text:
    WIENER et al. v. FERNANDEZ, Collector of Internal Revenue.
    No. 936.
    District Court, E. D. Louisiana, New Orleans Division.
    March 31, 1945.

      Herold, Cousin & Herold and Sidney L. Herold, all of Shreveport, La., and Phelps, Dunbar, Marks & Claverie and Charles E. Dunbar, al-1 of New Orleans, La., for plaintiffs.
    Samuel O. Clark, Jr., Asst. Atty. Gen., Andrew D. Sharpe, Helen R. Carloss, and James P. Garland, Sp. Assts. to the Atty. Gen., and Herbert W. Christenberry, U. S. Atty., and A. P. Schiro, III, Asst. U. S. Atty., both of New Orleans, La., for defendant.
    R. N. Gresham, of San Antonio, Tex., Palmer Hutcheson, of Houston, Tex., J. P. Jackson, of Dallas, Tex., and Harry C. Weeks, of Fort Worth, Tex., amici curiae.
   BORAH, District Judge.

This action was filed by the universal 'legatees and heirs of Sam Wiener, Jr., deceased, to recover an alleged overpayment of federal estate taxes in the amount of $162,329.59, with interest. The case was tried by the court without a jury on an agreed statement of facts. The stipulated facts, incorporated herein by reference, reveal the following:

Plaintiffs are the sons of Sam Wiener, Jr., who died on December 10, 1942, in Shreveport, Louisiana, leaving a last will and testament in which he constituted the present plaintiffs his sole heirs. Decedent was married in Shreveport, Louisiana, in the year 1907 to Florence Loeb with whom he lived from that time until his death.

“During the marriage, Sam Wiener, Jr., was engaged in many different kinds of business, such as the grocery business, lumber business, real estate and later, in investments of various character. All assets of every character, movable and immovable, which stood of record ,or in the possession of the decedent at the time of his death (with the exception of certain realty in Mississippi) was acquired by, and fell into the ownership of the marital community which had existed between him and his surviving wife. At no time during the existence of the community was Mrs. Wiener ever employed in a gainful occupation outside the household, nor did .she receive from any one salary or other compensation for such personal services, nor was any part of the community property derived originally from any separate property owned by Mrs. Wiener.”

In the federal estate tax return filed on behalf of the estate of Sam Wiener, Jr., deceased, plaintiffs reported the entire value of all of the separate property owned by decedent, plus the one-half of the net value of the community which had existed between decedent and his surviving wife. Included in said community, and therefore reported only to the extent of one-half thereof, were fifteen policies of life insurance contracted for by decedent during the said marriage, all naming the wife as beneficiary, and each and all of the premiums on which had been paid with community funds. Each of. said policies reserved the right to the insured of changing the beneficiary.

Under the return as filed there was an estate tax liability of $107,078.47 and this sum was paid.

In the audit of the federal estate tax return the Commissioner of Internal Revenue assessed a-deficiency of federal estate taxes of $165,821.57, which together with interest in the amount of $3,807.08 was paid by pla-intiffs to defendant herein on August 10, 1944. The additional assessment resulted in part from the inclusion by the Commissioner of Internal Revenue in decedent’s taxable estate of ’the entire value of all of the community property of every character and the inclusion in the taxable estate of the total proceeds of the life insurance above referred to.

Claim for refund of the amount sued for herein was filed by plaintiffs on August 12, 1944, and said claim was rejected in its entirety by the Commissioner of Internal Revenue on October 31, 1944.

“There exists no controversy between the parties respecting valuations. The amount claimed by the plaintiffs in their claim for refund, and which forms the subject matter of this suit, represents that part of the deficiency assessment resulting-entirely from the application by the Bureau of Internal Revenue of the provisions of Section 402(b) (2) and of Section 404(a) of the Federal Revenue Act of 1942, 26 U. S.C.A. Int.Rev.Acts; that is to say, in the inclusion by the Bureau of Internal Revenue in the taxable estate of the decedent the entire community property (rather than only one-half thereof as returned), including the entire proceeds of the life insurance above referred to.”

Section 811, subsections (e) and (g) of the Internal Revenue Code, the applicable statute, was amended by Sections 402(b) (2) and 404(a), respectively, of the Revenue Act of 1942. This case presents the question of the constitutional validity of Sections 402(b) (2) and 404(a). For convenience of discussion I shall hereinafter refer only to Section 402(b) (2) as the constitutional questions raised by plaintiffs in respect to this amending section apply with equal force to Section 404(a).

Section 402(b)(2) of the Revenue Act of 1942 provides that there shall be included in a decedent’s gross estate the full value of all property “to the exent of the interest therein held as community property by the decedent and surviving spouse under the law of any State, Territory, or possession of the United States, or any foreign country, except such part thereof as may be shown to have been received as compensation for personal services actually rendered by the surviving spouse or derived originally from such compensation or from separate property of the surviving spouse. In no case shall such interest included in the gross estate of the decedent be less than the value of such part of the community property as was subject to the decedent’s power of testamentary disposition.”

By its express terms this statute provides that all property held by a decedent and spouse in community shall be included in the gross estate of the decedent, except that portion shown to have been received as compensation for personal services actually rendered by the survivor, or derived from such compensation, or from the separate property of the survivor, but in no case shall such interest included in the gross estate be less than the share over which the decedent had a testamentary power of disposition.

The community property with which we are concerned in the instant case is of the type which does not fall within either exception in the statute. We have therefore a type of community property in which the first spouse to die is taxed on the whole, including the survivor’s share.

The fact that section 402(b) (2) allows all property which can be shown to have been received for personal services actually rendered or derived originally from such compensation or from separate property of the surviving spouse does not operate in aid of its validity in Louisiana. All income of the husband is presumed under the law of this state to be community property. Civil Code Art. 2405. Furthermore, “compensation for personal services actually rendered” falls into the community (Article 2402) regardless of whether such service be rendered by the husband or by the wife living together as such. To charge the heirs with the burden of showing what part of the community consisted of the survivor’s separate earnings or separate property would not only be impracticable but would have the effect of denying one of the most important principles of the community property system, the theory that the gains of the community automatically vest in the husband and wife equally, each having full ownership of one-half of such gains. Arts. 2402, 2406. Moreover, section 402(b) (2) itself denies this allowance by providing that in no case may the gross estate be less than the value of such part of the community property as was subject to the decedent’s power of testamentary disposition. Thus the statute first states, in effect, that community property, for taxation purposes, will be regarded as the separate property of each spouse to the extent that it was earned by that spouse, then suddenly announces a recognition of the surviving spouse’s half interest in the community, regardless of its source by providing that the estate of the spouse dying first is taxable to the extent of at least one-half the community in all instances.

The federal estate tax is not a tax on property, but on the transmission of property from the dead to the living. United States v. Perkins, 163 U.S. 625, 16 S.Ct. 1073, 41 L.Ed. 287; Plummer v. Coler, 178 U.S. 115, 20 S.Ct. 829, 44 L.Ed. 998. This statute abolishes completely as to community partnership property only the test of ownership at death as being the controlling factor in measuring the tax, and substitutes therefor, as to the bulk of such property, the conception of dual, but complete, ownership by both spouses, so that this bulk is .taxed as a part of the gross estate on the first to die, depending not on source, actual ownership or management, but upon the accidental circumstance of which spouse predeceases the other. As to that property received or derived from compensation for personal services actually rendered or traceable to income from separate property, the source controls only in the event the first to die received the compensation or owned the separate property, and all such property must be included in such recipient’s gross estate. If the first to die did not receive the compensation or the derivatives from separate property, •source is completely disregarded, and one-half is included in the gross estate of such decedent. Power of testamentary disposition limits the amount to be included in the gross estate, so it can not in any case be less than the amount over which the decedent had power of testamentary-disposition and thus in certain events a third and different rule of taxation is applied.

“The nature and character of the right of the wife in the community for the purpose of taxation (is) peculiarly a local question” and determination of the state court thereon is not reviewable by the Supreme Court. Moffitt v. Kelly, 218 U.S. 400, 406, 31 S.Ct. 79, 81, 54 L.Ed. 1086, 30 L.R.A.,N.S., 1179; Lang v. Commissioner of Internal Revenue, 304 U.S. 264, 58 S.Ct. 880, 82 L.Ed. 1331, 118 A.L.R. 319. As was said in United States v. Goodyear, 9 Cir., 99 F.2d 523, 526, “the present rule seems to be that community property law is applicable in determining the amount of the gross estate” for federal estate tax purposes. “Every marriage contracted in this State, superinduces of right partnership or community of acquets or gains, if there be no stipulation to the contrary,” Article 2399, and it is the settled law of Louisiana “That this community is a partnership in which the husband and wife own equal shares, their title thereto vesting at the very instant such property is acquired.” Succession of Wiener, 203 La. 649, 657, 14 So.2d 475, 477.

“In Louisiana, the wife has a present vested interest in community property equal to that of her husband.” Bender v. Pfaff, 282 U.S. 127, 132, 51 S.Ct. 64, 65, 75 L.Ed. 252. “The wife’s rights in and to the community property do not rest upon the mere gratuity of her husband; they are just as great as his and are entitled to equal dignity.” Succession of Wiener, supra, 203 La. at page 666, 14 So.2d at page 480. The rights of the wife as well as those of the husband in and to the marital gains grow out of the marriage contract itself and do not originate only when it is dissolved. She is the half partner and owner of all acquisitions made during the existence of the community whether they be property or income. She is afforded the same privilege as her husband of disposing of her interest therein by will, and in the absence of a will, at her death her interest in the community property passes to her legal heirs in the same manner as her husband’s interest therein passes to his legal heirs, in the absence of a will.

