text:
    WIENER v. MUTUAL LIFE INS. CO. OF NEW YORK.
    No. 3496.
    District Court, E. D. Missouri, E. D.
    July 20, 1945.

      See, also, 4 F.R.D. 358.
    Burnett, Stern & Liberman, of St. Louis, Mo., for plaintiff.
    Jones, Hocker Gladney & Grand, of St. Louis, Mo., for defendant.
   HULEN, District Judge.

Plaintiff instituted this action against the defendant to recover disability benefits under a policy of insurance issued by defendant. The petition is in four counts, for yearly benefits. The first count covers the period July 3, 1940, to July 3, 1941. Counts two, three, and four are for successive yearly periods. The answer put in issue the total and permanent disability of the plaintiff within the meaning of the term as used the policy during the period in question. The case was submitted to the jury on interrogatories. The jury answered the interrogatories in favor of the plaintiff, and also returned a verdict finding defendant’s refusal to pay the plaintiff was vexatious, arbitrary, and without reasonable cause, and allowed plaintiff $1500 attorneys’ fee, but no damages. The principal complaint now presented by motion for new trial of the defendant is that the Court erred in submitting to the jury the issue of vexatious refusal to pay plaintiff’s claim.

This is the second trial of this case. The first trial was in the state court. There plaintiff suffered an adverse verdict. On appeal to the St. Louis Court of Appeals, that Court, 170 S.W.2d 174, certified the case to the Supreme Court because of division in opinion. The Supreme Court reversed and remanded the case for new trial, 179 S.W.2d 39, on account of error in admission of evidence and instructions given. The record on the second trial is not substantially different than that of the first trial as summarized in the opinions of the Supreme Court.

By brief, the plaintiff submits the following circumstances in support of his position that the issue of vexatious refusal to pay was properly submitted to the jury:

“1. The fact that the defendant company had recognized the claim and paid the benefits thereunder for four years, but in 1941 ceased its payments without any apparent reason or justification.
“2. The undisputed testimony that plaintiff’s condition had not improved by 1941, but, if anything, was worse.
“3. The report by Dr. O’Neal, the defendant’s own doctor, in May, 1941, that plaintiff was still disabled and should not return to work.
“4. The inexplicable, arbitrary failure of defendant to produce any testimony on the ultimate issue, especially its failure to have the inr red examined before trial by its doctors or by a doctor appointed by the court.
“5. The ‘maneuverings’ by defendant in its pleadings in an unjustified, reprehensible effort to get immaterial, prejudicial evidence before the jury.
“6. The attitude of the company, exemplified by the statements of its adjuster, that it would only make a lump sum settlement, to get the claim off of its books, despite its contract to continue annual payments during the period of disability.”

In examining the authorities cited by learned counsel for the plaintiff and defendant, it appears that while the opinions handed down by the appellate courts construing the statute on vexatious refusal to pay, R.S. No. 1939, Section 6040, Mo. R.S.A., are uniform as to principles of law announced, the application of the law to the fact situations in the particular cases does not present a uniform construction of the law. The authorities are agreed that a penalty for vexatious refusal to pay is not lightly to be assessed and its imposition will, with rare exceptions, be found to be based upon evidence of conduct on the part of the insurer which clearly reflects delaying tactics, bad faith, or a wilful and recalcitrant attitude toward the claimant on the policy. The cases make it clear that absent such conduct, if there is any reasonable doubt on the part of the insurer as to its liability, it is justified in refusing to pay the claim, and where' such liability is doubtful, it is error to submit to the jury the question of whether the insured’s refusal to pay was vexatious. Clower v. Fidelity-Phenix Fire Ins. Co., St. Louis Ct.App. 1921, 220 Mo.App. 1112, 296 S.W. 257; Paetz v. London Guarantee & Accident Co., Ltd. of London, England, K.C.Ct.App. 1934, 228 Mo.App. 564, 71 S.W.2d 826. The penalty should not be permitted unless the evidence and the circumstances show that the refusal to pay was wilful and without reasonable cause, as the facts would appear to a reasonably prudent man before the trial. Volz v. Travelers Insurance Co., K.C.Ct.App. 1942, 161 S.W.2d 985.

The defense urged at both trials of this cause was one of fact. Such being the case, the question of vexatious refusal to pay will not be one for the jury to pass upon unless there is “something of a substantial nature” in the case to indicate that the insurer has acted in bad faith and without reasonable cause. St. Clair v. Washington Fidelity National Insurance Co., St. Louis Court of Appeals, 89 S.W.2d 85. We review some of the cases as illustrations of what the courts have in mind when they refer to “something of a substantial nature” in the case to indicate that the insurer has acted in bad faith and without reasonable cause. In Clair v. American Bankers Ins. Co., K.C.Ct.App. 1940, 137 S.W.2d 969, it was denial of liability without making any investigation and assertion that the policy was reinsured with another company, a claim later shown to have no basis in law or fact. In Thomas v. Metropolitan Life Ins. Co., K.C.Ct.App. 1935, 230 Mo.App. 206, 89 S.W.2d 590, it was the writing of letters by the insurer which misconstrued the terms of the contract sued on, and which set up an arbitrary and false basis as the grounds for refusing to pay. In Lux v. Milwaukee Mechanics’ Ins. Co., K.C.Ct.App. 1930, 30 S.W.2d 1090, it was the raising of the issue of plaintiff’s insurable interest without a tender back of premiums. In White v. American Life & Accident Ins. Co., St. Louis Ct.App. 1936, 90 S.W.2d 118, it was defendant’s action in taking the position that at the time the policy was issued, assured was suffering from duodenal ulcers, which it claimed had contributed to his death, while assured stated in his application he was in good health. The insurance company did not have any evidence to the effect that the insured was suffering from duodenal ulcers at the time'the policy was issued. The court held that the defendant could not reasonably have expected the return of a verdict in its favor upon the issue of breach of the sound health provision of the policy. In Florea v. Iowa State Ins. Co., St.L.Ct.App. 1930, 225 Mo.App. 49, 32 S.W.2d 111, it appeared that three days after p fire loss, plaintiff notified the company’s agent; that an investigator came to the scene of the first a month later; that neither agent nor investigator would inform plaintiff as to the company’s position on paying the loss. A letter to the company got no reply. Mortgage of the premises had like experience. The local agent could get no response from the company. Such facts were held to sustain recovery of penalty for vexatious refusal to pay the loss. In Novosel v. Mid West Life Ins. Co. of Mo., K.C.Ct.App. 1925, 276 S.W. 87, recovery was allowed where defendant’s answer alleged that at time of issuance of the policy, insured had tuberculosis of the lungs, which resulted in her death, and that the insured was aware of her condition, and that the insured falsely warranted her condition in her application for insurance. At the trial, the evidence of defendant’s medical examiner showed that insured did not have tuberculosis at time of her application. Deceased’s death certificate showed she died of lobar pneumonia. The evidence showed all premiums on the policy were paid, yet it was insisted by defendant at the trial that there was a default in payment of premium. In Occidental Life Insurance Co. v. Eiler, 8 Cir., 125 F.2d 229, certiorari denied 316 U.S. 688, 62 S.Ct. 1278, 86 L.Ed. 1760, it was the act of the insurance company in contesting a claim for accidental death, where deceased committed suicide while insane, in the face of a long line of decisions, both federal and Missouri, which sustained the proposition that suicide by an insane person is death by accidental means. In Columbian National Life Insurance Co. v. Keyes, 8 Cir., 1944, 138 F.2d 382, it was the act of the defendant in raising the question of the constitutionality of the Missouri suicide statute and also claiming the contracts in issue were Massachusetts contracts, although each contained an express provision to the effect that it was to be treated as a Missouri contract.

Plaintiff in the case at bar claims that the payment by the defendant company of benefits under the policy for four years is a circumstance to support the allowance of damages for vexatious refusal to continue payments under the policy. In Stearns v. Prudential Ins. Co. of America, Springfield Ct.App. 1940, 235 Mo.App. 135, 140 S.W.2d 766, 774, a situation somewhat similar to the one now urged by the plaintiff was present. In the Stearns case, the plaintiff became disabled because of pleurisy and pulmonary tuberculosis, and the defendant commenced the payment of disability claims under the provisions of the policy. Payments were continued for almost two years before the defendant terminated the payments. Plaintiff filed suit, whereupon defendant resumed payments for several years. Payments being suspended, plaintiff instituted an action on the policy. Trial resulted in a verdict for the plaintiff, assessing damages for monthly payments due and for vexatious refusal to pay. In the Stearns case, plaintiff was examined by two physicians, upon whose report the insurance company made payments. The court found that the plaintiff was totally and permanently disabled unless in fact he was a malingerer. There was no evidence of malingering on the part of the plaintiff. The court ruled that the insurer “should not have attempted, without such evidence, to defend the suit by relying upon the ingenuity of counsel to assign numerous harmless errors.” In the case at bar, defendant in effect made a charge of malingering against the plaintiff by the second amended answer. It was the opinion of this court that not only was there no evidence offered on the issue, but defendant must have been cognizant of the lack of evidence to support it when it tendered the plea. In Rush v. Metropolitan Life Insurance Co., St. Louis Ct.App. 1933, 63 S.W.2d 453, 456, plaintiff brought suit on a life insurance policy and verdict included damages for vexatious refusal to pay. One element in the case, commented on by the appellate court, in connection with allowance of penalty, was a finding by the defendant’s medical examiner tending to support the claimant’s right to recover on the policy. In the case at bar, the defendant had Dr. Wiener examined by its physician in May, 1941, and from him received a report that plaintiff was still disabled and could not return to the practice of his profession without endangering his life. There is a further fact in the Rush case having some relevancy in the present case, in that the insurance company relied upon testimony of the attending physician to assist its defense. The court held that the company should have known that such evidence “would be inadmissible in evidence, absent a waiver of privilege on the part of plaintiff which it had no right to anticipate.” In this case it appears that the company based its defense in part upon evidence of other insurance carried by Dr. Wiener, yet the law is so well settled as to the admissibility of this evidence that we think the observation of the court in the Rush case is applicable to the defendant’s position in this case, as to this line of evidence which the defendant was relying on. In Albert v. Metropolitan Life Insurance Co., Springfield Ct.App. 1936, 95 S.W.2d 343, a verdict for damages for vexatious refusal to pay was sustained on an accident policy. There the court comments on the result of plaintiff’s examination by physicians at the instance and request of the defendant, as part of evidence upon which the recovery of damages for vexatious refusal to pay could be sustained. In Groves v. Great Eastern Casualty Co., Kansas City Court of Appeals, 1902, 212 Mo.App. 316, 246 S.W. 1002, suit was on an accident insurance policy which provided for reimbursement for injuries caused by accidental means while traveling as a passenger in a place regularly provided for passengers. Verdict in the trial court included damages for vexatious delay. In sustaining the findings, the appellate court commented upon the fact that the company never intended to defend on the ground that the plaintiff was not traveling as a passenger in a place regularly provided for passengers, until the trial. In this case, there is evidence that before the institution of this suit, the representative of the insurance company called on Dr. Wiener’s counsel and discussed disposal of the case. The defendant’s representative at that time did not make a claim that Dr. Wiener was not totally and permanently disabled. At that time (October, 1941), defendant’s representative stated “that they wanted to dispose of the claim; they wanted it off their books.” Defendant wanted to negotiate a lump-sum settlement. An offer of $7,500 was made. There is evidence from which it could be found that the defendant at that time assumed the disability of the plaintiff. Defendant’s representative (referring to the disease which had caused Dr. Wiener’s disability) stated —“there isn’t any expectancy with people who have coronary thrombosis — a man who had had coronary thrombosis was dead; there was no expectancy.” In Streeter v. Washington Fidelity National Insurance Co., St. L. Ct. of App. 1934, 229 Mo.App. 33, 68 S.W.2d 889, the appellate court held that an offer of settlement was a circumstance for the jury to consider in awarding damages for vexatious refusal to pay. In Columbian National Life Insurance Co. v. Keyes, supra [138 F.2d 383], there was evidence that the insured’s company sent their local agent “to see if he could get a lump sum settlement.” The Court of Appeals for the Eighth Circuit held this evidence admissible on the issue of vexatious refusal to pay.

