text:
    CONTINENTAL OIL CO. v. UNITED STATES. VERRILL v. SAME.
    Nos. 45730, 46029.
    Court of Claims.
    Nov. 5, 1945.

      The separate petitions of the Continental Oil Company, a Delaware corporation, and of Robinson Verrill as Successor-Trustee of Continental Oil Company, a Maine corporation, predicate recovery upon the same claim for refund of tax and each petition prays for judgment in the same amount, namely, $62,423.32, claimed to represent an overpayment of consolidated income and profits tax for 1920 by the Elk Basin Consolidated Petroleum Company. Each plaintiff claims as a successor in interest to the Elk Basin Company which paid the tax in controversy for itself and certain subsidiary corporations whose incomes were consolidated and reported for federal tax purposes upon a single consolidated return for the calendar year 1920.
    January 1, 1920, the Elk Basin Company acquired all the outstanding capital stock of two other corporations in exchange for 600,000 shares of its own capital stock; and on March 15, 1920, Elk Basin Company acquired all the outstanding capital stock of Mutual Oil Company of Maine and all the outstanding stock of each of its three subsidiary corporations in exchange for an additional 600,000 shares of its own stock.
    The question presented is the valuation for invested capital purposes of the stock so paid in for the stock of the Elk Basin Company.
    Special Findings of Fact.
    1. Continental Oil Company, plaintiff in No. 45730, is a Delaware corporation with its principal office and place of business in Ponca City, Oklahoma.
    Robinson Verrill, plaintiff in No. 46029, is the duly appointed and qualified trustee of the Continental Oil Company, a Maine corporation (not the same corporation mentioned in the paragraph next above) dissolved by decree of the Supreme Judicial Court of Maine on December 9, 1931, with authority and power under that decree to receive and collect all assets and money due the corporation, pay all debts, and sell and dispose of the corporation’s remaining assets, and to wind up its affairs. He was and is expressly authorized by court order to institute and maintain suit No. 46029.
    Each of the above plaintiffs claims the same sum, $62,423.32, with interest thereon as allowed by law, and plaintiff, Robinson Verrill, admits and alleges that he is not entitled to recover if a recovery is had by Continental Oil Company. Both plaintiffs allege the same cause of action against the defendant.
    2. On January 1, 1920, and for some time prior thereto and thereafter, the Elk Basin Consolidated Petroleum Company was a Maine corporation, hereinafter sometime referred to as the “Elk Basin Company,” engaged in the production, refining and marketing of petroleum and petroleum products.
    3. On March 15, 1921, Elk Basin Company filed a tentative, and on May 14, 1921, filed its completed federal consolidated income and excess profits tax return for the calendar year 1920. That return included the income of Elk Basin Company, Grass Creek Petroleum Company, Keoughan-Hurst Drilling Company, Mutual Oil Company of Maine, Mutual Oil Company of Arizona, Mutual Refining and Producing Company and Northwestern Oil Refining Company, for the entire calendar year 1920. It reported a consolidated invested capital of $8,721,214.84, a consolidated net taxable income of $1,167,974.45, and a total tax of $200,707.45, together with interest of $201.-77 accrued at that time. Such tax and interest were timely assessed against and paid out of its own funds by Elk Basin Company, as parent, in installments during 1921, as follows:

    No part of the total payment of $200,909.21 above has ever been repaid by the United States to either of the plaintiffs herein or otherwise.
    4. The Commissioner of Internal Revenue audited the consolidated return filed as stated in the preceding finding and determined that it erroneously included the income of Mutual Oil Company of Maine and its three subsidiaries (Mutual Oil Company of Arizona, Mutual Refining and Producing Company, and Northwestern Oil Refining Company) for the period January 1 to March 14, 1920. That determination was based upon the premise that the Mutual Oil Company of Maine and its three subsidiaries existed as a separate affiliation for the period January 1 to March 14, 1920, and had an affiliated relationship for federal tax purposes .with the Elk Basin Company only from March 15 to December 31, 1920, inclusive. The Commissioner held that there were two different and separate affiliated groups of corporations; that the change in affiliation required separate computations for the fractional parts of the year 1920; that a separate consolidated return should have been filed for the period January 1 to March 14, 1920, both inclusive, by the Mutual Oil Company of Maine for itself and its three subsidiaries; and that its income for that period should not have been included in the return filed May 14, 1921, by Elk Basin Company as set out above. The income of the Mutual Oil Company of Maine and its three subsidiaries, determined separately for the period January 1 to March 14, 1920, both inclusive, was calculated to be $196,469.18 and their invested capital was calculated to be $665,132.55, representing an invested capital of $3,192,-636.27 at January 1, 1920, apportioned to the first fractional part of 1920.
    5. On March 15, 1920, and prior thereto, Mutual Oil Company of Maine, a corporation organized under the laws of the State of Maine, had as subsidiaries and owned all of the outstanding capital stock of Mutual Oil Company of Arizona, Mutual Refining and Producing Company, and Northwestern Oil Refining Company, then engaged in the production, refining, and marketing of petroleum and petroleum products. Elk Basin Company, by the issuance of 600,000 shares of its own stock on March 15, 1920, simultaneously acquired all of the outstanding capital stock of Mutual Oil Company of Maine and all of the outstanding capital stock of each of its three subsidiary corporations.
    6. On January 1, 1920, Elk Basin Company also acquired all of the outstanding capital stock of the Grass Creek Petroleum Company (incorporated in 1916 under the laws of the State of Maine) by the issuance of 133,333% shares of its capital stock, and on the same day acquired all of the outstanding capital stock of Keoughan-Hurst Drilling Company (incorporated in 1916 under the laws of the State of Wyoming) by the issuance of 466,666% shares of its capital stock.
    The par value of the capital stock of Elk Basin Company was $5.00 per share.
    7. During years after 1920 certain material changes occurred in the corporations mentioned above, as follows:
    On April 30, 1921, the Northwestern Oil Refining Company and the Mutual Refining and Producing Company each transferred without consideration all of its property and assets to the Mutual Oil Company of Arizona.
    On December 22, 1921, Elk Basin Company changed its name to Mutual Oil Company.
    On December 31, 1921, Mutual Oil Company of Arizona transferred without consideration all of its property and assets (including the property and assets of Northwestern Oil Refining Company and Mutual Refining and Producing Company which it acquired as aforesaid) to Mutual Oil Company, known prior to December 22, 1921, as the Elk Basin Consolidated Petroleum Company.
    Mutual Oil Company of Maine and Mutual Refining and Producing Company dissolved in 1921. Northwestern Oil Refining Company and Mutual Oil Company of Arizona dissolved in 1922.
    Mutual Oil Company (successor to Elk Basin Company, Mutual Oil Company of Arizona, Northwestern Oil Refining Company and Mutual Refining and Producing Company, as aforesaid) changed its name in 1925 to Continental Oil Company of Maine which entered into a written agreement on April 30, 1929, with the Marland Oil Company, a Delaware corporation, transferring all of its assets to the latter in exchange for shares of its capital stock. Marland Oil Company acquired the use of the name Continental Oil Company and duly changed its name accordingly.
    8. On April 30, 1929, Continental Oil Company of Maine entered into a written agreement entitled Plan of Reorganization and Agreement with the Marland Oil Company, a Delaware corporation, wherein and whereby the Marland Oil Company acquired the assets of the Continental Oil Company of Maine (formerly known as Elk Basin Company) in exchange for shares of the capital stock, and thereafter, upon consummation of that agreement, acquired the use of the name Continental Oil Company and duly changed its name accordingly. It is the plaintiff in case No. 45730.
    The eleventh paragraph of that agreement is as follows:
    “Eleventh. Marland will pay and discharge any Federal and/or State Income Tax Liability to which Marland and/or Continental may be subject and will assume and pay all other liabilities which may arise or result from the carrying out of this plan of reorganization and agreement.”
    9. The adjustments made by the Commissioner on the consolidated federal income and excess profits tax return for the calendar year 1920 (mentioned in finding 4 above) resulted in a separation of taxable income and invested capital for the two taxable periods (a) January 1 to March 14, 1920, and (b) March 15 to December 31, 1920, inclusive.
    During 1925 the Continental Oil Company of Maine received a so-called 60-day letter proposing to assess a deficiency of $56,113.14, for the period of January 1 to March 14, 1920, inclusive, against it as transferee of the assets of Mutual Oil Company of Maine and its three subsidiaries. An appeal was taken from that letter to the United States Board of Tax Appeals. A decision determining no deficiency was promulgated May 19, 1931, and is reported in 23 B.T.A. 311. The Commissioner appealed therefrom to the Court of Appeals of the District of Columbia which reversed and remanded the decision below. Helver-ing v. Continental Oil Co., 68 F.2d 750, 63 App.D.C. 5. The United States Supreme Court denied a petition for writ of certio-rari, 292 U.S. 627, 54 S.Ct. 629, 78 L.Ed. 1481. Upon remand, the Board of Tax Appeals reconsidered the matter and determined deficiencies against the Continental Oil Company, 34 B.T.A. 29. This decision was appealed to the Court of Appeals of the District of Columbia and affirmed. Continental Oil Co. v. Helvering, 100 F. 2d 101, 69 App.D.C. 236. A deficiency was thereafter assessed and defendant therein filed a petition in the action in the Supreme Judicial Court in Equity, County of Cumberland, State of Maine, entitled “George F. Smith, Plaintiff, v. Continental Oil Company, Defendant” (which is the same action mentioned in paragraph First of the petition in case No. 46029) to compel payment of such deficiency. A decision on that petition was entered February 21, 1944, in favor of the United States and the Court entered a decree on April 13, 1944, directing payment on or before May 16, 1944, of the sum of $61,523.34, with interest at 6% per annum from February 15, 1937, to the date of payment. Payment was made by check on May 16, 1944, in the amount of $88,142.44.
    10. On March 9, 1925, a claim for refund of $200,707.45, for the calendar year 1920, on Treasury Department Form 843, was filed with the Collector of Internal Revenue at Denver, Colorado. This claim was executed in the name of Elk Basin Company and set forth as grounds a statement “That the assessments are before the department and that facts have developed which will be presented in connection with appeals from proposed additional tax to show income smaller and invested capital larger .than reported, entitling the taxpayer to refund of all or a greater part of the taxes paid.” That refund claim was one for an overpayment of tax alleged to have arisen by reason of the exclusion of income and invested capital of the Mutual Oil Company of Maine and its three subsidiaries for the first two and a half months of 1920, as stated above, and claimed that such refund resulted from an understatement of invested capital.
    11. Upon an examination of the refund claim filed March 9, 1925, the Commission determined an overpayment of tax by the Elk Basin Company in the sum of $12,779.-97 and duly issued a certificate of over assessment therefor, together with a check in such amount, plus accrued interest thereon of $4,475.09. That check was rejected and returned by the Continental Oil Company of Maine to the Commissioner, together with the certificate of overassessment. The check and the certificate were subsequently cancelled and the money repaid into the Treasury of the United States. In making that determination, the Commissioner computed a consolidated net income of $1,084,-800.52 and a consolidated invested capital as follows:
    Invested Capital
    Capital Stock ............................. $3,000,000.00
    Surplus paid in ........................... 119,314.03
    Reserves for income tax.................. 10,962.46
    Surplus, earned .......................... 176,266.25
    Total .................................. 3,306,542.74