The Louisiana Code speaks of the community always as a partnership, the husband being its manager. The husband is the managing partner of the partnership but his powers of management are restricted and circumscribed. His management of the wife’s interest in the property terminates upon separation, upon divorce, upon a showing of fraud, or whenever the husband proves to be incompetent, a bad manager, of a reckless and speculative disposition or whenever his affairs are in such disorder .that her property rights are jeopardized. Under the statutes of Louisiana the wife can by ante-nuptial agreement with her husband stipulate that there shall be no community, or by agreement make herself rather than him the managing partner, or agree that the community partnership shall be managed jointly by husband and wife or vary the partnership agreement in any other way they see fit. Failure to exercise such option carries with it .the conclusive presumption that they had elected that future acquisitions should be under the régime of the ordinary community which “consists of the profits of all .the effects of which the husband has the administration and enjoyment, either of right or in fact, of the produce of the reciprocal industry and labor of both husband and wife, and of the estate which they may acquire during the marriage,” etc. Article 2402. Accordingly all property found in the possession of either spouse upon dissolution of the community is presumed to be community partnership property unless it can be clearly identified as belonging to .the separate estate of one or the other. Art. 2405. The source and nature of community partnership property was summarized in Succession of Wiener, supra, and it would serve no useful purpose to repeat that summarization here.

I believe in the reality of the wife’s interest in the Louisiana marital community, and I believe in the inequity of taxing a decedent’s estate with respect to wealth which he never owned. These principles the statute patently ignores.

The law in question clearly violates the principle announced in Hoeper v. Tax Commission, 284 U.S. 206, 215, 52 S.Ct. 120, 122, 76 L.Ed. 248, 78 A.L.R. 346, that “any attempt * * * to measure the tax on one person’s property * * * by reference to the property * * * of another is contrary to due process of law.”

In Heiner v. Donnan, 285 U.S. 312, 326, 327, 52 S.Ct. 358, 361, 76 L.Ed. 772, the court said: “That a federal statute passed under the taxing power may be so arbitrary and capricious as to cause it to fall before the due process of law clause of the Fifth Amendment is settled. Nichols v. Coolidge, 274 U.S. 531, 542, 47 S.Ct. 710, 71 L.Ed. 1184, 52 A.L.R. 1081; Brushaber v. Union Pac. R. Co., 240 U.S. 1, 24-25, 36 S.Ct. 236, 60 L.Ed. 493, L.R.A.1917D, 414, Ann.Cas.1917B, 713; Tyler v. United States, supra, 281 U.S. [497], 504, 50 S.Ct. 356, 74 L.Ed. 991, 69 A.L.R. 758.” And then after discussing the Hoeper case the court said: “In substance and effect, the situation presented in the Hoeper case is the same as that presented here. * * * The result is that upon those who succeed to the decedent’s estate there is imposed the burden of a tax, measured in part by property which comprises no portion of the estate, to which the estate is in no way related, and from which the estate derives no benefit of any description. Plainly, this is to measure the tax on A’s property by imputing to it in part the value of the property of B, a result which both the Schlesinger [Schlesinger v. Wisconsin, 270 U.S. 230, 46 S.Ct. 260, 70 L.Ed. 557, 43 A.L.R. 1224] and Hoeper cases condemn as arbitrary and a denial of due process of law. Such an exaction is not taxation but spoliation. 'It is not taxation that government should take from one .the profits and gains of another. That is taxation which compels one to pay for the support of the government from his own gains and of his own property.’ United States v. Railroad Co., 17 Wall. 322, 326, 21 L.Ed. 597.” (Italics supplied.)

The statute cannot be supported on the basis that economic benefits were shifted by death. It is quite true that there is frequently a shift in management at the husband’s death, but the rights held by the wife when contrasted to the restrictions and circumscribed agency powers of the husband do not lend support to the view that the husband’s death confers a real or substantial economic benefit on the wife with respect to the one-half interest in the partnership property, which she has always owned. A shift of bare management powers is not a shift in economic interest and cannot be made the subject of the tax. That the tax must be measured by the shifting of real economic benefits as distinguished by mere agency or trust powers is shown by the decision of Reinecke v. Northern Trust Co., 278 U.S. 339, 346-347, 49 S.Ct. 123, 73 L.Ed. 410, 66 A.L.R. 397; Poe v. Seaborn, 282 U.S. 101, 113, 51 S.Ct. 58, 75 L.Ed. 239. But, be this as it may, the statute is not limited in its application to the case where the husband died first. The language compels its equal application where the husband is the survivor. It expressly provides that there shall be included in the taxable estate of the decedent “the interest therein held as community property by the decedent and surviving spouse.” The decedent may well be the wife and the surviving spouse the husband. In such case it is not believed that any one familiar with Louisiana law would have the temerity to urge that the husband had acquired any right by his wife’s death. Yet the statute operates equally in the assumed case as under the facts here involved. On settled principles and from the authorities it is clear that if the statute be invalid in the case of the predecease of the wife it is equally invalid in the case where it is the husband who died first. United States v. Reese, 92 U.S. 214, 221, 23 L.Ed. 563; Poindexter v. Greenhow, 114 U.S. 270, 304-305, 5 S.Ct. 903, 962, 29 L.Ed. 185, 207; Howard v. Illinois Cent. R. Co., 207 U.S. 463, 501, 28 S.Ct. 141, 52 L.Ed. 297; Butts v. Merchants’ & Miners’ Transportation Co., 230 U.S. 126, 134, 33 S.Ct. 964, 57 L.Ed. 1422; Bowman v. Continental Oil Co., 256 U.S. 642, 648, 41 S.Ct. 606, 65 L.Ed. 1139; 11 Am.Jur., Constitutional Law, .Secs. 152, 155, 160, pages 834, 837, 842-845, 854-855.

The committee reports show that section 402(b) (2) was enacted upon the theory that its constitutionality was assured under the cases of Tyler v. United States, supra, and United States v. Jacobs, 306 U.S. 363, 59 S.Ct. 551, 83 L.Ed. 763. But these cases do not support the amendment. Technically many grounds exist for distinguishing the issue involved' in the common-law devices of concurrent ownership from the problem of community property. In tenancy by the entirety and joint tenancy, neither party has the power of testamentary disposition before the death of the other. In both instances the doctrine of survivorship is the predominant and distinguishing feature, the interest of the decedent automatically vesting in the survivor. Under the community property system each spouse has the full power of testamentary disposition over one-half of the community property at all times and the surviving spouse obtains the decedent’s share of the community in full ownership only in case there are no ascendants or descendants.

Tenancy by the entirety and joint tenancy are created only by a private conveyance or devise and are disfavored in most common-law states in preference to tenancy in common. In Louisiana the marriage of the parties automatically superinduces the community property system unless there is stipulation to the contrary, and all property, real and personal, acquired during the marriage is presumed to fall into the community. In the Tyler and Jacobs cases, death became the generating source of important and definite accessions to the survivor’s property rights and all the property came mediately or immediately to the tenancy as a pure gift from the decedent. In Louisiana the wife’s interest does not proceed from a gratuity nor does the death of a community partnership spouse generate added property rights in the survivor’s one-half of the property.

In the Tyler case the statute expressly included such estates but also expressly excepted “such part thereof as may be shown to have originally belonged to such' other person and never to have belonged to the decedent.” 39 Stat. 778, §. 202(c). And as to the estate held to be taxable it is said: “None of the property constituting it had, prior to its creation, ever belonged to the surviving spouse.” [281 U.S. 497, 50 S.Ct. 358.] This was a just basis for the decision. But neither the Tyler case nor the Jacobs case has the remotest application to community partnership property.

In view of the foregoing the court deems it unnecessary to pass on the remaining constitutional questions raised by plaintiffs.

Findings of Fact.

The court finds as the facts the allegations of fact contained in the complaint, to the extent that they were admitted by the defendant’s answer, and the additional facts contained in the written stipulation on file. These are incorporated herein by reference.

Conclusions of Law.

1. Section 402(b) and Section 404(a) of the Revenue Act of 1942 are unconstitutional and void, being in conflict with the requirements as to due process contained in the 5th Amendment to the Constitution of the United States.

Plaintiffs are entitled to recover from the defendant the aforesaid sum of $162,-329.59, with interest at the rate of six per cent, per annum from August 10, 1944 until paid.

The clerk is directed to enter judgment accordingly.

       14 Am.Jur., Cotenancy, Secs. 6, 7, 8, 12, 15, 86.


source: Caselaw Access Project

author: McGUIRE, Associate Justice.

license: Public Domain

text:
    PENINSULA CORPORATION OF SEAFORD, DEL., v. UNITED STATES et al.
    No. 24102.
    District Court of the United States for the District of Columbia.
    Jan. 31, 1945.

      J. E. Hummer, C. V. Guthrie, and E. B. Ussery, all of Washington, D. C., for plaintiffs.
    E. M. Reidy, Asst. Chief Counsel, of Washington, D. C, for Interstate Commerce Commission.
    Robert L. Pierce, Department of Justice, Wendell Berge, Department of Justice, and Edward M. Curran, U. S. Dist. Atty., all of Washington, D. C., for the United' States.
    John R. Norris and James J. Doherty, both of Baltimore, Md., and Eugene X. Murphy, of Washington, D. C., for intervenor Interstate Common Carrier Council of Maryland, Inc.
    Before EDGERTON, Associate Justice of the United States Court of Appeals for the District of Columbia, and LETTS and McGUIRE, Associate Justices.
   McGUIRE, Associate Justice.

This is a suit under 28 U.S.C.A. §§ 41 (28), 43-47a, to set aside an order of the Interstate Commerce Commission entered November 11, 1943.

The report and order of Division 5 of the Commission (Exhibit B to the complaint) dismissed plaintiff’s application under the “grandfather” clause of Section 206 (a) of the Interstate Commerce Act. This application, as amended, sought a certificate of public convenience and necessity to continue operations as a common carrier by motor vehicle in interstate commerce of commodities to and from certain designated points over irregular routes.

In view of the character of the attack made by plaintiff on the conduct of the proceedings before the Commission, a rather lengthy résumé of the proceedings both before and after the order in question as gleaned from the.' record before this court is set forth and in some detail.