The plaintiff urges as a circumstance from which the jury could properly infer vexatious refusal to pay “the ‘maneuverings’ by defendant in its pleadings in an unjustified, reprehensible effort to get immaterial, prejudicial evidence before the jury.” We are of the opinion that such alleged conduct of the defendant has no bearing on the issue, as the right to recover any penalty must be based upon the insurer’s conduct in refusing payment and not its action in defense of the suit.

In support of its assignment of error on submitting the issue of vexatious refusal to pay, defendant’s brief sets out a lengthy list of circumstances alleged to constitute reasonable cause for refusing to continue payment of benefits to Dr. Wiener. These we will now consider against the background that in neither trial did defendant offer any testimony. Although many circumstances were alleged by it as justification for stopping benefit payments to the plaintiff, after having acknowledged its liability to plaintiff for many years by making payment, there is no evidence in the record before this Court that it had notice of any of the circumstances now relied on, prior to denying liability on the policy. On the record before this Court, the only information in defendant’s possession as to plaintiff’s condition prior to stopping payment on the ^policy was the report of a physician appointed by, and who examined plaintiff for, the defendant. The doctor’s report was that plaintiff was unable to return to his profession. But we will consider the list of grounds asserted by the defendant and assume that facts relative thereto were in its possession prior to its act of stopping payments on the policy and before the institution of this suit. Defendant asserts that “other companies (had) also denied” liability to Dr. Wiener in 1940, and one company filed suit for a declaratory judgment. There is no evidence that defendant knew why the other companies denied liability. There could have been many reasons other than the claim of recovery. If prior to denial of liability and the institution of this suit the defendant even tried to find out why such action was taken by the other companies, the record does not show it. The settlement contract with other companies containing a clause that Dr. Wiener reserved the right to practice medicine in the future without affecting the company’s obligation under the contract is listed. This was explained by Dr. Wiener. It was not inserted in the contract at his request, but over his protest. Inquiry would have revealed this state of facts to defendant. It is possible and probable the provision was inserted in the contract as a consideration for payment of less than the face amount of the obligation. The fact that plaintiff’s “general physical condition has not progressed” since 1936 is listed. This would not show a recovery of plaintiff — at most only a stationary condition. Attention is directed to the occasional acts of plaintiff in giving medical lectures, editing two medical books, and carrying on experiments with animals. These do not show that plaintiff was no longer totally and permanently disabled within the meaning of the terms of the policy. It is in accord with the universally recognized treatment of one in plaintiff’s condition that a total abstinence from all activity is harmful rather than helpful. That plaintiff “repeatedly sought medical” opinion and advice that he could return to the practice of his profession without endangering his life is on the list. This is the direct antithesis of malingering — as charged by the defendant in its last pleading. Investigation by defendant would have shown that no doctor was found who would givé such advice, and many were approached. Defendant lays great stress on the jury verdict for the defendant in the first trial. We consider it of minor importance, first because the jury was misdirected as to the meaning of total and permanent disability under the terms of the policy, and, second, the jury was permitted to consider improper testimony of income from other insurance, in arriving at their decision. That evidence of income from other policies is admissible where the defense is malingering does not justify the defendant in proceeding on such knowledge of the law, absent ability to offer evidence of malingering. Defendant’s chief claim is based upon failure of the state courts to accept plaintiff’s theory that he was entitled to an instructed verdict. This is not controlling on the present question, in our opinion. We assume the trial judge was of the same opinion as the judges of the Supreme Court that whether plaintiff was totally and permanently disabled .under the facts presented was a question for the jury. On this subject, the Supreme Court said [179 S.W.2d 43]: “The burden of proof was on the doctor. ‘The jury * * * may believe or disbelieve the testimony of any one or all of his witnesses, though such evidence be uncontradicted and unimpeach-ed.’ * * * The doctor may not claim the verdict was against the weight of the evidence because a verdict for a defendant in such a case as this, need not be supported by affirmative evidence, the burden being on the other party.”

Plaintiff is not required to make a case showing that he is entitled to a verdict as a matter of law before the question of vexatious refusal to pay may be a submissible issue. While it is true there is no direct and positive evidence to the effect that the stoppage of benefit payments to the plaintiff was vexatious, such evidence— that is positive and direct evidence — is not required. The jury is authorized in cases of this character to infer and conclude that the delay was vexatious, from a survey of all the facts and circumstances in the case bearing upon the conduct of the insurance company with respect to the issue.

We conclude that whether the situation and circumstances with which the defendant was confronted prior to the institution of this suit were sufficient to raise in the mind of a reasonable man a doubt or a question as to liability, or whether the refusal of the defendant to pay plaintiff under the policy was wilful and without reasonable cause, as the facts would appear to a reasonable man, are questions of fact for the jury under the record in this case.

We find no error in the admission of evidence of conversations with defendant’s representative on the subject of lump-sum settlement. See Columbian National Life Insurance Co. v. Keyes, supra. At'the time this testimony was received, the Court announced it was received solely on the issue of vexatious refusal to pay, and so instructed the jury on submission of the case. Defendant’s belated objection that there was no proof of agency of Mr. Boyle we consider highly technical. Testimony with reference to the conversation between plaintiff’s counsel and Mr. Boyle as representative of the defendant was offered and received in the first trial without objection as to agency. We do not believe the defendant was harmed because no direct testimony of the agency of Mr. Boyle was supplied.

Order.

Motion of the defendant to set aside the verdict and findings of the jury and the judgment of the court and to enter a judgment in favor of the defendant in accordance with its motions for a directed verdict, or in the alternative to grant a new trial, or in the alternative to set aside the judgment entered herein and to enter a corrected judgment is overruled.


source: Caselaw Access Project

author: HULEN, District Judge.

license: Public Domain

text:
    UNITED STATES v. ROYAL LOAN CO. et al.
    No. 3299.
    District Court, E. D. Missouri, E. D.
    June 27, 1945.
    Harry C. Blanton, U. S. Atty., of Sikes-ton, Mo., and Russell Vandivort, Asst. U. S. Atty., of St. Louis, Mo. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Andrew D. Sharpe and Frank A. Michels, Sp. Assts. to the Atty. Gen., on the brief), for plaintiff.
    Ben L. Shifrin and Taylor, Mayer, Shifrin & Willer, all of St. Louis, Mo., for defendants.
   HULEN, District Judge.

Plaintiff by this action seeks to collect documentary stamp taxes from defendants, growing out of the issuance by the defendants of promissory notes. The case was submitted upon an agreed statement of facts and testimony, the latter being.the opinion of brokers on the meaning of the term “corporate securities.”

The defendant Royal Loan Company is the parent corporation of the other defendants. On January 16, 1940, the Royal Loan Company made application to the Mississippi Valley Trust Company for a line of credit of $300,000. At that time the Royal Loan Company had outstanding obligations evidenced by promissory notes in excess of $900,000. As a condition for extending credit to the Royal Loan Company, the trust company required that the creditors of the Royal Loan Company subordinate their claims to the liability of the Royal Loan Company “to any bank or trust company from which said Royal Loan Company would borrow money.” This was agreed to. In order to insure compliance with the agreement, the trust company required the notes subordinated to the indebtedness of the trust company to be numbered and registered with the trust company. The subsidiary corporations joined in the agreement of the Royal Loan Company with the trust company, and all notes issued by the subsidiary companies were to be subordinate to the bank loans in the same manner as the notes issued by the Royal Loan Company. In carrying out this arrangement, all outstanding notes of both the Royal Loan Company and its subsidiaries were called in and new serial notes registered with the trust company, issued in exchange. The notes were all executed on the same form, varying only as to number, amounts, and ownership. In making the exchange, many of the notes in large denominations were split up into notes of smaller denomination. One hundred thirty-four instruments were issued to sixty individuals, in amounts ranging from a minimum of $100 to a maximum of $150,-000, represented by each note, the total issuance of notes being $987,750. The agreed statement of facts contains the following two paragraphs:

“That thereafter, in view of the fact that some of the money borrowed from individuals was being used by its various subsidiaries, it was agreed that the various subsidiary companies 'would issue their notes for the money so advanced and used by the various subsidiaries in lieu of the notes of the Royal Loan Company. * * *
“That said notes are not secured in any way, but are based on the credit of the maker.”

