author: DE VANE, District Judge.

text:
    THOMPSON v. TAYLOR.
    Civil Action No. 234.
    District Court, S. D. Florida, Orlando Division.
    April 19, 1945.
    W. A. Pattishall, of Orlando, Fla., for plaintiff.
    Claude L. Gray, of Orlando, Fla., for defendant.
   DE VANE, District Judge.

This suit arises out of the Emergency Price Control Act of 1942 and the Stabilization Extension Act of 1944, 50 U.S.C.A. Appendix § 901 et seq. and § 963 et seq. Plaintiff seeks to recover damages from the defendant authorized by said Acts for alleged overcharges in rent.

Plaintiff alleges in his complaint that in May, 1942, he rented from the defendant a furnished dwelling house in Orlando, Orange County, Florida, at a monthly rental of $25.05 per month, payable to the First Federal Savings and Loan Association of Orlando, Florida for the account of the defendant. The premises described are located within the Orlando Defense Rental Area in which Federal Rent Control became effective on November 1, 1942. Plaintiff alleges that effective as of December 1, 1943, defendant increased the monthly rental on the housing accommodations from $25.05 per month to $32.50 per month, and that plaintiff thereafter paid ■to the defendant, the increase each month through June, 1944 which resulted in an overcharge above the ceiling price of $7.45 each month for seven months, and plaintiff seeks to recover the sum of $50 for each monthly overcharge, or a total of $350, plus reasonable attorney’s fees and costs, as provided by Section 205(e) of the Emergency Price Control Act of 1942, 50 U.S. C.A.Appendix § 925(e).

Plaintiff further alleges that effective July 1, 1944, defendant further increased the rental on said housing accommodations from $32.50 to $37.50 per month and at the time of making this lattep increase in rent required plaintiff to purchase the necessary painting material to paint the house and to have same painted. Plaintiff alleges that under this latter agreement he was to continue to pay, in cash, to the First Federal Savings and Loan Association of Orlando, Florida, for the account of the defendant, the sum of $25.05, and that the balance of $12.45 due monthly on account of the rent, would be used by the plaintiff, first to reimburse him for expenditures made for painting materials and cost of having the house painted, and after full reimbursement plaintiff was to pay the increased rental of $12.45 to -the defendant. Plaintiff alleges that he spent $19.11 for painting materials and that he and friends painted the house, which labor was reasonably worth $75. Plaintiff alleges that between July 1, and November 9, 1944, the overcharge which he was required to pay the defendant, above the ceiling price, amounted to $86.41 and plaintiff seeks to 'recover three times this overcharge as authorized by the Stabilization Act of 1944, together with reasonable attorney’s fees and costs.

Plaintiff .further alleges that shortly after completing the work of painting the house defendant served notice upon him to vacate the premises and upon his failure to do so instituted proceedings in the County Judge’s Court for Orange County, Florida and forceably and illegally divested him of the further use and possession of the property and plaintiff seeks in his complaint to recover damages for said alleged unlawful dispossession of said premises.

In his answer defendant denies that the original rental was $25.05, per month, as claimed by the plaintiff, but was $32.50 per month; that when said premises were rented to the plaintiff they were furnished with the exception of one room and that upon the urgent request of the plaintiff defendant subsequently purchased furniture for the additional room for which plaintiff agreed to pay $5 per month for the use of this extra furniture. Defendant also claimed in his answer that plaintiff assumed all maintenance and repairs on the building as further consideration for the use and occupancy of the premises and that the painting was done by the plaintiff on his own initiative and in compliance with his agreement with the defendant.

At the trial of the case the testimony of the respective parties was in substantial support of the statements contained in the complaint and answer. The Court, therefore, finds it necessary to resort to other evidence to determine the true facts in this case.

Defendant had occupied the premises as a home prior to May, 1942, when it was leased to the plaintiff. Defendant testified that he had accepted a position away from Orlando and was more interested in securing a tenant who would take care of the property during his absence than in the amount of rent received therefor. Defendant further testified that he declined to execute a lease for any definite period for the reason he desired to be in a position to reoccupy the premises in case he found his health, which was not too good at the time, would not permit him to pursue his new employment and it should become necessary for him to return to Orlando.

Orlando, Florida did not become a defense rent control area until November 1, 1942, which was several months after the premises were rented by the defendant to the plaintiff and defendant did not register said premises with the Office of Price Administration until October 9, 1944, and then only because required to do so by the Office of Price Administration. The registration statement filed at that time with the Office of Price Administration stated the maximum rental to be $25.05 per month and that all equipment and furnishings indicated as being on the premises were included in the rent paid for the premises. The registration statement further shows that all services to the premises, including fuel, water, light, interior and exterior repairs, painting and decorating were to be borne by the tenant. Plaintiff testified that he received a copy of this registration statement and made no complaint to the Office of Price Administration as to the information shown thereon.

There is considerable other testimony in the record to sustain the claim of the plaintiff that the original rent agreed upon was $25.05, but in face of the fact that the defendant registered the property with the Office of Price Administration at that amount of rental, when required to do so, makes it unnecessary for the Court to set out this testimony. It is the opinion of the Court, and the preponderance of the evidence supports this opinion, that in the registration statement filed with the Office of Price Administration, by the defendant, the defendant disclosed the true facts with reference to the rental agreement between the plaintiff and the defendant when the premises were originally rented.

At the trial defendant pleaded ignorance as to his legal right at the time he filed the registration statement with the Office of Price Administration and counsel for the defendant contends that the defendant is not bound by the registration statement. While technically the position of counsel as to the legal effect of the registration statement is correct, factually the record shows that the defendant had not taken any steps up to the day of the trial to have the Office of Price Administration determine and fix a reasonable rental for the premises involved in this case. It is not the duty nor does the Court have the power to make such determination and upon the record in this case the Court is without authority to do anything other than enforce the ceiling price, whatever that may be.

The Court finds the ceiling rental price was $25.05 per month and that the defendant made an overcharge against the plaintiff, above the ceiling price of $7.45 each month for seven months and that plaintiff is entitled to Recover the $50 penalty imposed by the Emergency Price Control Act of 1942 for each such overcharge, totalling $350.00, plus reasonable attorney’s fees and costs, as provided by Section 205 (e) of said Act.