On February 4, 1936, one John R. Mitchell (plaintiff’s predecessor) filed an application with the Commission under the “grandfather clause” of the Interstate Commerce Act—supra, requesting authority to operate as a common carrier by motor vehicle of commodities generally throughout Maryland, Virginia, North Carolina, Delaware, Pennsylvania, New Jersey and New York. The application was filed on the short emergency form, which specified that the applicant must, on or before a date to be designated by the Commission, furnish evidence to support all allegations.

On March 8, 1937, Mitchell filed a statement of facts in support of his application in which he said that the main volume of his traffic was obtained in Florida, North Carolina, and Del-Mar-Va Peninsula, and was transported to Northern and Eastern markets. Seventy-five percent of the revenue was claimed to be derived from hauling farm products, the remainder from general commodities. At the same time Mitchell filed statements by two shippers to the effect that he had carried shipments for them to and from Florida, and he also filed a certificate of registration under the N.R. A. which recited that he operated in North Carolina, Virginia, Maryland, Delaware, Pennsylvania, New Jersey and New York. In this statement Mitchell indicated that, in addition to the seven states just named, he operated in Florida, Georgia, South Carolina, the District of Columbia, Connecticut, Rhode Island and Massachusetts.

On April 5, 1937, the application was transferred to Mitchell’s successor, Mitchell and Furniss, d/b/a Sussex Motor Line, a partnership.

On December 8, 1937, at the direction of the Commission, Mitchell appeared before a District Supervisor to submit proof of his operations. He submitted an affidavit in which he enumerated seventeen classes of commodities which he handled and specified the points of origin and destination. It is alleged ‘ by the plaintiff that Mitchell exhibited to the Supervisor certain documents, books and papers, in support of his operations, and this allegation is apparently admitted by the Commission; there is, how■ever, no reference to this evidence in the papers forwarded by the Supervisor to the Commission. Mitchell also submitted affidavits of ten shippers to the effect that he "had hauled commodities for them; only one -of those is specific as to dates, commodities transported, origin and destination. The District Supervisor forwarded to the Commission these eleven affidavits together with a short questionnaire, but it nowhere appears in the record what, if any, recommendation the Supervisor made.

On February 12, 1938, the Commission entered an order authorizing the applicant to transport the seventeen classes of commodities enumerated in Mitchell’s affidavit and designating practically the same points of origin and destination as had been specified in Mitchell’s affidavit.

On March 15, 1938, the rail carriers in the Official Classification Territory filed a petition with the Commission to stay issuance of the certificate upon the ground that there was not adequate proof to support the order as issued; it was requested further that the applicant be required to furnish documentary proof or specific affidavits indicating the nature of his operations. This petition was denied by Division 5 of the Commission on May 12, 1938.

On October 28, 1938, the rail carriers filed another petition asking reconsideration and reopening of the applicant’s case on the ground that proper proof had not been submitted to support such a broad authorization. It was further alleged that the original application, which mentioned only the seven states from North Carolina to New York, had never been amended. On May 19, 1939, the rail carriers were notified that the Commission deemed their objections sufficient to refer the case back to the field for further investigation.

Accordingly the case was referred back to the District Supervisor with instructions to hold a conference with the rail carriers. After holding this conference the Supervisor notified the applicant that in the opinion of the protestants the evidence submitted was not sufficient to substantiate the scope of operations granted in the original order.

The Supervisor requested that the applicant appear in his office on June 8, 1939, for an informal conference with the protesting rail carriers, bringing with him such additional proof as he had and specific affidavits of shippers. The applicant refused to appear and requested a formal hearing. On July 24, 1939, the Commission vacated the original order.

On August 22, 1939, the application of Mitchell and Furniss was transferred to the Peninsula Corporation.

On September 13, 1939, the Commission set the case for a formal hearing to be held before Examiner Kephart at Salisbury, Maryland, on October 11, 1939. On September 30, 1939,- the rail carriers filed a formal protest against allowance of the application.

At the hearing the rail carriers appeared by counsel. The Peninsula Corporation appeared by its President, Harry I. Truitt, and Mitchell and Truitt testified in its behalf. From the evidence it appeared that the corporation had been formed by Truitt and .several small independent carriers for the purpose of avoiding regulation under the Interstate Commerce Act; (Tr. 30), the carriers retained title to their own trucks (Tr.31) and, when hauling exempt commodities, did so as individuals; when nonexempt commodities were to be hauled the trucks were leased to the corporation which then provided the required services (Tr. 31-32-33). The intent plainly was to avoid the provision of the act by which a carrier who hauls both exempt and non-exempt commodities is regulated in all respects. Mitchell testified as to his operations prior to June 1935 (Tr. 13). He was operating as a common carrier over irregular routes (Tr.13). His chief loads were agricultural products and he made a practice of following the produce season (Tr. 13-14). He hauled produce from Florida to points along the Atlantic Seaboard as far up as Massachusetts and also to Western Pennsylvania and New York (Tr.13-15-19). On return .trips he hauled canned goods and frozen fruit from the Del-Mar-Va Peninsula and from the Western shore of Maryland to Florida and other Southern states. He hauled produce from Georgia, North and South Carolina, Virginia and the Del-Mar-Va Peninsula to the same Northern markets and also hauled from Western New York to the coast. In addition to produce he hauled fertilizer, building materials and wholesale groceries (Tr.21-25). Mitchell, however, could offer no documentary proof. He claimed that the papers which he submitted to the District Supervisor on December 8, 1937, had been destroyed when his house burned down in 1938 (Tr.25). He relied entirely upon his own testimony and the affidavits of shippers which he submitted on December 8, 1937 — he had not asked any of these shippers to testify at this hearing (Tr.27). The rail carriers objected to the admission of any of these affidavits unless the shippers were brought to the hearing for cross-examination (Tr.48) and the examiner rejected them. Truitt complained that it was practically impossible to get shippers to appear at a hearing, but proceedings were adjourned for a week to enable him to try to get more evidence (Tr.57). Before the hearing concluded Truitt amended the application as above indicated.

On October 17, 1939, Truitt appeared at the hearing with only one witness whose knowledge of Mitchell’s operations did not prove very substantial. He said he had been so busy that he could not get any of the shipping documents. (Tr.60-69).

Before he could act on the case Examiner Kephart went into the army and the proceedings were turned over to Examiner Sullivan.

On December 11, 1940, the Examiner filed a report and a proposed order. His recommendations as to farm produce covered practically the same territory as had been allowed the applicant in the original order. He was also allowed practically what he had asked for in hauling fertilizer, lubricating oil, livestock feed, coal and lime. He was allowed to transport canned goods from Baltimore and Aberdeen on the Western shore of Maryland, to the Del-Mar-Va Peninsula and points in Virginia, North and South Carolina and Georgia.

On January 15, 1941, the Peninsula Corporation, through an attorney, filed exceptions to the Examiner’s report. The chief objection raised was that the Examiner had allowed transportation of canned goods from Baltimore and Aberdeen to the Del-Mar-Va Peninsula, although the body of his report made it clear that Mitchell carried such goods from Baltimore, Aberdeen and the Del-Mar-Va Peninsula to other points. It was contended that this must have been a clerical error in preparing the report. Examiner Sullivan’s report said that Examiner Kephart had excluded the ten affidavits, which Mitchell had attached to his original application, from consideration in the formal hearing on objection by the rail carriers. It was objected that Examiner Kephart had not ruled on the objection of the rail carriers. A further hearing was requested, if the Commission felt that the facts had not been sufficiently proved.

The Commission reopened the case, and on June 1, 1942, ordered a further hearing at Salisbury, Maryland, on July 25, before Examiner Price. On July 8, Mr. Truitt requested a postponement of 90 days arid a transfer of the hearing to Washington; he stated that most of his witnesses were in the army, defense plants, or engaged in hauling produce at that time. On July 11, the Commission refused this request.

At the hearing on July 25, Mr. Truitt complained that the Commission had not given him sufficient time to prepare, and that it should have held the hearing in Washington where his attorney was. He presented no new witnesses and no more evidence. The hearing developed into an argument between the Examiner and Truitt.

On January 12, 1943, Exarniner Price filed his report and proposed order. He found that the Peninsula Corporation was formed simply to circumvent the Interstate Commerce Act and that no rights should be awarded to it, but should go instead to its predecessor, Mitchell and Furniss. His recommendation as to operations to be allowed were considerably less than those of Examiner Sullivan.

On January 30, 1943, the Commission stayed the effectiveness of the recommended order pending further consideration. On February 3, 1943, Truitt filed exceptions to the recommended order. These exceptions had been prepared by himself and for the most part relate to alleged misstatements of fact in the Examiner’s report. The Commission refused to accept these exceptions since the final date for filing was February 1, 1943.

On November 11, 1943, the Commission entered an order denying the application in its entirety on the ground that the applicant had failed to present proper proof.

On January 20, 1944, the applicant filed a motion for reconsideration. It was contended that it was not allowed sufficient time to prove its case and to file exceptions. The motion was denied on April 17, 1944.

Before this court the plaintiff urges in support of its petition:

(1) That the Commission was “unduly influenced by the Official Classification Territory Lines Motor Carrier Committee in performing its administrative functions under the laws to the prejudice of the plaintiff * * * and * * * “erred in refusing. to grant the plaintiff herein a postponement of the said hearing of July 25, 1942; that the plaintiff was denied a reasonable tim<J in which to secure witnesses and prepare evidence to be presented * * * at said hearing and that the Commission erred in denying the plaintiff a full and fair hearing.”

(2) That there was error in the decision and order, that the same was contrary to the evidence, in disregard of material evidence of record, and that the decision and order were arbitrary, capricious and unreasonable.

We find no merit in these contentions.

We find nothing in the record, nor was anything .elicited at the hearing before us other than mere assertion, to support either the conclusion or the inference that the Commission was unduly influenced in the performance of its administrative function and in taking the action it did.

The allegations to the contrary in the complaint are mere conclusions, unsupported by any facts pleaded and are, therefore, insufficient. Isbrandtsen-Moller Co., Inc. v. United States, 300 U.S. 139, 145, 57 S.Ct. 407, 81 L.Ed. 562.

