author: GIBSON, Circuit Judge. BRIGHT, Circuit Judge

text:
    William F. and Gwendolyn WRIGHT, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.
    No. 72-1562.
    United States Court of Appeals, Eighth Circuit.
    Submitted April 10, 1973.
    Decided July 26, 1973.

      Ernest J. Brown, Atty., Tax Div., Dept, of Justice, Washington, D.C., for appellant.
    Raymond R. Morris, Little Rock, Ark., for appellee.
    Before GIBSON, BRIGHT and ROSS, Circuit Judges.
   GIBSON, Circuit Judge.

The question presented on this appeal is whether or not “boot”, in the form of a promissory note, received in connection with a corporate consolidation and reorganization is taxable as an ordinary dividend under 26 U.S.C. § 356(a)(2) or as a distribution entitled to capital gain treatment under 26 U.S.C. § 356(a)(1). The District Court decided that the distribution was entitled to capital gain treatment. We affirm.

Initially, the plaintiffs contended that the consolidation and reorganization of the involved corporations resulted in an exchange of stock for stock and securities that qualified under the nonrecognition of gain provisions of § 351 of the Code. The taxpayer does not appeal the ruling of the District Court that the promissory note involved constituted “boot” and was taxable as a gain and in his brief now concedes the note to be a distribution pursuant to a corporate reorganization under § 368(a)(1) (A) of the Code.

The “boot” consisted of a promissory note in the amount of $102,002 received by taxpayer as a result of the reorganization of two closely held corporations in 1963 into a single new corporation. Prior to the reorganization in 1963, the taxpayer and Leonard Dunn, a field superintendent employed by the taxpayer, controlled and operated Danco Construction Company (Danco), an Arkansas corporation in the business of laying waterlines, sewers, and utility cables. From 1959 until 1963, Danco’s 151 shares of stock were owned by the taxpayer (108 shares or 71.5 per cent), Dunn (42 shares or 27.9 per cent), and John Thurman, Sr., one of the taxpayer’s attorneys (one share or .6 per cent).

The taxpayer also had controlling inr terest in F & G Construction Company (F & G), also an Arkansas corporation engaged in construction. From 1957 until 1963, F & G’s 240 shares were owned by the taxpayer (238 shares or 99.2 per cent), the taxpayer’s wife (one share or .4 per cent), and John Thurman, Sr. (one share or .4 per cent).

In addition to Danco and F & G, the taxpayer controlled a third corporation, World Wide, Inc. (World Wide), originally organized to engage in the automobile business but by 1963 limited to leasing equipment to Danco. In 1963, World Wide’s 1,077 shares were owned by the taxpayer (603 shares or 56 per cent), Dunn (323 shares or 30 per cent), Mrs. W. F. Wright, Sr., the taxpayer’s mother (150 shares or 13.9 per cent), and John Thurman, Jr., also an attorney for the taxpayer (one share or about .0009 per cent).

In late 1962 and early 1963, the taxpayer was considering a consolidation of F & G and World Wide in order to diversify and expand the business of the two corporations. The taxpayer and Dunn wanted the new corporation, eventually named Omni Corporation (Omni), to be owned in approximately the same proportionate basis as Danco, which was owned 71.5 per cent by the taxpayer and 27.9 per cent by Dunn. By simply consolidating F & G and World Wide with the shareholders of both corporations exchanging their shares solely for Omni shares, the taxpayer would have owned approximately 85 per cent of Omni and Dunn would have owned .approximately 10 per cent. Such a reorganization would have been tax-free, however it would not have accomplished the desired percentage ownership in the new corporation contemplated by the taxpayer and Dunn. On April 1, 1963, F & G’s capital stock was worth $24,000 and its earned surplus was $101,802. At the same time World Wide’s capital stock was worth $21,540 and its earned surplus was $38,365. The taxpayer and Dunn did not want a consolidation that would simply exchange shares of the two previous corporations solely for shares of Omni, for that would not result in the percentage ownership desired by the taxpayer and Dunn.

In order to effectuate the announced purposes of ownership of Omni on the similar proportionate basis of Danco and of allocation of the equities of F & G and World Wide as previously held, a Plan of Consolidation (Plan) was adopted by the shareholders of F & G and World Wide on March 1, 1963. According to the Plan, F & G and World Wide were dissolved and their assets and liabilities transferred to Omni. In addition Dunn was required to pay $7,005.-57 to Omni, and Omni issued on March 15, 1963, a promissory note for $102,002 payable to the taxpayer on or before March 15, 1973, and bearing five per cent interest. Omni issued the following shares:

Class Class Total ‘B’ Shares Par Value
W. F. Wright, Jr. (taxpayer) 223 1,999 2,222 $55,500
Leonard Dunn 100 900 1,000 25,000
Mrs. W. F. Wright, Sr. 33 301 334 8,350
Mrs. W. F. Wright, Jr. 2 19 21 525
John Thurman, Sr. 2 21 23 575
360 3,240 3,600 $90,000

This Plan left the taxpayer with a 61.7 per cent ownership in Omni and Dunn with a 27.8 per cent interest.

The disputed issue is whether the taxpayer’s receipt of the $102,002 note from Omni constituted “boot” to the taxpayer that should be treated as an ordinary dividend under 26 U.S.C. § 356(a)(2) (thus taxable at ordinary income tax rates) or as a gain under § 356(a)(1) (taxable as a capital gain).

The Commissioner determined that the note should be considered a dividend under 26 U.S.C. § 356(a)(2) and assessed the taxpayer an additional income tax of $69,683.55 plus interest for the taxable year 1963. On June 16, 1967, the taxpayer paid the deficiency assessment and interest and on July 7, 1967, filed a claim for refund which was disallowed by the Commissioner on September 14, 1967. The plaintiffs commenced this action in the District Court on December 28, 1967, under 26 U.S.C. § 1346(a)(1) to recover income taxes erroneously assessed and collected by the Commissioner.

The District Court concluded that the note was “ ‘boot’ under § 356, with its fair market value to be recognized as gain to the taxpayer.” However, the District Court in interpreting § 356(a)(2) held that the distribution of the note to the taxpayer did not have the effect of a dividend, because “Wright’s interest in the corporation emerging from the consolidation was substantially reduced, from about 85 per cent in the combining corporations to about 62 per cent of Omni.” Since the note was held not to have the effect of a dividend, the gain was viewed as realized from the exchange of property and taxed as long term capital gain. Judgment was rendered for the plaintiff for an overpayment of federal income tax for 1963 in the amount of $43,748.13 plus interest. The District Court did not mention 26 U.S.C. § 302, concerning redemptions, in relation to § 356(a)(2).

The history of taxation of “boot” distributions in relation to what has become known as the “automatic dividend” rule has been mixed with confusion, shifting positions by the Commissioner, and much unfavorable commentary. The discontentment is traceable to Commissioner of Internal Revenue v. Bedford, 325 U.S. 283, 65 S.Ct. 1157, 89 L.Ed. 1611 (1945), which commentators generally agree was assumed to say that “§ 356(a)(2) automatically converted any recognized gain into dividend income, to the extent of the distributing corporation’s earnings and profits, where the taxpayer continued as a shareholder after the exchange.” B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders § 14.34 (1971) (footnote omitted) (hereinafter Bittker & Eustice). The Bedford rule is generally known as the “automatic dividend” rule.

The Commissioner has vacillated in arguing for the adoption of the “automatic dividend” rule in different cases. Commentators have strongly criticized the “automatic dividend” rule supposedly announced by Bedford, In the District Court, the Commissioner argued that the “automatic dividend” rule should be applied, but on appeal agrees that the “District Court in this case was correct in rejecting the ‘automatic dividend’ reading of the Bedford opinion.” The crucial issue then becomes whether this “boot” distribution has “the effect of a distribution of a dividend” under § 356(a)(2). The answer is not without difficulty since the distribution has some but not all the characteristics of either a sale or a dividend. The Commissioner admits this, but contends that the dividend characteristics predominate in this factual situation. We do not agree.

A dividend is generally defined as a “distribution of earnings and profits which effects no change in basic relationships between the shareholder and either the corporation or the other shareholders.” Himmel v. C. I. R., 338 F.2d 815, 817 (2d Cir. 1964). Basically, a dividend is a “pro rata distribution out of corporate earnings and profits.” Hawkinson v. Commissioner of Internal Revenue, 235 F.2d at 751. A redemption of corporate shares ordinarily would result in a sale, i.e. a retiring stockholder, but a pro rata redemption of corporate shares is viewed as a dividend. United States v. Davis, 397 U.S. 301, 90 S.Ct. 1041, 25 L.Ed.2d 323 (1970). Such redemptions need not be totally pro rata to be considered as essentially equivalent to a dividend. Sachs v. Commissioner of Internal Revenue, 277 F.2d 879, 882-883 (8th Cir.), cert. denied, 364 U.S. 833, 81 S.Ct. 63, 5 L.Ed.2d 59 (1960). The total factual situation determines whether a redemption of corporate shares, in whatever form taken, is essentially equivalent to a dividend. Thus an ultimate factual question is presented. Treas.Reg. § 1.302-2(b).