Plaintiff seeks to recover three times an alleged overcharge of $86.41 alleged to have been paid by the plaintiff from July 1, to November 9, 1944. This alleged overcharge represents what plaintiff claims to be the worth of the improvements placed by him upon the premises, less a small credit for unpaid rental for the time in November, 1944, that plaintiff occupied the premises.

As pointed out above, in the registration statement filed with the Office of Price Administration, defendant indicates that the expenses of all improvements made to the premises while occupied by plaintiff were to be borne by the tenant and plaintiff admitted the receipt of a copy of this registration statement. Since plaintiff filed no protest with the Office of Price Administration as to any of the information shown on the registration statement the Court holds that he is now estopped to recover this alleged overcharge.

The Court, at a Pre-trial Conference in this case, held that plaintiff’s claim for $600 damages for being allegedly, illegally ejected from the premises had no place in a suit brought under the Emergency Price Control Act of 1942, and now reaffirms this ruling.

Plaintiff was served on October 10, 1944, with notice, under a Florida Statute, to vacate the premises on October 30, 1944, but failed to vacate same until forceably evicted by the Sheriff of Orange County, Florida, on November 9, 1944. Defendant incurred costs amounting to $27.65 in the proceedings brought against the plaintiff to evict him from the premises and has recovered judgment against the plaintiff for this amount and sets this up as a counterclaim in this proceeding. Defendant also claims an additional month’s rent is due by the plaintiff because of his failure to vacate said premises on or before November 1, 1944, and filed a counterclaim for double rental for his failure to vacate said premises, under a Florida Statute, imposing such penalty.

The counterclaim amounting to $27.65 representing Court costs sustained by defendant in evicting plaintiff from the premises will be allowed to be set off against the amount found by the Court to be due the plaintiff by the defendant for the overcharge in rent above the ceiling price.

The Court holds that under the Price Control Act as amended in 1944 the penalty is not applicable, but that defendant is entitled to the set-off of $25.05 against the amounts due plaintiff by him, because of plaintiff’s failure to vacate said premises in accordance with the legal notice served upon him to do so.

By agreement the parties left to the Court the matter of reasonable attorney’s fees for plaintiff’s attorney. The Court fixes the same at $100.

Judgment will be entered for the plaintiff in the sum of $297.30, plus $100 as reasonable attorney’s fees, together with cost of this proceeding.

Findings of fact and conclusions of law will be prepared and filed in accordance with this Memorandum Opinion.


source: Caselaw Access Project

author: DAVIES, District Judge.

license: Public Domain

text:
    PROFESSIONAL GOLF CO., Inc., v. NASHVILLE TRUST CO.
    No. 2685.
    District Court, M. D. Tennessee, Nashville Division.
    Feb. 9, 1945.
    Fred M. Williams, of Chattanooga, Tenn., for plaintiff.
    A. O. Denning, Asst. U. S. Atty., of Nashville, Tenn., and Cou'rtnay C. Hamilton, of Washington, D. C., for defendant.
   DAVIES, District Judge.

The cause was submitted upon the pleadings, evidence, exhibits, and argument of counsel for plaintiff and defendant, and, after due consideration thereof, the Court enters its Findings of Fact and Conclusions of Law, as follows:

Findings of Fact.

1. This suit was commenced August 9, 1938. The plaintiff seeks to recover $1,400 (with interest), claimed to have been overpaid as manufacturers’ excise tax on sporting goods manufactured and sold by the plaintiff under Sec. 609 of the Revenue Act of 1932, C. 209, 47 Stat. 169, 26 U.S.C.A. Int.Rev.Acts, page 612, for the period June, 1932, to May, 1936, inclusive.

2. On May 14, 1931, the plaintiff, Professional Golf Company, Inc., was incorporated under Tennessee law for the purpose of importing, manufacturing and selling golf clubs and golf accessories. Plaintiff was engaged in such business during the taxable period involved. The only product manufactured and sold by the plaintiff during the taxable period was golf clubs.

3. In May, 1932, J. Harkins, then president of plaintiff corporation, Undertook the formation of a merchandizing and selling corporation for the purpose of disposing of •the plaintiff’s manufactured products. The organization of the selling corporation under Tennessee law was completed on or about July 1, 1932, as the Professional Golf Company of America.

4. Upon the organization of the selling corporation, J. Harkins was the president, treasurer, and sales manager of both corporations, and I. Alsup was the secretary of both corporations. J. Harkins remained as president of both corporations until November 1, 1935, at which time he resigned as president of the selling corporation but retained his position as president of the manufacturing corporation and his position as sales manager of both corporations. I. Al-sup was the secretary of both corporations throughout the entire taxable period and kept the books of both. The corporations occupied the same offices.

5. Throughout the taxable period J. Harkins and I. Alsup together constituted a majority of the Board of Directors of both corporations and managed the affairs of both. J. Harkins and I. Alsup were also large stockholders in both corporations.

6. Beginning in July or August, 1932, and throughout the taxable period, the manufacturing corporation sold to the selling corporation most of the golf clubs manufactured by it at cost plus 10%, plus the 10% tax, which was less than similar clubs could be purchased from other manufacturers of golf clubs at that time and less than the manufacturing corporation had been receiving for the same or similar products prior to the organization of the selling corporation. J. Harkins fixed the prices at which golf clubs were sold by plaintiff to the selling corporation and also, the prices at which the selling corporation sold them. The record is silent as to how these prices were arrived at by Harkins, since it appears that the manufacturing corporation kept no cost records.

7. The manufacturing corporation filed its returns for the taxable period and paid the tax on the basis of the prices received by it from the selling corporation. The Commissioner determined that the sales of these products from the manufacturing corporation to the selling corporation were not arm’s-length transactions and were at prices far less than their fair market price, and he further determined that the tax should be computed on the prices for which such articles were sold in the ordinary course of trade, and that the prices at which the selling corporation actually sold the articles to its customers truly reflected the prices for which su'ch or similar articles were sold in the ordinary course of trade by manufacturers thereof. An additional tax was assessed on this basis of about $2,200. Interest was also assessed. Of this amount the plaintiff had paid $1,400 at the commencement of this suit.

