author: HEALEY, District Judge.

text:
    MELANSON v. BAY STATE DREDGING & CONTRACTING CO.
    No. 1940.
    District Court, D. Massachusetts.
    Jan. 25, 1943.
    Herbert C. Splane and Kneeland & Splane, all of Boston, Mass., for plaintiff.
    Dunn, Scannell & Roberts, of Boston, Mass., for defendant.
   HEALEY, District Judge.

This is an action brought under the Jones Act, 46 U.S.C.A. § 688. The defendant has filed a motion to dismiss for lack of jurisdiction.

Facts

On the evidence presented at the hearing on the motion, I find the following facts:

The Bay State Dredging & Contracting Company is a corporation with a usual place of business in Boston in the Commonwealth of Massachusetts.

On March 20, 1942, the defendant was engaged in dredging work in Boston Harbor near Marginal Street in the Orient Heights section of Boston.

The dredging was being done in pursuance of a subcontract with Rowland Tomkins & Son and James A. Munroe & Sons, who had jointly entered into a contract with the United States of America for the construction of a fuel pier and storage facilities to be used by the United States Navy.

The work being performed by the defendant, beginning March 16, 1942, and ending April 4, 1942, was dredging to the depth of 8 feet at mean low water, beginning at the 8-foot contour and carrying the work to the shore line, within 150 feet of the street line.

The 8-foot contour was approximately 500 feet from the shore.

At the time of the injury to the plaintiff’s intestate on March 20, 1942, the dredge was at a point now occupied by .a part of the pier then to be constructed.

There was evidence to warrant a finding that the dredge was in navigable waters; and I so find.

The dredge had no motive power of its own, but had to be towed from place to place.

In shallow water, it is possible to move the dredge ahead about 30 feet at a time by dropping the bucket attached to the crane and using the bucket as a lever to pull up to it.

Working in conjunction with the dredge was a scow which carried away the dredged material.

The dredging being performed at the time of the accident was for the purpose of furnishing flotation for a pile driver so that piles might be driven in the construction of the fuel pier and storage facilities.

The pier was to extend from the shore to the deep water channel.

The dredge w.as afloat at all times.

At the time of the injury to plaintiff’s intestate, the dredge was not in motion.

The decedent, in the course of his duties on this particular job, operated a winch which regulated spuds used to secure the dredge in position, hung navigation lights, helped repair the dredge or scow in case of a breakdown, helped make the scow fast to the dredge when it pulled alongside, helped wind the scow, washed down the deck, brought food supplies from shore, helped take on fresh water from the water boat and rowed crews from shore to the dredge.

The defendant did not furnish meals to its employees, but the employees could make arrangements with the cook to eat on the dredge at their own expense.

There were sleeping quarters on the dredge which the plaintiff’s intestate could use. The plaintiff’s intestate could also sleep ashore if he so desired.

At the time of the injury to and death of plaintiff’s intestate, the defendant was insured under the provisions of the Massachusetts Workmen’s Compensation Act, G.L.(Ter.EcL) Mass. c. 152 § 1 et seq.

Discussion

The defendant contends that plaintiff’s complaint should be dismissed for lack of jurisdiction on substantially the following grounds:

1. The plaintiff’s intestate was not a seaman within the meaning of the Jones Act.

2. The plaintiff’s intestate was not engaged in a maritime employment at the time of his injury, but the work upon which he was engaged at the time of said injury was a matter of purely local concern having no direct relation to navigation or commerce, and that plaintiff’s remedy, therefore, is exclusively under the Workmen’s Compensation Act of Massachusetts.

I am of the opinion that the first ground of defendant’s contention is without merit. It seems clear that plaintiff’s intestate was a seaman within the meaning of the Jones Act. Ellis v. United States, 206 U.S. 246, 27 S.Ct. 600, 51 L.Ed. 1047, 11 Ann.Cas. 589; Saylor v. Taylor, 4 Cir., 77 F. 476; Kibadeaux v. Standard Dredging Co. 5 Cir., 81 F.2d 670; Carumbo v. Cape Cod S. S. Co., 1 Cir., 123 F.2d 991.

In Ellis v. United States, supra, the question arose whether or not persons employed on a dredge in Boston Harbor were seamen. The court there held that they were seamen, saying at page 259 of 206 U.S., at page 603 of 27 S.Ct, 51 L.Ed. 1047, 11 Ann.Cas. 589: “The scows and the floating dredges were vessels. * * * They were within the admiralty jurisdiction of the United States. * * * Therefore all of the hands mentioned in the informations were seamen within the definition in an earlier statute of the United States.”

The decedent’s duties, or at least some of them, were in aid of navigation, and thus the duties usually performed by a seaman.

The defendant’s second objection raises a more difficult problem. On which side of the hazy boundary line between federal jurisdiction and the exclusive jurisdiction of the state compensation laws does this case fall. By Article 3, Section 2, of the Constitution of the United States, the judicial power of the United States is extended “to all Cases of admiralty and maritime Jurisdiction.” However, there has been developed by the Supreme Court of the United States a doctrine whereby the rules governing local matters, regulation of which would work no material prejudice to the general maritime law, may be modified or supplemented by state statute. Grant Smith-Porter Co. v. Rohde, 257 U.S. 469, 42 S.Ct. 157, 66 L.Ed. 321, 25 A.L.R. 1008; Millers’ Underwriters v. Braud, 270 U.S. 59, 46 S.Ct. 194, 70 L.Ed. 470.

In the Rohde case, the libellant was employed as a carpenter on an uncompleted ship launched. in navigable waters. The question presented was whether or not the exclusive features of the Workmen’s Compensation Law of the State of Oregon, Laws 1913, c. 112, as amended excluded admiralty jurisdiction. The court there held that libellant’s exclusive remedy was under the Workmen’s Compensation Law. The court said at pages 475, 476 of 257 U.S., page 158 of 42 S.Ct, 66 L.Ed. 321, 25 A.L.R. 1008:

“The contract for constructing ‘The Ahala’ was nonmaritime, and although the incompleted structure upon which the accident occurred was lying in navigable waters, neither Rohde’s general employment, nor his activities at the time, had any direct relation to navigation or commerce. * * * The injury was suffered within a State whose positive enactment prescribed an exclusive remedy therefor. And as both parties had accepted and proceeded under the statute by making payments to the Industrial Accident Fund it cannot properly be said that they consciously contracted with each other in contemplation lof the general system of maritime law. * * * Under such circumstances regulation of the rights, obligations and consequent liabilities of the parties, as between themselves, by a local rule would not necessarily work material prejudice to any characteristic feature of the general maritime law, or interfere with the proper harmony or uniformity of that law in its international or interstate relations.”