The Commissioner argues that in defining the “effect of the distribution of a dividend” under § 356(a)(2), the redemption provisions of § 302 should be applied. In making this contention, the Commissioner inferentially concludes that the definition of a dividend under § 316 does not in itself provide a complete description of a dividend for the purpose of § 356(a)(2). This position is consistent with contending that an “automatic dividend” rule does not apply to all “boot” distributions, for the definition in § 316(a), if applied by itself, has the same result as the Bedford “automatic dividend” rule. Although the Code does not expressly so provide, we agree with the Commissioner that § 356(a)(2) should be read in pari materia with § 302 for the purpose of determining whether a distribution had the effect of a dividend.

Further the Commissioner contends that the “effect of the exchange was the same as though F & G issued its note for $102,002 to the taxpayer prior to the reorganization in redemption of a portion of his F & G stock.” This redemption would reduce the taxpayer’s percentage ownership in F & G from 99.16 per cent to 95.43 per cent, and the redemption would not fall within the so-called “safe harbors” of § 302(b)(2), supra, since, inter alia, the taxpayer-shareholder owned more than 50 per cent of the total combined voting power of F & G stock after the redemption. If this analysis of what stock was redeemed is accepted, the Commissioner correctly argues that the note should be taxed as a dividend under § 302 because the taxpayer owned almost 100 per cent of F & G stock. United States v. Davis, 397 U.S. at 313, 90 S.Ct. 1041.

In order to evaluate the Commissioner’s casting of the consolidation of the corporations and distribution of the note as a redemption of F & G stock, it is necessary to examine § 302. Redemptions of stock are treated as distributions in part or full payment for exchange for stock under § 302(a), if the exchange meets the requirements of § 302(b). Section 302(b)(2) obviously does not apply here as the taxpayer would have greater than 50 per cent of the voting power of all classes of stock after redemption. However, § 302(b)(1) provides that “Subsection (a) shall apply if the redemption is not essentially equivalent to a dividend.” Therefore, even if an exchange does not qualify as a “safe harbor” under § 302(b)(2), it is still possible for the exchange to be a redemption or sale for tax purposes if it is “not essentially equivalent to a dividend” under § 302(b)(1).

In testing dividend equivalence under § 302(b)(1), Treas.Reg. § 1.302-2(b) (1955) states that “[t]he question whether a distribution in redemption of stock of a shareholder is not essentially equivalent to a dividend under section 302(b)(1) depends upon the facts and circumstances of each ease.” Courts agree that the determination is ultimately factual. United States v. Carey, 289 F.2d 531, 537 (8th Cir. 1961) (and therein cited cases); United States v. Fewell, 255 F.2d 496, 499 (5th Cir. 1958).

In deciding whether the exchange under the facts of this case was a redemption qualifying as an exchange under § 302, it is necessary to determine what stock was redeemed for the note and what factors are relevant to defining “essentially equivalent to a dividend” under § 302.

First, a threshold question is what stock did the taxpayer exchange for the $102,002 note. As indicated previously, the Commissioner argues in his brief on appeal that the taxpayer exchanged a portion of his F & G stock for the note prior to the consolidation of the corporation. During the oral argument, counsel for the Commissioner suggested as an alternative that a portion of the value of the note was exchanged for a portion of F & G stock and a portion of the value of the note was in exchange for a portion of World Wide stock. Therefore, the portion of the value of the note in exchange for World Wide stock would apparently qualify under the “safe harbor” of § 302(b)(2), whereas the portion of the note in exchange for F & G stock would not qualify under § 302(b)(2), or according to the Commissioner, under § 302(b)(1).

In analyzing this exchange, the Commissioner in his brief and during oral argument has mistakenly applied an artificial analysis in determining which corporation’s stock was redeemed for the note. We agree with the Commissioner that “it is not material whether the distribution is actually made by the corporation entering the reorganization or by the corporation resulting from the reorganization.” Courts and the Commissioner have said that it is irrelevant whether the earnings and profits were distributed before or after consolidation. Ross v. United States, 173 F.Supp. at 797. However, we are here confronted with the factual circumstance that there were two corporations, F & G and World Wide, before reorganization and one after reorganization, Omni. Theoretically and in addition to the Commissioner’s oral suggestion, we could look to F & G alone, World Wide alone, or F & G and World Wide together (in effect Omni at the time of consolidation, April 1, 1963) as the distributing corporation.

We think that it is artificial for the Commissioner to contend that the note was issued by F & G alone or that the note was issued partially by F & G and partially by World Wide. The issuance of the note was part of an entire corporate reorganization based on the capital accounts of both F & G and World Wide. The corporations involved did not exist separately but were owned and controlled by the same shareholders but in different proportions. We think that the note was issued by Omni in exchange for a portion of Omni stock that the taxpayer would have received if he had taken Omni stock entirely instead of receiving Omni stock and a note issued to him by Omni. In percentages and according to the Commissioner’s figures, the taxpayer reduced his ownership in Omni from 85 per cent to 61.7 per cent, or in other words the taxpayer exchanged 23.3 per cent of his Omni stock for the note that was issued to him by Omni.

Another reason exists for holding that the note was issued by Omni. The entire concept of a redemption contemplates a change in ownership between an ongoing corporation and a newly formed corporation or within an ongoing corporation itself. For example, underlying the “safe harbor” provision, § 302(b) (2), is the rationale that a substantially disproportionate redemption of stock leads to the conclusion that the exchange is a redemption. The percentage requirements, e. g. the 50 per cent rule, refers to the necessity of having 50 per cent of the total voting stock after redemption. This rule and other redemption provisions make sense only in relation to a corporation that will continue to exist. If a substantially disproportionate redemption of stock has occurred the distribution clearly can be said to be a sale rather than a dividend because the stockholder has relinquished valuable rights in the future business. Further, the rights of stock ownership— to vote, to participate in earnings, and to share in net assets on liquidation — are all affected by a redemption. But these rights and the effect of a redemption only make sense in relation to a corporation that will be engaged in doing business after the redemption. To analyze the present case as a redemption of F & G stock alone, World Wide stock alone, or a portion of F & G and a portion of World Wide is an artificial reading of the redemption provisions, for F & G and World Wide were dissolved as part of the Plan. The change in ownership that would be significant due to a redemption would be a change in ownership in Omni, the corporation that would exist after the redemption and would have voting stock, earnings, and assets that would be affected. Therefore, due to the underlying rationale of § 302 and redemptions in general, we determine under the facts of this case that the taxpayer has in effect exchanged Omni stock for the $102,002 note.

Viewing the distribution of the note as an exchange for Omni stock, the taxpayer’s redemption does not fall within the “safe harbor” of § 302 (b)(2), since he owned approximately 61.7 per cent of the stock of Omni after the redemption. However, the exchange may still qualify as a redemption under § 302(b)(1) if it is “not essentially equivalent to a dividend.” United States v. Carey, supra, typically represents the method of analysis that courts used in determining the factual question of dividend equivalence under § 302 before United States v. Davis, 397 U.S. 301, 90 S.Ct. 1041, 25 L.Ed.2d 323 (1970). The Eighth Circuit said in that case:

“Among these criteria are: The presence or absence of a bona fide corporate business purpose; whether the action was initiated by the corporation or by the shareholders; did the corporation adopt any plan or policy of contraction, or did the transaction result in a contraction of the corporation’s business; did the corporation continue to operate at a profit; whether the transaction resulted in any substantial change in the proportionate ownership of stock held by the shareholders; what were the amounts, frequency, and significance of dividends paid in the past; was there a sufficient accumulation of earned surplus to cover the distribution, or was it partly from capital.” United States v. Carey, supra, 289 F.2d at 537, quoting Heman v. Commissioner of Internal Revenue, 32 T.C. 479 (1959), aff’d, 283 F.2d 227 (8th Cir. 1960) (citations omitted).

See also Annot., 170 A.L.R. 1392 (1947) for a discussion of relevant factors for analyzing redemptions as of 1947.

This Court has since recognized, however, that Davis has changed the law in this area and that a business purpose is no longer a relevant inquiry. Johnson v. United States, 434 F.2d 340, 343 (8th Cir. 1970); accord, Title Insurance and Trust Co. v. United States, 326 F.Supp. 617, 620 (C.D.Calif.1971). In fact, the language in Davis broadly states that the “explanation [contained in the legislative history of § 302(b)(1)] gives no indication that the purpose behind the redemption should affect the result.” United States v. Davis, supra, 397 U.S. at 310-311, 90 S.Ct. at 1047 (footnote omitted). Rather the Court specifically said that to qualify under § 302(b)(1) “a redemption must result in a meaningful reduction of the shareholder’s proportionate interest in the corporation.” United States v. Davis, supra at 313, 90 S.Ct. at 1048 (emphasis added). We read that language and Davis as holding that the proper inquiry is the percentage change of ownership in the corporation and the attendant overall results due to that change. Stated otherwise, the basic inquiry is whether the distribution had the “net effect” of a dividend. Brown v. United States, 345 F.Supp. 241, 244 (S.D.Ohio 1972) (and cases cited therein).