      Additions:
    (a) Acquisition of Grass
    Creek Petroleum Co. $1,000,000.00 (10 Acquisition of Keou-ghan Hurst Drilling
    Co'. .................. 2,333,333133
    (c) Acquisition of Mutual Oil Co. of Maine, and
    subsidiaries .......... 2,393,442.62
    - 5,726,775.95
    Total ............................ 9,033,318.69
    Reductions:
    (d) Dividend ............... $137,736.49
    (e) Income tax for 1919.... 4,626.29
    (f) Deduction for inadmis-
    sibles ................. 964,224.17
    - 1,106,586.95
    Adjusted invested capital...... 7,926,731.74
    12. In reaching the determination upon which the certificate of overassessment was based and in issuing the check for $17,255.-06, the Commissioner in computing invested capital declined to take into account and give effect to a claimed fair market value for the capital stock of Elk Basin Company issued in exchange for the capital stock of Keoughan-Hitrst Drilling Company, Mutual Oil Company of Maine, Mutual Oil Company of Arizona, Mutual Refining and Producing Company and Northwestern Oil Refining Company, as stated above, but did determine invested capital from the basis of the value for the assets behind such stocks. An application was made to reopen and reconsider the claim for refund. This was granted but action thereon was deferred by mutual agreement pending final decision upon the pending appeal to the Board of Tax Appeals, mentioned above. After the Board proceedings were concluded, the claim for refund was reconsidered and disallowed and rejected in full by the Commissioner on December 13, 1941.
    13. The consolidated net income of Elk Basin Company for the calendar year 1920, which is subject to income and profits taxes for that year, is the sum of $1,087,025.43. This sum includes an adjustment for depletion of $38,576.29 in lieu of the amount of $39,942.40 claimed in plaintiffs’ petitions.
    14. Elk Basin Petroleum Company was organized December 11, 1916, with an authorized capital stock of 400,000 shares. On November 6, 1919, its authorized capital stock was increased to 1,000,000 shares. On January 6, 1920, its name was changed to Elk Basin Consolidated Petroleum Company and its authorized capital stock was increased to 3,000,000 shares, par value $5.-00 per share. For some time prior to March 15, 1920, and thereafter, this stock was traded in on the New York Curb Exchange. Quotations appear below. These are all for stock of Elk Basin Petroleum1 Company and Elk Basin Consolidated Petroleum Company. They were taken from the New York Times and from the Financial & Commerce Chronicle, both being daily newspapers of general public circulation in the City and and elsewhere. State of New York

    The Financial & Commercial Chronicle, in its issue of December 27, 1919, showing New York Curb Market quotations for the week December 20 to 26, inclusive, carried on the same page with the quotations of prices for Elk Basin Petroleum Company stock a statement reading:
    “New York ‘curb’ Market. Below we give a record of the transactions in the outside security market from Dec. 20 to Dec. 26, both inclusive. It covers the week ending Friday afternoon. On the ‘Curb’ there are no restrictions whatever. Any security may be dealt in and anyone can meet there and make prices and have them included in the lists of those who make it a business to furnish daily records of the transactions. The possibility that fictitious transactions may creep in, or even that dealings in spurious securities may be included, should, hence, always be kept in mind, particularly as regards mining shares. In the circumstances, it is out of the question for anyone to vouch for the absolute trustworthiness of this record of ‘Curb’ transactions, and we give it for what it may be worth.”
    A similar statement appeared in the issues showing quotations for the weeks ending December 5, 12, and 19, 1919, and for weeks ending March 5 and 12, 1920. No similar statement appeared in any of the issues of the New York Times, which also carried quotations of the Elk Basin Stock.
    15. The Elk Basin Petroleum Company filed a federal income and profits tax return for the calendar year 1919 reporting gross profits of $265,489.31, deductions therefrom of $152,272.01, a net taxable income of $113,217.30, an invested capital of $1,980,737.14, and a total federal tax due of $10,962.46.
    The Grass Creek Petroleum Company filed a similar tax return for the calendar year 1919 reporting gross profits of $337,-134.78, deductions therefrom of $306,700.79, a net taxable income of $30,433.99, an invested capital of $1,212,094.72, and a total federal tax due of $2,843.40. The Commissioner adjusted this return to show a corrected invested capital of $729,558.14 and a corrected net taxable income of $105,595.52, producing a deficiency tax of $15,477.71 which was assessed in February 1921.
    The Keoughan-Hurst Drilling Company filed a similar tax return for the calendar year 1919 reporting gross profits of $83,-372.75 from drilling operations only, deductions therefrom of $141,410.08, a net loss of $58,037.33, an invested capital of $1,916,-891.84, and no tax due.
    The Miutual Oil Company of Maine filed a consolidated federal income and profits tax return for itself and its three affiliated subsidiaries (Mutual Oil Company of Arizona, Mutual Refining and Producing Company and Northwestern Oil Refining Company) for the calendar year 1919 reporting a gross profit of $1,490,247.76, deductions therefrom of $982,302.26, a net taxable income of $507,945.50, an invested capital of $3,023,841.18 and a total tax due of $97,-941.43.
    16. The Elk Basin Petroleum Company addressed a letter to its stockholders on December 19, 1919, as follows:
    “Your Board of Directors has voted, subject to the approval of the stockholders, to increase its capital stock from 1,000,000 shares, of a par value of S5.00 each, a total of $5,000,000, to 3,000,000 shares, of a par value of $5.00 each, a total of $15,000,000; there is now outstanding $3,000,000 of the capital stock of the Company.
    “The Board has voted to set aside for the acquisition of the capital stock of the Keoughan-Hurst Drilling Company, a Wyoming corporation, $2,333,333 par value of its capital stock; and for the acquisition of the capital stock of the Grass Creek Petroleum Company, a Maine corporation, $666,667 par value of its capital stock. The holders of 75% of the outstanding capital stock of the Keoughan-Hurst Drilling Company, and 60% of the outstanding capital stock of the Grass Creek Petroleum Company have already agreed to accept the above proposition and it is the belief of the undersigned that practically all shareholders of both companies will accept the offer of exchange about to be made, so that all the assets of these two companies will become the Property of the Elk Basin Petroleum Company. With these two transactions completed there will be outstanding $6,000,000 par value of the capital stock of your Company, and $9,000,000 will remain unissued for future corporate needs and the enlargement of the scope of its activities.
    “The holdings of your Company with the above acquisitions completed will consist of valuable royalties and leasehold interests in the Elk Basin, Grass Creek, Big Muddy and Rock River fields of Wyoming; Rangel- and Burkburnett fields of Texas; Homer and Bull Bayou fields of Louisiana; and in the Beggs, Osage and Comanche fields of Oklahoma; also promising prospects in holdings in Texas, Kansas, Louisiana, New: Mexico, and Colorado. The Company will have interests in over 130,000 acres.
    “Net earnings of the 3 companies before depletion, depreciation and taxes are now running at the rate of approximately $1,-200,000 per annum. The Company has a large interest in the Rock River Field of Wyoming, which is being operated by the Ohio Oil Company and upon which that Company is now carrying on an extensive drilling programme and large earnings should be realized from this increased production; your Company will have when these transactions are consummated several strings of tools running in proven territory in the Ranger Field in Texas, which it is confidently expected will greatly increase its earnings. The regular quarterly dividend at the rate of 10% per annum on the outstanding $6,000,000 of stock will be paid February 1, 1920.
    “The Company will be in control by virtue of the above acquisitions of approximately $2,000,000 in cash; also drilling tools, and other equipment valued conservatively at $500,000 making over 40% of its capital represented by cash and other liquid assets.
    “It will be the policy of the Company to extend its development operations in the producing fields of the Mid-Continent, Wyoming, Texas and Louisiana, and it is the belief of your Board of Directors that the Company as thus capitalized will have bright prospects for developing into one of the important factors in the production of oil in the territories mentioned.
    “The active field management of the Company will be in the hands of Mr. S. H. Keoughan of Denver, Colorado, one of the most successful and economical oil operators in the West.”
    A copy of this letter appeared on page 2443 of the issue of the Financial and Commercial Chronicle of December 27, 1919.
    17. During the autumn of 1919, the firm of C. H. Pforzheimer & Company, brokers and dealers in securities, specializing in the securities of companies engaged in the production, refining, and marketing of petroleum products, with offices at No. 25 Broad Street in New York City, was an active dealer in the stock of Elk Basin Petroleum Company, both in the capacity of brokers and in that of traders.
    In October or November 1919, Elk Basin Petroleum Company offered its stockholders the right to subscribe to 200,000 shares of its capital stock (par value $5 per share) at a price of $7.50 per share, making an aggregate total of $1,500,000. The Pforz-heimer firm had formed a syndicate to take up at the same price so much of the Elk Basin stock as was not subscribed and paid for by the stockholders. On November 28, 1919, 133,333% shares were sold, 66,151% shares were sold on December 9, and 515 shares were sold on December 19, 1919, aggregating 200,000 shares, at a price of $7.50 per share. Elk Basin Petroleum Company paid a broker’s commission thereon of $150,000.
    By written agreement dated December 16, 1919, Keoughan-Hurst Drilling Company sold 100,000 shares of its capital stock (par value $5 per share) to the Pforzheimer firm at a price of $8.50 per share. This sale was actually made December 27, 1919, for cash. It was part of a plan whereby Elk Basin Petroleum Company was to acquire all of the outstanding capital stock of Keoughan-Hurst Drilling Company and Grass Creek Petroleum Company by an exchange of stock for stock, also to change its name, the number of its directors, and to secure the election of S. H. Keoughan and J. T. Hurst as such directors.
    In another written agreement, also dated December 16, 1919, the Pforzheimer firm contracted to exchange its 100,000 shares of Keoughan-Hurst stock for stock of the Elk Basin Company as part of the same plan mentioned in the paragraph next, above whereby the Elk Basin Company was to acquire all of the outstanding Keoughan-Hurst stock (300,000 shares, including the 100,000 mentioned above) in exchange for 466,666 shares of its own stock. C. H. Pforzheimer individually agreed to negotiate the contemplated transaction. It was also agreed, as part of the same plan, that the Elk Basin stock — other than that acquired by the Pforzheimer firm — would be withheld from the market until August 1, 1920. There was no restriction upon the sale of the Elk Basin stock acquired by the Pforzheimer firm. These agreements were carried out.
    18. On July 31, 1920, Elk Basin Consolidated Petroleum Company executed and filed its federal capital stock tax return for the year 1921, reporting 1,800,000 shares of capital stock outstanding with a par value of $5.00 per share aggregating $9,000,000, a surplus of $1,193,359.84, a .total value of $10,193,359.84 for capital stock tax computation, and a tax thereon of $10,-188. Exhibit B to that return reported New York Curb Market quotations for its stock as follows:

    The Commissioner addressed a letter to the taxpayer on October 3, 1921, proposing an additional tax of $4,033 upon its return, based upon a fair value of $14,226,330 for its capital stock. The Elk Basin Consolidated Petroleum Company replied by letter dated October 26, 1921, under oath, stating in substance that par value ($5 per share) of its stock should be used rather than the quoted Curb market value for its capital stock for the reasons (a) that sometime before July 1, 1920, all production of Keough-an-Hurst Drilling Company (previously something like two thousand barrels of daily production in Texas) had ceased; (b) that this fact had not become generally known to the public, did render the stock of Elk Basin Consolidated Petroleum Company much less valuable, but had not yet affected its market value; (c) that the market price of the Elk Basin stock after consolidation of Elk Basin Petroleum Company with the other corporations had not reflected the effect of the consolidation and was based upon the substantial dividend record of the original small company whose name “Elk Basin” was widely and favorably known; (d) that the market quotations for Elk Basin stock were not a fair criterion of its value since the block of stock exchanged for the securities of the Mutual Oil Company (600,000 shares) had been placed in escrow and remained so and that the block of stock exchanged for the Keoughan-Hurst stock had also been placed in escrow and that the market quotation of the Elk Basin stock was thus maintained at a higher level than would have been the case had the entire number of shares been subject to sale; and (e) that the market for the Elk Basin stock on the New York Curb was strongly supported by certain New York Curb brokers, who, by furnishing a ready and strong market for this stock, maintained its price at considerably above the value reflected by the books of the corporation. The Commissioner accepted the statements in the letter of October 26, 1921, from the Elk Basin Consolidated Petroleum Company as true and accepted its capital stock tax return and the value therein reported at $5.00 per share as correct.
    19. The consolidated invested capital of the Elk Basin Consolidated Petroleum Company for the calendar year 1920, after giving effect to all adjustments, including the acquisitions of stock, on January 1 and March 15, 1920, referred to in findings 5 and 6, was in the amount of $7,926,731.74.
    Arthur B. Hyman, of New York City (Morris Katz, of New York City, on the brief), for plaintiff.
    John A. Rees, of Washington, D. C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D. C., on the brief), for defendant.
    Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES and MADDEN, Judges.
   LITTLETON, Judge.

It would serve no useful purpose to recount here the many facts connected with the long history of litigation which has attended this tax case in the Internal Revenue Bureau, the Tax Court, and the other courts prior to the filing of this petition. It is likewise unnecessary to discuss the corporate history of plaintiff and the several related and affiliated corporations. Substantially, the entire issue in the case is a relatively simple one: namely, the actual cash value of certain stock of other corporations paid in for stock of the Elk Basin Company, the predecessor of plaintiff, and unless that issue is determined favorably to plaintiff there can be no recovery.

While separate plaintiffs are involved in the two suits, i. e., Continental Oil Company, a Delaware corporation, No. 45730, and Robinson Verrill, as Successor-Trustee of Continental Oil Company, a Maine corporation, No. 46029, the same cause of action is set up in each petition and the second suit was filed in order to preserve and protect the rights of the Maine corporation in the event it should be decided that the corporate plaintiff in No. 45730 is precluded by Section 3477 of the Revised Statutes, 31 U.S.C.A. § 203, from recovery under the first petition. No such defense, however, is applicable and has not been raised by the defendant. The second petition in No. 46029 will therefore be dismissed.

The Continental Oil Company, plaintiff in No. 45730, is the successor after various corporate changes to the Elk Basin Consolidated Petroleum Company and for convenience will generally be referred to as the plaintiff without regard to the various changes in corporate name and corporate status.

For some time prior to January 1, 1920, plaintiff had been engaged in the production, refining, and marketing of petroleum and petroleum products, and shortly prior to that date it embarked upon a plan of expanding its holdings and activities. Plaintiff acquired all the outstanding capital stock of two other corporations on January 1, 1920, in exchange for 600,000 shares of its own capital stock. Plaintiff by the issuance of 600,000 shares of its own stock March 15, 1920, acquired all the outstanding capital stock of another company which had three wholly owned subsidiary corporations whose stock was also acquired.

Plaintiffs filed a consolidated income and excess profits tax return for the calendar year 1920 on May 14, 1921, and included therein its own income and invested capital, the income and invested capital of the two corporations which were acquired on January 1, 1920, and the income and invested capital of the four corporations which were acquired on March 15, 1920, all the corporations in the group being considered as a part of a consolidated group for the entire calendar year 1920. The return showed a consolidated invested capital of $8,721,214.84, a consolidated net taxable income of $1,167,974.45, and a total tax due thereon of $200,707.45. The tax shown due, together with interest of $201.77, was paid in five installments during 1921.

The Commissioner audited that return and determined that the corporation with three subsidiaries, acquired on March 15, 1920, should be considered as a separate affiliated group for the period January 1 to March 15, 1920, and accordingly determined a separate assessment against that group for that period. The taxable income of that group for such period was computed in the amount of $196,469.18 and its invested capital in the amount of $665,-132.55, such latter amount representing an invested capital at January 1, 1920, of $3,-192,636.27, apportioned for the fractional period of 1920 for which a separate return was required. After extended litigation, a deficiency against that group was finally determined which was paid with interest in the total amount of $88,142.44 (finding 9).

In the meantime plaintiff filed a claim for refund on March 9, 1925, for the entire tax of $200,707.45 which it had paid on the consolidated return filed for 1920 on the ground that the income for the consolidated group had been overstated and the invested capital understated. The principal basis of the ground stated in that claim was alleged to have arisen by reason of the exclusion from the plaintiff consolidated group of the corporations acquired by plaintiff March 15, 1920, heretofore referred to, and that with such exclusion there had been an understatement of invested capital. After an examination of that claim, the Commissioner computed a consolidated net income in the amount of $1,084,800.52, and consolidated invested capital of $7,926,731.-74. In this computation the Commissioner allowed additions to consolidated invested capital of $3,333,333.33 and $2,393,442.62 on account of the acquisitions of stock of other corporations on January 1 and March 15, 1920, respectively, heretofore referred to.

On the basis of that computation the Commissioner determined an overpayment of $12,779.97 and duly issued a certificate of overassessment therefor together with a check in that amount plus accrued interest thereon of $4,475.09 (findings 10, 11, and 12). Plaintiff refused to accept this check and returned it to the Commissioner, together with the certificate of overassessment. The check and the certificate were subsequently canceled and the money repaid into the Treasury of the United States. In making that determination the Commissioner declined to give effect to the claimed market value of plaintiff’s stock which was issued for the stock of the groups of corporations on January 1 and March 15, 1920, but did determine additions to plaintiff’s consolidated invested capital by reason of those acquisitions on the basis of the value of the assets behind such stock which he determined represented the actual cash value of such stock. On application of plaintiff the claim for refund was later reconsidered by the Commissioner after plaintiff had rejected the determined overpayment and check, but on such reconsideration the claim was rejected in full December 13, 1941.

The position which plaintiff takes in this suit is that in determining its consolidated invested capital for 1920, the stock of the group of corporations acquired on January 1, 1920, and the stock of the group acquired on March 15, 1920, represented tangible property paid in for stock of plaintiff on those dates and by according to such stock its proper value invested capital will be substantially increased over that determined by the Commissioner and the refund sought through this suit will result. Section 326 (a) (2) of the Revenue Act of 1918, 40 Stat. 1092, contains the following provision with respect to the inclusion in invested capital of tangible property paid in for stock:

“Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus; * *

The governing statute, section 325 (a) of the Revenue Act of 1918, 40 Stat. 1091, includes in the definition of “tangible property” stocks, bonds, and other evidences of indebtedness and this court has held that where a corporation issues its stock for the stock of another corporation, the stock so acquired is to be considered as tangible property paid in for stock. United Cigar Stores v. United States, 62 Ct.Cl. 134, certiorari denied 275 U.S. 576, 48 S. Ct. 83, 72 L.Ed. 435.