In the Braud case, a diver submerged himself from a floating barge in navigable waters to saw off timbers which were obstructing navigation. While thus submerged, he was drowned. The defendant in error, sister of the decedent, recovered a judgment in the state court under the Workmen’s Compensation Act of Texas. Vernon’s Ann.Civ.St. Art. 8306 et seq. The Supreme Court, on the authority of the Rohde decision, affirmed the judgment of the state court, saying at pages 64, 65 of 270 U.S., at page 195 of 46 S.Ct, 70 L.Ed. 470: “In the cause now under consideration the record discloses facts sufficient to show a maritime tort to which the general admiralty jurisdiction would extend save for the provisions of the state Compensation Act; but the matter is of mere local concern and its regulation by the state will work no material prejudice to any characteristic feature of the general maritime law. The act prescribes the only remedy;' its exclusive features abrogate the right to resort to the admiralty court which otherwise would exist.”

On the other hand, there is a line of tases which limit the extent to which state statutes may change, modify or affect the general' maritime law. ’ Southern Pacific Co. v. Jensen, 244 U.S. 205, 37 S.Ct. 524, 61 L.Ed. 1086, L.R.A.1918C, 451, Ann.Cas. 1917E, 900; Great Lakes Dredge & Dock Company v. Kierejewski, 261 U.S. 479, 43 S.Ct. 418, 67 L.Ed. 756; Gonsalves v. Morse Dry Dock Co., 266 U.S. 171, 45 S.Ct. 39, 69 L.Ed. 228; Robins Dry Dock Co. v. Dahl, 266 U.S. 449, 45 S.Ct. 157, 69 L.Ed. 372; South Chicago Co. v. Bassett, 309 U.S. 251, 60 S.Ct. 544, 84 L.Ed. 732; Kuhl-man v. W. & A. Fletcher Co., 3 Cir., 20 F.2d 465; Kibadeaux v. Standard Dredging Co. 5 Cir., 81 F.2d 670.

The theory on which these cases proceed is that state legislation cannot be enacted affecting matters which are not merely lo cal, but which have direct relation to navigation and commerce.

In Southern Pacific Co. v. Jensen, supra [244 U.S. 205, 37 S.Ct. 529, 61 L.Ed. 1086 L.R.A.1918C, 451, Ann.Cas.l917E, 900], the court in holding that recovery for the death of a stevedore resulting from injuries received on a ship docked in navigable waters could not be had under the state workmen’s compensation laws, said that no such state legislation is valid if it “works material prejudice to the characteristic features of the general maritime law, or interferes with the proper harmony and uniformity of that law in its international and interstate relations,” and again at page 217 of 244 U.S., at page 529 of 37 S.Ct., 61 L.Ed. 1086, L.R.A.1918C, 451, Ann.Cas. 1917E, 900: “The work of a stevedore, in which the deceased was engaging, is maritime in its nature; his employment was a maritime contract; the injuries which he received were likewise maritime; and the rights and liabilities of the parties in connection therewith were matters clearly within the admiralty jurisdiction.”

The Kierejewski case, supra, was one in which a master boiler maker, while making repairs on a scow moored in navigable waters, was drowned. The Court there held that jurisdiction was in admiralty, and in distinguishing that case from the Rohde case, said at pages 480, 481, of 261 U.S., page 418 of 43 S.Ct., 67 L.Ed. 756:

“In the cause last cited neither Rohde’s general employment nor his activities bad any direct relation to navigation or commerce — the matter was purely local — and we were of opinion that application of the state statute, as between the parties, would not work material prejudice to any characteristic feature of the general maritime law or interfere with its proper harmony or uniformity.
“Here the circumstances are very different. Not only was the tort committed and effective on navigable waters, but the rights and liabilities of the parties are matters which have direct relation to navigation and commerce.”

In my opinion, the work of the plaintiff’s intestate had a direct relation to navigation and commerce. He was employed on navigable waters. The duties which he performed were maritime in nature. The general work being performed by the dredge was in preparation for the construction of a fuel pier and storage facilities to and from which vessels of the United States Navy would ply. The rights and liabilities of the parties are matters having direct relation to navigation and commerce. The work being performed by the plaintiff’s intestate was not of mere local concern. It follows, therefore, that the instant case falls within federal admiralty jurisdiction.

Furthermore, the evidence as presented at the hearing on this motion left some of the essential facts obscure and uncertain. In such a case, I feel that it is the better practice not to dispose of the case on a motion to dismiss, but only after a hearing has been had on the merits. See Frankel v. Bethlehem-Fairfield Shipyard, Inc., D.C., 46 F.Supp. 242.

The defendant has cited many cases in support of his motion, among which are the following: Alaska Packers’ Association v. Industrial Accident Commission, 276 U.S. 467, 48 S.Ct. 346, 72 L.Ed. 656; Sultan Railway & Timber Co. v. Department of Labor and Industries, 277 U.S. 135, 48 S.Ct. 505, 72 L.Ed. 820; In re Hydraulic Steam Dredge No. 1, 7 Cir., 80 F. 545; United Dredging Co. v. Lindberg, 18 F.2d 453; J. C. Penney-Gwinn Corporation v. McAndle, 27 F.2d 324, 59 A.L.R. 1342, and Fuentes v. Gulf Coast Dredging Co., 54 F.2d 69.