We think that if a distribution is not to have the “net effect” of a dividend, there must have occurred a meaningful reduction of the redeeming shareholder’s proportionate interest or in other words a meaningful change in the relative economic interests or rights of the shareholder after the redemption. United States v. Davis, supra, 397 U.S. at 313, 90 S.Ct. 1041; Brown v. United States, supra, 345 F.Supp. at 244. We further think that it is improper to refer to the “net effect” standard as the “net economic test,” as in Brown v. United States, since a meaningful change in shareholders’ voting power is a relevant inquiry. Also “net effect” can no longer be said to include the business purpose or motive of a corporation in making the distribution as was the ease in United States v. Fewell, supra, 255 F.2d at 499-500.

The Commissioner argues that Hawk-inson v. Commissioner of Internal Revenue, supra, provides a close parallel to this case and supports his analysis that the distribution of the note had the effect of a dividend. In Hawkinson, the taxpayer and other members of the Whitney family owned shares in Whitney Chain Manufacturing Company (Whitney Chain) that was consolidated with Hanson-Whitney Machine Company to form Whitney-Hanson Industries. After the redemption, the Whitneys received 5.7 per cent less stock in Whitney Chain because Whitney Chain canceled an indebtedness owed to it by some of the Whitneys. The court held that this cancellation of indebtedness as part of a plan of consolidation had the effect of a dividend since the whole transaction was “in reality a preservation of the economic status quo by a realistic alignment of ownership in the new corporation to reflect its productive assets.” Hawkin-son v. Commissioner of Internal Revenue, 235 F.2d at 751.

Arthur H. Squier, 35 T.C. 950 (1961), is more closely analogous to this case and distinguishable from Hawkinson. In Arthur H. Squier, the taxpayer owned, directly and constructively, 63.3 per cent of stock before the redemption and 56.82 per cent after the redemption. Also after the redemption, the taxpayer, an estate, had less than 50 per cent direct ownership, and a dissident minority interest increased from 36.7 per cent to 43.18 per cent. The Tax Court focused on a significant change in control and held that this 6.48 per cent reduction in shareholder interest due to the redemption caused the exchange to not have the effect of a dividend.

Apparently no change in voting power was present in Hawkinson after the redemption. However, in this case, the taxpayer reduced his interest in Omni from 85 per cent to 61.7 per cent after the redemption. Under Arkansas law, two-thirds vote is required for amending the articles of incorporation (Ark.Stat. Ann. § 64-507), for merger or consolidation (Ark.Stat.Ann. § 64-703), and for liquidation (Ark.Stat.Ann. § 64-901).

The redemption here has created a meaningful change in the voting power of the taxpayer under Arkansas law. Also, viewing the transaction as a realistic whole, the taxpayer has reduced his holding in one corporation, F & G, from almost complete ownership in F & G to 61.7 per cent ownership in Omni. In contrast, his ownership in World Wide was 56 per cent in relation to his 61.7 per cent ownership in Omni, which either before or after the redemption would make no difference under the above two-thirds requirements of Arkansas law. The change in voting power here is similar to the voting control focused upon in Arthur H. Squier.

Further, although there is no per se rule on what percentage reduction of ownership is required to assure that a redemption does not have the effect of a dividend, the taxpayer in this case has a 23.3 per cent less of a right to dividends and to assets upon liquidation, which in itself is of considerable significance.

We think it appropriate to note at this point that Judge Bright in his dissent focuses on the applicability of the constructive ownership provisions to this case. We feel in connection therewith that an issue not raised at trial or on appeal does not provide a proper predicate for a decision.

The dissent basically reasons that the constructive ownership provisions do apply, which would make the taxpayer’s ownership interest 72 per cent after the redemption, instead of 61.7 per cent. The dissent, further, is inclined to agree that Arthur H. Squier might be applicable to this case “[i]f the record in the present case revealed the exceptional situation where the interest of family-member shareholders . . . were in fact adverse to the taxpayer. . . . ”

However, the Commissioner at trial, in his brief, and during oral argument employed the 62 per cent figure as the proper percentage ownership of the taxpayer after redemption. He has never mentioned the possible applicability of § 318, and therefore the record and briefs have not discussed this issue.

This Court has recently held that the Commissioner’s failure to raise, before or at trial, the theories, Code sections, and regulations upon which he relies, deprives the taxpayer of fair notice and opportunity to defend against presumptively correct deficiency assessments. Commissioner of Internal Revenue v. Transport Manufacturing and Equipment Co., 478 F.2d 731, 736 (8th Cir. 1973). Although the facts as to ownership by family members were stipulated, the failure of the Commissioner to raise the issue at all makes an opportunity by the taxpayer to respond impossible. If the issue had been raised at the appropriate time, it could have been articulated and explicitly briefed. We offer no view on whether § 318 would, apply under the facts of this case and only conclude that the failure of the Commissioner to raise this issue at all precludes its consideration by this Court.

The factual circumstances in this case lead us to the conclusion that the “boot” distribution of the promissory note of $102,002 was “not essentially equivalent to a dividend” under § 302(b)(1) nor had “the effect of a distribution of a dividend” under § 356(a)(2).

The judgment of the District Court is affirmed.

BRIGHT, Circuit Judge

(dissenting).

I respectfully dissent. My difference with the majority lies not in its statement of the applicable law but in its application of that law to the total factual situation. This record discloses that the taxpayer, William F. Wright, owned all of F & G Construction Company (99.2 percent), except for one share held by his wife and one share held by his attorney, and that immediately prior to consolidation, this corporation’s earned surplus amounted to $101,802. The amount of the earned surplus was only $200 less than the amount of the note that the taxpayer received upon consolidation. As noted by the majority, the taxpayer owned 56 percent of the shares of a second corporation, World Wide, which was consolidated into Omni. Dunn, taxpayer’s business associate, owned 30 percent, and taxpayer’s mother and his attorney owned the remaining shares, constituting approximately 14 percent of the total shares.

The taxpayer has stipulated. that in consolidating F & G and World Wide into Omni, he, as well as Dunn, desired to attain equity ownership in Omni of the same proportionate percentage as their ownership in Danco Construction Company, a third corporation owned 71.-5 percent by taxpayer, 27.9 percent by Dunn, and .6 percent by taxpayer’s attorney.

Interestingly enough, following the consolidation of World Wide and F & G into Omni and after the payment of “boot” to taxpayer and the contribution of new capital by Dunn, the shareholdings show Dunn possessed of the almost identical percentage interest in Omni (27.8 percent) as his percentage of stock in Danco (27.9 percent). Taxpayer, however, was left with only 61.7 percent of Omni. Thus, in order for taxpayer to attain the same approximate percentage equity ownership in Omni as he had in Danco, the stipulation of the parties would require counting shares owned by Mrs. W. F. Wright, Sr. (taxpayer’s mother), Mrs. W. F. Wright, Jr. (taxpayer’s wife), and John Thurman, Sr. (taxpayer’s lawyer) as equitably owned and controlled by taxpayer.

Moreover, as the majority aptly observes in n. 14 of the opinion, the constructive ownership rules of 26 U.S.C. § 318 apply to § 302(b)(1). Thus, under the attribution rules the stock of the taxpayer’s wife and mother must be deemed owned by the taxpayer in determining whether the stock redemption was essentially equivalent to a dividend. United States v. Davis, 397 U.S. 301, 90 S.Ct. 1041, 25 L.Ed.2d 323 (1969).

The majority enunciates the following test for determining whether a stock redemption was “not essentially equivalent to a dividend:”

We think that if a distribution is not to have the “net effect” of a dividend, there must have occurred a meaningful reduction of the redeeming shareholder’s proportionate interest or in other words a meaningful change in the relative economic interests or rights of the shareholder after the redemption. [Majority opinion at 609 (citations omitted).]

In finding such a “meaningful change,” the majority emphasizes the reduction of the taxpayer’s voting power in Omni whereby he no longer directly retained the two-thirds interest necessary to amend the articles of incorporation or to force a merger, consolidation, or liquidation of Omni under Arkansas law.

I find this analysis flawed because the taxpayer by stipulation asserted that his intended “equity ownership” in Omni was to be the same as that in Danco, i. e., approximately 72 percent. Practical considerations, as well as the rules of attribution, indicate that the taxpayer has retained an interest in Omni which closely approximates the intended percentage of equity ownership. Of course this percentage is well over the two-thirds figure necessary for the taxpayer to exercise every power he possessed in the merging corporation, F & G.