On January 1, 1920, plaintiff issued 600,-000 shares of its stock for the stock of two corporations and on March 15, 1920, it also issued 600,000 shares of its stock for the stock of certain other corporations and the controversy relates to determination of the actual cash value of that tangible property (stock) paid in for plaintiff’s stock on those dates. In the certificate of overassessment and check for the overpayment above referred to which were rejected by plaintiff and later canceled by the Commissioner, the Commissioner declined to take into account and give effect, for invested capital purposes, to a fair market value claimed by plaintiff for the capital stock of these corporations but he did determine invested capital on account of the acquisition of these stocks on what he determined to be the actual cash value on the basis of the value of the assets behind such stock. On that basis the Commissioner allowed, as above stated, an addition to invested capital on account of the first acquisition of $3,333,333.33, and on account of the second acquisition of $2,-393,442.62, whereas plaintiff contended then and now contends that the actual cash value of the stock paid in in the first acquisition was $4,499,995, and in the second acquisition $6,075,000. The second acquisition was in the consolidated group for only a part of the year, that is, from March 15, 1920, and when appropriate adjustment is made therefor the addition to invested capital on account of that acquisition, as claimed by plaintiff, amounts to $4,846,721.31. The total additions to invested capital on account of the two acquisitions as determined by the Commissioner amounted to $5,726,775.95, whereas the total claimed by plaintiff amounts to $9,346,716.31.

Little, if any, evidence was presented as to the cash value of the stocks paid in, that is, such as what their past history of earnings was, what assets were back of this stock, or what the prevailing market prices were for these stocks. Plaintiff presents and relies almost exclusively on the curb market prices for its own stock which prevailed on or about the basic dates in question, which it contends, as it had contended before the Commissioner, show an actual cash value of its own stock on January 1, 1920, of approximately $7.50 per share, and on March 15, 1920, of $10% per share. It says that therefore the actual cash values of the stock paid in for its stock are to be measured by these market prices for its own stock. If we assume without deciding that the cash value of plaintiff’s stock is a proper basis of valuing the stock paid in, we are nevertheless unable to agree that, in the circumstances which prevailed in this case, the curb market prices alone are sufficient to substantiate and justify the allowance of a cash value based on those prevailing prices. It is of course true that in many cases prevailing market prices are an acceptable basis for determining value. However, we are here concerned with oil stocks which not only are ordinarily of a highly speculative nature but also the corporations were at that time being brought together in a new operation. We do not therefore have either a past history of sales of stock or a past history of operations as guides in considering these stocks. That they were highly speculative is shown by the fact that within a short time after the basic dates in question many of the bright pictures painted by the brokers who were selling the new stock of plaintiff had been found unwarranted. The market which prevailed was strongly supported by certain New York curb brokers who were dealing in this stock and in addition there was a restrictive agreement in effect which prevented a large block of the stock from being offered for sale during the period we are asked to value .the stock.

No more persuasive argument against acceptance of these curb market prices as a basis of valuation need be offered than that presented by the plaintiff when the Commissioner sought to use these and similar prices to fix a fair value for this stock for capital stock tax purposes on July 1, 1920. The plaintiff had used a par value of $5 per share, whereas the Commissioner sought to increase that value by the use of the prevailing curb market prices. Plaintiff submitted arguments in opposition to such an increase similar to the considerations we have set out above as showing the unreliability of such market quotations in the peculiar circumstances of this case. The Commissioner receded from his position after the receipt of those arguments and allowed the valuation of $5 a share to stand as shown in the original capital stock tax return. That valuation was, of course, for a somewhat later date, July 1, 1920, and for a different purpose, but the arguments advanced by plaintiff covered the period with which we are here concerned and also some of the market prices with which we are dealing. We do not say that as a result of what occurred at that time plaintiff is estopped to take a different position in this proceeding which concerns an entirely different determination, but we are convinced that the arguments there advanced against relying on these curb market stock quotations as a guide for valuing the stock are sound.

Whether the term “actual cash value,” as used in the governing statute, is something different from the term “fair market value,” it is not necessary to decide. We think, however, that it emphasizes the fact that in determining invested capital all speculative or inflationary values are to be eliminated and an actual sound value of the property paid in must be established. Cf. La Belle Iron Works v. United States, 55 Ct.Cl. 462, affirmed 256 U.S. 377, 41 S. Ct. 528, 65 L.Ed. 998. Merely because some of this stock was being bought and sold on the Curb Exchange in a broker-supported market is not sufficient evidence to convince us that the actual cash value of tangible property paid in for that stock can be fully and satisfactorily measured by such prices.

We are, however, convinced from the record that plaintiff is entitled to some increase in its invested capital for 1920 on account of these stock acquisitions over that allowed by the Commissioner when he rejected the claim for refund in full on December 13, 1941. Prior to that time and after the invested capital and income of the second group had been excluded from the consolidated return, the Commissioner re-audited the return in connection with the claim for refund and determined and allowed additions to invested capital on account of the two acquisitions in the respective amounts of $3,333,333.33 and $2,393,-442.62. While the certificate of overassessment and the refund check for a total of $17,255.06, based on that determination were rejected by plaintiff and later canceled by the Commissioner, we are convinced that the amounts and values determined and allowed at that time represented reasonable additions to invested capital on account of the actual value of property paid in at the times in question. The fact that they are based on the valuation of the assets back of the stock, rather than an attempt to value the stock itself, does not mitigate against their use as evidence in determining value ; that was the best evidence available. In¡ that determination the Commissioner computed an adjusted invested capital of $7,-926,731.74 which we likewise are satisfied was fair and reasonable, and have so found as a fact. The parties have stipulated that the consolidated net income of plaintiff for the calendar year 1920 is the sum of $1,-087,025.43. On the basis of that net income and the invested capital as above-mentioned, the correct tax liability for 1920 is. $188,550.46. The difference between that amount and the tax which has been paid,. $200,707.45, is $12,156.99, which constitutes, an overpayment.

It accordingly follows that plaintiff, Continental Oil Company, is entitled to recover an overpayment in the amount of $12,156.99, plus interest at 6% per annum from December 16, 1921, the date of payment, to a date not later than 30 days, preceding the issuance of the refund check which plaintiff rejected, which interest was. a part of the interest of $4,475.09 heretofore tendered by the Commissioner in that refund check. Since the amount of this overpayment and the amount of interest due thereon were tendered to plaintiff, it is not entitled to any additional interest under section 177 (b) of the Judicial Code, as amended by sec. 615 (a) of the Revenue Act of 1928, 28 U.S.C.A. § 284 (b).

Judgment is entered in favor of plaintiff, Continental Oil Company, for $12,156,-99 with interest computed as above stated.

The petition as to Robinson Verrill, etc., No. 46029, is dismissed. It is so ordered.

WHALEY, Chief Justice, and WHITAKER, Judge, concur.

MADDEN and JONES, Judges, took no part in the decision of this case.


source: Caselaw Access Project

author: JONES, Judge.