8. Prior to the organization of the selling corporation, the plaintiff had acquired a registered trade-name or trade-mark applicable to its manufactured products called “First Flight” and had expended large sums in advertising and making it known throughout the nation. During 1932 the plaintiff and the selling corporation entered into an oral contract whereby the trade-name “First Flight” would be sold to the selling corporation, or at least the selling corporation would have the right to use the trade-name in marketing the products manufactured by the plaintiff. The terms of the contract are rather indefinite but the purchase price for the trade-name or the right to use it was to be $20,000 payable over a period which was also indefinite, when, as and if the selling corporation was able to pay. During the taxable period the following sums were paid under the oral contract: $6,200 in 1933, $3,000 in 1934, $4,512.88 in 1935, and $2,000 in 1936, a total of $15,712.-88.

9. During the taxable period the total sales of golf clubs from the manufacturing corporation to the selling corporation, according to their books, amounted to $27,-474.80. The same golf clubs were in turn sold by the selling company for a total of $49,365.30. The difference, $21,890.50, was the basis of the additional tax assessed by the Commissioner in 1937, which amounted, with interest, to $2,543.47, at the date of the assessment. The sums paid by the selling corporation to the manufacturing company for the trade-name or the use of the trade-name were not taken into consideration and not included in any computation as a part of the sale price of the golf clubs by either corporation or by the Commissioner for tax purposes.

10. The sales of golf clubs from the plaintiff to the selling corporation during the taxable period were made otherwise than through arm’s-length transactions at less than the fair market prices therefor.

11. The prices obtained for the golf clubs by the selling corporation in sales to its customers represented the fair market prices.

12. The plaintiff has failed to establish any other figure that the Court could find represents the fair market value of the golf clubs during the taxable period.

13. The purpose and reason for the organization of the selling corporation was to keep down the prices of the golf clubs manufactured by the plaintiff so as to result in the payment of a small amount of manufacturers’ excise tax.

14. The action of the Commissioner in using as the basis of the tax the price at which the selling corporation sold the golf clubs involved during the taxable period was not arbitrary or capricious. On the other hand, it was fair and correct and a proper basis for computing the tax.

Conclusions of Law.

1. The plaintiff did not overpay the tax involved.

2. The plaintiff has not established by proof that it is entitled to recover any amount in this case or introduced proof sufficient to overturn the Commissioner’s determination.

3. The suit should be dismissed at plaintiff’s cost.

Judgment will be entered accordingly.


author: FREED, District Judge.

text:
    HARTER BANK & TRUST CO. v. GENTSCH. SPONSELLER v. SAME.
    Civil Actions Nos. 21653, 21654.
    District Court, N. D. Ohio, E. D.
    Feb. 12, 1945.
    Albert B. Arbaugh, of Canton, Ohio, for applicants.
    Francis B. Kavanagh, Asst. U. S. Atty., of Cleveland, Ohio, and Paul R. Russell and Andrew D. Sharpe, Sp. Assts. to Atty. Gen., for the Government.
   FREED, District Judge.

In these actions, which by motion were consolidated for hearing, brief, argument and decision, plaintiffs, as executors and trustees of an insurance trust on behalf of the taxpayers, seek to recover alleged over-payments of income taxes for the calendar year 1936.

The taxpayers were two of the minority stockholders who owned 800.64 of 2151.36 shares outstanding of the Harvey Loehr Lumber Co. The Harvey Loehr Lumber Co. was organized in 1916 and was engaged in the wholesale and retail lumber and construction business in the City of Canton, Ohio. In 1936, a serious and acute dissension between those who held the minority and majority stock resulted in a discussion pertaining to a proposal that the majority group sell its stock to the minority, or, in the alternative, that the majority purchase the holdings of the minority. An agreement eventually was reached by which the corporation agreed to buy the stock of the minority. The reason for the change as to the purchaser is not disclosed either in the record or the briefs.

In order to arrive at the amount to be paid by the corporation, an appraisal was made of all the corporate assets. The corporation gave cash and physical assets for the stock.

The taxpayers received consideration valued at $31,021.50 as the result of the transaction, which sum was $19,357.58 more than they originally had invested in the corporation in 1916.

The taxpayer Renkert received $3,025.55 in excess of his original investment; and the taxpayer Wagner, $16,332.03 more than he originally invested.

The stock which was to have been obtained by the corporation first was intended to have béen held as treasury stock. Subsequently, however, upon the suggestion of the corporation’s auditor, to escape the Ohio State franchise tax upon treasury shares, by proper corporate action, the capital stock was reduced from 2160 shares to 1500 shares; and 660 of the 800.64 shares of stock received in the transaction here in question were cancelled.

The company continued to do business without change or curtailment of its previous activities. The assets delivered for the stock were of such nature as did not in any manner interfere with its operation.

The taxpayers, in their income tax returns, included the profits realized as a gain resulting from the sale or exchange of capital assets, and as taxable Under Section 117(a) of the Revenue Act of 1936, 26 U.S. C.A. Int.Rev.Acts, page 873, which provided for a tax of 30% of such gain.

The Commissioner of Internal Revenue, however, found that the gains were taxable under Section 115(c) of the Revenue Act of ■1936, 26 U.S.C.A. Int.Rev.Acts page 868, as for a gain resulting from a distribution in partial liquidation of the corporation, which section provided for a tax on all, or 100% of such gain.

Section 115(c) of the Revenue Act here involved, provides in part:

“(c) Distributions in liquidation. Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined Under section 111, but shall be recognized only to the extent provided in section 112. Despite the provisions of section 117(a), 100 per centum of the gain so recognized shall be taken into account in computing net income, except in the case of amounts distributed in complete liquidation of a corporation. * * * ”

Section 115 (i) of the same Act defines a “partial liquidation” as follows:

“(i) Definition of partial liquidation. As used in this section the term ‘amounts distributed in partial liquidation’ means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.”

The question as to what constitutes partial liquidation must be determined from the facts and attendant circumstances. Neither the law governing the matter of partial liquidation, nor the decisions of the courts interpreting it, recite specific circumstances and outline definite requirements which resolve the question posed. There are several decisions in which conditions are enumerated which establish partial liquidation, and which, under the peculiar facts, decide what constitutes complete cancellation or redemption of all or a portion of the stock so as to bring about a partial liquidation. See: Stern v. Harrison, D.C., 55 F.Supp. 687, and numerous cases cited therein.