The majority’s reliance upon Estate of Arthur H. Squier, 35 T.C. 950 (1961), is misplaced since that case is clearly distinguishable on its facts. Initially, I note that if one uses the same method to compute the taxpayer’s interest in Squier as that used by the majority here, i. e., without applying the attribution rules of § 318, the taxpayer’s percentage interest in Squier was 50.09 percent before the redemption and 41.27 percent after the redemption. As a result of the redemption, the principal, nonre-lated, minority shareholder actually became the majority shareholder with 43.-18 percent of the shares.

However, even if the rules of attribution are applied to the factual situation in Squier to reach the ownership percentages cited by the majority, the present factual situation is not analogous. Contrary to the majority’s assertion that the “dissident minority” interest was the 43.18 percent shareholder, the “dissident” shareholders in Squier were actually family members whose stock the Tax Court attributed to the taxpayer under the rules of 318, i. e., taxpayer’s wife and grandchild. These family members had had a severe disagreement with the taxpayer (the executor of the estate) over the selection of a new president upon the death of Mr. Squier. The Tax Court found that as a result of the executor’s failure to appoint decedent’s son-in-law as the new president, there was “considerable friction and strained relations” between the taxpayer-executor and the decedent’s family. Thus the Tax Court concluded:

[T]he record herein reveals a sharp cleavage between the executor and members of the Squier family, and in spite of the attribution rules as to stock “ownership,” the redemptions herein in fact resulted in a crucial reduction of the estate’s control over the corporation. [Emphasis on “control” in original.] Accordingly, notwithstanding the attribution rules, the re-demptions in this case did result in a substantial dislocation of relative stockholdings in the corporation and also in'fact brought about a significant change in control. [Id. at 956 (emphasis added).]

If the record in the present case revealed the exceptional situation where the interest of family-member shareholders (whose shares were attributable to the taxpayer) were in fact adverse to the taxpayer, I would be inclined to agree that the Squier case would be applicable here, and under its holding the taxpayer would have made a meaningful change in his interest through the redemption. However, the record before us provides no basis for assuming that shares attributable to the taxpayer are held by shareholders with interests adverse to the taxpayer.

Therefore, I conclude that the majority has ignored the taxpayer’s own argument that “the type of treatment to be accorded distributions in connection with reorganizations is to be determined from all the facts pertaining to a given case.” Appellee’s Br. at 3. Instead, the majority has focused only on an artificial change in the taxpayer’s interest, which, when closely scrutinized, reveals that the taxpayer has recovered all of the earned surplus of F & G corporation without surrendering any meaningful control in the new corporate entity (Omni). Whether or not we apply the attribution rules of § 318, practical considerations, i. e., family ownership of stock and the stipulation indicating taxpayer’s intended ownership, amply demonstrate that there has been no significant change in taxpayer’s ownership interest in Omni by reason of the distribution of boot. Thus the “boot” received by the taxpayer must be treated as a dividend for tax purposes. 26 U.S.C. § 356(a) (2).

      . The Honorable Garnett Thomas Eisele, United States District Judge for the Eastern District of Arkansas, presided in this court-tried case.

      . The plaintiffs are husband and wife, and Mrs. Gwendolyn Wright is a party to this suit since slie filed a joint income tax return with her husband for 1963. Hereinafter “taxpayer” will refer to Mr. W. P. Wright, Jr., the husband.

      . 26 U.S.C. §§ 354, 361, and 368(a)(1) (A).

      . The Commissioner points out on appeal that the taxpayer’s interest in Omni diminished from 85 per cent to 82 per cent by the contribution of this $7,005.57 in equity capital by Dunn. Under the facts of this case, the use of 82 per cent instead of 85 per cent would make no difference in this decision.

      . That subsection reads :
      “(a) Gain on Exchanges.—
      “(2) Treatment as Dividend. — If an exchange is described in paragraph (1) but has the effect of the distribution of a dividend, then there shall be treated as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be treated as gain from the exchange of property.”

      . The District Court rejected the “automatic dividend” rule for “boot” distributions (to be discussed later in the text) by relying on Hawkinson v. Commissioner of Internal Revenue, 235 F.2d 747 (2d Cir. 1956) and Idaho Power Co. v. United States, 161 F.Supp. 807, 142 Ct.Cl. 534, cert. denied, 358 U.S. 832, 79 S.Ct. 53, 3 L.Ed.2d 70 (1958).

      . Generally the Commissioner has urged the courts to apply the “automatic dividend” rule. However in Idaho Power Co. v. United States, supra, the Commissioner argued that courts in these cases “closely examined all of the surrounding circumstances and treated the fact of diminution of earnings and profits as only one of the factors to be considered.” Quoted in Shoulson, Boot Taxation: The Blunt Toe of the Automatic Rule, 20 Tax L.Rev. 573, 585 (1965). Idaho Power involved the issue of whether a corporation was entitled to a dividends paid credit, and it was to the Commissioner’s advantage to argue against the application of the “automatic dividend” rule.

      . See, e. g., Shoulson, supra; Bittker & Eustice, supra at § 14.34; Wittenstein, Boot Distributions and Section 112(c)(2): A Re-examination, 8 Tax L.Rev. 63 (1952).

      . 26 U.S.C. § 302 reads in part:
      “Sec. 302. Distribution in Redemption of Stock.
      “(a) General rule. — If a corporation redeems its stock (within the meaning of section 317(b)), and if paragraph (1), (2), (3), or (4) of subsection (b) applies, such redemption shall be treated as a distribution in part or full payment in exchange for the stock.
      “(b) Redemptions treated as exchanges.—
      “(1) Redemptions Not Equivalent to Dividends.- — -Subsection (a) shall apply if the redemption is not essentially equivalent to a dividend.
      “(2) Substantially Disproportionate Redemption of Stock.—
      “(A) In general. — Subsection (a) shall apply if the distribution is substantially disproportionate with respect to the shareholder.
      “(B) Limitation. — This paragraph shall not apply unless immediately after the redemption the shareholder owns less than 50 percent of the total combined voting power of all classes of stock entitled to vote.
      “(C) Definitions. — For purposes of this paragraph, the distribution is substantially disproportionate if—
      “(i) the ratio which the voting stock of the corporation owned by the shareholder immediately after the redemption bears to all of the voting stock of the corporation at such time, is less than 80 percent of — •
      “(ii) the ratio which the voting stock of the corporation owned by the shareholder immediately before the redemption bears to all of the voting stock of the corporation at such time.
      “For purposes of this paragraph, no distribution shall be treated as substantially disproportionate unless the, shareholder’s ownership of the common stock of the corporation (whether voting or nonvoting) after and before redemption also meets the 80 percent requirement of the preceding sentence. For purposes of the preceding sentence, if there is more than one class of common stock, the determinations shall be made by reference to fair market value.”

      . Section 316(a) reads:
      “Sec. 316. Dividend Defined.
      “(a) General rule. — For purposes of this subtitle the term ‘dividend’ means any distribution of property made by a corporation to its shareholders—
      “(1) out of its earnings and profits accumulated after February 28, 1913, or
      “(2) out of its earnings and profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made. “Except as otherwise provided in this subtitle, every distribution is made out of earnings and profits to the extent thereof, and from the most recently accumulated earnings and profits. To the extent that any distribution is, under any provision of this subchapter, treated as a distribution of property to which section 301 applies, such distribution shall be treated as a distribution of property for purposes of this subsection.”

      . Hawkinson v. Commissioner of Internal Revenue, 235 F.2d at 751; Ross v. United States, 173 F.Supp. 793, 797, 146 Ct.Cl. 223, cert. denied, 301 U.S. 875, 80 S.Ct. 138, 4 L.Ed.2d 113 (1959); Bittker & Eustice, supra at § 14.34; Moore, Taxation of Distributions Made in Connection With a Corporate Reorganization, 17 Tax L.Rev. 129, 139, 150-51 (1961). Neither the Commissioner or taxpayer argues that the distribution of the note in this case was due to a partial liquidation under 20 U.S.C. § 346, and therefore this opinion expresses no view on whether these facts would warrant a finding that a partial liquidation had occurred.

      . Section 302(b)(2) establishes certain mathematical calculations to determine whether an exchange of stock falls within the category termed as “substantially disproportionate redemption of stock.” Commentators have called this provision the “safe harbor” situation, since a redemption satisfying the rigid mathematical test will automatically qualify for classification as an exchange subject to preferred tax treatment.

      . For a discussion of redemptions, see Moore, Dividend Equivalency — Taxation of Distributions in Redemption of Stock, 19 Tax L.Rev. 249 (1964).

      . The Commissioner has not urged us to apply the constructive ownership provision of § 318. United States v. Davis, supra, held that § 318 does apply to § 302(b)(1). Since the Commissioner has made no argument concerning tlie application of § 318 to the facts of this case, we accept the above figures used at trial by the Commissioner.

      . The record and the briefs do not indicate whether Omni’s Class B stock was voting or non-voting stock. The taxpayer held 01.7 per cent of Classes A and B stock and 61.9 per cent of Class A stock alone. The use of either percentage would disqualify the exchange under § 302(b)(2) (B).