license: Public Domain

text:
    CROWLEY v. UNITED STATES.
    No. 45648.
    Court of Claims.
    Nov. 5, 1945.
    This case having been heard by the Court of Claims, the court, upon the evidence and the report of a commissioner makes the following special findings of fact:
    1. The plaintiff, R. H. Crowley, is an individual, a resident of the United States, and at the time the contract was signed, was a resident of Spokane, Washington.
    2. On May 17, 1940, the plaintiff and defendant, the latter represented by the Chicago Quartermaster’s Office of the War Department, entered into a written contract whereby the plaintiff, for the consideration of $115,625.00, agreed to furnish all labor and materials for the construction of 150 prefabricated buildings for use in Civilian Conservation Corps camps (delivery F. O. B. cars at Spokane, Washington) in strict accordance with the specifications and schedules, which are in evidence as plaintiff’s exhibits 3 and 4, and made part hereof by reference.
    3. On May 13, 1940, plaintiff was advised of the award by telegram from the Chicago Quartermaster General’s Depot as follows:
    “You are hereby awarded the contract for furnishing CCC prefabricated buildings in accordance with items numbered 4, 11, and 12 of your bid dated April 27, 1940 on invitation for bids No. 199-40-286-PB for the amount of $155,685.00 [this was manifestly a typographical error as the record shows it should have been $115,625 and was so acted upon and accepted by the parties] less discount of 2 percent 20 days FOB shipping point Spokane Washington. Letter confirming this telegraphic award together with contract and performance bond for execution will be mailed promptly.”
    4. On May 14, 1940, a letter was forwarded to plaintiff giving written advice of award of the contract to him, confirming the telegram dated May 13, 1940, whereby he was advised that the contract when submitted would bear date of May 17, 1940, and provided for completion on or before June 17, 1940. This fixed the commencement date of the contract as of May 17, 1940, and the completion date June 17, 1940.
    5. Plaintiff completed the contract on July 13, 1940, 26 days after the completion date. Liquidated damages were assessed against him for 26 days’ delay in the sum of $12,091.17. Of this amount, remission of liquidated damages in the sum of $5,203.16 was made, representing nine days’ delay, under settlement of the General Accounting Office, leaving liquidated damages assessed against the plaintiff in the sum of $6,888.01.
    6. The pertinent contract provisions relating to delays and liquidated damages, upon the basis of which plaintiff made his bid, provide as follows:
    “Delays — Liquidated Damages. — If the contractor refuses or fails to make delivery of the materials or supplies within the time specified, or any extension thereof, the actual damage to the Government for the delay will be impossible to determine, and in lieu thereof, the contractor shall pay to the Government, as fixed, agreed, and liquidated damages for each calendar day of delay in making delivery, a sum equal to one-half of one per centum (% of 1%) of the price of each incomplete unit (one complete camp or complete group of supplementary buildings and materials intended for one camp will be considered a unit), for each calendar day’s delay after the date or dates specified for deliveries, and the contractor and his sureties shall be liable for the amount thereof: Provided, however, That the Government reserves the right to terminate the right of the contractor to proceed with deliveries or such part or parts thereof as to which there has been delay, and to purchase similar material or supplies in the open market or secure the manufacture and delivery thereof by contract or otherwise, charging against the contractor and his sureties any excess cost occasioned the Government thereby, together with liquidated damages accruing until such time as the Government may reasonably procure similar material or supplies elsewhere: Provided, further, That the contractor shall not be charged with liquidated damages or any excess cost when the delay in delivery is due to unforeseeable causes beyond the control and without the fault or negligence of the contractor, including, but not restricted to, acts of God or the public enemy, acts of the Government, fires, floods, epidemics, quarantine restrictions, strikes, freight embargoes, unusually severe weather, and delays of a subcontractor due to such causes unless the contracting officer shall determine that the materials or supplies to be furnished under the subcontracts are procurable in the open market, if the contractor shall notify the contracting officer in writing of the cause of any such delay within 10 days from the beginning thereof, or within such further period as the -contracting officer shall, with the approval of the head of the department or his duly authorized representative, prior to the date of final settlement of the contract, grant for the giving of such notice. The contracting officer shall then ascertain the facts and extent of the delay, and extend the time for making delivery when in his judgment the-findings of fact justify such an extension, and his findings thereon shall be final and conclusive on the parties hereto, subject only to appeal, within 30 days, by the contractor to the head of the department concerned or his duly authorized representative, whose decision on such appeal as to the facts of delay and the extension of time for making delivery shall be final and conclusive on the parties hereto.”
    7. For approximately five years previous to the instant contract, plaintiff had been either a member or superintendent of a contracting company engaged in work of making prefabricated CCC Camps, and had had experience in making prefabricated buildings for use as CCC Camps. However, the instant contract was the first that plaintiff had obtained in his individual capacity.
    8. After receiving the telegram of May-13, 1940, advising that the contract had been awarded him, plaintiff, without waiting for the receipt of a formal contract, started performance of the work by setting up the necessary machinery and employing labor for the project. Much of the machinery had been used by plaintiff on previous CCC contracts upon which he had worked* Mechanics and some of the carpenters needed on the instant contract were recruited from men who had worked on similar projects and were experienced in this work. Some of the carpenters and the general labor were employed locally and were without experience in cutting lumber for fabrication of CCC Camps.
    9. After the machinery was placed contracts were let for about 75% of the lumber to be used on this project. The major portion of the lumber was purchased from “Association” mills and the remainder was. graded by “Association” graders. The term “Association” mills comprehends all mills which are members of the Western Pine Association, which maintains uniformity of grades, methods and qualities, and which supplies graders and inspectors to classify lumber. The lumber purchased was in the grades called for in the specifications. A substantial quantity of the lumber was delivered by truck on the day the formal contract was signed and the balance was delivered as the contract work progressed.
    10. Specifications CCC No. 2, Special Conditions provides as follows:
    “SC-4. Inspection of the Work. — The work is entirely under the control of The Q. M. G. and he or his authorized representative may have access to the same at all times. It is contemplated that inspection will be made continuously by a representative or representatives of the U. S. These inspectors may be stationed at the Contractor’s plant during the period of fabrication, and all reasonable facilities will be furnished said inspectors for the purpose of assuring themselves that the details of the drawings and the provisions of the specifications are complied with.
    “SC-5. Interpretation of Contracts.— Unless otherwise specifically set forth, the Contractor shall furnish all materials, labor, etc., necessary to complete the work according to the true intent and meaning of the drawings and specifications, of which intent and meaning the Resident Engineer shall be the interpreter, except as otherwise provided in this contract, subí ect 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 hereto. In the meantime, the Contractor shall diligently proceed with performance. Except when otherwise indicated, no local terms or classifications will be considered in the interpretation of the contract or the specifications forming a part thereof.
    “SC-6. Quality of Materials. — Except it be otherwise specified, all materials shall be of the best quality of their respective kinds. Where two or more varieties of materials are specified for any purpose, it shall be optional with the Contractor which is used, but in any one instance the same material must be used throughout for that particular purpose. In all cases where an article is mentioned in the specifications in connection with the words ‘best quality,’ ‘approved quality,’ or ‘equal to,’ the Resident Engineer shall decide what is the best quality and most suitable article to use, subject to appeal provision included under paragraph SC-5, above.”
    11. The specifications for forms of fabrication of .panels provide that:
    “In order to fabricate the various panels accurately and uniformly, the Contractor shall construct the necessary jigs or templates. Beds shall be built to a true line with even surface and constructed of hardwood at least two inches thick, secured together and bolted to heavy underpinning. Forms shall be constructed of steel angle bars, rigidly bolted to bed and bolted or welded together. Forms, Jigs, and Templates must be so constructed as to contain positive provisions to insure an accurate check of the centering and boring of holes in all members. Metal dowel pins will be inserted through guides to retain members in proper position during assembly. All provisions, devices, forms, templates and jigs, must be approved by the Resident Engineer Inspector prior to any fabrication.”
    It was necessary in order to perform the work required under this contract that certain templates or patterns and also certain forms be made in order that the lumber might be accurately cut into proper-sized roof panels, floor panels, and panels for other portions of the work. For the purpose of making the forms plaintiff had employed a man who was an experienced mechanic and who had made the templates or patterns and forms for previous similar contracts on which plaintiff had been employed.
    12. Specifications No. 2, Section I, Specifications for Materials, paragraph 2A, provides as follows:
    “All softwood shall conform to Federal Specification MM-L-751a, and all hardwood lumber shall conform to Federal Specification MM-L-736 as to general instructions and to specific requirements as amplified herein.
    “Note. — Fabricated Units. — All lumber, including the three classes, boards, dimensions, and finish flooring, purchased by the bidder for use in fabricating the various units of the different camp buildings shall not be lower in grade than that specified for each class of material. After fabricating, each piece shall be subject to the further restrictions as to knots, shakes, crooks, and other defects specified for each class, espe-dally shakes or splits in any piece intended for roof trasses, joists, and rafters. (See Par. 2-B for Spedfic widths of boards permitted.) Irrespective of grading rules quoted, any materials having defects that would be obviously detrimental, either to the construction or for the use for which it is intended, will not be accepted in fabricated materials.”
    Specifications GCC No. 2, Special Conditions, paragraph SC-12, provides:
    “SC-12. Inspection and Acceptance or Rejection of Work. — The Contractor must understand that all materials, built-up sections, etc., delivered by him prior to final acceptance and payment for same, shall be subject to the inspection of The Q. M. G., or his authorized agent, with full right to accept or reject any part thereof, and that he must, at his own expense, within a reasonable time remedy any defective or unsatisfactory materials, and that in event of his failure to do so, after notice, the C. O. shall have full right to have same replaced and to deduct the cost thereof from any money due to the Contractor. The Resident Engineer may require the removal of rejected material from the site of the work.
    “Authorized agents of the United States, other than those designated by the Contracting Officer, shall be given full opportunity to inspect materials, built-up sections, etc., at any and all times.”
    13. The Resident Engineer arrived at plaintiff’s plant on May 26, 1940, nine days after the commencement date of the contract, and after about one-third of the contract time for completion had expired. Certain of the forms for fabrication of panels had been completed and plaintiff was completing the form for the floor panels. The specifications provided that the form be constructed of steel angle bars, rigidly bolted to bed and bolted or welded together. Plaintiff used 2" to 2%'' angle irons on a wooden floor, heavily bolted, in accord with his previous experience on similar contracts. Defendant’s Resident Engineer refused to accept the forms of floor and roof panels on the ground that they were not heavy enough. Plaintiff, in order to meet the requirements of the inspector, then had manufactured at a cost of about $50.00, forms made of 5'' and 7" channel irons for the floor and roof panels. These did not prove wholly satisfactory, many panels being damaged and wasted in their removal from the forms.
    14. The Resident Engineer in requiring the change in forms, upon his belated arrival at the plant, caused four days’ delay in plaintiff’s operations, about $50 cost of forms and some wasted panel material. The action of the Resident Engineer in requiring heavier forms was taken in good faith, under his interpretation of the contract.
    15. Prior to the arrival of defendant’s Resident Engineer, whose duties included the inspection and approval of material and fabrication, substantial progress had been made in" contract operations but in compliance with the provisions of the specifications, plaintiff did not proceed, except in a limited way, with actual fabrication pending arrival of defendant’s Resident Engineer. Upon his arrival there was a large quantity of lumber on hand at plaintiff’s plant, including finished flooring, subfloor-ing, roof sheathing, all cut to exact lengths. A quantity of sill stock of 2 x 8’s had arrived and was being dipped. A large quantity of truss members had been fabricated. The lumber had been ordered as indicated in the specifications.
    Defendant’s inspector refused to accept a quantity of 2 x 8’s, 2 x 4’s, and 2 x 6’s containing black knots which had black rings around them, although the grading rules permit No. 2 dimension lumber to have sound knots not larger than 2%" in diameter. This situation also applied to lumber for flooring and siding. Much of this lumber was sound and suitable for the purpose intended.
    The action of the Resident Engineer in rejecting so large a quantity of the lumber as described, and his requirement that lumber of better quality be used, caused plaintiff to provide a crew of two or three men, who spent their time in the particular work of cutting the lumber to remove the objectionable knots at additional expense, waste of lumber, and material delay in performing the contract work.
    16. The defendant’s inspector did not, at any time, expressly direct or request plaintiff to furnish a higher grade of lumber than called for by the specifications, but he declined to accept the lumber without elimination of the knots, which under his interpretation of the contract specifications would lessen the strength of the fabricated panels or members, and he required a better quality of lumber.