It is plaintiff’s position that the series of notes issued by the defendants in compliance with the agreement with the trust company are subject to a tax under Section 1801 of the Internal Revenue Code as amended by section 1 of the Revenue Act .of 1939.

The Act imposes a tax of ten cents on each $100 face value or fraction thereof on all bonds, debentures, or certificates of indebtedness issued by any corporation, and all instruments, however termed, known generally as corporate securities. Plaintiff further claims that the transfer of the instruments is subject to a tax of four cents on each $100 of face value under Section 3481(a) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, §. 3481(a). If the instruments are taxable under Section 1801, it follows that they are taxable under Section 3481 on their transfer.

In opposition to plaintiff’s claim, defendants assert the notes are not subject to tax under Section 1801, first because the original notes for which the notes in question were given in exchange, were not subj ect to the tax; second that the registration of the notes was solely for the benefit of the trust company to insure subordination of obligations of the defendants to the trust company; third, that the notes are not secured and are based only on the general credit of the defendants; fourth, that the notes are not sold to the public generally; fifth, that the undisputed evidence is that they are not “known generally as corporate securities;” and sixth, they do not represent investments. If the instruments in question are subject to tax under Section 1801, it is because ■ they come within the description contained in that section of the Act “ * * * and all instruments, however termed, issued by any corporation with interest coupons or in registered form, known generally as corporate securities i{i if: ifc

The Eighth Circuit Court of Appeals in Willcuts v. Investors’ Syndicate, 57 F.2d 811, 814, describes corporate securities as follows: “A corporate security is simply a means adopted by the corporation to secure funds which it can employ in its business; and, by making a larger return on the fund so secured, it is enabled to pay its obligations under the corporate security issued, and also secure an income for itself” — and states the purpose of such instruments to be: “The purpose of the issue of the certificate was the same as the purpose ordinarily involved in issuing corporate securities; namely, to secure the money of others for use in the corporate business.”

The instruments issued by the defendants represented a means adopted by the corporation to secure funds to employ in its loan business, as evidenced by the quotation from the agreed statement of facts set out above. It is evident that the instruments issued by the defendants come within the meaning of that term described in the Willcuts case, and were for the purpose referred to in the Willcuts case.

In United States v. American Trust & Banking Co., (125 F.2d 113, 115), the Sixth Circuit Court of Appeals, in describing corporate securities, used this language : “ ‘Security’ is defined as ‘an evidence of debt or of property, as a bond, stock certificate, or other instrument, etc.’ Webster’s New International Dictionary. The word is used widely as a synonym for ^investment.’ In re Scorer, 94 L.J.Ch. 196. In the case of In re Waldstein, 160 Misc. 763, 291 N.Y.S. 697, 700, in defining the term ‘security,’ the court said: ‘The term “security” has no exactly defined legal definition. Generically, the word has reference to written instruments, usually for the payment of money or evidences of a debt, and being more than a mere promise of the debtor of a general liability on his part, but having as collateral to it a pledge of property or some additional obligation. * * * Those instruments, however, secured or unsecured, which are used for the purpose of financing enterprises and promoting a distribution of rights in or obligations of such enterprises, and which are designed as a means of investment, are termed securities.’ ”

The notes issued by the defendants are for definite sums payable “one year after demand,” bear interest at eight per cent, are transferable according to the terms printed on the face thereof, are numbered serially, and are “in registered form.” They constitute evidences of property and represent investments. They may not be gilt edged corporate securities, as indeed they are unsecured. The rate of interest indicates the risk taken by the holders, but they are the general obligations of the defendant corporations, subject to the indebtedness of defendant corporations to banks and trust companies. That they were given in exchange for outstanding securities; that the registration was to meet requirements of the trust company; that they are not secured but are the general obligations of the defendants, subject to obligations to banks and trust companies; that they are not sold to the public generally ; are conditions and exceptions not covered by any term in Section 1801 of the Internal Revenue Code. The language of the act contains no qualifications as to grade of security, reason for its registration, or that it must be offered to the public generally. That the original obligations for which the notes in question were issued, were not subject to the tax, is of no importance. It was by the change from the unregistered to registered securities that the notes came within the purview of the Act. In the absence of qualifying words in the Act, this Court is without power to write them into the law. In the Willcuts case, the Court made the following observation on distinguishing features that rendered corporate securities taxable or non-taxable: “The statute makes no distinction for taxing purposes between absolute and conditional obligations to pay; the latter as well as the former are taxed.”

The testimony of brokers as to what was considered corporate securities by them, namely stocks, bonds, and debentures, if followed, would nullify the provision in the statute which, after naming specifically bonds, debentures and certificates of indebtedness, proceeds to provide that “all instruments, however termed, issued by any corporation with interest coupons or in registered form, known generally as corporate securities,” shall be subject to the tax. We find nothing in the Act, nor any authority to support the defendants’ position that the term “known generally” is restricted to what those engaged in the stock broker’s business consider “corporate securities.”

We conclude that the securities issued by the defendants under the agreement with the trust company are subject to the stamp tax. Findings of fact, conclusions of law, and order will be submitted.

       Following is a copy of the printed form of note used:
      - Note No. - St. Louis, Missouri, -, 19—
      “One (1) year after demand, for value received, we promise to pay to the order of - - Dollars with interest from date at the rate of-per cent per annum.
      “The principal of this note to be payable at the office of the Mississippi Valley Trust Co. in the City of St. Louis, Missouri, interest to be payable monthly at the office of the Company in the City of St. Louis, Missouri.

        “The undersigned shall have the privilege of paying this note prior to its maturity date by giving the registered owner hereof ninety (90) days’ written notice of its intention so to do; and at the end of said 90-day period, shall be entitled to deposit at the Mississippi Valley Trust Co. for the benefit of the undersigned the amount due on said note plus accrued interest, including said 90-day period, which amount shall be applied towards the payment of this note. Should the registered owner fail to surrender his note and receive the money deposited for the payment thereof after said 90 day period, no further interest shall be due or payable to the registered holder after said time.
      “This note is subject to the terms of a certain contract dated the second day of January, 1940, between the undersigned and the Mississippi Valley Trust Co. of St. Louis, Missouri, which contract is by reference made a part hereof as if fully set out herein; and for valuable consideration, the claim represented, by this note is hereby subordinated to the claim of any bank or trust company that may have or may hereafter extend credit to the Royal Loan Company.
      “This note shall not become or be valid for any purpose until registered by the Mississippi Valley Trust Co., and no transfer hereof shall be valid unless endorsed by the registered holder hereof to a registered transferee, and a new note issued and the new note registered by the said Mississippi Valley Trust Co.
      “Royal Loan Company,
      “By ---
      President.
      “By-
      “Registrar’s Certificate.
      “This is to certify that this note has been duly registered in the name of the above holder on the records of the undersigned.
      “Mississippi Valley Trust Company
      “By -
      Trust Officer.”

       Sec. 1801. Corporate securities—
      “On all bonds, debentures, or certificates of indebtedness issued by any corporation, and all instruments, however termed, issued by any corporation with interest coupons or in registered form, known generally as corporate securities, on each $100 of face value or fraction thereof, 10 cents until July 1, 1941, and 5 cents thereafter: Provided, That every renewal of the foregoing shall be taxed as a new issue: * * 26 U.S.C.A. Int.Rev.Code § 1801.


author: PRAY, District Judge.

text:
    UNITED STATES v. SLOAN.
    No. 10671.
    District Court, D. Montana.
    June 18, 1945.
    John B. Tansil, U. S. Dist. Atty., of Billings, Mont., for plaintiff.
    Swanberg & Swanberg, of Great Falls, Mont., for defendant.
   PRAY, District Judge.

In this proceeding the United States is seeking to remove the defendant in the above entitled cause from the District of Montana to the Territory of Alaska for trial on an indictment charging perjury, in falsely testifying before a United States Commissioner, in Alaska, in making his application for a marriage license and in stating that he had been married only once whereas in truth and in fact he had been married twice, and that he knew of no reason why the marriage ceremony could not be solemnized, whereas, as charged, he was then legally married to another woman, an interlocutory decree of divorce granted three years before not having been made final.

The contention of the defendant is that the government has not the right to invoke the aid of the removal statute under the indictment in question, which does not disclose the commission of an offense against the United States.

Section 591 of Title 18 U.S.C.A. begins as follows: “Section 591. Arrest and removal for trial. For any crime or offense against the United States, the offender may, by any justice or judge of the United States, or by any United States commissioner, * * * be arrested or imprisoned, or bailed, as the case may be, for trial before such court of the United States as by law has cognizance of the offense. * * * ” This statute further provides for the removal of the offender to the district where the trial is to be had.

The general charge is perjury, committed as set forth in the indictment, in making application for a marriage license to a United States Commissioner in Alaska. The facts alleged in the indictment apparently are fully covered by the Territorial laws of Alaska, and describe an offense committed in violation of such laws¡

Section 231, Title 18 U.S.C.A., defines perjury as follows: “Whoever, having taken an oath before a competent tribunal, officer, or person, in any case in which a law of the United States authorizes an oath to be administered, that he will testify, declare, depose, or certify truly, or that any written testimony, declaration, deposition, or certificate by him subscribed, is true, shall willfully and contrary to such oath state or subscribe any material matter which he does not believe to be true, is guilty of perjury, and shall be fined not more than $2,000, and imprisoned not more than five years.” On the question presented the material part of the above definition is found in the words “in any case in which a law of the United States authorizes an oath to be administered.”

Counsel for the defendant contends that no such law of the United States can be found wherein a United States Commissioner has authority to administer an oath on an application for a marriage license, and the Court thus far has been unable to find such a law, and counsel for the government in the oral argument made no reference to such a law, and in fact seemed inclined to accept the views of counsel for the defendant in that respect, subject to further investigation.