      . It might be noted here that the analysis used to determine that the taxpayer exchanged 23.3 per cent of Omni stock for the note negates a pro rata distribution. However, even if there lias been no formal declaration of a dividend or there has been no general distribution to all shareholders, this is no ieason to ignore the true nature of any distribution of payment of corporate funds in considering dividend equivalency. Sachs v. Commissioner of Internal Revenue, 277 F.2d 879, 882-883 (8th Cir.), cert. denied, 364 U.S. 833, 81 S.Ct. 63, 5 L.Ed.2d 59 (1960).

      . 345 F.Supp. at 244 (S.D. Ohio 1972).

      . Arthur H. Squier, 35 T.C. 950 (1961). Of course “voting power” may indeed eventually have an economic effect.

      . For one comparison, note that Hawkinson involved a 5.7 per cent reduction of stock ownership due to the redemption and Arthur H. Squier involved a 6.48 per cent reduction,

        . The stipulation stated:
      [T]hey [taxpayer and Dunn] wished to pool the assets of World Wide Motors, Inc. and F & G Construction Company into a single corporate operation with the equity ownership of said new corporation as between Wright and Dunn to be approximately the same as that of Danco Construction Company.

      . Tangentially, I also note my disagreement with the views of the majority that the taxpayer reduced his ownership in Omni by 23.3 percent. This computation fails to take into consideration ownership by attribution and the new capital contributed by Dunn. Thus, I compute taxpayer’s diminution in ownership at approximately 10 percent (82 percent before redemption; 72 percent after redemption), a relatively insignificant change.

      . The percentages' provided by the majority in regard to the taxpayer’s interest (63.03 percent before the reilemption and 56.82 percent after the redemption) were not discussed by' the Tax Court because its holding was not based on the change in percentage ownership but on the actual change in control.

      . I do not here consider whether the Tax Court was correct in applying attribution rules of § 318.

      . The grandchild’s aliares were held in trust by the decedent’s daughter.

      . Instead of being a “dissident” interest, the nonfainily shareholder actually cooperated with the executor on most corporate decisions. Estate of Arthur H. Squier, 35 T.C. 950, 951 (1961).


source: Caselaw Access Project

author: BELL, Circuit Judge:

license: Public Domain

text:
    Alice LOVE et al., Plaintiifs-Appellants, v. DeCARLO HOMES, INC., et al., Defendants-Appellees.
    No. 72-3585.
    United States Court of Appeals, Fifth Circuit.
    July 30, 1973.
    Sally Weintraub, Legal Services of Greater Miami, Inc., Perrine, Fla., for plaintiffs-appellants.
    Edward C. Vining, Jr., R. M. MacArthur, Miami, Fla., for DeCarlo Homes, and others.
    Before BELL, GOLDBERG and SIMPSON, Circuit Judges.
   BELL, Circuit Judge:

This is an appeal from a summary judgment rendered against plaintiffs. Plaintiffs-appellants filed a class action against DeCarlo Homes, Inc., and two banks, alleging racial discrimination in the sale and financing of certain residential property located in Dade County, Florida. Plaintiffs’ claim below was predicated upon alleged violations of the Civil Rights Act of 1866, 42 U.S.C.A. §§ 1981, 1982, 1983 and 1985. We affirm.

In affirming we are satisfied to rely on the careful consideration and reasoning of the district court as demonstrated in its opinion granting summary judgment. In the view of the district court: “[Tjheir [plaintiffs’] claims are not those of victims of discriminatory deprivation, but those of alleged victims of an overreaching opportunist.”

Plaintiffs sought to represent a class of some 300 individuals who had purchased houses in Lincoln Estates, a subdivision developed by DeCarlo Homes in a section of Dade County populated largely by black citizens and thus, in effect, for blacks. The purchases in issue took place between 1963-1968. The named plaintiffs were thirteen (including four couples) of the some 300 purchasers. Seven of the group were involved in foreclosure proceedings on their purchases in the Florida state courts either before or during the instant litigation. The essence of their federal complaint was that DeCarlo Homes took advantage of each purchaser by imposing onerous, unconscionable, and unlawful provisions in each contract for the purchase of a house in Lincoln Estates. In addition to the contract terms, plaintiffs complained of other deceptive practices, all of which had the effect of denying purchasers “fair financing”. Such practices included: discouraging plaintiffs from retaining counsel for assistance in the purchase of homes; leading purchasers to believe that home insurance could be obtained only through DeCarlo’s insurance agency; and requiring purchasers to execute quitclaim deeds in DeCarlo’s favor, apparently to facilitate the cutting off of a purchaser’s interest and also as a continuing threat to a purchaser.

Noting the pattern of residential racial segregation existing in Dade County, Florida, and the scarcity of residential housing available to blacks in the area, plaintiffs contended that DeCarlo Homes was able to exploit them only because of their race. In addition to the provisions complained of in the agreements for deed and the alleged deceptive selling practices, plaintiffs claimed that Lincoln Estates houses were sold for amounts in excess of the fair market value for similar properties located in predominately white communities proximately located. However, plaintiffs did not assert that DeCarlo Homes refused to sell, to blacks, houses located in any of their other subdivisions. Nor did plaintiffs allege that DeCarlo Homes sold houses similar to those in Lincoln Estates to whites but on more favorable terms. Plaintiffs’ complaint was directed solely to the contract terms, and the selling and collection practices of De-Carlo Homes.

At the second hearing held in the district court, there was an .attempt to show that purchasers in a predominately white subdivision developed by DeCarlo Homes were given more favorable terms than Lincoln Estates purchasers. Plaintiffs established that owners of houses located in this other subdivision had acquired warranty deeds rather than the agreements for deed used in Lincoln Estates. However, to secure the warranty deeds, these purchasers were required to make a down payment of at least ten per cent of the purchase price. Under the agreements for deed used in Lincoln Estates, the down payment required was only one to three per cent. Aimed at a different market, the houses in the predominately white subdivision were substantially more expensive than the houses located in Lincoln Estates. In short, the two subdivisions did not contain “similar properties” and thus were not fit subjects for comparison. Moreover, the houses in Lincoln Estates were available for purchase by cash, or through FHA or conventional financing. In these latter events, however, the down payments would be larger and it would have been necessary for each purchaser to personally qualify for the loan whereas the DeCarlo financing was available on an entirely different basis. That basis was a low down payment, and low monthly payments coupled with a high but not unlawful interest rate with DeCarlo being the lender through the banks.

On appeal, plaintiffs have abandoned all theories to establish a cause of action save their § 1982 claim. This statute provides that:

“All citizens of the United States shall have the same right, in every State and Territory, as is enjoyed by white citizens thereof to inherit, purchase, lease, sell, hold, and convey real and personal property.”

Virtually dormant for one-hundred years, § 1982 was revitalized by the Supreme Court in 1968. In Jones v. Alfred H. Mayer Co., 1968, 392 U.S. 409, 88 S.Ct. 2186, 20 L.Ed.2d 1189, a private developer, selling houses to whites, refused to sell a house to a black solely because of race. In these circumstances, it was clear that members of one race were being treated in a different manner from members of another race. Racial discrimination was established; the only question was whether such conduct by a private person fell within the purview of § 1982. The Court held that § 1982 barred all racial discrimination in the sale or rental of property.

The instant case presents an altogether different claim from the refusal to sell involved in Jones. The alleged injury to plaintiffs stems from the fact that black citizens in 1963 were forced to buy houses in a limited geographic area because of residential racial segregation in the Dade County, Florida area. This residential racial segregation resulted in a scarcity of residential housing available to blacks. In plaintiffs’ view, De-Carlo Homes exploited, this scarcity to exact onerous and unlawful terms. The allegations presented in plaintiffs’ complaint, if true, would presumably afford a basis for relief in the state courts in the form of seeking reformation of contract or actions for fraud and deceit or damages. The difficulty, however, with plaintiffs’ bringing a civil rights suit in federal court is that the acts complained of do not fit within the traditional concept of racial discrimination.

Plaintiffs are complaining that a private party, (DeCarlo), engaged in a practice of racial discrimination. Racial discrimination normally involves treating, in similar circumstances, a member or members of one race different from the manner in which members of another race are treated. In their complaint, plaintiffs do not allege that DeCarlo Homes actually treated whites differently, or more favorably in similar circumstances. While plaintiffs did attempt by proof to show that DeCarlo Homes treated whites more favorably in another DeCarlo subdivision, the evidence, as stated, indicated only that the houses in this predominately white subdivision were not in a similar market costwise or With the differences, attendant-in the ¡marginal risk financing present in Lincoln Estates. In" sum, plaintiffs have not shown that DeCarlo Homes discriminated against them on the basis of race by selling houses to whites on more favorable terms.