      Plaintiff, in view of the quantity of lumber to which the Resident Engineer objected, purchased lumber of a higher grade than he had on hand, in order to save his contract time and prevent further waste. This caused considerable additional expense as well as occasional idle time of machines and labor, lasting an hour or more on several occasions, while waiting for lumber.
    17. The defendant’s inspector suggested to plaintiff that he sort the lumber and re-pile it, using the better or higher quality pieces out of the particular grade for specific uses and the lower quality pieces of the grade for other specific uses. Plaintiff objected to sorting the lumber on the ground that he was complying with the specifications in his purchase and use of the lumber and that it would cause delay and cost considerable money to sort the large quantity of lumber on hand.
    Plaintiff, however, upon the inspector’s refusal to accept the lumber did sort certain parts of it, using the best pieces for roof panels and the less desirable pieces for subfloor panels, and did cut out black knots with black rings around them.
    18. Plaintiff furnished for table tops No. 1, common, as provided in the specifications, but this was unacceptable to the inspector who required a better quality of lumber. After considerable delay in trying to locate lumber that would meet with the inspector’s approval, plaintiff purchased select Idaho pine which is a higher grade and more expensive. This the inspector finally accepted. The Government determined that the inspector had interpreted the specifications for mess table tops as including a better grade of lumber than No. 1 common dressed lumber prescribed in the contract, which caused the contractor to procure therefor particular lumber at an excess cost of $336.91. Since this item has already been allowed by the defendant it is not in dispute here.
    19. Defendant’s Resident Engineer was privileged to make his inspection of lumber at any place that he desired, but with respect to table tops and other fabricated items, the inspector waited, in many instances, until these items were fabricated and lined up for loading in cars and made his objection there, necessitating the taking apart and rebuilding or repairing of panels, which resulted in duplication of work, waste of lumber, and additional expense.
    20. Defendant’s Resident Engineer was experienced as an engineer and as a lumberman in the Southeastern States, but his experience with the classes and grades of lumber in the Northwest, such as was used in plaintiff’s contract, was limited. One of the Resident Engineer’s assistants was without experience in lumber used on the instant contract, while the other assistant is not shown to have had qualifications as an inspector.
    21. Within the same grades of lumber there will be a range of quality. All lumber No. 2 grade will not be of the same quality, but there are ranges within the grade, some of which will approximate high quality of the preceding grade and low quality of the next higher grade. Cutting operations, if properly conducted, would eliminate many defects in lumber by allowing varying qualities within the grade to be used in fabrication of different items required under the specifications without going outside the grade range set by the specifications.
    22. The elimination of so-called defects appearing in certain grades of lumber converts it into lumber of higher quality and elimination of defects by cutting operations may cause the finished product to appear better in quality than the identical lumber from which it was made.
    Plaintiff, in cutting and fabricating the lumber did eliminate many of the defects originally in the respective grades which tended to make the lumber show, up as of a higher quality.
    23. Defendant’s Resident Engineer was rigid in his inspection and rejection of the lumber and fabricated units on the instant project. His action in rejecting the lumber for table tops and requiring the higher grade of lumber therefor was unreasonable. His rejection of a considerable amount of lumber and fabricated units which contained sound knots and requiring a better quality of lumber in place thereof, in effect, amounted to unreasonable action on his part. In these rejections the Resident Engineer acted under his interpretation of the specifications. His action is attributable to his limited experience with the particular character of lumber grown in the Northwest, which was used on this project. It is impossible to determine from the record any definite amount of the lumber so improperly rejected.
    24. Had defendant’s Resident Engineer arrived at plaintiff’s plant at the commencement of the contract time, May 17,- 1940, and made his objections to the forms and lumber at that time, .plaintiff would have been saved much of the delay in performing the contract, duplication of work, waste of lumber, and expense due to disorganization and confusion in carrying on the work under the contract.
    It is not possible under the proof to determine a definite period of delay caused plaintiff by reason of the belated arrival of the Resident Engineer, but a fair approximation is fifteen days, exclusive of the four days determined for manufacture of forms, as set forth in finding 14.
    25. Defendant contends that plaintiff’s workmanship was inefficient and caused serious delay and additional expense.
    On two occasions plaintiff loaded a number of panels into cars without inspection and was required to unload the panels for inspection. It is not shown that this act was intentional.
    The specifications provided that fabricated lumber must be shipped in sequence for erection of finished units. The proof shows that at times carloads of fabricated material were loaded out of sequence. The Resident Engineer refused to issue bills of lading until material could be shipped out in sequence. The result was that at times, there was congestion in the yards and there is some evidence of an item of demurrage for loaded cars remaining too long. It is not shown to what extent, if any, the contract work was affected by this situation.
    Some of plaintiff’s carpenters were without experience in performing this particular class of work, and until they became accustomed to the cutting and boring machines made some errors. There was faulty workmanship on some of the material.
    In cutting lumber for studs and gables a quantity of 2 x 4’s and 4 x 4’s was not cut or pointed to the same pitch as the rafters and roof of the house. The Resident Engineer used some of them that could be used while some were repaired and used, and a quantity were rejected. Those rejected were thrown away. The proof fails to show what quantity was wasted.
    Specifications called for roof plates made from 2x6 lumber 12 to 16 feet in length. The roof plates were not to be bored. However, plaintiff cut and bored 10-foot lengths. The Resident Engineer permitted use of such as were regarded as suitable. A large part of ten or fifteen thousand feet was corrected but perhaps one-fourth of the lot was wasted.
    Specifications for rafters required lumber 12' long to be bo-red and of such quality that a knot or shake would not injure the strength of the pieces. About 1,400 pieces were improperly bored -and used for truss members. In this process there was waste.
    Some waste in sheathing lumber was caused on account of the boards being of improper width which caused their rejection. The proof does not indicate what amount of sheathing was rejected and wasted.
    The specifications called for floor joists to be made from material which was 1% x 5%. Plaintiff cut a number of pieces of lumber which the Resident Engineer believed to be too short and too narrow to meet the specifications. The Resident Engineer rejected a number of such pieces where, in his judgment, there was too much difference in the width and in those instances the floor joints were required to be removed and replaced with lumber which met specifications. Some waste in lumber was occasioned thereby.
    After fabrication of garage roof panels some were stacked outside of the building and some of the lumber in the panels shrank, causing knots to become loose. These panels had to be replaced with sound lumber. This caused some waste.
    Certain ridge plates in the end of the roof panels were made too narrow, due to use of 2 x 4’s instead of 2 x 6’s. Some were rejected. Some lumber was broken up and wasted in removal from the panels.
    In interior partition panels some of the lumber shrank, knots became loose, and many panels were rejected. In removing the rejected pieces from the panels they were broken and wasted. The proof does not indicate what amount of this lumber was wasted.
    Mechanical defects in the construction of some of the panels also occurred. On some of the wall panels where 2 x 4’s and 2 x 6’s came together, the timbers failed to flush on one side, making it necessary to withdraw some and replace with new panels, or to nail the toe in such direction as to make the member flush on the face side.
    26. The proof shows that plaintiff used lumber that was within grade, as indicated in the specifications, but in some instances, as hereinbefore described, there was faulty workmanship which contributed to slowing down of operations and caused some waste and additional cost. It is impossible to determine from the record a definite amount of waste caused by acts attributable to plaintiff. A fair approximation is seven days.
    27. On June 12, 1940, plaintiff protested to the Chicago Quartermaster Depot against the actions of the inspector in rejecting the forms which plaintiff had made, and in requiring the use of a better grade of lumber, which he termed arbitrary, and requested an extension of two weeks’ time in which to complete performance of the contract This request for extension was denied by letter from the Chicago Quartermaster Depot dated July 5, 1940.
    28. The work was completed on July 13, 1940, and plaintiff was paid sums aggregating $99,331.89, being the contract price of $115,625 less discount of $2,312.50, freight adjustment of $1,889.44 and liquidated damages in the amount of $12,091.17 for failure to complete within specified time.
    29. On August 7, 1940, plaintiff filed with the Quartermaster General a claim in the amount of $39,999.86 for extra labor and material furnished on demand of the inspector and remission of liquidated damages.
    30. On November 8, 1940, the Contracting Officer .made special findings of fact which were transmitted to plaintiff on November 9, 1940, setting forth the full and complete basis upon which the denial of extension of time, denial of waiver, the refunding of liquidated damages .and denial for extra compensation were based.
    31. On November 13, 1940, the plaintiff wrote the Quartermaster General protesting the adverse decision of the Contracting Officer and the interpretations of the Resident Engineer and taking exceptions to the Contracting Officer’s findings of fact of October 3, 1940. The Quartermaster General, treating this letter in the nature of an appeal from his findings of fact, wrote the Under Secretary of War on January 28, 1941 recommending approval of the Contracting Officer’s findings of fact and denial of the contractor’s appeal.
    32. On March 4, 1941, the Brigadier General, United States Army, Director of Purchases and Contracts, acting on behalf of the Secretary of War, issued a memorandum dealing with the appeal from findings of fact under this contract under which it w,as recommended that nine days’ extension of time should be allowed to the contractor due to the late arrival of the Resident Engineer, and that a credit of $336.91 should be allowed the contractor for the excess costs alleged to have been incurred by him in the procurement of mess table tops. Under date of March 8, 1941 the Secx-etary of War filed his findings of fact relative to the appeal of the contractor from the engineer’s interpretation of the specifications as well as the appeal from the findings of fact of the Contracting Officer. This final determination recommended that a nine days’ extension of time should be allowed to the contractor '■nd remission of liquidated damages for this period be allowed, and that a credit be allowed the contractor of $336.91 for excess costs involved in the procurement of the mess table tops.
    33. On August 6, 1941, settlement of plaintiff’s claim issued from the General Accounting Office, Washington, D. C., to R. H. Crowley on his claim for liquidated damages, expenses incurred for extra materials and labor, excessive waste of materials and additional overhead expenses alleged to have been incurred in the performance of the contract. Under this settlement plaintiff’s claim was disallowed in the amount of $34,459.79, and allowed in the sum of $5,540.07. The allowed portion of the claim represented the excess costs which were claimed in connection with table tops in the sum of $336.91, and remission of liquidated damages for nine days’ delay in delivery, which were admitted to be due to the late arrival of the Resident Engineer. However, payment of the allowed portion of the claim, namely, $5,540.-07, was suspended on the theory that the plaintiff was one of the defendants liable for payment of claim due to the United States in the sum of $119,057.90 arising out of default on prior contracts. The allowed portion of the claim, which is herein admitted as due under the settlement from the United States, was suspended for application against indebtedness claimed to be due to the United States by the plaintiff herein.
    34. The defendant’s action in disallowing the amount found due plaintiff is set forth in statement of the General Accounting Office dated August 6, 1941, as follows:
    “By certificate of settlement No. US-6915-FSA (W) (CCC), dated February 29, 1940, the Crowley Millwork Company, Spokane, Washington, in which the above-named. R. H. Crowley had an interest, was certified to be indebted to the United States in the amount of $119,057.90, arising from its default under contracts Nos. W-5921qm-ECW-138, dated June 12, 1935; W-5902-qm-EC W-48, dated June 8, 1935; W-5913-qm-ECW-68, dated June 8, 1935; W-5916-qm-ECW-91, dated June 8, 1935; W-5915-qm-ECW-62, dated June 8, 1935; W-5919-qm-ECW-112, dated June 7, 1935; W-5914 — qm-ECW-113, dated June 8, 1935; and W-5908-qm-ECW-71, dated June 8, 1935. Said indebtedness has been referred to the Attorney General for collection and to date has not been liquidated.
    “Accordingly, the amount of $5,540.07, representing the excess cost claimed in connection with the table tops and liquidated damages assessed for 9 days’ delay in the delivery of the various units under contract No. W-199-qm-CIV-1957, supra, is hereby suspended for application against said indebtedness.”
    35. The Crowley Millwork Company was a corporation organized under the laws of the State of Washington. Plaintiff was given one share of stock. He contracted to purchase approximately 99 shares additional and gave his promissory note therefor dated January 2, 1933, due January 2, 1934, which was never paid. The shares of stock were never issued to plaintiff. Plaintiff attended the first directors’ (organization) meeting and became secretary and also treasurer. He received no dividends. He drew a salary for labor performed for the corporation. Under date of February 1, 1938, plaintiff and the corporation executed an instrument whereby the corporation and Crowley mutually released each other from claims existing in favor of each other, and plaintiff had no further relation with the corporation.
    36. Had plaintiff’s performance period been extended for 19 days his contract should have been completed on July 6, 1940. (See findings 14 and 24.) Liquidated damages for deliveries after July 6, 1940, amount to $2,071.55. Subtracting this amount from the $12,091.17 liquidated damages assessed, as set forth in finding 5, leaves $10,019.62.
    37. In considering the, various types of lumber required and the processing thereof a 20% allowance is a reasonable estimate for waste in cutting and processing the total lumber purchased. Allowing 20% waste on lumber purchases, plaintiff’s excess costs of material and labor on the contract in suit is $15,311.83, as shown by the following:
    Item: Excess cost
    Flooring.................... $5,873.66
    2 x 4’s...................... 2,997.07
    2 x 6’s...................... 2,586.90
    2 x 8’s...................... 563.28
    Siding...................... 3,279.71
    Interior panels .............. 1,016.60
    Labor costs not otherwise allocated ..................... 2,064.13
    18,381.35
    From the above total of $18,381.35, there is deducted $3,069.52, representing a recovery of $1,869.52 for lumber left over and sold at the termination of the contract, and $1,200 of saving in labor (computed on unused lumber at $12 per 1,000 for 100,000 board feet), leaving net excess costs of $15,311.83.
    H. Russell Bishop, of Washington, D. C. (H. D. Driscoll, of Washington, D. C., on the brief), for plaintiff.
    Mary K. Fagan, of Washington, D. C., and Francis M. Shea, Asst. Atty. Gen., for defendant.
    Before WHALEY, Chief Justice, and WHITAKER, JONES, LITTLETON, and MADDEN, Judges.