Again, and for reasons as cogent as they are obvious, there is a presumption of regularity that attends and supports “the official acts of public officers, and, in the absence of clear evidence to the contrary, courts will presume that they have properly discharged their official duties.” United States v. Chemical Foundation Inc., 272 U.S. 1, 14, 15, 47 S.Ct. 1, 6, 71 L.Ed. 131.

The allegation that the plaintiff was not afforded a full and complete hearing is without foundation. The Commission, by the very nature of its duties, has the inherent power to fix the time of hearings, grant or refuse continuances, make its own rules of procedure, and to adopt and follow such methods of investigation and inquiry as will enable it best to discharge its responsibilities and the duties imposed upon it.

Of course, it follows that interested parties must be given an opportunity for hearing, but most certainly, there is nothing in the record here that would cause us to conclude to the contrary. Federal Communications Comm. v. Pottsville Broadcasting Co., 309 U.S. 134, 142, 143, 144, 60 S.Ct. 437, 84 L.Ed. 656.

Nor was the order made contrary to the evidence, in disregard of material evidence of record, nor was it arbitrary, capricious or unreasonable.

The controverted matters of fact raised in proceedings of this character had been entrusted by Congress to the Commission. United States et al. v. Maher, etc., 307 U.S. 148, 154, 155, 59 S.Ct. 768, 771, 83 L.Ed. 1162.

The provisions of the act requiring proof of public convenience and necessity as a basis for a permit for operators, otherwise inhibited, are remedial. The so-called “grandfather” sections, 206 (a) and 209 (a), 49 U.S.C.A. §§ 306(a), 309 (a), establish exceptions and such sections must be read in harmony with the purpose of the act itself and extend to those carriers plainly within its terms, and the burden of proof is on the applicant. McDonald v. Thompson, 305 U.S. 263, 59 S.Ct. 176, 83 L.Ed. 164.

The “grandfather” clause, so-called, requires that the Commission in specifying in a certificate the service to, be rendered shall endeavor to preserve “substantial parity between future operations and prior bona fide operations.” Alton R. Co. et al. v. United States et al., 315 U.S. 15, 22, 62 S.Ct. 432, 437, 86 L.Ed. 586; United States et al. v. Carolina Freight Carriers Corporation, 315 U.S. 475, 481, 62 S.Ct. 722, 86 L.Ed. 971; Crescent Express Lines v. United States et al., 320 U.S. 401, 409, 64 S.Ct. 167, 88 L.Ed. 127.

This it is plain cannot be done where there is no substantial proof as the record indicates here, as to the nature and character of the operations of the applicant conducted on the so-called “grandfather” date.

The test of bona fide operation with reference to locale of operations under the “grandfather” clause must of necessity be proof of other than isolated, incidental, intermittent, or sporadic and infrequent service — it must be service which for want of a better term has been characterized as “substantial”. United States v. Carolina Carriers Corporation, supra.

After a full hearing the Commission has found and set forth basic and primary findings, based on substantial evidence which lead as they must to the final conclusion of fact made by it and upon which its order is based. This is sufficient. Saginaw Broadcasting Co. v. Federal Communications Comm., 68 App.D.C. 282, 287, 96 F.2d 554, certiorari denied 305 U.S. 613, 59 S.Ct. 72, 83 L.Ed. 391; United States et al. v. Baltimore & Ohio R. R. 293 U.S. 454, 464, 465, 55 S.Ct. 268, 79 L.Ed. 587.

Upon full examination of the record we are of the opinion and hold that the finding made had a basis in substantial evidence and was not as a consequence arbitrary or capricious. Shields et al. v. Utah Idaho Cent. R. R. Co., 305 U.S. 177, 185, 59 S.Ct. 160, 83 L.Ed. 111.

The fact, as suggested that applicant may now be hauling canned goods from the so-called Del-Mar-Va Peninsula to the South, which it is argued may be necessary because of the war, has no relation to this proceeding.

The only matter before this court is the validity of the order under review.

The complaint is dismissed and parties may submit proposed findings and decrees.

       49 U.S.C.A. § 306(a). This section, after forbidding operation in interstate or foreign commerce by common carriers by motor vehicle without a certificate of public convenience and necessity from the Commission authorizing such operations, contains the following proviso known as the “grandfather” clause:

        “Provided, however, That * * * if any such carrier or predecessor in interest was in bona fide operation as a common carrier by motor vehicle on June 1, 1935, over the route or routes or within the territory for which application is made and has so operated since that time, or if engaged in furnishing seasonal service only, was in bona fide operation on June 1,1935, during the season ordinarily covered by its operation and has so operated since that time, except in either instance as to interruptions of service over which the applicant or its predecessor in interest had no control, the Commission shall issue such certificate without requiring further proof that public convenience and necessity will be served by such operation, and without further proceedings, if application for such certificate was made to the Commission as provided in paragraph (b) of this section and within one hundred and twenty days after October 1, 1935, and if such carrier was registered on June 1, 1935, under any code of fair competition requiring registration, the fact of registration shall be evidence of bona fide operation to be considered in connection with the issuance of such certificate.”

       By plaintiff’s president, Truitt, at the hearing on October 11, 1939. (Tr. 51-54).

        Farm produce, from points in Florida, points in Bibb and Tifton Counties, Ga., and points in Barnwell County, S. C., to New York, N. Y., Baltimore, Md., Philadelphia, Pa., Seaford, Del., and Washington, D. C., and from points in Western New York State to Allentown, Altoona, Bradford, Johnstown, Philadelphia, Pittsburgh, and Uniontown, Pa., Bridgeport, Hartford, and New Haven, Conn., Boston, Mass., Providence, R. I., Newark, N. J., Baltimore, Md., and Washington, D. C.

        Canned goods, from points in the Del-Mar-Va Peninsula to points in North Carolina, South Carolina, and Georgia, and to Norfolk, Richmond and Suffolk, Va.

        Shingles, lumber, and insulating boards, from Philadelphia, Pa., and Wilmington, Del., to points in Delaware and eastern shore of Maryland.

        Lubricating oils and greases, in contain
        ers, from Marcus Hook, Pa., to Seaford, Del.

        Fertilizer, from Laurel, Del., and Salisbury, Md., to points and places in Wicomico, Dorchester, Caroline, Talbot, Queen Anne and Worcester Counties, Maryland, and Accomac and Northampton Counties, Virginia; and from Salisbury, Md., and Laurel, Del., to points and places in Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, and Salem Counties, New Jersey.

        Lime, from Philadelphia, Plymouth, Meeting, Paoli, and West Chester, Pa., and Wilmington, Del., to points and places in Kent and Sussex Counties, Del., and Wicomico, Dorchester, Worcester and Somerset Counties, Md.

        Livestoeh feed, from Baltimore, -Md., Wilmington, Del., and Philadelphia, Pa., to points and places in Sussex County, Del., and Wicomico County, Md.

        Goal, from Eranklinville, Minersville, Pottsville, and Scranton, Pa., to points and places in Sussex County, Del., and Wicomico County, Md.

        Sugar and wholesale groceries, from Philadelphia, Pa., to Georgetown and Laurel. Del.

       49 U.S.C.A. § 306(a). This section, after forbidding operation in interstate or foreign commerce by common carriers by motor vehicle without a certificate of pub-lie convenience and necessity from .the Commission authorizing such operations, contains the 'following proviso known as the “grandfather” clause:

        “Provided, however, That * * * if any such carrier or predecessor in interest was in bona fide operation as a common carrier by motor vehicle on June 1, 1935, over the route or routes or within the territory for which application is made and has so operated since that time, or if engaged in furnishing seasonal service only, was in bona fide operation on June 1,1935, during the season ordinarily covered by its operation and has so operated since that time, except in either instance as to interruptions of service over which the applicant or its predecessor in interest had no control, the Commission shall issue such certificate without requiring further proof that public convenience and necessity will be served by such operation, and without further proceedings, if application for such certificate was made to the Commission as provided in paragraph (b) of this section and within one hundred and twenty days after October 1, 1935, and if such carrier was registered on June 1, 1935, under any code of fair competition requiring registration, the fact of registration shall be evidence of bona fide operation to be considered in connection with the issuance of such certificate.”

       The Examiner made no formal order at the hearing rejecting the affidavits, since they were never actually offered, but in his recommended report of December 11, 1940 he did find that such testimony should be excluded.

       See notes 2 and 3, supra.


author: JOHNSON, District Judge.

text:
    KENNECOTT COPPER CORPORATION v. STATE TAX COMMISSION. SILVER KING COALITION MINES CO. v. SAME.
    Civil Actions Nos. 671, 680.
    District Court, D. Utah, Central Division.

      Oct. 30, 1944.

    C. C. Parsons, of Salt Lake City, Utah, for Kennecott Copper Corporation.
    R. J. Hogan, of Salt Lake City, Utah, for Silver King Coalition Mines Co.
    A. H. Nielsen and W. L. Skanchy, both of Salt Lake City, Utah, for State Tax Commission.
   JOHNSON, District Judge.

The decision of these cases depends upon the meaning and fair interpretation of the State and the United States statutes applicable to the situation.

These various statutes have been read and re-read during the progress of this discussion, and I will not have them re-read at this time, but they may be considered incorporated in the remarks that I shall make respecting the cases.

In this connection I will say that a taxing body, such as the Utah State Tax Commission, is charged with the duty of collecting all taxes that may be properly assessed and collected under the laws of the State, and it becomes its duty as such to solve powers that are doubtful in favor of the state. That is the universal practice, so far as I have observed, of all taxing bodies, including the revenue department of the United States. So that it results in many cases an appeal must be made to the courts to determine what is the proper meaning and construction of the statutes under which taxes have been levied and assessed. That is the case here.

The State statute provides for the collection of an occupation tax on the gross sales or value of the metals produced by mining companies, and so in these cases the State Tax Commission has proceeded to levy assessments upon the gross amount which it claims has been paid to or received by the respective mining companies covering the period involved, and which assessments have been paid under protest by plaintiff companies.