Since racial discrimination in the usual sense is not involved here, the question left is whether § 1982 can somehow be extended to reach the conduct of DeCarlo Homes. Plaintiffs urge that their case fits within the decision in Contract Buyers League v. F. & F. Investment, N.D.Ill., 1969, 300 F.Supp. 210, aff’d. Baker v. F. & F. Inv., 7 Cir., 1970, 420 F.2d 1191. The court in Contract Buyers held that a complaint alleging the sale of property to non-whites at higher prices and less favorable terms than would have been offered to whites stated a cause of action under § 1982.

Plaintiffs’ complaint against DeCarlo Homes does bear some of the earmarks of the complaint in Contract Buyers for it too alleges that non-whites were offered houses at higher prices and on more onerous terms than were offered to whites in predominately white communities proximately located, but this did not prove to be the ease. Plaintiffs have been afforded two hearings to present evidence to support their claims, including the § 1982 claim. The record contains no evidence of houses similar to those in Lincoln Estates being sold to whites on less bux'densome terms. In short, there is no genuine issue of fact on the pivotal question. Plaintiffs cannot show disparate treatment as between whites and blacks within equal protection concepts. In the end, § 1982, although applicable to private persons under Jones v. Mayer, supra, nevertheless rests on an equal protection premise to the extent that blacks aré being denied something pertaining to property that is available to whites. See the history of § 1982 in Hurd v. Hodge, 1948, 334 U.S. 24, 32-34, 68 S.Ct. 847, 92 L.Ed. 1187.

Affirmed.

      . The summary judgments entered on behalf of tlie two banks are not contested on this appeal.

      . Plaintiffs have not invoked any of the provisions of the Fair Housing Act of 1968, 42 U.S.C.A. § 3601 et seq.

      . Plaintiffs twice amended their complaint. Inter alia, they complained of the form of the contract, an agreement for deed rather than a warranty deed. The contract terms complained of in the agreements for deed included provisions for “late fees”, “attorney’s fees”, and “court costs” imposed when late notices demanding payment were sent; forfeiture of all payments upon default in any installment payment ; a requirement that purchasers maintain insurance through a “highest insurable value” clause; and unlawful interest rates. Plaintiffs also complain that the agreements for deed were misrepresented to be mortgages for terms of fifteen years or less. Unlawful evictions and threats of eviction are also alleged. Plaintiffs also asserted that their houses were poorly constructed and that DeCarlo Homes refused to make necessary repairs.

      . On oral argument, counsel for plaintiffs conceded that they were not complaining about the absence of whites in Lincoln Estates and thus were not presenting a Traffieante type claim. Trafficante v. Metropolitan Life Insurance Co., 1972, 409 U.S. 205, 93 S.Ct. 364, 34 L.Ed.2d 415.

      . The evidence developed in these hearings demonstrated that at least one and probably more homeowners in Lincoln Estates did use FHA financing to obtain warranty deeds.

      . Plaintiffs do not argue that the procedure employed by the district court deprived them of an opportunity to present the evidence necessary to establish a cause of action.


author: ADAMS, Circuit Judge. ALDISERT, Circuit Judge

text:
    UNITED STATES of America v. Thomas Peter VALLEJO et al. Appeal of Edson L. WHIPPLE.
    No. 72-2016.
    United States Court of Appeals, Third Circuit.
    Argued March 22, 1973.
    Decided June 20, 1973.

      Robert E. J. Curran, U. S. Atty., Jeffrey M. Miller, Asst. U. S. Atty., Philadelphia, Pa., for appellee.
    Leonard Sosnov, Asst. Defender, Jonathan Miller, Vincent J. Ziccardi, Defender Association of Philadelphia, Philadelphia, Pa., for appellants.
    Before SEITZ, Chief Judge, and ALDISERT and ADAMS, Circuit Judges.
   OPINION OF THE COURT

ADAMS, Circuit Judge.

In this case arising from an abortive attempt to smuggle one ton of marijuana from Mexico by way of Texas to Philadelphia, appellant Whipple was convicted of dealing in and conspiring to import marijuana. 21 U.S.C. § 176(a); 26 U.S.C. § 4755. The district court denied a suppression petition, and Whipple has appealed.

Richard Esch and John Schenck went to Mexico in early 1971 to discuss with David Miller the possibility of flying “illicit” drugs into the United States. After agreeing to work together in upcoming drug ventures, Esch and Schenck returned to the United States while Miller remained in Mexico.

Thereafter, Leonard Glassberg flew to Mexico and met with Miller in January, 1971, to discuss the plans for smuggling the marijuana into the United States. In February, 1971, Whipple came to see Glassberg in his hotel room and indicated that he, Whipple, was “fully capable of procuring an airplane and pilot, and asked if it were possible for him to enter into some sort of contractual agreement with [Glassberg] and David Miller in relationship to smuggling marijuana.” Glassberg’s girl friend, Maria Kirby, who was present at the meeting, confirmed this story.

Celcer, the pilot of the plane, testified that Whipple hired him with instructions to pick up a load of marijuana in Vera Cruz, Mexico. Celcer received the marijuana, landed in Texas, and, after obtaining further instructions from Whipple, flew the marijuana to Philadelphia. Whipple’s conversations with Cel-cer were intercepted electronically by government agents with the pilot’s permission.

Under these circumstances there was probable cause to issue an arrest warrant, which was properly executed upon Whipple in a public airport lobby in Harlington, Texas on April 12,1971.

When taken into custody, Whipple was carrying a large clothes bag and some carry-on luggage that were taken from him by the arresting authorities. He was immediately driven to the United States Customs House in Brownsville, Texas. Upon arrival in Brownsville, approximately one hour after his arrest in Harlington, the authorities examined Whipple’s baggage and retained certain documents later used at trial. They had no search warrant.

Whipple contends, among other things, that the warrantless search of his luggage at the Brownsville Customs House following his arrest at the airport nearly one hour earlier violated his Fourth Amendment rights.

Having carefully examined all the evidence in this case, this Court is of the opinion that it is unnecessary to determine the legality of the search of appellant’s baggage. Even assuming that the search was unlawful, the mass of remaining evidence against Whipple was overwhelming. Glassberg and Miller both changed their pleas to guilty and testified on behalf of the government. Maria Kirby confirmed Glassberg’s trial testimony. Celcer, the pilot, also testified against Whipple, and the conversations between Whipple and him, which had been tape recorded with Celcer’s permission, were played to the jury. In addition, U. S. Customs Agents testified to having seen Whipple meet with Miller and to having heard Whipple planning the touchdown of the plane in Philadelphia. Under these circumstances, the admission of the “fruit” of the allegedly unlawful search was harmless beyond a reasonable doubt. Milton v. Wainwright, 407 U.S. 371, 92 S.Ct. 2174, 33 L.Ed.2d 1 (1972); Harrington v. California, 395 U.S. 250, 89 S.Ct. 1726, 23 L.Ed.2d 284 (1969); Chapman v. California, 386 U.S. 18, 87 S.Ct. 824, 17 L. Ed.2d 705 (1967); Fahy v. Connecticut, 375 U.S. 85, 84 S.Ct. 229, 11 L.Ed.2d 171 (1963).

As intellectually alluring as it might be to address ourselves to the intriguing question whether the examination of the luggage at the Customs House constitutes a “search” for Fourth Amendment purposes, in view of the conclusion that any error committed by the admission of the fruits of that activity was harmless beyond a reasonable doubt, we eschew, as unnecessary and thus inappropriate, that attractive assignment.

The judgment of the district court will be affirmed.

ALDISERT, Circuit Judge

(concurring).

I prefer to address the interesting question posed in this appeal: whether the warrantless search of appellant’s luggage at the Customs House in Brownsville, Texas, one hour after his arrest in a public airport in Harlington, Texas, was lawful as incident to an arrest, United States v. Miles, 413 F.2d 34 (3d Cir. 1969), or comes within the prohibition of Preston v. United States, 376 U.S. 364, 84 S.Ct. 881, 11 L.Ed.2d 777 (1964) . The district court denied a petition for suppression and appellant was convicted of dealing in and conspiring to import marijuana. 21 U.S.C. § 176(a); 26 U.S.C. § 4755.

The arrest followed an abortive attempt to fly a ton of marijuana from Mexico via Texas to Philadelphia on March 15, 1971. One Glassberg met appellant Whipple in Mexico in February, 1971, at which time Whipple indicated that he was “fully capable of procuring an airplane and pilot, and asked if it were possible for him to enter into some sort of contractual relationship with (Glassberg) and David Miller in relationship to the smuggling enterprise.” A government undercover agent witnessed the meeting. The plane’s pilot testified that Whipple had hired him with directions to pick up a load of marijuana in Vera Cruz, Mexico. The pilot did exactly that, stopped in Texas, and, after obtaining further instructions from Whipple, flew the ton of marijuana to Philadelphia. Whipple’s conversations with the pilot were intercepted electronically by government agents with the pilot’s permission. It is an understatement to observe that under these circumstances there was probable cause to issue an arrest warrant which was properly executed upon Whipple in a public airport lobby in Harlington, Texas, on April 12, 1971.