If no law of the United States is involved, has the court the authority to order the removal of the defendant in this proceeding, or should the authorities in Alaska have resorted to a proceeding for the extradition of the defendant? The leading case on the subject and one which seems to be clearly in point is that decided by Judge Neterer in Ex Parte Krause, D.C., 228 F. 547, 549. In that case an attempt was made to remove a defendant to the Territory of Alaska on the charge of kidnapping which the court held was not an offense against the laws of the United States but was an offense against the laws of the Territory of Alaska.

The court stated therein: “It is fundamental that the United States courts, as such, can only entertain jurisdiction of offenses against the United States. If the offense charged is not an offense against the United States, this court would not have jurisdiction to try the petitioner if it had been committed within this district, and that, I think, is the criterion by which this issue must be determined. The question is not, Has the District Court of Alaska jurisdiction? For that court acts in a dual capacity, one in administering the laws of the United States, and the other in administering the local laws of the territory. The Supreme Court of the United States, in the case of Coquitlam, 163 U.S. 346, 16 S.Ct. 1117, 41 L.Ed. 184, held that the District Court of Alaska is to be regarded as the Supreme Court of the territory, within the meaning of section 15 of the act of March 3, 1891 (26 Stat. 830, c. 517), and because of such status and order of the Supreme Court, a decree of that court was subject to review by the Circuit Court of Appeals of the Ninth Circuit. Justice Harlan, in McAllister v. United States, 141 U.S. 174, 179, 11 S.Ct. 949, 951, 35 L.Ed. 693, said: ‘It is clear that the District Court for Alaska was invested with the powers of a District Court and a Circuit Court of the United States, as well as with general jurisdiction to enforce in Alaska the laws of Oregon’ — which, by section 7 of the act of May 17, 1884, (23 Stat. 24, c. 53), was declared to be the law of Alaska so far as they were applicable and not in conflict with the provisions of that Act or of the laws of the United States, and held that a judge of the District Court of Alaska is not a judge of a court of the United States within the generally accepted meaning of that term. * * * The Compiled' Laws of Alaska have no greater force than a law enacted by a territorial Legislature, subject to congressional approval, and as such its provisions are not laws of the United States, and do not come within the cognizance of the United States courts.. Maxwell v. Federal Gold & Copper Co., 155 F. [110], 111, 83 C.C.A. 570; In re Moran, 203 U.S. 96, 27 S.Ct. 25, 51 L.Ed. 105; United States v. Jones, Adms., 236 U.S. 106, 35 S.Ct. 261, 59 L.Ed. 488 [Ann.Cas.1916A, 316]. Chief Justice Marshall, in United States v. Burr, 25 Fed.Cas. [pages 187], 188, No. 14,694, says: ‘No man can be condemned * * * in the-federal courts on a state law.’ Nor does it seem to me that the provisions of section 1014, supra [18 U.S.C.A. § 591], can be-extended to territorial affairs as such.”

Among other pertinent questions discussed in this decision, the Court calls, attention to the fact that the authorities, of Alaska have a full and complete remedy under the provisions of the extradition laws which are open to all the states and' territories. It does not seem to this Court-that the offense charged in the indictment-as perjury in an application for a marriage-license, made to a United States Commissioner in Alaska, is any more an offense-against the laws of the United States than, was the offense of kidnapping in theKrause case. It would appear that the intent of Congress was to treat the Criminal Code of Alaska as a territorial act as distinguished from the laws of the United States. United States v. Pridgeon, 153 U.S. 48, 14 S.Ct. 746, 38 L.Ed. 631; Jackson v. United States, 9 Cir., 102 F. 473.

In United States ex rel. McDermott v. Jaeger et al., 2 Cir., 126 F.2d 1002, 1003, the Court held: “Whether the crime is an offense against the United States or is merely a local offense turns not on the procedural entitlement of the case but on the nature of the crime. If it were only a local offense then it seems that extradition would be required, as has been held with respect to Alaska, Ex Parte Krause, D.C.W.D.Wash., 228 F. 547, but the situation is otherwise as to a charge of a federal crime. United States v. Haskins, D.C. Cal. Fed.Cas.No. 15,322.”

Consequently the Court is of the opinion that no authority is vested in the Court to •order the removal of the defendant to Alaska, and such is the ruling herein.


author: LEAVY, District Judge.

text:
    STEVENS v. WALKER.
    No. 662.
    District Court, W. D. Washington, S. D.
    July 14, 1945.
    Wm. P. Lord and Ben Anderson, both of Portland, Or., and James W. Mifflin, of Seattle, Wash., for plaintiff.
    Teats & Teats, of Tacoma, Wash., for defendant.
   LEAVY, District Judge.

This matter was presented to the court on the defendant’s motion for a summary judgment seeking a dismissal of the plaintiff’s action. The motion for a summary judgment is based upon Rules 12(c) and 56 (b), Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c.

The case is at issue and ready to be set down for trial. The defendant pleads the Oregon Statute of Limitations and the Oregon Law of Partnership, and the allegations in this regard have been admitted by the plaintiff in his reply.

The motion was heard by the court on oral argument on May 7, 1945, and the defendant relied upon two grounds in support of his motion: First, that the asserted claim for damages grew out of the negligent operation of a co-partnership business, of which co-partnership the defendant was a member; second, that the action was barred by the statute of limitations of the State of Oregon, where the injury occurred.

Following the argument, the matter was taken under advisement, and the court asked that counsel submit written briefs touching on the issue of the statute of limitations.

Each of the parties was given a limited time in which to file a memorandum of authorities; the defendant was first to submit his authorities on or before May 15, 1945, which he did, and the plaintiff was given until June 1. On June 1, plaintiff applied to have the time extended to and including June 15, 1945, in which to file his memorandum of authorities. This application was granted by a formal order. The plaintiff to this date has failed to file any memorandum of authorities, and the court makes a disposition of the motion without the aid of such memorandum.

The contention of the plaintiff was that the Washington Statute of Limitations applied, while the defendant contended that the Oregon Statute applied. The court is of the opinion and finds that the Oregon Statute of Limitations must be given application in this cause, since it is in that State where the alleged injury and damages took place and the right of action rose. The date of the claimed injury is April 17, 1942. The action was commenced in this court by the filing of a complaint on October 5, 1944. The Oregon statute fixes the limitation for an action of this nature at two years, while the Washington statute has a three year limitation.

Having found that the Oregon Statute of Limitations and not the Washington Statute applies, we come then to the question raised by the plaintiff that even though the court should hold the Oregon Statute of Limitations should apply, the allegations of the plaintiff, which are admitted by defendant, are that the defendant during all times subsequent to the date of plaintiff’s injury was absent from the State of Oregon, and under such circumstances, the Oregon Statute of Limitations would be tolled.

The issue raised by the defendant’s motion as to whether an action against one member of a co-partnership in a tort action, such as we have here, is a joint liability and not a joint and several one,' need not be considered, in view of the court’s finding that this action is governed by the Oregon Statute of Limitations. The State of Oregon had adopted, and had in effect at the time liability herein arose, the Uniform Partnership Act.

The plaintiff’s action, being governed by the Oregon Statute of Limitations, is therefore barred by the two year limitation, unless the further provision in the Oregon Statute relative to tolling the same during the absence of the defendant from that State, must be given application. The authorities cited by the defendant in his memorandum, together with others that the court has examined, clearly establish the law to be that the provision in the Oregon Statutes, tolling the same during a party’s absence from the state, have no application in the instant case. This action is brought in a Federal Court, and such court’s process at all times since the date of the origin of the cause of action could have been invoked as against the defendant herein, irrespective of whether he was within or without the State of Oregon. The absence of the defendant from the State of Oregon in no manner affected the plaintiff’s right to bring the action in this court, since the amount involved and the diversity of citizenship appear as facts in the pleadings, and the case is therefore governed by the law as announced in the following cases: Stern v. La Compagnie Generale Transatlantique, D.C., 110 F. 996; Pond Creek Mill & Elevator Co. v. Clark, 7 Cir., 270 F. 482; The Harrisburg, 119 U.S. 199, 7 S.Ct. 140, 30 L.Ed. 358; Davis v. Mills, 194 U.S. 451, 24 S.Ct. 692, 48 L.Ed. 1067.

All of the foregoing authorities support the rule that if an action is barred by the law of the state where it has its origin, under facts such as are here admitted by the pleadings, the same would likewise be barred in a federal court, even where such federal court is located in another state.

In the Stern case, supra [110 F. 1000], the court said:

“Under such circumstances there is no-sound reason why in this suit founded solely upon the New Jersey statute and brought in a federal court, the time limit of the statutory proviso should not be applied according to its terms.”

In that case, as in the case at bar, the action was brought in a Federal Court in-a state other than the one where the cause of action arose; the state where the action originated being New Jersey, and where it was instituted being New York; and, there, as here, it was contended that the-defendant was not a resident of the State-of New Jersey, and could not be served with process therein, and, therefore, the absence of the defendant from the State of New Jersey had the effect of tolling that state’s statute of limitations. The situation in reference to the applicability of the state statute of limitations is identical with that in the instant case, even though the action was one brought in admiralty.

In the Pond Creek Mill & Elevator Co. case, supra, from the 7th Circuit, it was said [270 F. 488]:

“ * * * the place of performance of the contract would be regarded as Olda-hnma, and the right of action there accrued, and, the action being there barred after five years, the Illinois statute will give effect to this limitation, and bar it in Illinois.”

The Court is not arriving at its decision based upon the application of the Washington Statute, but wholly disregards the same as having no application whatever to the admitted facts as disclosed by the pleadings herein; and rests its decision solely upon federal practice.

In The Harrisburg case, supra, the Supreme Court of the United States uses the following language [119 U.S. 199, 7 S.Ct. 147]:

“The time within which the suit must be brought operates as a limitation of the liability itself as created, and not of the remedy alone. * * * Time has been made of the essence of the right, and the right is lost if the time is disregarded. The liability and the remedy are created by the same statutes, and the limitations of the remedy are therefore to be treated as limitations of the right.”