       While some of the papers show the contract price of $115,685, this is apparently an error, and should read $115,625.

   JONES, Judge.

This case involves extra labor and material costs and liquidated damages.

R. H. Crowley, plaintiff, agreed to manufacture and deliver prefabricated buildings f. o. b. Spokane, Washington, to be used by the defendant in the erection of a CCC Camp. He was advised of the award on May 13, 1940, and since the agreement stipulated that the work should be completed within 30 days from May 17, 1940, he began work without awaiting the receipt of a formal contract, which was not signed until June 11, 1940. The contract price was $115,625.

The work was completed on July 13, 1940, 26 days after the specified completion date. Liquidated damages were assessed against plaintiff for the 26 days’ delay in the sum of $12,091.17. On appeal the Secretary of War remitted liquidated damages in the sum of $5,203.16, representing 9 days’ delay, and also allowed plaintiff $336.91 extra costs of some table tops caused by a change in the materials required. These amounts, however, have not been paid plaintiff, payment being held up by the General Accounting Office as an offset to the defendant’s claim against a corporation in which it asserts plaintiff had an interest, but which had no connection with this contract.

Defendant’s resident engineer did not arrive at plaintiff’s plant until May 26, 1940, 9 days after the commencement date of the contract, and after about one-third of the contract time for completion had expired. Some of the forms for fabrication of panels had been completed and plaintiff was completing the form for the floor panels. The resident engineer refused to accept the forms for floor and roof panels claiming that they were not heavy enough for the purpose. New forms and panels were constructed.

Defendant’s inspector refused to accept a. quantity of the lumber containing black knots which had black rings around them, although the grading rules permitted No. 2 dimension lumber to have sound knots not more than 2% inches in diameter. The same ruling was made as to lumber for flooring and siding. Much of this lumber was sound and suitable for the purpose intended.

The resident engineer, while an experienced lumberman, had not had experience in the particular type and quality of lumber required for this purpose in the particular area. His rulings made it necessary for plaintiff to use a better quality of lumber than the specifications called for, although he ,at no time specifically directed that this be done.

Plaintiff claims that this action made it necessary for him to furnish more expensive materials than otherwise would have been required, resulting in extra costs and extra labor; that the rejection of so much of the material caused delay in the completion of the contract, and that consequently he should be permitted to recover this extra cost and that he should also be repaid the amount of the liquidated damages which were assessed against him. He asserts the delay was the fault of the defendant.

There is considerable ground for this complaint on the part of the plaintiff. However, the terms of the contract and the adverse action of the Department preclude recovery on most of these items.

Article 12 of the contract makes the action of the contracting officer on disputed questions of fact final, subject to appeal within 30 days to the head of the department. The specifications, SC-5, make final the interpretation of the drawings and specifications by the resident engineer, subject to appeal within 30 days to the head of the department.

The appeal was taken, the Secretary of War remitted liquidated damages for the 9-day delay covered by the belated arrival of the resident engineer, and allowed plaintiff the item of increased costs due to the better quality of the lumber required for the table tops than was designated in the specifications.

The resident engineer was rigid and extreme in his interpretation of the contract and specifications. If the two provisions, referred, to above, were the only ones involved we would be inclined to hold that the action of the engineer in charge was so clearly erroneous as to imply legal bad faith. This was not intentional on his part. It was due to his inexperience in the type of lumber in that area called for by this contract. The lumber had been graded by the inspectors of the Association. It met their grading rules, as graded by them measured up to the quality called for in the specifications. It was suited to the purposes for which it was to be used. The action of the resident engineer in charge caused plaintiff delay and extra expense.

However, in addition to the provisions mentioned above, there were two others. One of them on materials (Specifications No. 2, Section I, paragraph 2 A) contained the following language:

“Irrespective of grading rules quoted, any materials having defects that would be obviously detrimental, either to the construction or for the use for which it is intended, will not be accepted in fabricated materials.”

The other provision (Specifications CCC No. 2, SC-6) was as follows:

“ * * * In all cases where an article is mentioned in the specifications in connection with the words ‘best quality’, ‘approved quality’, or ‘equal to’, the Resident Engineer shall decide what is the best quality and most suitable article to use, subject to appeal provision included under paragraph SC-5, above.”

These provisions, to which plaintiff agreed, make the question of the quality of the materials one of fact to be determined by the resident engineer. In the light of these plain provisions we are unable to hold that the action of the resident engineer was so arbitrary as to imply legal bad faith. United States v. Gleason, 175 U.S. 588, 602, 20 S.Ct. 228, 44 L.Ed. 284.

Plaintiff, however, is entitled to recover the sum of $5,540.07 in accordance with the decision by the head of the department.

The reason assigned by defendant for nonpayment is that the plaintiff had an interest in the Crowley Millwork Company, a corporation, of Spokane, Washington, and that such company was indebted to the United States, arising out of the alleged default of such corporation in several contracts dated in 1935, which claims had not been liquidated.

Plaintiff had only a small interest in that corporation. On February 1-, 1938, the plaintiff and the Crowley Millwork Company executed an instrument whereby the corporation and Crowley mutually released each other from all claims in favor of either, and since that date plaintiff has had no further relations with that corporation. Since it was a corporation and he never had any substantial interest in it, and since his relationship with it was completely severed more than two years before the making of the instant contract, the defendant is not entitled to offset the debt owned from it to plaintiff by any claims which it may have against the Crowley Millwork Company.

The plaintiff is entitled . to recover the sum of $5,540.07. It is so ordered.

WHITAKER and LITTLETON, Judges, and WHALEY, Chief Justice, concur.

MADDEN, Judge, took no part in the decision of this case.


author: MEANEY, District Judge.

text:
    RANDOLPH LABORATORIES, Inc., v. SPECIALTIES DEVELOPMENT CORPORATION et al.
    Civ. A. No. 5316.
    District Court, D. New Jersey.
    Oct. 31, 1945.

      Pitney, Hardin & Ward and William H. Osborne, Jr., all of Newark, N. J., and Ralph M. Snyder, of Chicago, Ill., for plaintiff.
    Kessler & Kessler, of Newark, N. J. (Darby & Darby and Samuel E. Darby, Jr., of counsel), all of New York City, for defendants. '
   MEANEY, District Judge.