When taken into custody, Whipple was carrying a large clothes bag and some carry-on luggage. He was taken to a waiting car and immediately driven to the United States Customs House in Brownsville, Texas. Immediately upon arrival there — approximately one hour after his arrest in Harlington — this baggage was examined and certain documents were retained by the authorities.There was no search warrant. The question for our resolution is whether this was a lawful search and seizure incident to arrest.

I begin my analysis with the seemingly inflexible pronouncement of Preston v. United States, supra, 376 U.S. at 367, 84 S.Ct. at 883, that a contemporaneous search incident to a lawful arrest must be limited to the situs of the arrest: “Once an accused is under arrest and in custody, then a search made at another place, without a warrant, is simply not incident to the arrest. Agnel-lo v. United States, supra, 269 U.S. [20], at 31, 46 S.Ct. [4], at 5, 70 L.Ed. 145.” See also Stoner v. California, 376 U.S. 483, 84 S.Ct. 889, 11 L.Ed.2d 856 (1964). But if there is one unyielding principle which has emerged from the troublesome area of Fourth Amendment case law, it is that isolated excerpts from judicial opinions do not necessarily rise to black letter dogma.

It is necessary, therefore, to consider the factual background giving rise to the quoted proscription when attempting to apply the principle to a new situation. In Agnello, relied upon by Preston, Ag-nello was arrested in the home of one Alba. The police attempted to justify as incident to an arrest, the warrantless search of Agnello’s house some blocks away. In Stoner, decided the same day as Preston, the search of a hotel room on one day while attempting to arrest Stoner was held not to be incident to an arrest made two days later at a different place. In Preston, an arrest for vagrancy was made in an automobile parked on the street. The car was driven some distance away to the station-house, from which it was towed to a garage where the automobile’s trunk was searched.

Preston itself was not devoid of cautionary language: “This right to search and seize without a search warrant extends to things under the accused’s immediate control, Carroll v. United States, supra, 267 U.S. [132] at 158, 45 S.Ct. [280] at 287, 69 L.Ed. 543, and, to an extent depending on the circumstances of the case, to the place where he is arrested, Agnello v. United States, supra, 269 U.S., at 30, 46 S.Ct. [4] at 5, 70 L. Ed. 145. . . .” 376 U.S. at 367, 84 S.Ct. at 883 (Emphasis supplied.)

Indeed, in Cooper v. California, 386 U.S. 58, 87 S.Ct. 788, 17 L.Ed.2d 730 (1967), the Supreme Court indicated that there was no absolutism to the Preston holding, and affirmed a conviction where, without a search warrant, the police took heroin from the glove compartment of petitioner’s impounded automobile a week after he had been lawfully arrested for a narcotics violation. Harris v. United States, 390 U.S. 234, 88 S.Ct. 992, 19 L.Ed.2d 1067 (1968), sustained the admissibility of items inventoried by the police as a routine procedure where automobiles were received in police custody. Dyke v. Taylor Implement Mfg. Co., 391 U.S. 216, 88 S.Ct. 1472, 20 L.Ed.2d 538 (1968), distinguished searches occurring when police have the right to custody of the automobile, as in Cooper, from those in which the automobile was parked near the police station while the driver was being processed for reckless driving.

It appears, therefore, that any application of Preston must be guided by the statement that “the circumstances of the case” control. Varying factual circumstances have guided our court as we have approved or disapproved warrant-less searches. Thus, in Miles v. United States, supra, we held that removal of the seized object from a darkened hotel stairwell to a location three blocks away and its examination there an hour later did not invalidate an otherwise valid seizure. In United States v. Dento, 382 F.2d 361 (3d Cir.), cert. denied, 389 U.S. 944, 88 S.Ct. 307, 19 L.Ed.2d 299 (1967), we did not require officers to make an on the spot search of a car stopped on a busy highway, and held that removal to a police station for an examination twenty minutes later did not invalidate the search. However, in United States ex rel. Clark v. Maroney, 339 F.2d 710 (3d Cir. 1965), on facts closely resembling those of Agnello, supra, .we found no lawful search incident to an arrest when appellant was arrested on a street in Rankin, Pennsylvania, transported to a Clairton, Pennsylvania, police station where he was interrogated for three hours, and, thereafter, while appellant was still in custody, police conducted a search of his dwelling in Rankin.

I perceive still another factor important to this analysis. I believe that it is necessary to distinguish between the seizure by the police of hand carried objects at the time and place of arrest which are examined later at another place, and the search and seizure at a place some distance from the point of the lawful arrest. Vale v. Louisiana, 399 U.S. 30, 33, 90 S.Ct. 1969, 26 L.Ed. 2d 409 (1970); Chimel v. California, 395 U.S. 752, 89 S.Ct. 2034, 23 L.Ed.2d 685 (1969). A search is an investigative process which seeks to find or discover the presence of some object. When the object is found or discovered and subject to manucaption by the “searcher,” then it can be said that a “seizure” has taken place.

When a search and seizure are effectuated pursuant to a warrant, the geographic limits of the investigative search and the description of that to be seized can be spelled out with some specificity. When a warrantless search and seizure are authorized in conjunction with a lawful arrest, the test of reasonableness rather than the language of a warrant defines both the limits of the search and the objects capable of being seized from the person. Without attempting to define the outer limits of that which is permissible, this would seem to include at the very least seizure of those objects capable of manucaption, i. e., seizure by hand from his person or within “grasping distance” as defined by Chimel. Hand carried luggage would come within these specifications. See Draper v. United States, 358 U.S. 307, 79 S.Ct. 329, 3 L.Ed.2d 327 (1959) (zipper bag); United States v. Robbins, 424 F.2d 57 (6th Cir. 1970) (suitcases); Malone v. Crouse, 380 F.2d 741 (10th Cir. 1967), cert. denied, 390 U.S. 968, 88 S.Ct. 1082, 19 L.Ed.2d 1174 (1968) (suitcase).

I am persuaded that both a search and seizure occurred at the airport. The pieces of luggage which form the subject of our inquiry were not the object of a search. They were in plain view. They were seized immediately, as Whipple’s person was searched for weapons, contraband and evidence of crime.

How then do I describe that which occurred at the Customs House in Brownsville? In my view, it was merely a thorough examination in Brownsville of an object which already had been lawfully seized in Harlington.

Appellant seems to concede that it would have been perfectly lawful for this examination to have taken place on the floor of the public airport in Har-lington, but unlawful if performed where it was — in the office of the authorities in Brownsville, immediately after it was transported there by the Customs agents. This is a formalistic argument with no support other than from language lifted out of context from cases with dissimilar fact situations. No rights inured to the appellant in the public airport in Harlington which were not present in the Customs House in Brownsville. There was no prolonged delay between the seizure of the luggage and the subsequent examination of its contents which would suggest that incriminating material was “planted” therein by the authorities. The examination took place as soon as appellant and his luggage were transported from Harlington to the Customs House in Brownsville. To accept the basic premise of appellant would be to thwart society’s interest in efficient law enforcement. “While the legal arrest of a person should not destroy the privacy of his premises, it does — for at least a reasonable time and to a reasonable extent— take his own privacy out of the realm of protection from police interest in weapons, means of escape, and evidence. Were this not to be so, every person arrested for a serious crime would be subjected to thorough and possibly humiliating search where and when apprehended. See United States v. Caruso, supra, 358 F.2d [184] at 185-186 [(2nd Cir.), cert. denied, 385 U.S. 862 (1966)]. We see no constitutional mandate for such a practice.” United States v. DeLeo, 422 F.2d 487, 493 (1st Cir.), cert. denied, 397 U.S. 1037, 90 S.Ct. 1355, 25 L.Ed.2d 648 (1970).

I detect an increasing tendency of some courts and commentators to attempt a juridical codification of Fourth Amendment law. Proscribed by the Amendment are only unreasonable searches and seizures; and what is unreasonable must of necessity turn on the particular facts at hand. While there is great temptation to fashion symmetry to the law, see ALI Model Code of Pre-Ar-raignment Procedure (Proposed Official Draft No. 1, 1972), this can be accomplished properly only by the use of neutral principles and not by a mechanical application of case holdings which would mix automobiles with real estate in an attempt to formulate a rigid rule equally applicable to a hand-carried suitcase seized in a public airport. Desirable though it may be to fashion tight jurisprudential formulae, the constitutional polestar is still the test of reasonableness. United States v. Cafero, 473 F.2d 489, 500 (3d Cir. 1973).