The tax or levy in these cases has this anomaly: For the bulk of the metal values produced it is agreed, using copper as an illustration, that it has a valuation or sales price of twelve cents a pound — the relative proportion of these two prices I am unable to state offhand — but for that which was produced in excess of this twelve cents per pound price they are here claiming a price of seventeen cents, resulting from a payment made, not by the purchasers of the metals in question, but by the United States Government.

I just asked counsel for the State Tax Commission whether that extra, additional payment was made for the benefit of the purchasers of these metals, or for the benefit of the seller of the metals. Not holding him to his answer, I am, however, of the opinion that he answered correctly when he said it was for the benefit of the sellers, that is to say, of the plaintiffs in these actions.

So that we have this question submitted for determination: Was that extra five cents per pound for this additional production any part of the purchase price or the sales price of these metals ?

Certainly, so far as the relation between the purchaser and the seller or the Government is concerned, it constituted no bargain contract price or part of the price. Then what was it?

To that I think we must look to the statutes of the United States. The State of Utah, neither by its Legislature nor by its Tax Commission, can say what the United States Government shall do with its own money. That is a matter that must be determined by Congress, and its determination of that question is final and conclusive upon all the courts of the nation, State and National.

Now what was the purpose of Congress in enacting this sort of legislation providing for the payment of this particular subsidy?

The statute itself does not recite, but it does contain the word “subsidy”, and subsidy, speaking generally, Is something, usually money, donated or given or appropriated by the Government through its proper agencies — in this country by the Congress. Congress may, and has as here, in these war times used many sub-agencies of the Executive Department to carry out the laws enacted by it.

Now, what did Congress mean and intend when it authorized the payment of subsidies under the conditions specified in the Act? Was it appropriated for the purpose of relieving the buyers of the products or metals indicated from the payment of the market value of the metals in question?

In that connection we must bear in mind that Congress has authorized the Price Control Administrator to make and fix ceiling prices on practically all articles in use in this country. In these cases the Administrator fixed prices at which these metals could be sold, copper for instance, at twelve cents a pound. Now these prices, whatever they may be in any particular case, we must presume were based upon a fair consideration of what would be a fair and just price to be received and paid for the article in question. Can we say that the fixing of the price of copper was a mere subterfuge on the part of the Administrator, and that the real price that he should have fixed, if he had been honest about it, was seventeen cents? Such a construction given to his acts would be to question his honesty, it seems to me. Twelve cents per pound for copper when it was fixed we must accept as the fair market value to be paid for this metal and to be received by the producer of it, and with respect to the bulk of the production in these cases the producer did receive and the purchaser did pay that price. Now the Government, for its own reasons, and without consulting the Legislature of the State of Utah or its Tax Commission, made these extra and additional payments, and the Congress called it a subsidy, which by its very terms means a gift from the Government to these producers. True when it is paid, it is money received and used by the producers, as •they use any other money, and it might very well be that in the determination of income, the courts, in the construction of an •income statute, or the Congress in passing such a statute, may be held to have intended that the States, or the Government itself, should include that payment in the amount upon which income taxes should be assessed. But this is not an income tax. This is an occupation tax upon the gross sales of these metals by these producers, and who are paid money as a subsidy by the United States.

It is recited and reiterated by some of the Government representatives who have written about this matter, that these payments were made to meet the additional cost and expense that would be incurred by producers in making this extra effort to add to its product. Well, I am inclined to the view that these gentlemen were entirely -right in that construction of the statute as to the purpose which Congress had in authorizing these subsidy payments.

In my view of the situation it would be, .and is, a strained construction to make these -payments, although based upon five cents, or some other amount, per pound for the metal in question, a part of the purchase ■price so as to bring it within the terms .and meaning of the State statute under ■which the Tax Commission in these cases has acted.

In that connection, however, I want to repeat that I have no criticism to make of the Tax Commission in raising this ques•tion. It is the duty of the Tax Commission to collect all the taxes that are authorized under the State ^statute, and if it had .any doubt about it, it solved it by levying this tax, and with these resulting law suits. But I am very clearly of the opinion that -neither the state statute nor the Federal statutes give the Tax Commission any authority whatever to make these levies and . collections.

I will state to the jury that the court, ;-after listening to the argument of counsel and being as fully advised as may be, is of the opinion that the plaintiffs in these actions are entitled to judgment as prayed for.

The jury directed by the court to find for the plaintiffs in the amounts indicated in the verdicts.


author: BORAH, District Judge.

text:
    STEEL CONST. CO. v. LOUISIANA HIGHWAY COMMISSION.
    No. 82.
    District Court, E. D. Louisiana, Baton Rouge Division.
    March 21, 1945.

      H. Payne Breazeale, of Baton Rouge, La., and D. W. Strickland, and John W. Lapsley, both of Birmingham, Ala., for plaintiff.
    Richard B. Montgomery, Jr., and Arthur B. Hammond, both of New Orleans, La., for defendant.
   BORAH, District Judge.

Findings of Fact

I. There exists in this case a diversity of citizenship and the amount involved far exceeds the jurisdictional amount.

2. The Steel Construction Company did not follow the administrative procedure outlined in subsections 1, 7 and 8 of Section 5, Division 1 of the contract, to correct the abuses alleged to exist in this case, but in most instances acquiesced in the requirements of the inspectors and/or resident engineer.

3. The Steel Construction Company only made general complaints and these were in most instances made after the work involved in the dispute had been performed in compliance with the request of the inspectors and/or resident engineer.

4. In some instances plaintiff protested during the work and put the resident engineer on notice that it would make a claim but in all instances plaintiff met the requirements of the inspectors and the resident engineer and performed the work demanded of it without ever submitting the matter or dispute to the State Highway Engineer for his ruling or decision.

5. During the progress of the work the State Highway Engineer received a few letters from the officers of the Steel Construction Company complaining generally about the unreasonable inspection requirements of his subordinates but in none of these letters did plaintiff request a ruling from the State Highway Engineer.

6. At no time during the progress of the work did the Steel Construction Company refer any of the disputed items to the State Highway Engineer and request a ruling thereon.

7. The Steel Construction Company did not obtain any extra work order or supplemental contract in respect to any of the items involved in this suit, nor did they request one from any of the highway engineers.

8. It was not until after the work was completed that any claim of any nature or kind was presented by the Steel Construction Company to the State Highway Engineer, and then a claim was presented by the attorneys for the plaintiff to the State Highway Engineer unaccompanied by any supporting evidence, statements, affidavits, or even arguments as to why the said State Highway Engineer should allow the claim.

9. The claim was not itemized or broken down until the very day this suit was filed against the Louisiana Highway Commission for recovery.

10. The State Highway Engineer gave consideration to the claim as presented and decided that plaintiff was not entitled to be paid any additional amounts in addition to that offered in the final check which it had refused to- cash.

11. The engineers and inspectors acted throughout in good faith. Fraud, bad faith or gross error on the part of the State Highway Engineer, the resident engineer or the inspectors is not alleged and the evidence adduced at the trial would not sustain such a charge.

12. The court finds that the balance due plaintiff on the final estimate amounts to $1,435.11; that of this amount $420 is in dispute; that defendant, tendered a check for $1,015.11 in payment of the balance due on the contract and withheld and deducted $420 as liquidated damages for 12 days’ delay but that defendant did not put plaintiff in default for failure to complete the contract within the allotted time.

13. Inspector Senn did not reject rivets which were according to specifications and his inspection of the rivets was not unreasonable.

14. Inspector Senn did not require plaintiff to clean and paint steel in a manner not in accordance with the specifications. The inspection and requirements were reasonable as to cleaning and painting in the shop.

15. The defendant did not request or order plaintiff to sand blast the steel in lieu of cleaning it with rotary wire brushes.

16. Inspector Senn did not require steel to be loaded in a manner different from the requirements of the railway and his requirements were not unreasonable under the circumstances.

17. The inspection and requirements as to field painting by the Steel Construction Company and its subcontractor Carlson were not unreasonable under the circumstances.

18. The requirements of the State Highway Inspectors, including Roland and Baker, were not unreasonable in regard to the cutting out and replacing of field rivets. The inspectors did not order rivets cut out that were up to specifications.

19. Plaintiff did at the request of Erickson dig ditches and do some grading on the west approach to restore the grade to as good a condition as it was before plaintiff commenced operations.

20. In respect to the claim for reaming rivet holes the court finds that there were shop errors in punching and it was necessary to ream these mismatched rivet holes to get fair holes in which to drive the rivets and secure the connection.

21. The plaintiff has been paid for the extra ties which had to be replaced because of the settlement of the east and west railway abutments.

22. Plaintiff received payment for shims at the contractor’s price which included the cost of labor and it was not due to the fault of the Highway Commission that these shims had to be placed under the tie plates at the curve transition point.

23. Plaintiff neither requested nor received any work order, supplemental agreement or written force account for the work of raising span 22. This work was done upon the order of Inspector Roland to permit him to inspect the bearing plate.

24. The realigning of the towers was not to correct surveying errors but was done under an agreement between Inspector Roland and plaintiff’s General Superintendent Campbell in order to facilitate the plaintiff, and this agreement did not provide for extra compensation for this work and no written order was obtained.

25. The furnishing of bolts and pins was in accordance with the specifications and agreement between plaintiff’s general superintendent and the resident engineer and plaintiff was paid for these items in accordance with the terms of the contract.

26. The court finds that all shims were paid for under the terms of the contract and that the plaintiff was required to furnish shims in no larger amount than was anticipated in view of the nature of this contract; that the shims were required because of errors in fabrication of the steel and because of settlement in the foundations and not because of any error or negligence on the part of the highway engineers.

27. The court finds that any additional storage or expense of unloading steel was due to the delay in the preparation of the foundations by the superstructure contractor, the Uvalde Construction Company, and that the Steel Construction Company had full knowledge of Uvalde’s construction schedule and knew when it commenced erection that it might be delayed by the superstructure contractor. The court makes the same finding in regard to the realigning of tracks.