The foregoing direct and unequivocal statement of the law by the Supreme Court of the United States is in point in this case. The liability upon which recovery is sought is one dependent upon laws of the State of Oregon. The right to maintain such an action within a fixed time is likewise provided by the laws of Oregon, and those laws provide a two-year limitation of such right.

Had plaintiff seen fit to sue the defendant in the state courts of Washington, he could not have extended the time in which to bring his action by asserting the Washington Statute of Limitations, because it is provided by statute in Washington that:

“Foreign statutes of limitations, how applied. When the cause of action has arisen in another state, territory, or country between nonresidents of this state, and by the laws of the state, territory or country where the action arose, an action cannot be maintained thereon by reason of the lapse of time, no action shall be maintained thereon in this state.” Rem.Rev.Stat. of Wash. § 178.

In Davis v. Mills, supra, Justice Holmes, speaking for the Supreme Court, stated the law as follows [194 U.S. 451, 24 S.Ct. 695]:

“The essential feature of that cause of action is that it is one in the jurisdiction which created it; that it is one elsewhere is a more or less accidental incident. If the laws of Montana can set the limitation to the domestic suit, it is the least possible stretch to say that they may set it also to a foreign action, even if-to that extent an existing right is cut down.”

The pleadings herein disclose that the liability sought to be recovered upon had its origin in the State of Oregon. The remedy to effect a recovery is limited to two years. The tolling provision of the Oregon Statute is without application in a federal court, whose process was at all times available and could have been made effective within the time limits of such statute, had the plaintiff seen fit to institute his action within such time limits. Had the plaintiff seen fit to sue in the state courts of Washington, where the defendant was a resident, subsequent to two years after his right of action arose, he would have been barred by reason of the provisions of the law of Washington, which has been quoted herein.

To give application as contended for by the plaintiff to the tolling provision of the Oregon Statute, or the three year limitation of the Washington Statutes, would result in recognizing a liability that could not be maintained in the domestic courts of either state, and, thus, extend the time for instituting an action beyond that fixed by the laws of limitations of both states. It can thus readily be seen that such a situation would have the effect of extending the time for bringing an action beyond that recognized in either state, and this can not be accomplished by passing over the state courts and invoking the jurisdiction of the federal courts.

I have been cited to no authorities holding contrary to the above cited cases, and I have found none from independent research. Therefore, I hold that the Oregon Statute of Limitations of two years applies; that this action was not instituted within the time limited in such Statute, and the defendant is entitled to a summary judgment in his favor, dismissing the action.


author: BARD, District Judge.

text:
    STOKES v. ROTHENSIES, Collector of Internal Revenue.
    No. 3196.
    District Court, E. D. Pennsylvania.
    June 29, 1945.

      Edgar J. Goodrich and Walter J. Bro-byn, both of Washington, D. C., and F. H. Spotts (of Pepper, Bodine, Stokes & Schoch), all of Philadelphia, Pa., for plaintiff.
    Harold D. Cohen, Sp. Asst. to Atty. Gen., for defendant.
   BARD, District Judge.

This is an action by Edward Lowber Stokes to recover $37,706.41, representing an allegedly excessive income tax paid by plaintiff for the calendar year 1936 and an assessment for the same calendar year made by the Commissioner of Internal Revenue together with interest from the dates of payment.

I make the following special

Findings of Fact

1. For the calendar year 1936 plaintiff paid to defendant in quarterly installments amounts totalling $44,004.67, representing individual income tax as reported and computed on his return for that year. Thereafter, on February 19, 1938, pursuant to an additional assessment by the Commissioner of Internal Revenue for the year 1936, plaintiff paid to defendant an alleged deficiency of $19,894.07, plus interest of $1060.11, or a total additional assessment of $20,954.18. On October 3, 1939, plaintiff received a refund in the principal amount of $501 together with interest of $26.70.

2. On March 9, 1940, plaintiff filed a timely claim for refund with defendant, which was rejected by the Commissioner of Internal Revenue on December 11, 1942.

3. From 1922 to November 4, 1931, plaintiff was a partner in the firm of Edward Lowber Stokes and Company, dealer in securities. On November 4, 1931, the partnership dissolved and thereafter plaintiff carried on the business individually and' as sole proprietor under the same firm-name.

4. Prior to 1936 the accounting, practice of the partnership, followed by plaintiff as sole proprietor, had been to inventory at market prices all unsold securities carried in the investment or securities account and the income for tax purposes was computed on the basis of the inventory figures.

5. On December 18, 1936, plaintiff created a new account on his books designated “Personal B” Account, and to it transferred from the company’s securities account four .issues of municipal bonds valued at original cost price. The cost and market values of these bonds were as follows :

Market Market
Value at Value at
Par Value Cost 12/18/36 12/31/36
150.000 Allegheny Co. Pa. 2%’s 152,842.80 156.750.00 162,000.00
100.000 New York City 3%’s, 7/1/75 101,656.25 106.500.00 109.000. 00
225.000 New York City 3y2’s, 1/15/76 228.375.00 248.625.00 256,500.00
100.000 New York City 4’s, 10/1/80 112.625.00 111,218.75 125.000. 00

6. These bonds were not included in the closing inventory of the company for 1936, and their appreciation in book value was not reflected in plaintiff’s income tax return. The deficiency assessed against plaintiff by the Commissioner of Internal Revenue was based on the exclusion of these. bonds from inventory.

7. Included in the closing inventory for 1936 were the following government bonds of which the cost and market values as of December 31, 1936, were as follows:

Market
Value
Par Value Cost 12/31/36
1.300.000 U.S.Treasury 1%’s, 12/15/41 1,300,000.00 1,306,500;00
1.000 000 U.S.Treasury 2%’s, 12/15/49 1,006,850.78 1,014,687.50
350.000 U.S.Treasury 2%’s, 9/15/56-59 357,585.94 360,500.00
350.000 U.S.Treasury 2%’s, 1955-60 363,093.75 366,187.50

Plaintiff included in his 1936 income for federal tax purposes the excess of the market value of these government bonds over their cost, as shown in the closing inventory.

8. On December 15, 1936, plaintiff exchanged Treasury notes of an aggregate par value of $1,600,000, and aggregate cost of $1,621,777.34, for Treasury notes and bonds of the aggregate par value of $1,600,000, and an aggregate market value on that date of $1,613,375.

9. Plaintiff wrote off losses of $21,777.-34 based on the difference between the original cost of the bonds and notes and the face value of the bonds and notes which were received in exchange. Plaintiff included the new Treasury bonds and notes in the inventory appraisal of December 31, 1936, at their then market value of $1,610,906.25, creating an inventory profit of $10,906.25, so that a net loss of $10,871.09 on the exchanged government securities was reflected on his books and in his income tax return for 1936 (see par. 7 supra).

10. The inventory of December 31, 1936, contained miscellaneous industrial and railroad bonds and stocks listed in the Investment Account as follows:

11. Plaintiff included the excess of market value over the cost of the bonds and stock in the 1936 income for federal tax purposes, as shown in the closing inventory.

12. The securities listed in paragraphs 5, 7 and 10 were commingled on the books of the plaintiff with other securities held for resale to customers and were an integral part of plaintiff’s business as dealer. They constituted securities which were held by plaintiff for resale to his customers in the ordinary course of his business as a dealer in securities.

Discussion

Taxpayer has engaged in the securities business for many years under the trade name of Edward Lowber Stokes & Co. Until November 1931 the company was a partnership composed of taxpayer and his brother, but thereafter taxpayer carried on the business individually and as sole proprietor under the same firm name. Despite termination of the partnership, taxpayer continued to file for each year a company return on Partnership Form 1065 showing the income from the business with himself as 100% distributee. In addition he filed Form 1040, the individual income tax return, showing as his-' distributive share from Edward Lowber Stokes and Company the amount set forth in Form 1065, as well as other income from personal investments and' speculations.

In the Form 1065 return for 1936 taxpayer computed the company’s income by inventorying the unsold securities on hand at their respective market values. Included among the securities in the closing inventory were four issues of.United States Treasury bonds with a par value of $3,-000,000 and twenty-two issues of miscellaneous industrial securities. Shortly before the end of the taxable year taxpayer transferred four issues of municipal bonds to a new “Personal B” account. Since these municipal bonds were not included in the closing inventory, their appreciation in value was not reflected in the company income which was declared for tax purposes. In 1938 a deficiency of $19,894.07, plus interest of $1060.11, was assessed by the Commissioner on the theory that the appreciation of these municipal bonds should have been reflected as profit in the 1936 return.

Market
Value
Par Value or Number Cost 12/31/36
$388,000 miscellaneous industrial $283,416.81 $296,480.00 and railroad bonds
835 shares miscellaneous stocks 82,404.40 79,362.50

Taxpayer filed a claim for refund on the ground that the municipal bonds, the Treasury bonds, and the miscellaneous industrial securities were investment items and were not held as “stock in trade” and, therefore, were not inventoriable. After denial of the claim for refund, taxpayer brought this action to recover the alleged excessive payment of tax resulting from overstatement of income and the alleged erroneous assessment for the taxable year 1936.

Municipal Bonds

(A) On December 31, 1935, taxpayer purchased Allegheny County 2%% bonds par value $250,000 from Brown, Harriman and Company. Purchase of the bonds was financed by a loan from Fidelity-Philadelphia Trust Company to the extent of 99% of par value and the bonds were delivered directly to the bank as collateral. The purchase was entered in a company account entitled “Special Account — Participation: Company 150 M — W. Standley Stokes 100 M.” The company disposed of bonds in the amount of $100,000 to various bond dealers between March 10 and September 29, 1936, the last sale of fifty bonds being made on that day. On September 29th plaintiff requested Mellon National Bank to submit a bid for $100,000 bonds, which would have reduced plaintiff’s holding to $50,000 bonds, but the bank was uninterested. The bonds were repeatedly advertised for sale in the “Blue List,” a trade periodical circulated among dealers and other prospective purchasers, from February 20, 1936, to June 1936. Bonds in the value of $150,000 remaining in the account were transferred to “Personal B” account on December 18th and were not included in the closing inventory of 1936.