It is obvious from a reading of the reported cases that the decision in each is referable to its own stated set of facts, and that they lay down no tests under which the formula, provided by the statutory definition of “partial liquidation,” can be applied with certainty.

In the final analysis, therefore, the court must look at the entire transaction in all its details, and from them find whether there was a sale or partial liquidation.

In this case it is manifest that there occurred nothing more than the purchase of stock from recalcitrant stockholders. There was no plan to terminate any of the corporation’s activities, or to alter substantially the corporate structure, or to retire all of the stock of a particular preference.. The company continued its business as it carried on before the transaction occurred.

The fact that subsequent to the agreement, the remaining stockholders, in order to reduce the state franchise tax, decided to reduce the capital stock and cancel a part of the shares purchased, does not transform a stock purchase and sale agreement into partial liquidation. Alpers v. Commissioner of Internal Revenue, 2 Cir., 126 F.2d 58.

It is urged by the Government that the factual conditions, which this court believes are determinative as constituting a sale, disclose a partial liquidation. It contends, in effect, that wherever a diminution in the capital or surplus results from the transaction in the transfer of stock by the stockholder to the corporation, it constitutes a partial liquidation. Neither in the applicable statutes, nor in the very decisions cited by the Government, may support be found for such construction. Had Congress intended to impose a tax on all of the gain realized from the distribution of the assets of a corporation to its stockholders, such intent could have been registered by so stating it. It chose to apply it to liquidation or partial liquidation only. Were the transaction here in question to be regarded as a partial liquidation, then the purchase of every share of stock by a corporation for a price determined by appraisal of its actual value, could be so regarded.

The transaction which took place here is devoid of any characteristics that would •constitute it a partial liquidation.

Judgment, therefore, will be rendered in .accordance with this opinion.


author: VOGEL, District Judge.

text:
    In re SZARKOWSKI.
    No. 1814.
    District Court, D. North Dakota, Southeastern Division.
    Feb. 2, 1945.
    C. E. Brace, Asst. Atty. Gen., for State ■of North Dakota.
    Arthur L. Knauf, of Jamestown, N. D., for bankrupt.
   VOGEL, District Judge.

This is a review of an order of the Conciliation Commissioner, acting as Referee, dated December 21, 1944, entitled “Order Denying Secured Creditor’s Petition For Order Of Sale Under Second Proviso Of Subsection (3) Of Subsection s Of Section 75 Of The Bankruptcy Act [11 U.S. C.A. § 203, sub. s(3)]”.

The bankrupt herein deposited the appraised value of the encumbered real estate and petitioned for redemption thereof. The creditor, the State of North Dakota, holding the mortgage on the real property, requested a reappraisal or hearing on value. A hearing was held and the Conciliation Commissioner fixed the value of the property at an amount in excess of that for which it had been originally appraised. Upon petition of the creditor his order fixing value was reviewed by this Court and sustained. It was subsequently sustained by the Circuit Court of Appeals and certiorari denied by the Supreme Court. Thereafter the secured creditor made a written request for a public sale of the property pursuant to the provisions of Section 75, sub. s (3) of the Bankruptcy Act. Such petition was denied by the Conciliation Commissioner, and it is of such order that review is had herein.

This case possesses a long history of litigation. Questions arising in the case have, twice prior hereto, been reviewed by this Court and have been twice appealed to the Eighth Circuit Court of appeals, and certiorari has been denied by the Supreme Court. See State of North Dakota v. Szarkowski, 8 Cir., 134 F.2d 201; 8 Cir., 142 F.2d 333; certiorari denied October 9, 1944, 65 S.Ct. 47.

In the instant question counsel for both parties have been very helpful to the Court and have exhaustively briefed the applicable cases. The Conciliation Commissioner, in denying the creditor’s request for a public sale, filed a memorandum opinion, in which he concluded that the case of In re Carter, D.C.W.D.Va.1944, 56 F.Supp. 385, and upon which the creditor strongly relies, was “wholly inconsistent with the holding and language used by Supreme Court Judge Douglas in the case of Wright v. Union Central Life Insurance Co., 311 U.S. 273, 61 S.Ct. 196, 85 L.Ed. 184.” After a review of both cases cited, as well as the additional cases cited by counsel for both parties, I conclude that the Conciliation Commissioner’s decision is correct. By no amount or degree of rationalization can I bring myself to believe that the two decisions are not inconsistent and, of course, the decision of the Supreme Court in the case of Wright v. Union Central Life Ins. Co., supra, must be controlling.

In its brief, well supported by the Court’s opinion in the Carter case, supra, the creditor herein attempts to show that the Supreme Court, in its opinion in the Wright case, supra, was not passing upon the identical question involved herein, but was limiting itself solely to the right of the bankrupt to redeem the property as against the Court’s order for a sale brought about by the bankrupt’s having failed to comply with the provisions of the Act or with orders of the Court made pursuant thereto. It is pointed out that in the Wright case the creditors had not petitioned for a public sale in accordance with the proviso of Section 75, sub. s (3) of the Bankruptcy Act, reading as follows: “Provided, That upon request in writing by any secured creditor or creditors, the court shall order the property upon which such secured creditors have a lien to be sold at public auction. The debtor shall have ninety days to redeem any property sold at such sale * * 11 U.S.C.A. § 203, sub. s(3).

Another proviso of the Act with which it is claimed by the creditor the Supreme Court was dealing in the Wright case reads as follows: “If, however, the debtor at any time fails to comply with the provisions of this section, or with any orders of the court made pursuant to this section, or is unable to refinance himself within three years, the court may order the abpointment of a trustee, and order the property sold or otherwise disposed of as provided for in this title.” (Emphasis supplied.) 11 U.S.C.A. § 203, sub. s(3).

