.-07. We axe not in accord with the Board in saying that at any time there was an insufficient sum in the estate to pay this commission. The failure to collect prior to March 1, 1913, did not convert it into income so that, when it was received in 1917, the tax was improperly imposed on this item.

Rule 50 of the Board of Tax Appeals sets forth the procedure when the Board determines the issues in any proceeding and withholds final decision of the deficiency or over payment for later computation. It provides: “Any hearing under this rule will be confined strictly to the consideration of the correct computation of the deficiency or overpayment resulting from the report already made, and no argument will be heard upon or consideration given to the issues or matters already disposed of by such report or of any new issues. This rule is not to be regarded as affording an opportunity for rehearing or reconsideration.”

The Board’s amended opinion was rendered November 6, 1929, and, on December 19, 1929, respondent filed a recomputation of liability. It showed a combined deficiency in income and excess profits taxes of $71,-890.77, all uneolleetable because of the bar of the statute of limitations. The recomputation which the taxpayer filed January 17, 1930, shows an uneolleetable deficiency in income tax of $107,475.01 and an overpayment of excess profits taxes of $31,816.18. A second computation was filed by the Commissioner January 22, 1930, and shows a combined deficiency in income and excess profits taxes of $75,658.69, all uneolleetable because of the bar of the statute of limitations. The Board entered its final order January 31, 1930, holding “that for the year 1917 there is no deficiency and there is no overpayment of tax.” The difference between these opposed computations is that the Commissioner calculated total income taxes and excess profits tax according to the Board’s findings and credited them against the total amount of both taxes paid by the taxpayer, leaving an uncollected deficiency of one sum. The petitioner recomputed the income tax and excess profits tax separately and credited against them the respective amounts paid on each account. The result of sueh computation is the overpayment in excess profits taxes which respondent in effect credited against uneolleetable income tax. The1 petitioner claims that the overpayment of excess profits tax should be refunded. It seems to be agreed by both petitioner and respondent that no excess profits taxes were due and none were shown in either computation of the tax. But, since there must be a recalculation as to the taxes in heeordanee with this decision, the ease will be remitted to the Board, where a calculation of the normal tax due will be considered, and at that time due allowance can be made for the excess profits tax admittedly erroneously paid. Sections 607, 609 of the Revenue Act of 1928 (45 Stat. 791, 26 USCA §§ 2607, 2609); section 284 (a), Revenue Act of 1926 (44 Stat. 9, 26 USCA § 1065 (a).

Order reversed.