(B) On February 20, 1936, taxpayer opened a new account in his books for New York City 3J4% bonds. Numerous purchases were made from bond dealers between February 20th and May 21st, to-talling $300,000 of these bonds. Between April 2nd and June 16th several sales were made to bond dealers which reduced the total value of these bonds owned by taxpayer to $150,000. On September 29th and November 24th plaintiff sold two $25,-000 blocks of these bonds to dealers, reducing the total to $100,000. This amount was transferred to the “Personal B” account on December 18th and was not included in the closing inventory of 1936. All of these bonds were pledged to the Chase National Bank or the Fidelity-Philadelphia Trust Company as collateral security for loans exceeding 90% of their value.

(C) Plaintiff purchased $250,000 New York City 3%% bonds on February 28, 1936, from bond dealers and deposited' them with Fidelity-Philadelphia Trust Company as collateral security for loans. Several purchases and sales of this issue were made in May and June 1936 in twenty-five bond blocks. On September 29th taxpayer sold $25,000 bonds from those deposited as collateral with the bank. The remaining bonds totalling $225,000 were transferred to the “Personal B” account on December 18th and were not included in inventory at the end of the year.

(D) Plaintiff purchased $100,000 of New York City 4% bonds on July 8, 1936, which were deposited with Fidelity-Philadelphia Trust Company as collateral on a loan. On August 31st, plaintiff’s New York office transferred $50,000 bonds which had- been purchased at a prior date to the Philadelphia office. Plaintiff offered this issue for sale in the Blue List several times during the month of August. On October 1st and November 25th plaintiff sold blocks of twenty-five bonds to bond dealers, reducing his holding to $100,000 of this issue which was subsequently transferred to the “Personal B” account on December 18th and was not included in the closing inventory of 1936.

United States Treasury Bonds and Notes

For several years prior to 1936 plaintiff dealt in United States Government bonds and notes. During 1936 plaintiff made approximately 150 sales of government securities with a par value of about twenty-three million dollars and purchased a like amount. His purchases were financed by loans from banks at a very low rate of interest — as low as 1/4 of 1%. Plaintiff was not considered a “specialist” in government securities since he did not carry a sufficiently large and varied stock; he did not advertise as a government bond specialist; he did not issue daily printed quoted quotations; he did not have wire connections throughout the country which would enable the instant quotation of prices and instantaneous purchases and sales. This, however, does not prevent him from being a dealer. Helvering v. Fried, 299 U.S. 175, 57 S.Ct. 150, 81 L.Ed. 104.

On December 15, 1936, plaintiff exchanged $1,600,000 par value government notes and bonds for a new issue at the same par value, suffering a loss of $21,777.-34, the difference between the original cost of the government securities and the par value of the new issue, which loss was reflected on his books. Plaintiff included his total holdings of government notes and bonds, totalling $3,000,000 par value, including the notes and bonds received in the exchange in his closing inventory for 1936.

Miscellaneous Listed Securities

On December 31, 1936, plaintiff included twenty-two miscellaneous industrial and railroad bonds and stocks in the closing inventory for income tax purposes which he now claims was an erroneous inclusion of profit. Except for one or two of the securities, they were listed on the stock exchange and were purchased in the open market from members of the Stock Exchange, of which plaintiff was not a member. These securities were carried in the so-called “Investments” account. This account was a miscellaneous, catch-all account in which plaintiff listed all securities which he did not desire to include in an individual or company account regardless of whether the security was, in fact, held for investment purposes. Plaintiff’s books showed sixty-five purchases and twenty-five sales of securities listed in the “Investment” account and the value of the securities therein listed at the end of 1936 was approximately $375,000.

The Revenue Act of 1936 permits the use of inventories to compute income for tax purposes whenever, the Commissioner determines that the use of inventories is necessary to clearly reflect income. Under the Act the Commissioner is authorized to prescribe the conditions under which the inventory method may be used in a particular business. The Commissioner’s Regulations promulgated pursuant to that authority permit a dealer in securities to use the inventory method to determine income. In defining the term “dealer in securities” the Commissioner has ruled: “* * * For the purpose of this rule a dealer in securities is a merchant of securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom. If such business is simply a branch of the activities carried on by such person, the securities inventoried as here provided may include only those held for purposes of resale and not for investment. Taxpayers who buy and sell or hold securities for investment or speculation, irrespective of whether such buying or selling constitutes the carrying on of a trade or business, and officers of corporations and members of partnerships who in their individual capacities buy and sell securities, are not dealers in securities within the meaning of this rule.”

This regulation has been interpreted to require that the taxpayer, in order to be classified as a dealer, hold himself forth as a merchant in securities, in the sense that he must carry a stock of goods to be sold to customers as they appear. Leach Corporation v. Blacklidge, D.C., 23 F.Supp. 622. There must be an offering of wares to customers with a primary view to a distributing profit which may be derived from a middleman operation in securities. United States v. Chinook Inv. Co., 9 Cir., 136 F.2d 984. Therefore, it is essential that there appear an element of resale to regular customers who repeatedly buy from the taxpayer and that the taxpayer maintain a supply of securities which he offers for sale to these customers. Shafer v. Helvering, 299 U.S. 171, 57 S.Ct. 148, 81 L.Ed. 101. Where the taxpayer holds the securities for the income which they are expected to yield rather than for the profit which he hopes to obtain on resale to customers, he is considered an investor and not a dealer in securities. United States v. Chinook Inv. Co., supra. Likewise, a broker who buys and sells securities on the customer’s order acting as an agent and deriving his income from commissions is not considered a dealer in securities. Seely v. Helvering, 2 Cir., 77 F.2d 323.

The taxpayer may be a dealer or merchant as to one class of securities and at the same time he may be holding other securities as to which he is not a dealer in securities. Harriman National Bank v. Commissioner of Internal Revenue, 2 Cir., 43 F.2d 950; Hammitt v. Commissioner of Internal Revenue, 3 Cir., 79 F.2d 494. It is therefore the duty of this Court to determine whether the taxpayer purchased and held the municipal bonds, the government bonds and notes, and the industrial and railroad securities, not for investment «or speculation, but for resale at profit to regular customers as a dealer in securities. Commissioner of Internal Revenue v. Charavay, 3 Cir., 79 F.2d 406; Oil Shares, Inc., v. Commissioner of Internal Revenue, 29 B.T.A. 664. If taxpayer was a dealer in securities within the meaning of the Regulation, the securities were proper inventory items and plaintiff may not recover any portion of the income tax paid for the calendar year of 1936.

However, plaintiff urges that, as to the three groups of securities, he was an investor for his own account and not a dealer; that he was therefore not entitled to include these securities in the closing inventory; that his income for tax purposes was improperly inflated by the erroneous inclusion of these securities in the closing inventory; and that he is entitled to recover the income tax paid on the excessive income reflected in his 1936 income tax return and the assessment made by the Commissioner.

Section 22(c) of the Revenue Code delegates virtually complete discretionary authority to the Commissioner in the field of inventories, Riverside Mfg. Co. v. United States, 67 Ct.Cl. 117, certiorari denied 279 U.S. 863, 49 S.Ct. 479, 73 L.Ed. 1002. Where the Commissioner has exercised his authority, the burden rests upon the taxpayer to show that the Commissioner’s action was plainly arbitrary or capricious before his decision can be reversed. Lucas v. Kansas City Structural Steel Co., 281 U.S. 264, 50 S.Ct. 263, 74 L.Ed. 848; Swift Mfg. Co. v. United States, 12 F.Supp. 453, 81 Ct.Cl. 932; Finance & Guaranty Co. v. Commissioner of Internal Revenue, 4 Cir., 50 F.2d 1061. The determination of the Commissioner is prima facie correct and it can be overcome only by clear and convincing proof of error. Louisville Cooperage Co. v. Commissioner of Internal Revenue, 6 Cir., 47 F.2d 599; Wood & Ewer Co. v. Ham, D.C., 14 F.2d 995. Therefore it is incumbent upon plaintiff to prove that the Commissioner’s determination that plaintiff was a dealer in securities and that the securities were proper inventory items was arbitrary and capricious. He has not sustained this burden.

Plaintiff conducted his securities operations as “Edward Lowber Stokes & Co.” with the principal office in Philadelphia and branch offices in New York City and Boston. The company was listed in “Security Dealers of North America,” a trade publication, as participating distributors and dealers in municipal, railroad and public utility bonds. The company made offerings of municipal bonds in the “Blue List of Current Municipal Offerings,” a trade publication in which purchases of securities were solicited by dealers. Taxpayer regularly sold his securities to a group of securities dealers and brokerage houses. They were his customers to whom he sold, without distinction, acknowledged trading securities together with the securities which he now claims were held for investment. Helvering v. Fried, 299 U.S. 175, 57 S.Ct. 150, 81 L.Ed. 104.

Throughout the calendar year of 1936 the alleged investment securities were commingled with other trading items on the taxpayer’s books. The books showed no distinction between investment and trading securities. Practically all securities, regardless of character, were placed on loan with the Fidelity-Philadelphia Trust Company and the Chase National Bank. There was nothing in the method of handling the securities, whether in bookkeeping methods, financing, or purchases and sales, which would show objectively any clear line of demarcation between the securities admittedly held for resale and the securities which taxpayer now claims were held for investment purposes.

Plaintiff contends that he always intended to hold the securities in question as investment items. He urges that he should not have been required to pay an inflated tax merely because the investment character of the securities was not clearly indicated on his books of account. Prior to 1931, when the partnership was an active dealer in securities, the bookkeeping system efficiently reflected the merchandising of securities and the inventories of stock on hand. After the retirement of plaintiff’s brother from the partnership, the argument continues, plaintiff shifted his activities from merchandising to investing on his own account. It never occurred to him that this change in the nature of his business necessitated a change in the system of accounts in order to separate the investment items.

This alleged subjective intent is inconsistent with much of the evidence produced. Plaintiff had expert accounting advice available at all times. It is inconceivable that his accountants were unfamiliar with rulings of the Commissioner and with the necessity of separating investment items. During this entire period plaintiff carried a separate personal account on his books but, strangely enough, failed to carry therein any of the securities he now claims to be investments.