It is true that in the Wright case the creditors filed a petition asking that the proceedings be dismissed or, in the alternative, that an immediate sale be had, and alleged, among other things, that the bankrupt had failed to comply with orders of the court requiring shares of the crops to be delivered to the trustee, failure to pay taxes, et cetera. The bankrupt countered with a cross-petition asking for the right to redeem the mortgaged real estate. The Supreme Court held that the bankrupt’s right of redemption was paramount. If the Supreme Court’s opinion in.that case applies only to a sale ordered because of failure to comply with orders of the court, et cetera, and is to be given such narrow construction as is asked for by the creditor herein, then certainly the vast majority of the language used by the Supreme Court in its decision is not only most unfortunate and elusive, but has led many lesser courts into an erroneous understanding of the meaning thereof. As I have stated, I fail to take that view of the Supreme Court’s opinion. Note the language used by the Supreme Court in that case:

“The narrow issue presented by this petition for certiorari and which moved us to grant it is whether under § 75, sub. s (3), the debtor must be accorded an opportunity, on his request, to redeem the property at the reappraised value or at a value fixed by the court before the court may order a public sale." 311 U.S. pages 275, 276, 61 S.Ct. 198, 85 L.Ed. 184. (Emphasis supplied.)

“We think that the denial of an opportunity for the debtor to redeem at the value fixed by the court before ordering a public sale was error.” 311 U.S. page 277, 61 S.Ct. 199, 85 L.Ed. 184.

“True, the granting of a request for a public sale is mandatory. (The order of sale granted because of failure to comply with orders of the court, et cetera, is not mandatory but entirely discretionary. Hence the Supreme Court must have had in mind that part of the Act providing for a request for a public sale which, by the terms of the Act is mandatory, and with which we are here involved.)

“But so is the granting of a request for a valuation at which the debtor may redeem. Yet a reconciliation of these seemingly inconsistent remedies is not difficult if the purpose and function of the Act are not obscured. This Act provided a procedure to effectuate a broad program of rehabilitation of distressed farmers faced with the disaster of forced sales and an oppressive burden of debt. Wright v. Union Central Life Ins. Co., supra [304 U.S. 502, 58 S.Ct. 1025, 82 L.Ed. 1490]; John Hancock Mutual Life Ins. Co. v. Bartels, supra [308 U.S. 180, 60 S.Ct. 221, 84 L.Ed. 176]; Kalb v. Feuerstein, 308 U.S. 433, 60 S.Ct. 343, 84 L.Ed. 370. Safeguards were provided to protect the rights of secured creditors, throughout the proceedings, to the extent of the value of the property. John Hancock Mutual Life Ins. Co. v. Bartels, supra, 308 U.S. at pages 186, 187, 60 S.Ct. at page 224, 84 L.Ed. 176; Borchard v. California Bank, supra, 310 U.S. at page 317, 60 S.Ct. at page 960, 84 L.Ed. 1222. There is no constitutional claim of the creditor to more than that.” 311 U.S. p. 878, 61 S.Ct. 199, 85 L.Ed. 184. (Emphasis supplied.)

“Equal protection to debtor and creditor alike can be afforded only by holding that the debtor’s request for redemption pursuant to the procedure prescribed in the first proviso of § 75, sub. s(3), cannot be defeated by a request of a secured creditor for a public sale under the second proviso. Certainly equal protection of debtor and creditor would not be obtained if the contrary view were followed. Then the debtor’s rights under the first proviso would be either dependent on the outcome of his race of diligence with a creditor, for which customarily he would be poorly equipped (Cf. Kalb v. Feuerstein, supra) ; or they would be defeasible at the instance of a creditor. Under our construction, however, the debtor will be given the benefit of an express mandate of the Act. And the creditor will not be deprived of the assurance that the value of the property will be devoted to the payment of its claim. For, as indicated in Wright v. Vinton Branch, 300 U.S. 440, 468, 57 S.Ct. 556, 564, 81 L.Ed. 736, 112 A.L.R. 1455, if the debtor did redeem pursuant to that procedure, he would not get the property at less than its actual value. In that case this Count, in sustaining the constitutionality of § 75, sub. s, emphasised that the Act preserved the right of the mortgagee to realise upon the security by a judicial sale. By our construction the exercise of this right is merely deferred or postponed until the other conditions and requirements of the Act, prescribed for the protection of the debtor, have been met. It is eventually denied the creditor only in case he is paid the full amount óf what he can constitutionally claim.” 311 U.S. page 279, 61 S.Ct. 200, 85 L.Ed. 184. (Emphasis supplied.)

“But there is nothing in that opinion or in the Act which says that that power of the court may be utilized so as to wipe out the clear and express right of the debtor under § 75, sub. s (3), to redeem at the reappraised value or at the value fixed by the court.” 311 U.S. page 280, 61 S.Ct. 200, 85 L.Ed. 184.

“We hold that the debtor’s cross petition should have been granted; that he was entitled to have the property reappraised or the value fixed at a hearing; that the value having been determined at a hearing in conformity with his request, he was then entitled to have a reasonable time, fixed by the court, in which to redeem at that value; and that if he did so redeem, the land should be turned over to him free and clear of encumbrances and his discharge granted. Only in case the debtor failed to redeem within a reasonable time would the court be authorised to order a public sale.” 311 U.S. page 281, 61 S.Ct. 201, 85 L.Ed. 184. (Emphasis supplied.)

I find in the above quotations no> equivocation of language and no indication upon the part of the writer that the Court’s interpretation of the Act was meant to be limited solely to that portion providing for a sale where the bankrupt had failed to comply with provisions of the Act or orders of the Court made pursuant thereto. Every indication all through the opinion leads to the conclusion that the Supreme Court was dealing with that provision of the Act providing for the granting of a request for a public sale that was mandatory, not discretionary. All of the cases cited by the creditor in support of its position, with the sole exception of In re Carter, supra, were decided prior to the rendering of the Supreme Court’s opinion in the Wright case, supra. The fact that petitions for certiorari were denied in such cases is not persuasive. The Wright opinion, which is subsequent thereto, speaks for itself clearly and effectually against the interpretation sought by the creditor herein. The bankrupt in this case has petitioned for the right to redeem the property at the value fixed by the Court. The granting of such request is mandatory by the Act itself, and is amply supported by the Supreme court’s opinion in the Wright case. A denial of such right to the bankrupt would be error. I am, accordingly, of the opinion that the Conciliation Commissioner’s order denying the creditors the right to a public sale as against the bankrupt’s petition for redemption was correct, and it will be, in all things, affirmed.


author: CHESNUT, District Judge.

text:
    UNITED STATES v. HOTCHKISS et al.
    No. 20615.
    District Court, D. Maryland.
    May 3, 1945.
    Bernard J. Flynn, U. S. Atty., and Thomas J. Kenney, Asst. U. S. Atty., both of Baltimore, Md., for plaintiff.
    Leon I. Kappelman, of Baltimore, Md., for defendants.
   CHESNUT, District Judge.