28. The court finds that the Steel Construction Company requested through its president permission to commence the operation of erection earlier than the defendant had anticipated granting such authorization; that plaintiff had full knowledge of the conditions and of the progress of the work of Uvalde Construction Company and that the plaintiff started operations in full knowledge that it ran the risk of delay due to the Uvalde Construction Company’s not completing the foundations sufficiently in advance to allow for the continuous erection of steel.

Division 1, Section 8, subsection 3 of the contract, provides in part as follows: “Each contractor shall be held responsible for any damage due by him or his agents to the work performed by another contractor and the Commission will not entertain any claims for damages or delays resulting from such operations.”

29. The court finds that it was the obligation of the Kansas City Bridge Company to drill anchor bolt holes, railroad and highway abutments on piers 1 and 6 but that the resident engineer did not require it to do the work because of the small amount involved and the possibility of cumulative errors and he thought plaintiff would prefer not to take the chance of having to drill them out and replace them. Most contractors preferred to do it that way and if plaintiff preferred to take the chance and believed that this was extra work it should have requested a written extra work order or should have refused to drill the anchor bolt holes and appealed to the State Highway Engineer. The Kansas City Bridge Company advised plaintiff that it would not do the work and plaintiff did not raise its voice in protest until this suit was filed.

30. The court finds that any reaming out of rivet sets ordered by Inspectors Roland and Baker was not unreasonable and beyond the specifications.

31'. The court finds that any delay in the furnishing of shim lists was not due to any negligence on the part of the highway engineers but was due to the fact that the foundations were not ready on the west approach and that as a matter of fact the furnishing of shim lists for small lots was to facilitate the plaintiff.

32. The court finds that plaintiff’s shop detail drawings corrected an omission in the plans and showed the type of bolts which were to be used with permission of defendant in fastening checkered and wrought iron plates; that plaintiff knew that these plates had to be fastened, made no protest at the time and was paid for these bolts in accordance with, the terms of the contract.

Division 1, Section 4, subsection 1 of the contract, reads as follows: “The intent is to prescribe a complete work or improvement which the Contractor undertakes to do, in full compliance with the contract. The Contractor shall perform all items of work covered and stipulated in the contract and perform extra work and' shall furnish, unless otherwise definitely provided in the contract, all materials, implements, machinery, equipment, tools, supplies, transportation and labor necessary to the prosecution of the work. The Commission will not pay freight charges on any material furnished under this contract.”

33. There was no delay on the part of the defendant in furnishing plans for span No. 13. Plaintiff knew that it had to secure the approval of the Y. & M. V. Railroad to erect that span and'this was its responsibility, not the responsibility of defendant.

34. The court finds in regard to the claim for rental charges for machinery in the field, that this delay was not due to the furnishing of shim lists or to any negligence or delay on the part of the defendant’s engineers, but was due to delay of the Uvalde Construction Company in placing the foundations on the west approach at the disposal of the defendant.

Conclusions of Law.

1. The contract in suit specifically provides for an administrative procedure for the settlement of disputes concerning questions arising under the contract. To the end that any arbitrary ruling or requirement of the inspector may be corrected there was imposed upon the plaintiff the duty of referring such disputes first to the resident engineer and if not settled then to the State Highway Engineer for his final decision.

2. It was under this contract clearly the implied intent of the parties that disputed ■questions arising during the progress of the work would within a reasonable time be ultimately referred to the State Highway Engineer for his final determination.

3. The administrative procedure set forth in the contract provided a complete and reasonable means of correcting the abuses alleged to exist in this case. It of course applies to disputes arising during the general progress of the work and does not apply to any extra work.

4. The contract in suit provided an administrative procedure for the settlement of disputes concerning questions arising ■under the contract, and having accepted and agreed to these provisions, plaintiff was not free to disregard them without due •cause, accumulate large damages and then sue for recovery.

5. I find nothing in this record that suggests that there was any valid reason or justification for plaintiff’s failure to pursue the procedure set forth in the contract and even if it could be said that the conduct of the resident engineer or his inspectors was so flagrantly unreasonable and so grossly erroneous as to imply bad faith, it would still follow that the appeal provisions of the contract had to be exhausted before relief could be sought in the courts.

6. Even if it be assumed that the time element was waived and that plaintiff followed the administrative procedure outlined in the contract, there still has been no showing such as would entitle plaintiff to go behind the judgment of the engineer for there is neither averment nor proof that the engineer has been guilty of fraud •or of mistake so gross as to justify an inference of bad faith, or that he has failed to exercise an honest judgment.

7. The court holds, as a matter of law, that the contractor was obligated under the contract to dig the drainage ditches and grade the bridge site as requested by the resident engineer.

8. The court holds, as a matter of law, that under the contract there was a duty imposed upon the Steel Construction Company to obtain supplemental agreements or written extra work orders under Division 1, Section 10, subsections 3 and 4 of the contract, for any work done upon request of the resident engineer or an inspector which it did not believe came under the terms of the contract, and failure to do so precludes recovery.

9. The court holds that the contract provided for a complete work and that the contractor had no right to take advantage of any error or omission in the plans, and that, therefore, as a matter of law, plaintiff cannot recover for the work done in fastening the wrought iron and checkered plates.

10. The court holds that the defendant is not liable under the contract for the delays caused by other contractors and that this includes the delay caused by the Uvalde Construction Company and the Y. & M. V. Railroad and any subcontractor in the erection of pier 13 over the Y. & M. V. tracks. Nor does it lie in the mouth lof plaintiff to complain about a condition that it was instrumental in creating.

11. Plaintiff is entitled to judgment in the amount of $1,435.11, the balance due on the final estimate, together with interest at the rate of five per cent, per annum thereon from December 21, 1939 until paid. ' In all other respects plaintiff’s claim is denied and rejected.

12. Of the twenty-six items involved in this controversy, only one, relating to the balance due on the final estimate, has merit, and the greater portion of that item was not in controversy. I think nine-tenths of this record is fairly attributable to matters in which the plaintiff has been unsuccessful, and that the costs should be apportioned on the basis of ninety per cent, against the plaintiff and ten per cent, against defendant.

On August 3, 1937, plaintiff was awarded a contract by the Louisiana Highway Commission for the construction of the superstructure of the approaches of the Mississippi River Bridge at Baton Rouge, Louisiana. Under the terms of this contract plaintiff agreed and bound itself to furnish and deliver all materials and equipment and to perform and furnish all labor necessary for the satisfactory completion of the proposed improvement on or before the expiration of 320 working days after receipt of written notice to proceed. Work was commenced on April 7, 1938, and was finally completed on October 9, .1939, in 350 working days. During this period plaintiff received two extensions aggregating 18 days and for the 12 days’ net delay in contract completion it was assessed liquidated damages at the rate of $35 per day, or a total of $420.

During the progress of the work plaintiff received the sum of $1,476,823.23, and on December 21, 1939, was tendered a, check in the amount of $1,015.11 as payment of final estimate on this contract. Plaintiff refused to accept this check and it was returned because defendant had withheld and deducted $420 for liquidated damages and because plaintiff had other matters which it expected to take up with defendant within a few days.

On March 25, 1940, plaintiff, through its attorneys, presented for the consideration of the Louisiana Highway Commission a claim for $181,704.20. This claim was detailed as follows: Cost of extra work and delays caused in shop by Louisiana Highway Commission Inspectors, $115,097.97; Extra work and delays caused in field by highway commission inspectors, $66,606.23.

Upon receipt of this claim Mr. Henderlite, the State Highway Engineer, replied that his office had no knowledge or information which would permit an analysis of the claim as only the gross amounts were described and plaintiff was advised that a study would be made of the claim if and when presented in such detail as to permit a determination of its correctness in accordance with the governing specifications. In presenting this claim it was suggested that those parts of the specifications deemed applicable be recited in support of each particular item or group of items. In a followup letter Mr. Henderlite advised the attorneys for plaintiff that his prior letter was not to be interpreted as a refusal to consider the claim which they had presented in their letter of March 25th.

O.n May 6, 1940, the attorneys for plaintiff addressed the following communication to Mr. Henderlite:

“In response to your letter of April 26. and agreeable to the Steel Construction Company, I am handing you herewith a ‘break-down’ on the seven items of the claim of Steel Construction Company against the Louisiana Highway Commission for your further consideration and attention.

“Under instructions from the company and simply in order to protect their claim legally, as it has arisen under the present Louisiana Highway Commission Administration, we are today filing suit in the Federal Court on this account and assure you the matter will be left without action until we hear from you further after you have had an opportunity to consider the ‘break-down’ .herein submitted.”

From this letter, and this letter alone, the court knows that the two items in plaintiff’s claim aggregating $181,704.20 were broken down into seven items but the “break-down” is not in evidence and the court does .not know whether or not this claim was presented in the form and manner suggested by the State Highway Engineer or whether or not it involves the same items that are presently before the court for consideration.

The present action involves the same two items that comprised the claim which plaintiff presented to the State Highway Engineer, with this difference, that the cost of extra work and delays in the field is $280 less than the amount asserted in its claim. As grounds for recovery it is alleged: “That from the time Plaintiff first began its work on the project and under the contract and continuously during the entire progress thereof, the defendant, through its Engineer, its inspectors and assistant and special engineers, so interfered with, hampered and impeded the plaintiff in completing its part of the project and has been so unreasonable and unjustified in its requirements of plaintiff that a direct loss and damage to plaintiff resulted therefrom amounting to the full sum of One Hundred Eighty-one Thousand Four Hundred Twenty-four and 20/100 ($181,424.20) Dollars * *

On August 21, 1940, Henderlite advised plaintiff’s attorneys by letter that Erickson, the resident engineer, had examined its claim for additional compensation on its contract and submitted his report and that the writer had reviewed the report and concurred in the recommendation that Steel Construction Company was not entitled to any payment in addition to that offered in the final check which it had refused to cash.