The defendants have moved to dismiss this action as to defendant Walter Kidde & Company, Incorporated, under the provisions of Federal Rules of Civil Procedure, Rules 12(b) (3) and 12(b) (6), 28 U.S.C.A. following section 723c. They also seek an order striking the allegations in paragraph V of the complaint under Rule 12(f).

The action was instituted by plaintiff, Randolph Laboratories, Incorporated, a corporation of the State of Illinois, against defendants Specialties Development Corporation, a corporation of the State of New Jersey, and Walter Kidde & Company, Incorporated, a corporation existing under the laws of the State of New York. The plaintiff seeks a declaratory judgment of invalidity and noninfringement by plaintiff of Minor Patent No. 1,760,274 and prays for injunctive relief. In addition, the complaint asserts charges of unfair competition against both defendants.

Defendant alleges first, that this court has no jurisdiction as to defendant Walter Kidde & Company, Incorporated, under the provisions of Judicial Code, Section 51, 28 U.S.C.A. § 112J This action is brought under Section 274d of the Judicial Code, 28 U.S.C.A. § 400, which gives to the courts of the United States, in case of actual controversy, the power to declare rights and other legal relations of interested parties. The section is silent as to the question of venue of cases brought under the Act. It follows that section 51 of the Judicial Code, 28 U.S.C.A. § 112, applies, Webster Co. v. Society for Visual Education, Inc., 7 Cir., 83 F.2d 47; Hall v. United States, D. C., 10 F.Supp. 739. Judicial Code, section 51, 28 U.S.C.A. § 112, provides in part as follows: “ *■ * * No civil suit shall be brought in any district court against any person by any original process or proceeding in any other district than that whereof he is an inhabitant; but where the jurisdiction is founded only on the fact that the action is between citizens of different States, suit shall be brought only in the district of the residence of either the plaintiff or the defendant.”

Since this case arises under the patent laws, it is within the jurisdictional limits of the District Court generally. Defendant Walter Kidde & Company, Incorporated, maintains a factory and offices in the State of New Jersey, and is licensed to do busines in this State, having a principal office and a designated registered agent in compliance with the laws of the State of New Jersey.

The defendant on this motion, however, denies the right of the District Court of this district to entertain this case as to defendant Walter Kidde & Company, Incorporated, on the grounds that said defendant is not an inhabitant of this district within the contemplation of this statute. Plaintiff, conversely, asserts that jurisdiction is properly invoked on the ground that since defendant Walter Kidde & Company, Incorporated, is authorized to do business in New Jersey by compliance with New Jersey Revised Statutes 14:15-3, N.J.S.A. 14:15-3, under which statute defendant has designated an agent upon whom service of process may be made, such compliance constitutes a “waiver” by defendant of this section as above set forth.

The pertinent portions of the New Jersey Statutes, N.J.S.A. 14:4-2 and N.J.S.A. 14:-15-3 provide that: “Every'corporation of this state, and every foreign corporation authorized to transact business in this state, shall maintain a principal office in this state and an agent in charge thereof upon whom process against the corporation may be served” and that “Every foreign corporation, except banking, insurance, ferry and railroad corporations, before transacting any business in this state, shall file in the office of the secretary of state * * * a statement * * * setting forth (among other things) * * *

“e. The principal office of the corporation in this state and the name and place of abode of an agent upon whom process against such corporation may be served * *

This precise question was determined by this court in Da Cunha v. Grasselli Chemical Co., 46 F.Supp. 28, 29, where it was then stated:

“While not so broad as the statutes in some other states, the New Jersey statute makes it clearly evident that, preliminary to authorization to transact business in New Jersey, is the appointment of an agent in charge of the principal office of the corporation in the State, upon whom process against the corporation may be served. There is no qualification upow this obligation.

“The United States Supreme Court in the case of Neirbo v. Bethlehem Shipbuilding Corp., 308 U.S.165, 60 S.Ct. 153, 84 L.Ed. 167, 128 A.L.R. 1437, decided that designation of an agent in a state for service of process constituted consent to be sued in the federal courts of that state, and is tantamount to a waiver of ;the privilege accorded by Section 51 above referred to. Previous to that decision, various districts decided the question variously. The Neir-bo case is dispositive.”

Under the facts .existent in the present case, defendant Walter Kidde & Company, Incorporated, must be held to have consented to be sued in the courts of New Jersey, federal as well as state. Service of process upon said defendant under such circumstances satisfies the requirements of section 51 of the Judicial Code, 28 U.S.C.A. § 112, and this Court possesses the challenged jurisdiction.

Defendant next urges upon the Court the contention that this suit must be dismissed as to defendant Walter Kidde & Company, Incorporated, under the provisions of Civil Procedure Rule 12(b) (6), on the ground that the complaint on its face fails to state a claim against said defendant upon which relief can be granted.

Paragraph III of the complaint alleges that letters patent No. 1,760,274 for Fire Extinguisher were issued on application of Henry R. Minor, assignor to Walter Kidde & Company, “and transferred to Specialties Development Corporation, defendants herein, and as plaintiff is informed and believes, are now owned by the said defendants either jointly or separately.”

Paragraph IV of the complaint asserts that defendant Specialties Development Corporation is wholly owned by defendant Walter- Kidde & Company, Incorporated, and all of the officers and directors of said Specialties Development Corporation are employees or directors of Walter Kidde & Company, Incorporated. The same paragraph further asserts that the office of Specialties Development is located in a branch plant of the Walter Kidde Company, that the assets and liabilities of Specialties Development Corporation are publicly consolidated in the statements of Walter Kidde & Company, Incorporated. And further, paragraph IV alleges “The Minor patent No. 1,760,274 was issued to Walter Kidde & Company, Incorporated, and was subsequently transferred to defendant, Specialties Development Corporation, with a license issued to defendant, Walter Kidde & Co., Inc.”

In view of the .fact that plaintiff has alleged that title to the Minor patent was “transferred to Specialties . Development Corporation”, defendant contends that the complaint fails to state any claim under the Declaratory Judgment Act against Walter Kidde & Company, Incorporated, upon which relief can be granted.

It is fundamental that, in order for plaintiff to maintain an action under the Declaratory Judgment Act, 28 U.S.C.A. § 400, he must show or allege an interest in defendant in the patent on which plaintiff now seeks a declaratory judgment of invalidity and noninfringement.

In the complaint as set forth above, the plaintiff alleges a transfer of the patent here in question from Walter Kidde & Company, Incorporated, to Specialties Development Corporation and makes the further assertion that “plaintiff is informed and believes (that the letters patent) are now owned by the said defendants either jointly or separately.” In the paragraph following, plaintiff asserts that the Minor patent was issued to Walter Kidde & Company, Incorporated, and was subsequently transferred to defendant Specialties Development Corporation, with a license issued to defendant Walter Kidde & Company, Incorporated.

In the pleadings it is alleged that defendant Walter Kidde & Company, Incorporated has some interest in the Minor patent, although whether as co-owner or licensee only, the court at this posture of the case is not able to determine. It is possible that the evidence adduced at the trial will support a finding that both defendants have an interest in the Minor patent.

Plaintiff’s complaint alleges that Specialties Development Corporation is wholly owned by Walter Kidde & Company, Incorporated. It is evident that the business relationship is very close between the two defendant companies. There is,, however, insufficient evidence presently before the court to justify a disregard of the legal theory of separate corporate entities. Most of the facts alleged in the complaint are found existing in any case where there is a parent-subsidiary relationship, and these facts in themselves do not justify the court’s disregard of the legal corporate relations existing as to each of the defendants.

The defendant’s motion to dismiss as against Walter Kidde & Company, Incorporated, may be pressed at a later stage should it become evident that defendant Walter Kidde & Company, Incorporated, in fact has no interest in the Minor patent upon which relief can be granted under the provisions of the Declaratory Judgment Act.

Defendant’s motion asks also for an order striking out the allegations contained in paragraph V of the complaint under rule 12(f).

The allegations of paragraph V are concerned entirely with plaintiff’s quest for damages for, and injunctive relief against, defendant’s alleged unfair competition.

In paragraph V, plaintiff alleges that Walter Kidde & Company, Incorporated, is the one hundred percent owner of defendant Specialties Development Corporation, and has harassed competitors including the plaintiff by certain statements of control of the trade and has threatened such other manufacturers, including plaintiff, with lawsuits. Thereafter, plaintiff has specifically set forth a number of infringement suits brought by Walter Kidde & Company, Incorporated, prior to the alleged transfer of the patent, all of which suits were dismissed and none of which involved the plaintiff herein. In addition, paragraph V alleges facts relating to several “cease and desist” orders issued by the Federal Trade Commission against Walter Kidde & Company, Incorporated, with respect to certain alleged unfair trade practices which had been engaged in by that company and which affected the trade in the specific product generally. These allegations are asserted by defendants to be immaterial, impertinent and evidentiary in nature.

Where no harm will come to the defendant, the courts generally are very cautious about disturbing the pleading unless it can clearly be seen that the allegations can have no possible bearing upon the subject matter of the litigation. Groves et al. v. Paden City Glass Mfg. Co., D. C., 2 F.R.D. 300; Sinaiko Bros. Coal & Oil Co. et al. v. Ethyl Gasoline Corporation, D. C, 2 F.R.D. 305. Allegations of evidential facts in cases involving complex issues, although unnecessary under the rule of brevity, are not stricken out if not prejudicial. Samuel Goldwyn, Inc., v. United Artists Corp., D. C., 35 F.Supp. 633. Thus, where it appears to the Court that defendants will not be unduly prejudiced by the inclusion of certain of the objected-to allegations, the motion to strike will be denied. It is into this latter category that I find the allegations of paragraph V fall. Certain of the allegations are necessary to plaintiff’s claim. Such as are evidential, while unnecessary, are not deemed to be prejudicial.

The motion to dismiss the action against defendant Walter Kidde & Company, Incorporated, is denied, as is also the motion to strike paragraph V of the complaint.