Certain guidelines have emerged from the cases. The government has a right “always recognized under English and American law, to search the person of the accused when legally arrested to discover and seize the fruits or evidences of crime. This right has been uniformly maintained in many cases. 1 Bishop on Criminal Procedure, § 211; Wharton, Crim.Plead, and Practice, 8th ed., § 60; Dillon v. O’Brien and Davis, 16 Cox C. C. 245”. Weeks v. United States, 232 U.S. 383, 392, 34 S.Ct. 341, 344, 58 L.Ed. 652 (1914). Chimel teaches that “[i]n addition [to a search for weapons on the person of the arrestee], it is entirely reasonable for the arresting officer to search for and seize any evidence on the arrestee’s person in order to prevent its concealment or destruction.” 395 U.S. at 763, 89 S.Ct. at 2040. “In the state and lower federal courts, the right of the police to take possession and make inventory of an arrested individual’s clothes and other belongings on his person, if he is being jailed, is generally acknowledged.”

But one lesson may be learned from the cases: where there is a valid arrest warrant a custodial examination at the stationhouse of the arrestee’s person and the belongings he had on hand at the time of his arrest may be considered incidental to the arrest. And a number of eases have upheld these procedures under the “search incidental to arrest” principle. As Judge Duniway stated in Cotton v. United States, 371 F.2d 385, 392 (9th Cir. 1967), since the police can search an individual’s person incident to arrest, and since the pre-jailing search is “standard and necessary police practice . . . [w]e cannot see that it makes any difference whether this is done on the spot or at the jail where he is booked.” In United States v. DeLeo, supra, the First Circuit was faced with a challenge to a search at F.B.I. headquarters forty minutes after a bank robber had been searched for a weapon at the situs of a lawful arrest. Judge Coffin explained: “We recognize that the range of Fourth Amendment cases and the pertinent language of the Court, from Agnello v. United States, 269 U.S. 20, 46 S.Ct. 4, 70 L.Ed. 145 (1925) to Preston v. United States, 376 U.S. 364, 84 S.Ct. 881, 11 L.Ed.2d 777 (1964), have generally dwelled with searches of cars, rooms, offices, and homes, but not of a person shortly after being arrested and conducted to a police station. Nevertheless, the Court was, in Abel v. United States, 362 U.S. 217, 80 S.Ct. 683, 4 L.Ed.2d 668 (1960), required to deal with a search of an alien after being arrested and taken to Immigration and Naturalization Service headquarters. . . The difference between the situation in Chimel and that in the case before us is this: the arrest of a suspect in a particular place — be it his apartment, office, or house — has no such nexus with that place as, without more (i. e., a valid search warrant), would justify searching the premises; but the fact that a suspect, arrested in a public place, has been subjected only to a hasty search for obvious weapons has a reasonable nexus with the necessity of conducting a more deliberate search for weapons or evidence just as soon as he is in a place where such a search can be performed with thoroughness and without public embarrassment to him. See 395 U.S. at 762-763, 89 S.Ct. 2034.” 422 F.2d at 492-493. The Fifth Circuit has rejected a similar contention in United States v. Gonzalez-Perez, 426 F.2d 1283, 1287 (5th Cir. 1970).

I am therefore persuaded that the instant case is of the same mold, for here the object examined at the Customs House was actually seized at the situs of the arrest. The examination of the luggage at the Customs House was not offensive to appellant’s Fourth Amendment right.

Finally, if the examination of the carry-on luggage at the Customs House was permissible, it was not improper for the searching officers to inspect papers or other documents found in the luggage. United States v. Gonzalez-Perez, supra; United States v. Frankenberry, supra; Cotton v. United States, supra, I would reject appellant’s contention that the search of the luggage was limited to uncovering contraband marijuana or weapons. A concomitant purpose of the search was to prevent permanent destruction of evidence, and the officers could not determine this without examining the items.

Accordingly, I would hold that since the search and seizure in Harlington was lawful as incidental to an arrest, its validity was not diluted by the subsequent examination of the contents of the luggage in Brownsville. I also agree with the majority that even if the “search and seizure” was illegal, it was harmless error; and that all other contentions of appellant are devoid of merit.

      . Appellant also contends: (1) adverse trial publicity denied him a fair trial; (2) the court erred in admitting evidence of conspiracies other than the one charged in the indictment and in failing to give a cautionary instruction; (3) the court erred in not dismissing the indictment because government agents failed to make an inventory of personal property seized from appellant and failed to return all of appellant’s property; (4) the court erred in not warning appellant that if he jumped bail, trial would proceed in his absence; (5) the court erred in failing to charge on entrapment; (6) the court charged improperly on unexplained possession of marijuana; and (7) his rights under Rule 32(a) of the Federal Rules of Criminal Procedure and the Sixth Amendment were violated by the court’s refusal to sentence appellant on all counts for which he was convicted. We have concluded that these arguments are without merit.

      . Given the authority to seize, I do not believe additional authority is necessary to make an examination of that 'which is properly seized. I recognize that my view is not shared by Judge Adams, who proposes a distinction between seizing and searching a suitcase. It is his theory that one may have authority to seize and detain, presumably indefinitely, a suitcase, but no right to examine its contents in the absence of specific additional authority. Concurring in United States v. Valen, 479 F.2d 467, 472 (3d Cir.) Judge Adams said, “I would be inclined to distinguish ‘searches’ from ‘seizures’ for the purpose of determining to what extent, if any, the government may properly (1) detain a person’s suitcase (seizure), and (2) examine its contents (search), without first obtaining a warrant before either step (1) or step (2).” He would give the government some right of detention, “by allowing the seizure of the property,” but argues that “no legitimate interest in effective law, enforcement would seem to justify the greater and further intrusion of a warrantless search of the already immobilized . . . suitcase.” But Judge Adams candidly concedes: “It appears, however, that the Supreme Court in Chambers v. Maroney, 399 U.S. 42, 51-52, 90 S.Ct. 1975, 26 L.Ed.2d 419 has rejected any such proffered distinction between warrantless searches and warrantless seizures.”

      . “As we have observed, the constitutional standard for searches and seizures relating to both tangible objects and communications is the reasonableness of the governmental action. Only unreasonable searches and seizures are beyond the constitutional pale.”

      . ALI Model Code of Pre-Arraignment Procedure, supra, at 189.

      . E. g., United States v. Frankenberry, 387 F.2d 337 (2d Cir. 1967); United States v. Evans, 385 F.2d 824 (7th Cir. 1967); Hurst v. United States, 425 F.2d 177 (9th Cir.), cert. denied, 400 U.S. 843, 91 S.Ct. 86, 27 L.Ed.2d 78 (1970); Westover v. United States, 394 F.2d 164 (9th Cir. 1968); Charles v. United States, 278 F.2d 386 (9th Cir.), cert. denied, 364 U.S. 831, 81 S.Ct. 46, 5 L.Ed.2d 59 (1960); Farrie v. State, Ind., 266 N.E.2d 212 (1971); People v. Hambrick, 98 Ill.App.2d 481, 240 N.E.2d 696 (1968); People v. Rogers, 241 Cal.App.2d 384, 50 Cal.Rptr. 559 (1960). In State v. Stevens, 26 Wis.2d 451, 133 N.W.2d 502, 507 (1965), the court described the inventory search as a fringe benefit of search incident to an arrest. See also Commonwealth v. Querubin, 211 Pa.Super. 360, 236 A.2d 538 (1967) and cases cited therein.

      . “Their reliance is misplaced. None of those cases (or those following them) involved searches of the person arrested. Stoner involved a search of a hotel room, Preston an automobile, and Agnello a house. Here, the arrestees themselves were searched at a time and place different from that of the arrest. A search of an arrestee is still incident to an arrest when it is conducted shortly thereafter at the jail or place of detention rather than at the time and place of arrest. Ray v. United States, 9 Cir. 1969, 412 F.2d 1052; Cotton v. United States, 9 Cir. 1967, 371 F.2d 385, 392; Baskerville v. United States, 10 Cir. 1955, 227 F.2d 454, 456; see United States v. Miles, 3 Cir. 1969, 413 F.2d 34, 40--41; Malone v. Crouse, 10 Cir. 1967, 380 F.2d 741; Rodgers v. United States, 8 Cir. 1966, 362 F.2d 358, cert. denied 385 U.S. 993, 87 S.Ct. 608, 17 L.Ed.2d 454. The arresting officers are not required to stand in a public place examining papers or other evidence on the person of the defendant in order for such evidence to be admissible.”

      . The Model Code of Pre-Ariaignment Procedure, supra, provides a specific section on “Execution and Return of Warrants for Documents,” Section SS 220.5; and, subject to certain exceptions, not applicable here, includes documents as permissible objects of Search and Seizure. Section SS 210.3. United States v. Bennett, 409 F.2d 888, 896-897 (2d Cir.), cert. denied sub nom., Haywood v. United States, 396 U.S. 852, 90 S.Ct. 113, 24 L.Ed.2d 101 (1969), rejected any limitation on the type of documents subject to seizure partly on the theory that such considerations are relevant to the Fifth rather than the Fourth Amendment, and partly on a doubt that limitations serve the cause of privacy inasmuch as ordinarily documents must be read in order to determine whether they are evidence of a criminal offense.