On September 13, 1940, plaintiff filed what it denominated a first amended complaint. This pleading sets forth a claim for damages in the amount of $226,261.06 and is somewhat unusual in that it does not refer to the original complaint in any particular and consequently does not in express terms purport to affirm, modify or amend any of the allegations previously made. In this pleading plaintiff’s averments of claim are set forth as follows: In paragraph 4 the amount of $1,435.48 is claimed as the balance due on the final estimate. In paragraphs 5, 6, 7, 8, 9 and 11 and in respect to each of the seventeen items there enumerated it is alleged that during the progress of the work and at the special instance and request of defendant plaintiff furnished labor and material which was not required by the contract and specifications. The same general allegations are made with respect to the four items enumerated in paragraph 12, except that it is not there alleged that this special and additional work was not required by the contract and specifications. In paragraph 14, which deals with the painting and cleaning of the steel on said project, there are two subparagraphs. In subparagraph (a) and in respect to the two items there enumerated it is alleged that during the progress of the work and at the special instance and request of the defendant plaintiff furnished extra and additional labor and materials in excess of the usual and customary requirements for contrac-' tors. In paragraph 10 it is alleged that the defendant estimated shims as carbon steel for the purpose of payment, but due to the fact that the shims were fabricated in small lots and at different times their reasonable value was 2‡ per pound in excess of the contract price, and plaintiff is entitled to be paid the additional sum of $1,262.46. In paragraph 13 it is alleged that defendant’s engineers and inspectors hampered and impeded plaintiff in the prosecution of its work in thirteen particulars, which resulted in direct loss and damage to plaintiff of $71,970.04. This sum is allegedly made up of two items; plant use $50,000, and equipment charges $21,970.04. And finally in paragraph 14(b) it is alleged that defendant’s inspectors and engineers wrongfully hampered and impeded plaintiff in the cleaning and field painting of the steel in nineteen particulars, and that the additional cost to plaintiff was $37,898.38.

From this analysis of the complaint as amended it is apparent that the claim in suit involves not seven items which total the sum of $181,704.20 but twenty-six items which total the sum of $226,261.06. It is seemingly plain from the very nature of things that the claim in suit cannot be the self-same claim that was presented to the engineer, though I am mindful of the fact that Henderlite said that it was, so far as he knew. From this analysis it also appears that the greater portion of plaintiff’s claim is for extra and additional work some of which was required by the contract and specifications, some of which was not so required, and some of which was in excess of the usual and customary requirements for contractors, and that the remainder of the claim, excluding the amount claimed as the balance due under the contract, is for damage suffered by plaintiff by reason of wrongful interference by defendant in the performance of the contract or by reason of unnecessary, unreasonable and arbitrary inspections or requirements made by the defendant or its engineers or inspectors in the course of the performance of the contract by plaintiff.

The pleadings tell one story and the evidence another, and the court is unable to determine from the briefs on file whether plaintiff is in fact attempting to recover any of the disputed items on the theory that they involved extra work or whether or not its entire case rests on the theory set forth in the last clause of the preceding paragraph. Viewing the matter from either angle, I cannot on this record say that plaintiff has established the facts which it mistakenly believes are determinative of the questions here involved. As a matter of fact plaintiff has not even produced the witnesses, including its own executive officers, who this record reveals were in a position to admit or deny the extravagant charges set forth in the amended complaint. And such evidence as it did offer was in many respects inconsistent with the theory that the engineers and inspectors were guilty of the arbitrary abuses and exactions complained of. Having had the opportunity to see and observe the demeanor of every witness, save one whose testimony was taken by deposition, I experience no difficulty in reaching the conclusion that the inspectors on this job were fair and unprejudiced and that the engineers and inspectors acted throughout in the best of faith. Nor can I on this record say that plaintiff is entitled to recover on any of the disputed items on the theory that’ they constituted extra work. Division 1, Section 10, subsections 2 and 4 of the contract in suit specifically provide for payment and extra and force account work. It is expressly stipulated in subsection 4 that “extra work not covered by a Supplemental Agreement or by a written Force Account order will not be paid for.” And the evidence in this case is all one way and to the effect that plaintiff did not in respect to any of the disputed items request or obtain from any of the highway engineers an extra work order or supplemental contract. Highway Construction Co., Inc. v. City of Miami, 5 Cir., 126 F.2d 777.

It has heretofore been noted that plaintiff is claiming the amount of $1,435.48 as the balance due on the final estimate, and I .shall facilitate the further discussion by disposing of that issue now. Of the amount claimed only $420 is in controversy. Putting aside the extraneous contentions of the parties, the question for decision is whether or not the defendánt had a right to assess and withhold this amount as liquidated damages. This question must be answered in the negative. The courts of Louisiana have repeatedly held in similar situations that the mere failure to complete the work within the time stipulated was a passive violation of the contract and did not render the contractor liable for damages until he was put in default. In the case at bar there is no allegation or showing that plaintiff was ever put in default or that it waived the putting in default. It follows that plaintiff is entitled to judgment in the amount of the sum withheld from it as liquidated damages, together with interest at the rate of five per cent, per annum thereon from December 21, 1939, the date this sum should have been paid. City of Baton Rouge, La., v. Robinson, 5 Cir., 127 F.2d 693; Davis v. Glenn, 3 La.Ann. 444; Godchaux v. Hyde, 126 La. 187, 52 So. 269; Herman Bros. v. Troxler, 166 La. 587, 117 So. 727; Haffner & Taylor v. Perloff, 174 La. 687, 141 So. 377; Article 1938, Revised Civil Code of Louisiana. Plaintiff is also entitled to interest on $1,015.11 from December 21, 1939, no legal tender having been shown and no payment into court having been made.

The provisions of the contract most pertinent to the decision of this case are set forth in Division 1, Section 5, subsections 1, 7 and 8, as follows:

“1. Authority of Engineer:

“The work shall be done under the direct supervision of the Engineer and to his satisfaction. The Engineer shall decide any and all questions which arise as to the quality or acceptability of materials furnished and work performed, manner of performance, rate of progress of the work, interpretation of the plans, and specifications, all questions as to the acceptable fulfillment of the contract on the part of the Contractor, disputes and mutual rights between Contractors on this project, and compensation. His decisions shall be final and he shall have executive authority to enforce and make effective such decisions and orders as the Contractor fails to carry out promptly. * * *

“7. Authority and Duties of Resident Engineer:

“The Resident Engineer shall be in direct charge of the work and shall have full authority, under the Engineer, in directing the proper performance thereof. * * * In case of any dispute arising between the Contractor and the Resident Engineer as to materials furnished or the manner of performing the work, the Resident Engineer shall have the authority to reject materials, or suspend the work until the question at issue can be referred to and decided by the Engineer. He shall not be authorized to revoke, alter, enlarge, relax or release any requirements of these specifications, or to approve or accept any por- ' tion of work, or to issue instructions contrary to the pl.ans and specifications. Any advice which the Resident Engineer may give the Contractor shall in no wise be construed as binding the Engineer or the Commission in any way, or releasing the Contractor from the fulfillment of the terms of the contract.

“8. Authority and Duties of Inspectors:

“Inspectors employed by the Commission shall be authorized to inspect all work done and all material furnished. Such inspection may extend to all or any part of the work and to the preparation or manufacture of the materials to be used. An Inspector shall be stationed on the construction to report to the Resident Engineer as to the progress of the work and the manner in which it is being performed; also to report whenever it appears that thq materials furnished and the work performed by the Contractor fail to fulfill the requirements of the contract, and to call to the attention of the Contractor any such failure or other infringement; but such inspection shall not relieve the Contractor from any obligation to perform all of the work in accordance with the requirements of the contract. In case of any dispute arising between the Contractor and the Inspector as to materials furnished or the manner of performing the work, the Inspector shall have the authority to reject materials or suspend the work until the question at issue can be referred to the Resident Engineer. The Inspector shall not, however, be authorized to revoke, alter, enlarge, relax or release any requirements of the contract, nor to approve or accept any portion of the work, nor to issue instructions contrary to the plans and specifications. He shall in no case act as foreman or perform other duties for the Contractor nor interfere with the management of the work. Any advice which the Inspector may give the Contractor shall in no wise be construed as binding the Engineer in any way, or as releasing the Contractor from the fulfillment of the terms of the contract.”

In these provisions the parties clearly set forth an administrative procedure for plaintiff to follow. To the end that any arbitrary ruling or requirement of the inspector may be corrected there was thus imposed upon plaintiff the duty of referring such disputes, first, to the resident engineer, and if not settled, then to the State Highway Engineer for his final decision. It was clearly the implied intention of the parties that disputed questions arising during the progress of the work would within a reasonable time be ultimately referred to the State Highway Engineer for his final determination. This procedure provided a complete and reasonable means of correcting the abuses alleged to exist in this case. It of course applies to disputes arising during the general progress of the work and does not apply to any extra work. Plaintiff accepted and agreed to these provisions but in most instances it acquiesced in the requirements of the inspectors and/or engineers and did not avail itself of the appeal procedure set forth in the contract. In some instances plaintiff protested during the work and put the resident engineer on notice that it would make a claim but in all instances plaintiff met the requirements of the inspectors and the resident engineer and performed the work demanded of it without ever submitting the matter or dispute to the State Highway Engineer. And at no time during the progress of the work did the plaintiff refer any of the disputed items to the State Highway Engineer and request a ruling thereon.

Furthermore it is to be presumed from the terms of the contract that both parties considered the possibility of disputes arising between them in reference to the execution of the contract and that in their minds was the possibility that the engineer might err in his determination of such matters. They chose to risk his judgment, and to rely upon their right to demand that the engineer should at all times exercise an-honest judgment in discharging the duty imposed upon him. Consequently, to the end that the interest of neither party should be put in peril by disputes as to any of the matters covered by that agreement, it was expressly stipulated that the engineer’s determinations should be final. The terms by which this power was conferred and the duty imposed are clear and precise leaving no room for doubt as to the intention of the contracting parties. They are susceptible of no other interpretation than that the action of the engineer was intended to be final.