The fact that almost the entire purchase price of the securities was borrowed from banks is inconsistent with an intention to hold the securities for investment purposes. The slightest fluctuation in the market would require disposal of the securities. It is of little significance that plaintiff held the securities over a period of months before their sale early in 1937. If a security is rising on the market, it is ordinary business practice among dealers to hold the security to reap the profits of the “bull market." In every business in which property is bought and sold there is an unavoidable element of investment and speculation. United States v. Chinook Inv. Co., supra, but the fact that a dealer in securities may avail himself of this element when it inures to his advantage does not, ipso facto, make him an investor or speculator.

Although plaintiff obtained income from the difference between the interest and coupon rate of the securities and the low interest charged by the lending banks, this did not serve to distinguish the securities as investments. This earning on the “carry” is regarded as an integral part of their business by all dealers in securities and the mere fact that this margin was relatively high in 1936 did not make the taxpayer an investor.

A basic requirement under Section 22(c) of the Revenue Act is that use of inventories must clearly reflect income. Trojan Powder Co. v. United States, 13 F.Supp. 61, 82 Ct.Cl. 312. It is essential to attain a clear reflection of income that the inventory practice of a taxpayer be consistent from year to year. Pittsburgh Bridge & Iron Works, Inc., v. Heiner, D.C., 25 F.2d 900. To assure consistency Regulation 94, Article 41 — 2 provides a method for withdrawal from the inventory system, requiring that one seeking withdrawal from the inventory system obtain the approval of the Commissioner and adjust his inventory so that the new accounting method will clearly reflect income. Plaintiff cannot disregard the Regulation and arbitrarily withdraw securities from inventory to avoid the effect of a rising stock market upon the income reflected by inventory. Nor is he entitled to aid from this Court in an action brought to obtain substantially the same result.

The weight of the evidence leads to a conclusion that plaintiff was a “dealer in securities” as defined in Regulation 94, Article 22(C) — 5, with regard to all of the securities in issue. Plaintiff’s income tax for 1936, which included the inventory income on the United States Treasury bonds and notes and the miscellaneous industrial and railroad bonds and stocks, and the Commissioner’s assessment for the inventory income on the municipal bonds which were withdrawn from inventory by the taxpayer, were properly computed. Judgment must be for defendant.

I make the following

Conclusions of Law

1. Plaintiff was a dealer in securities as defined in Treasury Regulation 94, Article 22(C) — 5, with respect to the municipal bonds, United States Treasury bonds and notes, and the miscellaneous railroad and industrial securities.

2. The United States Treasury bonds and notes and the miscellaneous railroad and industrial securities were properly in-eluded in the closing inventory of Decern-ber 31, 1936, for the purpose of computing plaintiff’s income for tax purposes for the calendar year 1936.

3. The additional assessment for 1936 by the Commissioner of Internal Revenue based upon plaintiff’s failure to include the municipal bonds in the closing inventory was properly assessed.

4. Judgment may be entered for the defendant.

       Act of June 22, 1936, c. 690, Title I, § 22(e), 49 Stat. 1658, 26 U.S.C.A. Int. Rev.Code, § 22(e):
      “Whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.”

       Regulation 94 (1936 Ed.), Art. 22(c) — 5.

       Regulation 94 (1936 Ed.), Art 22(c) — 5.


text:
    MISSISSIPPI VALLEY TRUST CO. v. UNITED STATES (two cases). BUELTERMANN v. SAME.
    Nos. 3196-3198.
    District Court, E. D. Missouri, E. D.
    June 23, 1945.

      Abraham Lowenhaupt, H. M. Stolar, and Fred L. Kuhlmann, all of St. Louis, Mo., for plaintiffs.
    Harry C. Blanton, U. S. Atty., of Sike-ston, Mo., and Russell Vandivort, Asst. U. S. Atty., of St. Louis, Mo. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Andrew D. Sharpe and F. A. Michels, Sp. Assts. to the Atty. Gen., on the brief), for defendant.
   HULEN, District Judge.

These actions for refunds of federal income taxes were consolidated because they grow out of the same transaction, and are based upon the same facts. Each plaintiff seeks judgment for taxes paid upon his portion or interest in the value of a building that had been erected by lessee and forfeited on termination of the lease.

Louis Bueltermann, owner -of a tract of land in the City of St. Louis, entered into a lease covering the premises on July 31, 1928. The property was leased to Harry Specter for a period of ninety-nine years. The lessor’s wife joined in the execution of the lease. The lease provided that the lessee would erect a building on the leased premises, and in the event of forfeiture, or on termination, by the lessee, the improvements were to become the property of the lessor. The lessee assigned his interest in the lease" to the Corner Investment Company, who erected a building on the leased premises. Subsequently, on March 8, 1935, the lessor died. His wife predeceased him. The lessor’s will disposed of his property (including the leased premises, subject to the terms of the outstanding lease), as follows: One-third to plaintiff, Mississippi Valley Trust Company, in trust for Norma Bueltermann, one-third to plaintiff Mississippi Valley Trust Company, in trust for Arthur Bueltermann. The will provided for remainders over to Arthur Bueltermann, Jr., and plaintiff Milton P. Bueltermann, and one-sixth outright to each of the grandchildren last named (one of whom is not a party to this litigation). Aside from showing the interest of the plaintiffs, the terms of the will are not involved in this case.

Subsequent to the death of the lessor, the successor lessee failed to comply with the conditions of the lease, the premises were forfeited under the terms of the lease, and plaintiffs obtained possession of the leased premises on December 23, 1940. Plaintiffs in their respective capacities filed income tax returns for the calendar year 1940, none of which disclosed any income on account of gains resulting from the forfeiture of the lease on premises which had been improved by the lessee by the erection of a building. The Commissioner of Internal Revenue determined that the building erected by the lessee had a value in 1940, the year of the forfeiture of the lease, of fifty thousand dollars, and asserted deficiencies in the taxes of plaintiffs, in their proportionate parts, the gain thus represented. Plaintiffs paid the deficiency, filed claims for refunds, which were refused, and this suit followed. Plaintiffs’ right to recover the income tax paid turns upon whether the plaintiffs, who in 1935 received by devise an undivided interest in real estate that was under a ninety-nine year lease, realized income under Sections 11, 12 and 22(b) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, §§ 11, 12, 22(b), when the lease was terminated in 1940, and the building that had been erected on the premises of the lessee was forfeited.

Plaintiffs concede that if Louis Buelter-mann had survived until the date of the forfeiture of the lease in 1940, he would have received gain to the amount of the fair market value of the improvements erected by the lessee on the leased premises. Such gain would have been subject to income tax. They base their claim for recovery of the tax paid on Section 113(a) (5) and (b) of the Internal Revenue Code, Title 26 U.S.C.A. Int.Rev.Code, § 113(a) (5) and (b), which reads as follows:

“Sec. 113. Adjusted basis for determining gain or loss.
“(a) Basis (unadjusted) of property. The basis of property shall be the cost of such property; except that — * * *
“(5) Property transmitted at death. If the property was acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent, the basis shall be the fair market value of such property at the time of such acquisition. * * *
“(b) Adjusted basis. The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided. * * * ”

Plaintiffs claim that since the property subject to the lease was valued for inheritance tax purposes in the estate of Louis Bueltermann, the land at $50,000 and improvements at $50,000, in 1935, and that the Commissioner of Internal Revenue in 1940, when the lease was forfeited, found the value of the land to be $35,000 and improvements $50,000, there has been no gain to them by the forfeiture of the lease. Defendants answer by pointing to Paragraph (b) of Section 113, as authority for the proposition that Paragraph (a) (5) of Section 113 of the Internal Revenue Code applies only to the “sale or other disposition of property.” This contention was sustained by a; ruling of the Seventh Circuit in the case of Friend et al v. Commissioner of Internal Revenue, 1941, 119 F.2d 959, 961, certiorari denied 314 U.S. 673, 62 S. Ct. 136, 86 L.Ed. 538. This opinion this Court feels bound to follow. Referring to Section 113(a) (5) the Court said: “It is plain from a reading of the statute that what is meant is to give the asset, whatever it may be, a basis for valuation far the purpose of determining gain or loss for income tax purposes in the event of a future sale of the asset. The statute can not be construed, even in conjunction with the valuation for estate tax purposes and the payment of that tax, to place the petitioners in the position of a purchaser of the leaseholds for á valuable consideration. Therefore, the contention of the petitioners must fail, and their other contentions must fall with it.” (Emphasis added.)

Plaintiffs’ reply brief concedes that they are in agreement with defendant that Section 113(a) (5) of the Internal Revenue Code supplies the “basis” of value for gain or loss only in case of “sale or other disposition” of the property:

“The forfeiture of the lease does involve a ‘disposition’ of plaintiffs’ property and therefore section 113(a) (5) is applicable. * * * Plaintiffs surrendered, lost, and disposed of the land and the improvements subject to the lease, which had been valued in the aggregate at $100,000 in 1935, and acquired land and improvements free from the lease valued in the aggregate at $85,-000. * * *
“It is true, as stated in defendant’s brief, that, when the lease was forfeited, plaintiffs acquired possession of the improvements. But they acquired this property right only after disposing of other property rights that they had originally inherited from their ancestor — the land and the improvements subject to the lease. There was a ‘disposition’ of property within the meaning of section 113(a) (5).”

We are unable to agree with plaintiffs in this line of reasoning. There was no disposition of any interest in the property in 1940 by the plaintiffs. They simply acquired possession of the property theretofore held by them, free and clear of any leasehold rights.