The last three cases cited were all decided by Circuit Court of Appeals for the Fifth Circuit. Kibadeaux v. Standard Dredging Co., 81 F.2d 670, was also decided by the Circuit Court of Appeals for the Fifth Circuit and was decided at a date later than any of- the other three cases mentioned. In that case, the libellant was a deckhand on a dredge which had no motive power, but was towed from port to port. The dredge at the time of libellant’s injury was engaged in cleaning out and deepening the slips of a terminal company in which slips ve'ssels plying in coastwise and foreign commerce were habitually moored. The other facts in that case were substantially the same as those in the instant cause. One of the defenses raised was that libellant’s remedy was under the Texas Compensation Act. Vernon’s Ann. Civ.St; Art. 8306 et seq. The Court there held that jurisdiction was in admiralty, saying at page 673 of 81 F.2d: “We consider that if Kibadeaux was a seaman under the general admiralty law as reshaped by the Merchant Marine Act [46 U.S.C.A. § 861 et seq.], and was also a member of the crew of a vessel, his injury on navigable waters in his employment about his vessel is cognizable in admiralty, and is controlled neither by the Longshoremen’s Act [33 U.S.C.A. § 901 et seq.] nor by the Texas statute.”

It is indeed difficult to distinguish the instant case from the Kibadeaux case. The Court in the Kibadeaux case distinguishes the other three Fifth Circuit cases which are cited above in this opinion.

In the Fuentes and McArdle cases, supra, the dredges involved were being used for the purpose of filling in land, which activity, of course, is of purely local concern.

In the Lindberg case, supra, the dredge was engaged in cutting a navigable canal across land. Of this case, the Court in the Kibadeaux case said at page 672 of 81 F.2d: “Indeed, injuries occurring on waters which are to become navigable after the dredge cuts a channel, but which have never been navigated before, could hardly be said to occur on navigable waters at all.”

In Alaska Packers’ Association v. Industrial Accident Commission, supra, the petitioner seeking compensation was injured while standing on land. In Sultan Railway & Timber Co. v. Department of Labor and Industries, supra, the plaintiffs were engaged in logging and in the booming of logs on a navigable river. In re Hydraulic Steam Dredge No. 1, supra, was a case involving a dredge engaged in filling in land for the purpose of building a railroad embankment. Consequently, all of these cases are distinguishable.

Defendant’s counsel has recently called to my attention the case of Davis v. Department of Labor and Industries of Washington, 317 U.S. 249, 63 S.Ct. 225, 87 L.Ed. 246, decided by the United States Supreme Court on December 14, 1942. The facts in that case are clearly distinguishable from those in the instant case. Obviously, the duties of the petitioner in the Davis case were not those of a seaman. The question there involved was, whether the petitioner’s remedy was under the Federal Longshoremen’s and Harbor Workers’ Compensation Act, 33 U.S.C.A. § 901 et seq., or under the workmen’s compensation laws of the State of Washington. In the instant case, the question is whether the plaintiff may proceed under the Jones Act or whether he must seek his remedy under the Massachusetts Workmen’s Compensation Act.

Conclusion

I, therefore, find on the facts so far presented that

1. Plaintiff was a seaman within the meaning of the Jones Act.

2. This court has jurisdiction in admiralty of this case.

I do not intend to preclude, nor does this opinion preclude, either party from introducing further evidence tending either to substantiate or contradict the facts as here found.

Defendant’s motion to dismiss is denied.


source: Caselaw Access Project

author: FORD, District Judge.

license: Public Domain

text:
    BOWLES, Price Administrator, v. HALL. SAME v. HOLLIDAY.
    Nos. 53, 54.
    District Court, E. D. Kentucky.
    Oct. 1, 1945.

      Hogan L. Yancey and Taylor N. House, both of Lexington, Ky., and Robert L. Moss, of Mt. Sterling, Ky., for plaintiff.
    Barney W. Baker, of Hazard, Ky., for defendants.
   FORD, District Judge.

These cases arise out of a single transaction between the defendants and by agreement of the parties were tried together.

Mrs. Eva Hall, the defendant in case No. 53, operates a retail grocery and meat business in Hazard, Perry County, Kentucky, and Green Holliday, the defendant in case No. 54, is a farmer residing in Perry County engaged in the business of raising, handling and selling hogs and other live stock.

On or about May 5, 1945, the defendant Green Holliday sold and delivered to the defendant Mrs. Eva Hall certain dressed hogs for use or consumption in the course of her business. , At the trial it was stipulated by the parties that the price paid was $435.04 in excess of the maximum permissible price prescribed for such commodity by section 1364.21 of revised maximum price regulation #148 promulgated by the Price Administrator under the provisions of the Emergency Price Control Act of 1942, as amended, 50 U.S.C.A. Appendix § 901 et seq.

In case No. 53, the plaintiff seeks only an injunction against Mrs. Hall to restrain future violation of the prescribed price regulation. In case No. 54 the Administrator, in addition to an injunction restraining the defendant Green Holliday from future violations of the Act, seeks to recover from him three times the amount of the overcharge.

The uncontroverted testimony is to the effect that before consummating the transaction both defendants communicated with the persons in charge of the local O.P.A. office at Hazard in an effort to ascertain the maximum price prescribed for the sale of dressed hogs and were informed that the local office had not received the applicable price schedule and was unable to give them the desired information. Thereupon they proceeded to consummate the sale with the understanding that if the price paid should thereafter be found to be in excess of the maximum price schedule, the overcharge would be refunded by the seller. The refund was duly made in accordance with the understanding.

It satisfactorily appears from the testimony that the violation of the price schedule by the defendants “was neither willful nor the result of failure to take practicable precautions against the occurrence of the violation.” However, under § 4 of the Price Control Act, 50 U.S.C.A. Appendix § 904 “regardless of any contract, agreement * * * or other obligation” it is made unlawful to sell, deliver, offer, solicit, attempt or agree to sell or deliver any commodity at a price in excess of the effective price schedule. One who receives in exchange for a commodity an amount in excess of the maximum price schedule may not avoid the liability imposed by the Statute by an agreement with the purchaser to refund the amount of the overcharge. The duty rests upon the seller as well as the purchaser to ascertain the maximum price applicable to the transaction before selling or delivering the commodity, and one who fails to do so makes the sale at his own risk. He is not protected by an understanding in reference to a subsequent price adjustment. United States v. Lutz, 3 Cir., 142 F.2d 985; Bowles v. Ammon, D.C., 61 F.Supp. 106, 117, note 9.