Plaintiff finds itself in this rather anomalous situation. If it fails to show that the disputed matters were submitted to the engineer for decision in accordance with the administrative procedure agreed upon in the contract, it cannot, in the absence of a valid excuse, assert a claim for damages in this court. United States v. Blair et al., 321 U.S. 730, 64 S.Ct. 820, 88 L.Ed. 1039. If, on the other hand, it shows that the disputed matters were submitted to the engineer for decision, it is confronted with the fact that it was expressly stipulated in the contract that the engineer’s determination should be final. Knowing full well that none of these matters was referred to the engineer for decision during the progress of the work, plaintiff nevertheless attempted to show that it followed the administrative procedure outlined in the contract by proving that a claim, though not the precise claim in suit, was presented to the engineer and determined. But assuming without deciding that the time element was waived and that plaintiff followed the administrative procedure outlined in the contract, there still has been no showing such as would entitle plaintiff to go behind the judgment of the. engineer, for there is neither averment nor proof that the engineer has been guilty of fraud or of mistake so gross as to justify an inference of bad faith, or that he has failed to exercise an honest judgment. Kihlberg v. United States, 97 U.S, 398, 24 L.Ed. 1106; Martinsburg & Potomac R. Co. v. March, 114 U.S. 549, 5 S.Ct. 1035, 29 L.Ed. 255; United States v. Gleason, 175 U.S. 588, 20 S.Ct. 228, 44 L.Ed. 284.

In the Blair case, supra, the respondent was awarded a contract by the United States to construct certain buildings at the Veterans’ Administration Facility at Roanoke, Virginia. After completing the contract, respondent filed a claim with the Veterans’ Administration for certain expenses including expenses alleged to have been imposed on him by the arbitrary, capricious and unfair conduct of government agents at the work site. The claim was rejected and a suit in the Court of Claims followed. The Court of Claims awarded respondent damages for extra labor and materials, excess wages and miscellaneous costs found to be the result of unauthorized acts, rulings and instructions of the Government superintendent and his assistant and also found that these acts, rulings and instructions were unreasonable and in many instances arbitrary, capricious and so grossly erroneous as to imply bad faith. In reviewing this judgment the United States Supreme Court used the following pertinent and appropriate language [321 U.S. 730, 64 S.Ct. 822]:

“Assuming without deciding that the actions complained of were unauthorized, unreasonable and arbitrary, we cannot conclude that recovery of the resulting damages was proper in this case. Article 15 of the contract in suit provides that all disputes ‘concerning questions arising under this contract shall be decided by the contracting officer or his duly authorized representative, subject to written appeal by the contractor within 30 days to the head of the department concerned or his duly authorized representative, whose decision shall be final and conclusive upon the parties thereto as to such questions.’ All of the items on which the recovery * * * was based were the subject of the ‘disputes concerning questions arising under this contract.’ Respondent appealed some of the decisions or instructions of the Government superintendent to the contracting officer, which resulted in at least one ruling favorable to respondent. As to the adverse rulings, however, respondent made no further appeal to the head of the appropriate department or his authorized representative. Moreover, the remaining items which were the subject of sharp dispute between respondent and the superintendent were not even appealed by respondent to the contracting officer. And where the contracting officer could be said to have acquiesced in the superintendent’s rulings, no attempt was made to appeal further to the departmental head.

“Respondent has thus chosen not to follow ‘the only avenue for relief,’ United States v. Callahan Walker Co., 317 U.S. 56, 61, 63 S.Ct. 113, 115, 87 L.Ed. 49, available for the settlement of disputes concerning questions arising under this contract. In Article 15 the parties clearly set forth an administrative procedure for respondent to follow. Such a procedure provided a complete and reasonable means of correcting the abuses alleged to exist in this case. Arbitrary rulings and actions of subordinate officers are often adjusted most easily and satisfactorily by their superiors. Furthermore, Article 15 provided the Government with an opportunity to mitigate or avoid damages by correcting errors or excesses of its subordinate officers. Having accepted and agreed to these provisions, respondent was not free to disregard them without due cause, accumulate large damages and then sue for recovery in the Court of Claims. Nor can the Government be so easily deprived of the benefits of the administrative machinery it has created to adjudicate disputes and to avoid large damage claims.”

And in respect to the court’s ruling that respondent was excused from following the procedure set forth in the contract, the Supreme Court found error and said:

“Even if the conduct of the Government superintendent or contracting officer, or their assistants, was so flagrantly unreasonable or so grossly erroneous as to imply bad faith, the appeal provisions of the contract must be exhausted before relief is sought in the courts. There was no finding or evidence that appeal to the head of the appropriate department or to his authorized representative would have been futile or prejudicial.”

In the light of this decision and - the views herein expressed it follows that plaintiff is entitled to recover the balance due on the final estimate and no more. The clerk is accordingly directed to enter judgment in favor of plaintiff in the sum of $1,435.11 with interest at the rate of five per cent, per annum from December 21, 1939 until paid.

Of the twenty-six items involved in this controversy only one, relating to the balance due on the final estimate, has merit, and the greater portion of that item was not in controversy. I think nine-tenths of this record is fairly attributable to matters in which the plaintiff has been unsuccessful, and that the costs should be apportioned on the basis of ninety per cent, against the plaintiff and ten per cent, against defendant.


author: PICARD, District Judge.

text:
    UNITED STATES v. NATHANSON et al.
    No. 4290.
    District Court, E. D. Michigan, S. D.
    Feb. 2, 1945.
    C. Dinu, Asst. Dist. Atty., of Detroit, Mich., for plaintiff.
    Joseph B. Beckenstein, of Detroit, Mich., for defendant.
   PICARD, District Judge.

The question in this case relates to the right of plaintiff to enforce collection of excise taxes, penalties and interest, assessed against defendant Louis Nathanson from rents due defendant and wife on property which they are purchasing under land contract as an estate by the entirety. The amount of the lien and the propriety or manner of procedure by which the government claims its lien are not material in making the decision and only one point of fact over which there is any dispute need be discussed.

The government claims that the husband alone made the verbal lease with tenants for payment of rent and substantiates its position by testimony of the tenant. On the other hand, defendant claims the wife was right in the room when the verbal agreement was made.

If this point is very material this court now holds that in any event the husband was obviously acting for both himself and wife and did not have exclusive control of the rent money since the evidence shows that part of the rent money went directly to the vendor to apply on the purchase price while the balance was held by the wife alone to meet contingencies. As a matter of fact it appears that the wife had more control over the actual cash than the husband, and we so find.

This disposes of government’s contention that under the decisions, when the husband has complete control of rents from an estate by the entirety, creditors of the husband can reach those assets. ' But even if this was the fact, as contended, the government fails to follow the distinction between the husband’s right to “manage and control” an estate of the entirety — which is complete, and his creditors’ rights to the proceeds from that estate — which is denied. That difference is pointed out in the review of similar cases made by the court in American State Trust Co. of Detroit v. Rosenthal, 255 Mich. 157, 237 N.W. 534. See, also, Bankers’ Trust Co. of Detroit v. Humber, 264 Mich. 71, 249 N.W. 454; Hiller v. Olmstead, 6 Cir., 54 F.2d 5; Battjes Fuel & Building Material Co. v. Milanowski, 236 Mich. 622, 211 N.W. 27; Annapolis Banking & Trust Co. v. Smith, 1933, 164 Md. 8, 164 A. 157; Arrand v. Graham, 297 Mich. 559, 561, 298 N.W. 281; 300 N.W. 16, 136 A.L.R. 1206, 1210.

None of the cases cited by plaintiff is authority for its position that creditors can successfully levy on the rents from an estate by the entirety.

This brings up the remaining question as to whether Congress by the most generous interpretation of the tax law involved has specified or designated such an estate (by entirety) as subject to tax for Congress undoubtedly has the right to determine by designation what interest or rights in property created by the states are taxable by the Federal government. Morgan v. Commissioner, 309 U.S. 78, 626, 60 S.Ct. 424, 84 L.Ed. 585; Helvering v. Stuart, 317 U.S. 154, 63 S.Ct. 140, 87 L.Ed. 154; Tyler v. United States, 281 U.S. 497, 50 S.Ct. 356, 74 L.Ed. 991, 69 A.L.R. 758.

But here again we must find against plaintiff for it appears that there is only one tax reference to estate by the entirety in the Revenue Act of 1926 and that is Section 302, 26 U.S.C.A.Int.Rev.Acts, page 227, which imposes a tax upon “ ‘the value of the gross estate of the decedent’ at the time of his death, including ‘the value at the time of his death of all property, real or personal * * * (e) to the extent of the interest therein held * * * as tenants by the entirety by the decedent and spouse.’ ” Detroit Bank v. United States, 317 U.S. 329, 63 S.Ct. 297, 299, 87 L.Ed. 304; Tyler v. United States, 281 U.S. 497, 50 S.Ct. 356, 74 L.Ed. 991, 69 A.L.R. 758.

We find no designation in the Federal Revenue Act by which a tax may be imposed upon property held by the entirety for taxes due from the husband alone. Michigan decisions covering property by entirety follow the common law and have withstood the onslaught of creditors for years. Neither the husband nor the wife has an individual, separable interest in entirety property. Neither can convey an interest without the aid of the other. Neither husband nor wife can sever the tenancy. They take the estate as one person and they take but one estate. Naylor v. Minock, 96 Mich. 182, 55 N.W. 664, 35 Am.St.Rep. 595; Way v. Root, 174 Mich. 418, 427, 140 N.W. 577; Vinton v. Beamer, 55 Mich. 559, 561, 22 N.W. 40; Speier v. Opfer, 73 Mich. 35, 38, 40 N.W. 909, 2 L.R.A. 345, 16 Am.St.Rep. 556; Nurmi v. Beardsley, 275 Mich. 328, 330, 266 N.W. 368; Long v. Earle, 277 Mich. 505, 269 N.W. 577; Arrand v. Graham, 297 Mich. 559, 561, 298 N.W. 281; 300 N.W. 16, 136 A.L.R. 1206, 1210.

There being no authority for plaintiff’s contention, an order dismissing the bill of complaint may be prepared for our signature.