Plaintiffs admit that had the original lessor been living on the date of the forfeiture of the lease, there would be no basis for resisting income tax liability on his part on the gain he would have "received” at the time of the forfeiture of the lease, but seek shelter from income tax liability when they “received” the property unencumbered by the lease because the “lessor in interest” changed hands after the lease was executed and before it was forfeited. The plaintiffs could receive from the lessor by devise no greater interest in the property than the lessor possessed at the time of his death. Plaintiffs took, in their separate proportions, only what the lessor possessed at the time of his death. The plaintiffs’ position is not improved because the property, subject to the lease, for inheritance tax purposes was valued at $100,000 in 1935. Referring to the decision in the case of Friend v. Commissioner of Internal Revenue, supra (and Chase National Bank v. United States, 278 U.S. 327 loc. cit. 334, 49 S.Ct. 126, 73 L.Ed. 405, 63 A.L.R. 388, and Igleheart v. Commissioner of Internal Revenue, 5 Cir., 77 F.2d 704, loc. cit. 712) as authority, we hold an estate tax is not a tax on property, but an excise tax based on the privilege of transmitting property of a decedent upon his death, the tax measured by the value of the property transmitted. The court stated in the Friend case, supra, “This tax has in no way affected the rights of the petitioners and can not be regarded as the cost of acquisition of the leases.” (Emphasis added.)

The plaintiffs acquired the reversionaryinterest of the lessors, namely the leased premises, subject to the lease, including the right to receive future rentals under the lease and the buildings erected thereon by the tenant at the termination of the lease. The lease was terminated in 1940, and thereupon the unencumbered right to the building erected by the tenant became the property of the plaintiffs in the proportions set out under the will of the lessor. The value of the building thus received by the plaintiff was income realized by the plaintiffs in 1940 under the ruling of the Supreme Court in Helvering v. Bruun, 309 U. S. 461, 60 S.Ct. 631, 84 L.Ed. 864 (and Commissioner of Internal Revenue v. Hills Corporation, 10 Cir., 115 F.2d 322). We do not consider the decisions of the appellate courts of Missouri holding that title to improvements placed on real estate vests in the lessor the instant it is erected as in conflict with the ruling in the Bruun case. The question is, in what year was the income realized by the lessor, or in the present case, heirs of the lessor. Under the holding of the Supreme Court in the Bruun case, the gain was realized by plaintiffs in the year of “repossession” of the leased premises. The lease was forfeited and “repossession” took place in the year 1940. In that year the plaintiffs received improvements unencumbered by the lease. The gain was taxable in that year. The Commissioner found there was a gain of fifty thousand dollars. The assessment of the tax is prima facie correct, casting upon plaintiffs the burden of showing that the Commissioner’s ruling was in error. This they have failed to do. (United States v. Rindskopf, 105 U.S. 418, 26 L.Ed. 1131, Wickwire v. Reinecke, 275 U.S. 101, 48 S.Ct. 43, 72 L.Ed. 184).

Deductions based upon payments of local taxes are allowable only in the year in which they are paid (Quinn v. Commissioner of Internal Revenue, 5 Cir., 111 P.2d 372) where the taxpayer is on a cash receipts and disbursements basis, as were the plaintiffs. Expenditures made by plaintiffs in obtaining possession of the leased premises, such as attorneys’ fees, sheriff’s fee and publication of notice, title examination, appraisers’ fees, are not deductible from gross income in order to compute net income. They may be made a capital charge and added to the cost of the property as a basis in computing capital gain or loss on subsequent disposition of the premises. Bowers v. Lumkin, 4 Cir., 140 F.2d 927, 151 A.L.R. 1336. Findings of fact, conclusions of law, and judgment may be submitted in accordance herewith.


author: GOODMAN, District Judge.

text:
    BOWLES, Price Adm’r, OPA, v. L. D. McCLEAN CO.
    No. 24190-G.
    District Court, N. D. California, S. D.
    June 13, 1945.

      George A. Faraday, W. H. Brunner, and Richard Coblentz, OPA, all of San Francisco, Cal., for plaintiff.
    George M. Naus and Robert J. McGahie, both of San Francisco, Cal., for defendant.
   GOODMAN, District Judge.

Plaintiff, Price Administrator, seeks by his amended complaint herein an order suspending defendant’s license to sell groceries and other food commodities at its San Francisco retail establishment. Section 205(f) (2), Emergency Price Control Act of 1942, 56 Stat. 23, 50 U.S.C.A.Appendix §§ 901-946. It is charged that plaintiff sent the statutory warning notice to defendant (section 205(f) (2) of the Act) because, in plaintiff’s judgment, defendant had violated its license and certain of the Administrator’s price regulations. Plaintiff further alleges that subsequent to the receipt of the notice, defendant violated Maximum Price Regulations 336 (8 F.R.2859), 422 (8 F.R.9395) and 445 (8 F.R.11161). Plaintiff prays for a license suspension order and “for such other and further relief as to the court may seem just and proper.”

Defendant denies both the violations alleged in the warning notice and any subsequent thereto; and, as a special defense, urges that if it did infract, the infractions were a result of innocent mistake and inadvertence and “not as the result of deliberation or intention to violate.”

The evidence adduced at the trial satisfies me that defendant violated the regulations in a number of the instances particularly charged in the amended complaint. Furthermore, it developed during the trial that on several occasions prior to the sending of the warning notice referred to in the complaint defendant had been advised by the regional office of the Price Administrator and by the local rationing board of infractions of price ceilings and the record-keeping requirements. After each of such instances, defendant promised and agreed to correct its shortcomings. Finally, on November 15, 1943, plaintiff sought and obtained in this court a permanent injunction pursuant to section 205(a) of the Act, restraining defendant from violating the Price Regulations. Nevertheless infractions continued, resulting in the warning notice referred to and this action. The bulk of the infractions charged occurred in the grocery department of defendant’s establishment.

Defendant contends that it has endeavored to comply with the regulations but that it has been difficult so to do because it does a large business ($950,000 in 1944) and because it has over sixty employes and sells in excess of five thousand items. That compliance entails the assumption of an additional business burden, however, is obviously not a valid reason for noncompliance. The record clearly shows that defendant can substantially comply with the regulations without undue hardship. Furthermore, “The standards of the public interest” (Hecht Co. v. Bowles, 321 U.S. 321, 64 S.Ct. 587, 592, 88 L.Ed. 754) which determine the objectives of this anti-inflation statute predominate over private inconvenience.

The important question here to be determined is: What kind of order, under the statute, do the facts warrant?

Section 205(f) (2) of the Act, after providing for the giving of a warning notice and for suit by the administrator for license suspension prescribes as follows: “If any such court finds that such person has violated any of the provisions of such license, regulation, order, price schedule, or requirement after the receipt of the warning notice, such court shall issue an order suspending the license to the extent that it authorizes such person to sell the commodity or commodities in connection with which the violation occurred, or to the extent that it authorizes such person to sell any commodity or commodities with respect to which a regulation or order issued under section 2, or a price schedule effective in accordance with the provisions of section 206, is applicable; but no suspension shall be for a period of more than twelve months.”

The Administrator contends that upon a finding of violation by defendant, the court’s power is limited to ordering the defendant’s license suspended for a fixed period of time. It is further urged that the suspension should be for a substantial period within the maximum prescribed statutory limitation. The Administrator suggests that he disapproves any suspension less than thirty days and that a suspension order here, if made, should be for a substantially longer period.

I am of the opinion that the court’s power, under the statute, is not so narrowly circumscribed. The relief sought by the Administrator is authorized under the enforcement provisions of the Act. The Supreme Court has treated enforcement proceedings in accordance with traditional equity practices. Hecht Co. v. Bowles, 321 U.S. 321, 330, 64 S.Ct. 587, 88 L.Ed. 754. Although the Hecht case was concerned with the injunctive process, nevertheless the court was there considering the whole problem of enforcement in the light of the objectives of the Act. It admonished the lower courts to ungrudgingly share the responsibility of enforcement. In the Report of the Senate Committee reporting the Act, the action of the Administrator in seeking a court order for license suspension is referred to as “an equity proceeding.” Senate Report No. 931, 77th Cong. 2nd Sess. p. 27. Mr. Justice Douglas said in Hecht Co. v. Bowles, supra, 321 U.S. 321 at page 329, 64 S.Ct. 587, at page 592, 88 L.Ed. 754: “The essence of equity jurisdiction has been the power of the Chancellor to do equity and to mould each decree to the necessities of the particular case. Flexibility rather than rigidity has distinguished it.”

If this court is to share the responsibility of enforcement, it should have in mind the “large objectives of the Act.” It should be concerned less with chastising defendant according to a fixed administrative pattern and more concerned with preventing inflation.

The infractions committed in the instant cause are not studied or deliberate. They arise in most part from an indifference caused by what defendant chooses to call its own difficulties — difficulties no doubt resulting from the hectic flow of business in a store engaged in vital food distribution. Yet they can “be remedied by the installation of a proper supervisory system. It is important, therefore, in the enforcement of this statute that the power vested 0in the court be elastically exercised so that the remedy adjudged may not only give warning both to defendant and others similarly situated, but also afford an opportunity to defendant to correct its procedure and in turn contribute its proper share to the anti-inflation program.

In my opinion, therefore, the “facts of this case require an order suspending the license of the defendant to conduct the grocery department of its business for a period of three months. After the aforesaid suspension has been in effect for ten days, further compliance therewith will be suspended and stayed for thirty days. At the end of the forty-day period, upon a showing that defendant is following a practice of satisfactory compliance with the applicable regulations, the suspension order will be vacated; otherwise it will remain in effect. The court will retain jurisdiction for the foregoing purpose.

Findings and judgment, in accordance with the views herein expressed, may be presented pursuant to the Rules.

       “Whenever in the judgment of the Administrator a person has violated any of the provisions of a license issued under this subsection, or has violated any of the provisions of any regulation, order, or requirement under section 2 or section 202(b), or any of the provisions of any price schedule effective in accordance with the provisions of section 206, which is applicable to such person, a warning notice shall be sent by registered mail to such person. If the Administrator has reason to believe that such person has again violated any of the provisions of such license, regulation, order, price schedule, or requirement after receipt of such warning notice, the Administrator may petition any State or Terri-tonal court of competent jurisdiction, or a district court subject to the limitations hereinafter provided, for an order suspending the license of such person for any period of not more than twelve months.”

       “Upon good cause shown, any such order of suspension may be stayed by the appropriate court or any judge thereof in accordance with the applicable practice.” Section 205(f)- (2).