The Emergency Price Control Act of 1942, as amended by Stabilization Extension Act of 1944, 50 U.S.C.A.Appendix § 925(e), imposes upon any person selling a commodity in violation of the established maximum price schedule liability for three times the amount of the overcharge, but this liability is qualified as follows: “Provided, however, That such amount shall be the amount of the overcharge or overcharges or $25, whichever is greater, if the defendant proves that the violation of the regulation, order, or price schedule in question was neither willful nor the result of failure to take practicable precautions against the occurrence of the violation.”

Under the provisions of the 1944 amendment, if the sale be for use in the course of the buyer’s trade or business, the exclusive right of action for recovery of the seller’s liability is in the Administrator. Bowles, Adm’r v. Rogers, 7 Cir., 149 F.2d 1010.

In the recent case of Bowles v. Krodel, 7 Cir., 149 F.2d 398, 400, the Court construed the 1944 amendment holding that in a suit by the Administrator, if the evidence establishes the defense that the violation was neither willful nor the result of failure to take practicable precautions against the occurrence of the violation, and the overcharge is more than $25 “the lower limit of the court’s discretion is the amount of the overcharge itself. * * * and in such case the court has no discretion but to enter a judgment for the minimum amount that is the overcharge * ;.k * ii

The same question was considered by the Circuit Court of Appeals of the Eighth Circuit in Bowles v. Sharp, 149 F.2d 148, 149, in which the amount of the overcharge was $267.21. The Court said: “If appellee produces evidence establishing that the violation of the regulation was not willful nor the result of failure to take practicable precautions against the occurrence of the violation, judgment should be for $267.21 and costs.”

It thus appears that liability under the Statute is not restricted to willful violations. “Innocent non-conformity with the Price Control Act is as inflationary and as damaging to competitors and the public as guilty non-conformity.” Brown, Adm’r, v. Hecht Co., 78 U.S.App.D.C. 98, 137 F.2d 689, 691; Bowles v. American Stores, Inc., 78 U.S.App.D.C. 238, 139 F.2d 377, cer-tiorari denied 322 U.S. 730, 64 S.Ct. 947, 88 L.Ed. 1565.

Under the 1944 Amendment, lack of willfullness in respect to the violation results in a reduction of maximum liability from three times the amount of the overcharge to the actual amount thereof, but does not afford complete immunity to the violator. The statute clearly makes it mandatory for the court to render judgment for at least the amount of the overcharge where, as in case No. 54, the violation is admitted and the overcharge exceeds $25.

The proof is insufficient to indicate substantial danger of future violations of the Act by either of the defendants and consequently the injunctive relief sought by the plaintiff in both cases should be denied.

Judgment should be entered in case No. 54 for the amount of the overcharge and the costs of the action.

This memorandum may serve as the Court’s Findings of Fact and Conclusions of Law in both cases.


author: LEIBELL, District Judge.

text:
    123 EAST FIFTY-FOURTH STREET, Inc., v. UNITED STATES.
    District Court, S. D. New York.
    July 19, 1945.

      Benet Polikoff, of New York City (Jack Clareman, of Brooklyn, N. Y., of counsel), for plaintiff.
    John F. X. McGohey, U. S. Atty., of New York City (Stanley H. Lowell, Asst. U. S. Atty., of New York City, and Moses L. Kove, Asst. U. S. Atty., of Albany, N. Y., of counsel), for defendant.
   LEIBELL, District Judge.

This action is brought by plaintiff under Section 24, subdiv. 20 of the Judicial Code, 28 U.S.C.A. § 41 (20), to recover a “cabaret tax” alleged to have been erroneously and illegally collected by defendant from the plaintiff. The facts are not in dispute. They are set forth in a written stipulation signed by the attorneys for the parties.

About January 2, 1942, the plaintiff commenced the operation of a restaurant and bar at No. 123 East 54th Street, Borough of Manhattan, New York City, in which piano music was played for the entertainment of the patrons. There were no provisions for dancing or any other form of entertainment within the meaning of § 1700 (e) of the Internal Revenue Code. At the time plaintiff opened the restaurant, the Collector of Internal Revenue of the district, through his agents, informed plaintiff that the restaurant came within the classification of a “cabaret” under § 1700(e), as amended September 20, 1941, by the Revenue Act of 1941, 26 U.S.C.A. Int.Rev.Acts. Plaintiff complied with the requirements of the Collector and filed the necessary monthly returns paid in the aggregate sum of $7,-629.53 as taxes under § 1700(e) during the period January 2, 1942 to January 31, 1943. In February 1943 plaintiff made no payment of the tax. The Collector instituted an investigation into the nature of the-business conducted by plaintiff and in: November 1943 he notified plaintiff that it did not come within the purview of § 1700(e) of the Internal Revenue Code and was not required to pay'the so-called cabaret tax.

Within a week thereafter plaintiff filed a claim for a refund of the cabaret taxes theretofore paid. The claim stated:

“The amount claimed herein, by way of refund, was erroneously paid by 123 East 54th Street, Inc., pursuant to Section 1700 (e) of the Internal Revenue Code. This section imposes an admissions tax on cabarets, roof gardens, and other similar places furnishing a public performance for profit. A cabaret, roof garden and other similar place, as defined in said section, is a place where music and dancing privileges or any other entertainment, except instrumental or mechanical music alone, are afforded patrons in connection with the serving or selling of food, refreshments, or merchandise.
“123 East 54th Street, Inc. now operates, and during the period for which the tax was paid, has operated a restaurant and bar at 123 East 54th Street, New York City. The corporation does not now, nor has it, at any time during the period for which the tax was paid, furnished any music and dancing privileges or any form of entertainment. Instrumental music only is provided by Roger Stearns, an officer of the corporation, on a piano. No admission, minimum or cover charge is imposed on patrons.”