In this case the defendants were indicted for (1) having in possession and control a 75-gallon unregistered distilling apparatus; (2) carrying on the business of a distiller in spirits with intent to defraud the United States of the tax thereon and (3) making and fermenting mash, to wit, 240 gallons of fruit mash, fit for distillation for the production of spirits on premises which were not a distillery duly authorized according to law. These offenses are classed as felonies. The defendants filed a motion to suppress the evidence with respect to the search and seizure of the “still” and certain other physical evidence. From the evidence submitted at the hearing on the motion, I find the following facts :

On or about Saturday, March 17, 1945, a police officer of the State of Maryland in Howard County, Maryland, received what he considered reliable information that there was an illegal “still” situated on certain farm premises in the county district of Howard County in possession of the defendant, Hotchkiss. He communicated this information to the federal agents of the Alcohol Tax Unit and on the following Monday evening the state and federal officers went to this farm to investigate. The defendant Hotchkiss had leased the. whole farm of about 300 acres from the owner by a written lease dated a day or two previously, but there was some evidence to the effect that he had been in possession of the property for some weeks theretofore. The dwelling house on this farm is situated about half a mile from the public road. There are several outbuildings on the property near the dwelling house incidental to the farm. The officers did not have a search warrant as their investigation was based only on information. They entered the farm property from the public road about 9 p. m., and went to the vicinity of the dwelling house and outbuildings. The dwelling house was entirely dark and apparently unoccupied at the time. After walking around various buildings the agents detected what they identified as the odor of fermenting cider mash in a small out-building, referred to as a smoke-house, about 75 feet from the dwelling house. The door to the smoke-house was securely padlocked. They made no effort to enter the smoke-house. They concealed themselves in the rear of the building and awaited further developments as they anticipated very probably some one would visit the premises during the evening.

Shortly thereafter they noticed an automobile enter the premises from which three men, two colored men and one white man, got out and one of them went to the dwelling house but did not enter, and then came back to the smoke-house. One of the three men broke the padlock on the door and all three entered the smoke-house. The officers then made their presence known, stated they were federal officers and ordered the men to come out. When the door was opened the odor of the mash was plainly distinct. The men were then arrested. They, or one of them, stated that there was a still in the smoke-house and on entering it the officers found the 75-gallon still not then in operation, and a considerable quantity of cider mash fit for distillation, and incidents of a still which had been operated or was ready for operation. The three men denied any personal connection with the still and one of them stated that the only purpose of their visit was to get a drink of the cider which one of them knew was there because a week or so previously he had been there and had been given a drink by Hotchkiss.

Shortly thereafter another automobile came into the premises, containing Hotchkiss and his wife, and the defendant Case and another young woman. Hotchkiss and Case were then also arrested. Hotchkiss as a witness at the hearing testified that the still did not belong to him and that, although he was aware that it was in the smoke-house, he intended to have it removed as soon as he took possession of the farm as tenant. He said that the only purpose of his visit that night was to bring Case to the farm-as the latter was to manage it for him. He made no complaint at the time of the search and seizure by the agents.

The question that arises on the motion to suppress the evidence is whether in all the circumstances the search and seizure of the still and the evidence of the agents with regard to it, should be suppressed on the ground that it constituted an unreasonable search and seizure under the 4th Amendment to the Federal Constitution which provides: “the right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated.”

What constitutes an unreasonable search and seizure depends upon the particular facts and circumstances of the case. In recent years, both during and subsequent to National Prohibition, there have been many adjudicated cases upon the subject. The principles to be applied in determining the question have been frequently stated by the Supreme Court of the United States, by the Circuit Court of Appeals for this Circuit, and in opinions of this District Court. Agnello v. United States, 269 U.S. 20, 46 S.Ct. 4, 70 L.Ed. 145, 51 A.L.R. 409; Taylor v. United States, 286 U.S. 1, 52 S.Ct. 466, 76 L.Ed. 951; Nathanson v. United States, 290 U.S. 41, 54 S.Ct. 11, 78 L.Ed. 159; and Hester v. United States, 265 U.S. 57, 44 S.Ct. 445, 68 L.Ed. 898; Benton v. United States, 4 Cir., 28 F.2d 695; DePater v. United States, 4 Cir., 34 F.2d 275, 74 A.L.R. 1413; Paper v. United States, 4 Cir., 53 F.2d 184; United States v. Sam Chin, D.C.Md., 24 F.Supp. 14; United States v. Lerner, D.C.Md., 35 F.Supp. 271; United States v. Seiler, D.C.Md., 40 F.Supp. 895. In a very recent case of this nature, In re Ginsburg, 2 Cir., 147 F.2d 749, 750, it was succinctly and aptly said by Circuit Judge Hutcheson: “It remains true, however, that each case of this kind is a fact case. The correct decision of each depends not so much upon a higher critical examination of the accumulated decisional gloss as upon a •common sense determination of whether, ■within the meaning of the word the Constitution uses, the particular search and seizure has been ‘unreasonable/ that is, whether what was done and found bears a reasonable relation to the authority then possessed and exercised or transcends it to become oppression.”

Applying the principles to the particular facts of the instant case, I reach the conclusion that the motion must be -overruled. The agents were not unlawfully on the premises because as officers of the law it was clearly their duty to go there to inquire regarding the truth of the information which they had. Hester v. United States, 265 U.S. 57, 44 S.Ct. 445, 68 L.Ed. 898; United States v. Feldman, 3 Cir., 104 F.2d 255; certiorari denied 308 U.S. 579, 60 S.Ct. 97, 84 L.Ed. 485; United States v. McBride, 5 Cir., 284 F. 416, certiorari denied 261 U.S. 614, 43 S.Ct. 359, 67 L.Ed. 827; Wida v. United States, 8 Cir., 52 F.2d 424. Upon arriving on the premises the agents, by the sense of smell, noted what seemed to them a probable violation of the law, but they did not consider that of itself, even with the information they had received, was sufficient to justify them in entering the smoke-house to make a search for the suspected still. I think they acted correctly in this regard although it is probable that what they observed would have justified the issuance of a search warrant. Taylor v. United States, 286 U.S. 1, 52 S.Ct. 466, 76 L.Ed. 951; United States v. Kaplan, 2 Cir., 89 F.2d 869. But after the three men came upon the premises and opened the door of the smoke-house under the circumstances stated, there was reasonable basis for the arrest of these men on the probable ground that they were committing or intending to commit a felony in the presence of the officers. And the subsequent entry and search of the smoke-house by the officers was a natural incident of the lawful arrest. Agnello v. United States, 269 U.S. 20, 46 S.Ct. 4, 70 L.Ed. 145, 51 A.L.R. 409; United States v. Feldman, 3 Cir., 104 F.2d 255; United States v. Sam Chin, D.C.Md., 24 F.Supp. 14, 17.