The claim was rejected by the Commissioner of Internal Revenue June 16, 1944, in a letter which reads as follows:

“Reference is made to your claim for refund of $7,629.53 tax and interest on cabaret charges for the period January 1942' through January 1943. The claim is based upon the contention that no liability was incurred since the only entertainment furnished during the period involved was music by a piano, which entertainment did not constitute a public performance for profit within the meaning of section 1710(e) of the Internal Revenue Code.
“The report of the investigation made discloses that piano music was the only form of entertainment furnished. There was no dancing or singing. However, tax was collected from the patrons and no part of said tax was borne by you, nor was any part of the tax refunded to the patrons. Since the patrons were the actual taxpayers, the amount claimed may not be refunded to you. Your claim is, therefore, rejected in full.” [The letter’s reference to § 1710(e) was an error. It should have been 1700(e).]

I do not think that the reasons given for rejecting the claim are valid in the light of the legislative history of the cabaret tax as shown by the pertinent statutes, and the rulings and regulations issued thereunder. The decisions of our highest court, directing refunds to the taxpayer of taxes erroneously paid, recognize the right of the taxpayer to the refund even if he has passed the tax on the patron or consumer, unless the statute bars a refund for that reason.

The Revenue Act of 1941 approved September 20, 1941, became effective October 1st, 1941, and remained in effect in that form until it was further amended November 1st, 1942. It contained, as theretofore, a Chapter 10 entitled “Admissions and Dues”, beginning with § 1700 of the Internal Revenue Code.

The Revenue Act of 1941 amended Section 1700(e) of the Internal Revenue Code to read as follows :

“There shall be levied, assessed, collected and paid — * * *
“(e) Tax on Cabarets, Roof Gardens, etc.—
“(1) Rate. — A tax equivalent to 5 per centum of all amounts paid for admission, refreshment, service, and merchandise, at any roof garden, cabaret, or other similar place furnishing a public performance for profit, if any payment, or part thereof, for admission, refreshment, service, or merchandise, entitles the patron to be present during any portion of such performance. í{C %
“(2) By whom paid. — The tax imposed under paragraph (1), shall be returned and paid by the person receiving such payments.”

The above amendment became effective October 1, 1941. There was also an amendment of July 23, 1942, but it is not pertinent to this case.

The Revenue Act of 1942, 56 Stat. 798, 981, further amended § 1700(e). The amendment was approved October 21, 1942, and became effective November 1, 1942. It was still in effect on January 31, 1943. It provided :

“Section 1700(e) (1) (relating to rate of cabaret tax) is amended to read as follows:
“‘(1) Rate. A tax equivalent to 5 per centum of all amounts paid for admission, refreshment, service, or merchandise, at any roof garden, cabaret, or other similar place furnishing a public performance for profit, by or for any patron or guest who is entitled to be present during any portion of such performance. The term “roof garden, cabaret, or other similar place” shall include any room in any hotel, restaurant, hall, or other public place where music and dancing privileges - or any other entertainment, except instrumental or mechanical music alone, are afforded the patrons in connection with the serving or selling of food, refreshment, or merchandise. A performance shall be regarded as being furnished for profit for purposes of this section even though the charge made for admission, refreshment, service, or merchandise is not increased by reason of the furnishing of such performance. ■ * * ”

It will be seen from the above quoted sections of the Internal Revenue Act, that for the period during which plaintiff paid the cabaret taxes (January 2, 1942, to January 31, 1943) the tax was payable by the cabaret owner. This view is supported by a comparison of § 1700(e) as amended September 20, 1941, with that section as it appeared in the June 29, 1939, and June 25, 1940, amendments. There it was provided that “the tax imposed under paragraph (1) shall be paid by the person paying for such refreshment, service, or merchandise.” 26 U.S.C.A. Int.Rev.Code, § 1700(e). Under that provision the cabaret owner collected the tax from the patron and was required to hold the tax as a special fund for the United States, under § 3661 of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code § 3661. The September 1941 amendment of § 1700(e) imposed the tax on the cabaret owner, “the person receiving such payments.”

The Internal Revenue Cum. Bull. 1941-42, Ruling Mim. 5319, January 26, 1942, page 63 provided:

“14. The tax on admissions to any roof garden, cabaret, or similar place of entertainment as imposed by section 1700(e) prior to the amendment of such section by section 542 of the Revenue Act of 1941, is payable by the person paying for the admission. Effective as of 10 a.m, on October 1, 1941, section 542 of the Revenue Act of 1941 amended section 1700(e) so as to change the basis for tax computation and to shift the liability for the tax to the person receiving the payment for admission, refreshment, service, and merchandise. Hence, cabaret taxes paid subsequent to 10 a.m. on October 1, 1941, are deductible from gross income by the person (i.e., the proprietor or cabaret operator) receiving the payment for admission, etc.”

Treasury Regulation 43 effective October 1, 1941, referring to Roof Gardens, Cabarets, etc., provides in part as follows:

“Sec. 101.13 Basis, rate and computation of tax * * *
“The liability for the tax is imposed upon the person receiving payment of the charges mentioned, and the tax must be paid by such person regardless of whether collected from the patron either as a separate charge or by being included in the amounts charged for admission, refreshment, service, and merchandise. * * * ”

The distinction between an operator who pays the tax and.one who collects it from a patron as an agent for the government, is followed in §§ 1715 and 1716 of the Internal Revenue Code, 26 U.S.C.A. Int.Rev. Code, §§ 1715, 1716, in respect to taxes imposed under various subdivisions of § 1700.

It seems clear from a reading of the statutes and regulations that in this case the plaintiff, as the cabaret owner, was the taxpayer, and was charged with the obligation of paying the tax.

The government argues that Section 1722 of the Internal Revenue Code, 26 U.S. C.A. Int.Rev.Code, § 1722, which provides: “all administrative, special, or stamp provisions of law, including the law relating to the assessment of taxes, so far as applicable, shall be extended to and made a part of this chapter,” incorporates by general reference another provision of the Internal Revenue Code, namely section 3443(d), 26 U.S.C.A. Int.Rev.Code, § 3443 (d), which provides:

“Sec. 3443. Credits and refunds, (as amended by Sec. 533, 1941 act; Sec. 307 (a) (b), 1943 Act). * * *
“(d) No overpayment of tax under this chapter shall be credited or refunded (otherwise than under subsection (a)), in pursuance of a court decision or otherwise, unless the person who paid the tax establishes, in accordance with regulations prescribed by the Commissioner with the approval of the Secretary, (1) that he has not included the tax in the price of the article with respect to which it was imposed, or collected the amount of tax from the vendee, or (2) that he has repaid the amount of the tax to the ultimate purchaser of the article, or unless he files with the Commissioner written consent of such ultimate purchaser to the allowance of the credit or refund. 53 Stat. 417.”