To justify a search made after an arrest, there must have been probable cause for the arrest. If the arrest was not on probable cause but merely a pretext for making the search, the latter is unreasonable. In this case I think the officers had probable cause for making the arrest. They had not only the evidence based on the sense of smell, but in addition thereto the unusual circumstance of three men at nighttime visiting a then unoccupied farm premises and breaking into the out-building where the agents had detected the presence of the suspected still. While the sense of smell alone in this case was not self-sufficient to justify entry and search, in the absence of any one reasonably suspected of committing a crime, the presence of the men in relation to the smoke-house in all the circumstances made the arrest valid. The importance of the alcoholic odor observed by the agents in a case of this kind varies with the nature and circumstances of the particular case. It also depends largely upon the nature of the crime thought to; be occurring. The odor of whiskey is not of itself probable cause to- suspect the commission of the crime of possession of untax paid liquor. And under the National Prohibition Act, now repealed, the mere odor of whiskey mash emanating from a dwelling house was not sufficient cause for search because by the applicable statute, 27 U.S.C.A. § 39, it was provided, “No search warrant shall issue to search any private dwelling occupied as such unless it is being used for the unlawful sale of intoxicating liquor, * * (Italics supplied.) United States v. Seiler, D.C., 40 F.Supp. 895, 896. But in the instant case what the agents suspected was the possession of an illegal still with mash fit for distillation in a smoke-house where there could be no reasonable likelihood that the still was duly registered. It may also be assumed that the smoke-house was technically within the “curtilage”. Even if the still and the odor emanating therefrom had been situated in the dwelling house and the three men had entered the latter, I think the arrest and entry under the circumstances would have been lawful. In judging these cases, what constitutes probable cause must be determined' from the standpoint of the arresting officer with his skill and knowledge, rather than from the standpoint of the average citizen under similar circumstances. United States v. Sebo, 7 Cir., 101 F.2d 889, 890; United States v. Murray, D.C.Md., 51 F.2d 516, 519.

When the defendant Hotchkiss arrived on the premises and was questioned by the officers, he stated that the three men who had been arrested had no connection with the still arid.it appears that they were subsequently dismissed at the hearing before the United States Commissioner. On this, counsel for the defendants argues that they were purely trespassers and by reason of their activities the officers did not obtain any greater authority for the entry and search of the smoke-house than if these three men had not intervened upon the scene. I think it is true that if the validity of the search had been based on the supposed permission or consent of the defendant Hotchkiss, this consent could not validly have been given by mere trespassers. United States v. Kaplan, supra; United States v. Ruffner, D.C.Md., 51 F.2d 579, 580. But when the three men were arrested the officers did not know or believe that they were merely trespassers. From the circumstances the officers naturally inferred that the entry of the three men into the smoke-house was for the operation of the still. The circumstances afforded probable cause for their arrest and their entry and search was a proper incident of the arrest. It is true that these men promptly thereafter repudiated any illegal connection with the still, but in the circumstances the officers were not required to accept this statement, even when confirmed by the later statement of Hotchkiss, and until the men were dismissed-by the Commissioner. As the arrest was for probable cause and the officers were therefore justified in entering the building, their discovery of the still did not constitute an unreasonable search. Paper v. United States, 4 Cir., 53 F.2d 184.

For these reasons I conclude that the motion to suppress the evidence must be overruled. With regard to the defendant Case, there is a further reason for the conclusion. It does not appear from the motion to suppress nor' from the evidence at the hearing that Case had any proprietary interest in the premises. As to the defendant Hotchkiss, it may also be observed that, as he has repudiated any possessary interest in the still and the incidental apparatus, and denies any connection with it except that he had intended to have it removed, it is at least doubtful whether he has a proper standing to challenge the seizure of the still by the officers of the law. Kitt v. United States, 4 Cir., 132 F.2d 920, 921; Shields v. United States, 58 App.D.C. 215, 26 F.2d 993, certiorari denied 278 U.S. 633, 49 S.Ct. 31, 73 L.Ed. 550; Matthews v. Correa, 2 Cir., 135 F.2d 534.


author: BRYANT, District Judge.

text:
    CHAHOON v. HICKEY, Collector of Internal Revenue.
    Civ. No. 1500.
    District Court, N. D. New York.
    Dec. 28, 1944.
    Laurence Graves, of New York City, for plaintiff.
    Irving J. Higbee, U. S. Atty., of Syracuse, and Samuel O. Clark, Jr., Asst. Atty. Gen. (Andrew D. Sharpe and Frederic G. Rita, Sp. Assts. to the Atty., Gen.), for defendant.
   BRYANT, District Judge.

This is a suit for the recovery of $11,-311.45 alleged to have been collected from the taxpayer as income taxes for the year 1936.

Question Presented.

Was the taxpayer, in computing his income taxes for the year 1936, entitled under Section 23(e) of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev.Code, § 23(e), to deduct from gross income as a loss an amount paid by him to indemnify a bank, of which the taxpayer was president, a stockholder and a depositor personally and through several corporations owned or controlled by him, against loss through shrinkage in value of securities held by it?

Findings of Fact.

1. I. Hasbrouck Chahoon, plaintiff herein, is, and at the time this action was instituted was, a resident of Ausable Forks, New York, and, on March 15, 1937, filed his federal income tax return for the calendar year 1936 with *the Collector of Internal Revenue for the Fourteenth District of the State of New York at Albany, New York.