Section 3443 is contained in sub-chapter C entitled “General Administrative Provisions” and is part of Chapter 29 which bears the heading “Manufacturers’ Excise and Import Taxes” to which it is specifically applied by its own wording. Section 3443 which became a law June 6, 1932, relates to credits and refunds on manufacturers’ excise taxes. It cannot properly be considered as incorporated by reference (through section 1722) into Chapter 10 of the Act, which deals with taxes on admissions and dues. Section 1722 incorporates into Chapter 10 any administrative sections of the Act which would be applicable to the administration of Chapter 10 (such as Chapter 37 relating to Abatements, Credits and Refunds) and any general provision relating to the assessment of taxes.

It is to be remembered “ * * * that we are here concerned with a taxing act, with regard to which the general rule requiring adherence to the letter applies with particular strictness”, and that a tax statute should not be extended by implication or enlarged by construction so as to embrace matters therein not specifically pointed out. Crooks v. Harrelson, 282 U.S. 55, 61, 51 S.Ct. 49, 51, 75 L.Ed. 156; United States v. Merriam, 263 U.S. 179, 188, 44 S.Ct. 69, 68 L.Ed. 240, 29 A.L.R. 1547; United States v. Field, 255 U.S. 257, 262, 41 S.Ct. 256, 65 L.Ed. 617, 18 A.L.R. 1461; Gould v. Gould, 245 U.S. 151, 153, 38 S.Ct. 53, 62 L.Ed. 211.

The government also contends that the plaintiff should not recover on the equitable ground that having passed the tax on to his customers (it was added to the patron’s check for food and refreshments), the plaintiff would be unjustly enriched by the refund. I would like to apply that principle and deny the refund of the tax in this case, but the decisions of our courts are to the contrary.

In Lash’s Products Co. v. United States, 278 U.S. 175, 49 S.Ct. 100, 73 L.Ed. 251, the court was concerned with a tax imposed on soft drinks sold by the manufacturer, The petitioner therein, who was the manufacturer, had paid the tax and he notified its customers of the new tax. The ■government contended that petitioner had passed the tax on and that the actual price ■of the goods was the amount received from the customer minus the amount of the tax. The Tax Commissioner rejected the claim for refund. The court, at page 176 of 278 U.S., at page 100 of 49 S.Ct, 73 L.Ed. 251, of its opinion by Mr. Justice Holmes, stated:

“The phrase ‘passed the tax on’ is inaccurate, as obviously the tax is laid and remains on the manufacturer and on him alone. Heckman & Co. v. I. S. Dawes & Son Co., 56 App.D.C. 213, 12 F.2d 154. The purchaser does not pay the tax. He pays or may pay the seller more for the goods because of the seller’s obligation, but that is all. * * *
“The price is the total sum paid for the goods. The amount added because of the tax is paid to get the goods and for nothing else. Therefore it is part of the price, and if the statute were taken literally, as there would be no reason for not taking it if it were now passed for the first time, there might be difficulty in accepting the Commissioner’s distinction even if the tax were made a separate item of the bill. * * *"

The form of the statute is controlling. Biddle v. Commissioner, 2 Cir., 86 F.2d 718, affirmed 302 U.S. 573, 58 S.Ct. 379, 82 L.Ed. 431; Shearer v. Commissioner, 2 Cir., 48 F.2d 552; 20th Century Club v. United States, 92 Ct.Cl. 93, 34 F.Supp. 1021.

The Lash case was decided in 1928, which was prior to the original enactment of section 3443 which imposed limitations on refunds of manufacturer’s excise taxes, and was first embodied in the Internal Revenue Act of 1932. In a number of other cases the Court applied the principle of the Lash decision.

I am aware that the plaintiff will receive a windfall and that the result is objectionable, but it is not the function of the court to insert something into the statute which the Congress has not placed there. Perhaps the omission was an oversight. If so, the remedy is with the legislative branch, as pointed out by Justice Sutherland in Crooks v. Harrelson, 282 U.S. 55, at page 60, 51 S.Ct. 49, at page 50, 75 L.Ed. 156:

“Courts have sometimes exercised a high degree of ingenuity in the effort to find justification for wrenching from the words of a statute a meaning which literally they did not bear in order to escape consequences thought to be absurd or to entail great hardship. But an application of the principle so nearly approaches the boundary between the exercise of the judicial power and that of the legislative power as to call rather for great caution and circumspection in order to avoid usurpation of the latter. [Inhabitants of] Monson v. [Inhabitants of] Chester, 22 Pick., Mass., 385, 387. It is not enough merely that hard and objectionable or absurd consequences, which probably were not within the contemplation of the framers, are produced by an act of legislation. Laws enacted with good intention when put to the test, frequently, and to the surprise of the law rriaker himself, turn out to be mischievous, absurd or otherwise objectionable. But in such case the remedy lies with the law making authority, and not with the court.’’

To the same effect, see Burnet v. Sanford & Brooks Co., 282 U.S. 359, at page 367, 51 S.Ct. 150, 75 L.Ed. 383.

Plaintiff is entitled to judgment against defendant in the amount of $7,629.53 with interest thereon, together with the taxable costs of this action.

I have signed findings of fact and conclusions of law which are being filed together with this opinion.


author: MILLER, District Judge.

text:
    BOWLES, Administrator, O.P.A., v. MILNER HOTELS, Inc. SAME v. 101 E. CHESTNUT STREET, Inc.
    Nos. 801, 823.
    District Court, W. D. Kentucky, Louisville Division.
    Sept. 21, 1945.
    Fritz Krueger and Jos. J. Grace, both of Louisville, Ky., for plaintiff.
    R. Lee Blackwell and Bullitt & Middleton, all of Louisville, Ky., for defendants.
   MILLER, District Judge.