2. The defendant, Harry M. Hickey, is, and at all times herein mentioned was, the United States Collector of Internal Revenue for the Fourteenth District of the State of New York.

3. After the plaintiff’s 1936 federal income tax return was filed with the defendant, the Commissioner of Internal Revenue of the United States determined a deficiency in income tax for said year in the amount of $11,311.45, whereupon the plaintiff filed a waiver of his right to appeal to the United States Board of Tax Appeals and consented to the immediate assessment of the deficiency; the Commissioner then assessed the said deficiency together with interest in the amount of $1,279.59, all of which the plaintiff paid to the defendant on February 8, 1939, in a total sum of $12,591.04.

4. On February 6, 1941, the plaintiff filed with the defendant a claim for refund in the amount of $11,311.45 and $1,279.59, paid as aforesaid. Plaintiff was advised by letter received by registered mail from the office of the Commissioner of Internal Revenue, dated March 2, 1942, that said claim for refund was disallowed in full. This suit was brought on February 29, 1944.

5. At all times here material, the plaintiff was president of the Plattsburg National Bank and Trust Company, Plattsburg, New York, the largest bank in the Adirondack area consisting of Franklin, Clinton and Essex Counties, with deposits of approximately $10,000,000, or about one-third of the total deposits of all the banks in this area. Plaintiff’s salary was $10,000 per annum until January 1, 1934, when it was reduced to $5,500. He was president of J. & J. Rogers Company, a corporation engaged in the manufacture of sulphide pulp and paper at Ausable Forks, New York, from which he 'received a salary of $12,000. This corporation, which was principally owned by the members of his family, had gross assets in excess of $2,000,000 and employed about 350 people out of the total population of Ausable Forks which was between 1,200 and 1,300. He owned one-third of the capital stock and was an officer and director of Ausable Credit Corporation, also of Ausable Forks, from which he received a salary of $3,000. This corporation was principally engaged in financing the purchase of automobiles and refrigerators sold in the surrounding communities with assets in excess of $500,-000 consisting of notes receivable on installment sales. He received a salary of $1,000 from Northern Insuring Agency, Inc., of which he was a stockholder, director and vice president. This corporation had offices in Ausable Forks and Plattsburgh. He was a stockholder, director and president of Adirondack Corporation, Ltd., with assets in excess of $800,000. More than 66% of the preferred stock of this corporation was owned by the members of his family and the entire common stock was owned by the J. & J. Rogers Company. He owned one-seventh of the capital stock and was an officer and director of- Chazy Orchards Company, Inc., of Chazy, New York, which owned and operated one of the largest apple orchards in the world. He was also a member of the Board of Managers of Delaware & Hudson Railroad Corporation, for which he received a salary of $240 per annum.

6. The years 1930 and 1931 were hazardous ones in the banking business. Many banks throughout the nation were forced to close. In New York State thirty (30) National Banks were closed in 1930 and two hundred and thirty (230) were closed in 1931. In Clinton County two banks were closed by the Comptroller of the Currency. The Plattsburg National Bank and Trust Company (referred to herein as the Trust Company) took over the assets and liabilities of the First National Bank of Plattsburg in order to prevent its formal closing. It also gave financial assistance in the re-organization of another Plattsburg bank, the Merchants National Bank and Trust Company.

7. The representatives of the Comptroller of the Currency of the United States made a report of the condition of the Plattsburg National Bank & Trust Company, dated July 17, 1931, which disclosed the following facts:

Bond depreciation $444,103.11

Losses 34,732.50 $478,835.61

Depreciation on bonds taken over by Trust Company from First National Bank 32i,606.51

Total losses and depreciation $ 800,442.12

Capital & surplus of Trust Company before adjustment for bond losses and depreciation:

Capital stock $500,000.00

Surplus 750,000.00

Profit and loss 7,905.88

Reserves 2,726.25

Total -1,260,632.13

Net capital after ■bond depreciation and losses $ 460,190.01

Further estimated losses on loan accounts:

Doubtful $ 98,197.82

Losses 8,030.00 106,227.82

Net capital after estimated losses $ 353,962.19

8. Plaintiff and the other officers and directors of Plattsburg National Bank & Trust Company were informed by the Comptroller of the Currency that this situation must be remedied or that the Plattsburg National Bank & Trust Company would be closed. Numerous conferences were held in New York City with representatives of the Comptroller of the Currency. The solution which was finally worked out was incorporated in two agreements executed on September 28, 1931. The effect of these agreements was that the plaintiff and the other subscribers to them agreed to indemnify the bank against loss on the sale of its bonds to the extent of $400,000, the difference at the time between the market value of the bonds and their cost to the bank. The agreements provided, however, if the sale of the bonds resulted in a profit, the profit was the bank’s and not the subscribers. Under the agreements, the plaintiff made himself liable to the extent of $100,000 and delivered his note for that amount.

9. At the time the said agreements were entered into the plaintiff owned 148 shares of the stock of the Trust Company out of a total of 5,000 outstanding. The corporations in which he and his family were vitally interested and from which he was receiving substantial salaries, had deposits with the Trust Company totalling $256,555.-59.

10. In 1936, the plaintiff and the other subscribers to those agreements were required to make good the difference between the cost and the then market value of the bonds. The plaintiff’s liability under the agreements was determined to be $48,000 which he paid in cash in that year.

11. In plaintiff’s income tax return for the year 1936, the plaintiff took this $48,000 as a deduction from gross income.

12. At all times herein mentioned plaintiff was actively engaged in business. He was constantly engaged in management and activities of corporations in which his capital was invested. He drew salaries from the Trust Company and other above mentioned corporations. Under the circumstances, his participation in the agreement was a normal business transaction, made to protect his extensive interests and substantial salaries in the various corporations, particularly the Trust Company.

13. The payment of $48,000, pursuant to said contracts, was both an ordinary and necessary expense incurred by plaintiff in carrying on his business and a loss incurred in his trades or businesses.

Conclusions of Law

1. Plaintiff is entitled to the deduction of $48,000, made in his 1936 return, either as a necessary business expense or a business loss, under Sec. 23(e) of the 1936 Revenue Act, 26 U.S.C.A. Int.Rev.Code, § 23(e).

2. Plaintiff is entitled to judgment against defendant for the amount demanded in the complaint.