These two actions, involving associated defendants and similar facts and the same questions of law, were heard together by the Court without a jury by agreement of the parties.

The facts as stipulated by the parties in each case are adopted by the Court.

In the first action the Price Administrator charges the defendant in its operation of the Tyler Hotel in Louisville, Ky., with overceiling charges on 54 different occasions arranging from 50 cents to $1.50, and involving aggregate overcharges of $31.50. In the second case the Price Administrator charges the defendant in its operation of the Milner Hotel in Louisville, Ky., of over-ceiling charges on 20 occasions involving aggregate overcharges of $13.50. The Administrator seeks damages in the amount of $25 for each of the 74 separate violations for a total of $1850. The defendants admit the violations and the amounts involved, hut contend that in the first case the recovery is limited to $31.50, being the amount of the overcharge, and that in the second case that the recovery is limited to the statutory amount of $25 provided for cases where the overcharges are less than that amount. The stipulation in each case provides that none of the violations committed by the defendant was willful or the result of failure to take practicable precautions against the occurrence of the violation.

Jurisdiction exists by reason of Section 205(c) and (e) of the Emergency Price Control Act of 1942, as amended by the Stabilization Extension Act of 1944, 50 U.S. C.A.Appendix § 925 (c, e). Section 205(e), giving a right of action to a buyer at over-ceiling prices against the seller and dealing with the question of damages, provides in part as follows: “In such action, the seller shall be liable for reasonable attorney’s fees and costs as determined by the court, plus whichever of the following sums is the "reater: (1) Such amount not more than three times the amount of the overcharge, or the-overcharges, upon which the action is based as the court in its discretion may determine, or (2) an amount not less than $25 nor more than $50, as the court in its discretion may determine: Provided, however, That such amount shall be the amount of the overcharge or overcharges or $25, whichever is greater, if the defendant proves that the violation of the regulation, order, or price schedule in question was neither wilfull nor the result of failure to take practicable precautions against the occurrence of the violation. For the purposes of this section the payment or receipt of rent for defense-area housing accommodations shall be deemed the buying or selling of a commodity, as the case may be?; and the word ‘overcharge’ shall mean the amount by which the consideration exceeds the applicable maximum price. If any person selling a commodity violates a regulation, order, or price schedule prescribing a maximum price or maximum prices, and the buyer either fails to institute an action under this subsection within thirty days from the date of the occurrence of the violation or is not entitled for any reason to bring the action, the Administrator may institute such action on behalf of the United States within such one-year period. If such action is instituted by the Administrator, the buyer shall thereafter be barred from bringing an action for the same violation or violations.”

The only question before the Court in each case is whether the plaintiff can reS-cover from the defendant $25 for each person so overcharged or is limited in each action to the total of the overcharges or $25, whichever is greater.

The defendants rely upon a number of cases which were decided before the Emergency Price Control Act of 1942 was amended on June 30, 1944, by the Stabilization Extension Act of 1944. See McCowan v. Dumont, D.C., 54 F.Supp. 749; Simmons v. Charbonnier, D.C., 56 F.Supp. 512; Everly v. Zepp, D.C., 57 F.Supp. 303; Link v. Kallaos, D.C., 56 F.Supp. 304; Bowles v. American Stores, Inc., 78 U.S.App.D.C. 238, 139 F.2d 377. However, the following cases, also decided before the amendment of 1944, took the opposite view of the question : See Gilbert v. Thierry, D.C., 58 F.Supp. 235; affirmed 1 Cir., 147 F.2d 603; Bowles v. Eitzen, D.C.N.M.; Pringle v. Kofsy, D.C.E.D.Pa., July 13, 1944. In view of the changes made in the wording of the Act by the amendment of June 30, 1944, none of the foregoing decisions appear applicable to the present case. The cases referred to deal for the most part with successive violations on tke part of the landlord against the same tenant, such as successive monthly collections of rent under the same lease. Some of the decisions held that such violations were cumulative, while other decisions held that they were not. However, this ambiguity in the original statute was removed by the amendment of 1944 . which specifically refers to “the amount of the overcharge, or the overcharges.” This amendment by the use of the additional phrase “or the overcharges” adopted, for the purposes of violations occurring thereafter, the view that successive overcharges against the same tenant were not cumulative. See Note 1 in Thierry v. Gilbert, 1 Cir., 147 F.2d 603, at page 605. However, where the successive overcharges by the landlord are against different tenants an entirely different picture is presented. The Act specifically permits each tenant so overcharged to bring an action for damages. In the present cases each of the 74 tenants could bring a separate action and recover $25 apiece. That apparently is conceded by the defendants. The Act also provides that if the buyer (or tenant) fails to institute his action within thirty days “the Administrator may institute such action on behalf of the United States.” The action by the Administrator is therefore the same action which the tenant could have brought with the Administrator merely being substituted as plaintiff for the tenant. This construction is further borne out by the provision that when the Administrator brings the action the tenant shall thereafter be barred from bringing an action for the same violation. It is accordingly clear that the Administrator in the facts involved in these cases could have instituted 74 separate actions and recover $25 in each action. I find nothing in the Act which takes from him this right when he elects to join numerous causes of action in one suit instead of bringing separate actions for each violation. The limitation of liability to “the amount of the overcharge or overcharges or $25, whichever is greater,” is not against the Administrator’s right of recovery in each of these two actions, as urged by the defendants. Its physical location in that section of the Act, dealing with the buyer’s right of recovery and before anything is said about the Administrator’s right of recovery, makes it clear that it is a limitation on the amount to be recovered by each buyer or tenant who has been overcharged. The Administrator in his action has a separate and cumulative recovery for each tenant overcharged.

The defendants in support of their construction strongly urge that the construction being given to the Act results in excessive damages for trivial overcharges, and in many cases could be ruinous to defendants who had committed only small violations although numerous in amount. Such a result is possible and could be exceedingly harsh in its effect if the Administrator elected to exact the maximum which the law allowed. Congress no doubt contemplated that the Administrator would act reasonably in such cases, but at the same time wanted to give him enough power to make its enforcement effective. As was said in Bowles v. American Stores, supra [78 U.S.App.D.C. 238, 139 F.2d 379], “Section 205(e) reflects the view that occasional hardship to one who honestly and intelligently endeavors to comply with the law is not too high a price to pay for the protection of the whole community against inflation.” Where the statute appears plain and unambiguous in the penalties which it provides, it is not the province of the Court to reduce or modify those penalties even if it disagrees with them. If the enforcement of the Act by the Administrator results in the collection of excessive penalties, it becomes a situation for Congress to consider and correct, if necessary, rather than for corrective action by the Court.

The plaintiff is entitled to judgment in the amount of $25 for each of the 74 violations.

       No opinion for publication.


text:
    T. P. TAYLOR & CO. v. GLENN, Collector of Internal Revenue.
    No. 776.
    District Court, W. D. Kentucky, Louisville Division.
    Sept. 28, 1945.

      Louis Seelbach and Bullitt & Middleton, all of Louisville, Ky., for plaintiff.
    Samuel O. Clark, Jr., Asst. Atty. Gen., Andrew D. Sharpe and Henry L. Spencer, Sp. Assts. to Atty. Gen., and David C. Walls, U. S. Atty., of Hardinsburg, Ky., for defendant.
   MILLER, District Judge.

The plaintiff, T. P. Taylor & Co., brought this action to recover corporation income taxes and corporation excess profits taxes for 1940, and also corporation income taxes, declared value excess profits taxes and corporation excess profits taxes for the year 1941, in the total amount of $18,717.33, with interest, which it alleges was erroneously assessed against it by the Commissioner and thereafter illegally collected by the defendant. The deficiency assessment resulted from a disallowance by the Commissioner of certain salary payments to the President and Vice President of the plaintiff for the two years in question. The plaintiff claims that the amounts paid by it as such salaries and taken as deductions in its income tax return was reasonable compensation for personal services actually rendered and a proper deduction for income tax purposes.

T. P. Taylor, Sr., started a retail drug business in Louisville, Kentucky, about 60 years ago. A son Horace Taylor went into business with his father in 1905, and another son T. P. Taylor, Jr., went into the business in 1909. Both of the sons studied pharmacy at the University of Louisville and became graduate pharmacists. T. P. Taylor, Sr., .at that time had several stores in Louisville and his two sons worked through all branches of the business and each finally became manager of one of the stores. Horace Taylor managed the store at Fourth and Walnut Streets and T. P. Taylor, Jr., managed the store at Fourth and Chestnut Streets. T. P. Taylor, Sr., and his sons built up their business until they were finally operating eleven stores in Louisville in 1929. T. P. Taylor, Sr., retired and subsequently died before 1929, and at that time his two sons had acquired all of -the interest of their father in the business. In 1929 Horace Taylor and T. P. Taylor, Jr., sold their business to the Whalen Drug Company, which was a subsidiary of the United Cigar Stores, a very large operator of chain drug stores in the United States with offices in New York. The Whalen Drug Company went into the hands of a receiver in 1932. In the Fall of 1932 Horace Taylor and T. P. Taylor, Jr., decided to go back into the drug business and in about October, 1932, incorporated T. P. Taylor & Co., the plaintiff herein, under the laws of Kentucky. Its capital stock was $25,000, consisting of 1,000 shares of $25 each. The original investment also included a surplus of from $4,000 to $5,000. The two sons each bought 50% of the stock. At a later time in December, 1935, the Taylor brothers put into the business an additional $60,000, for which they received 5% preferred stock equally divided between them.

The plaintiff started in business with four stores, located at Fourth and Chestnut, Third and Jefferson, Fourth and Oak and Fourth and Market. In 1934 a fifth store was opened at Third and Broadway in the Weissinger-Gaulbert Building. In 1935 they opened another store at Brook and Broadway, and also one at the loop in the Highlands. In 1938 they opened another store at Cecil and Broadway. In October, 1939, they opened another store at St. Matthews, Kentucky, one of the suburbs of Louisville. About May, 1941, they opened their tenth store on Fourth near Walnut. The plaintiff also established and operated a warehouse and a commissary department. During that period of time the major competition encountered was as follows: In 1932 the Hook Drug Company of Kentucky operated about six or seven stores in Louisville. The Liggett Company, a subsidiary of .the United Drug Company, had one store in the Marion E. Taylor Building at Fourth and Jefferson. The Walgreen Company had about four stores in Louisville. About 1936 the Hook Drug Company sold its Louisville stores to the Walgreen Company, and subsequently the Walgreen Company closed all of the Hook stores but the one situated in the Heyburn Building at Fourth and Broadway. The Liggett Company went out of business in Louisville in 1935.

When the plaintiff company was organized in 1932 Horace Taylor became President and T. P. Taylor, Jr., became Vice President. They devoted practically all of their time and energy to the development of the business of the company, with the two working as a team with the same authority. They jointly decided upon and directed the policy of the company. They also jointly made the selections of locations for new stores and of junior executives who worked under the supervision of the brothers. They also owned in their individual names from 25 to 40 pieces of real estate, which returned to them substantial income. The smaller pieces of real estate were handled by real estate agents. The large pieces were handled by themselves with most of the detail work being done by a woman employee. From time to time it would be necessary for the two brothers to negotiate new leases for these pieces of property. The handling of their individual real estate interests took not more than from two to four percent of their time. Horace Taylor became President of the Board of Aldermen of the City of Louisville in the latter part of 1933 and for a period of four years thereafter spent quite a bit of his time in this work for the City. During this period T. P. Taylor, Jr., became President of the Company and Horace Taylor became Vice President. Horace Taylor also served as a Director of the United Drug Company, which position he resigned in 1929 when he temporarily retired from the business. He also served for a while as a Director of the Louisville Trust Company. During the period of 1939 through 1941 T. P. Taylor, Jr., was a Director in the First National Bank of Louisville, which position required his attendance at directors’ meetings for about an hour in the morning one day in each week. He resigned this directorship in 1942 because he did not feel that he could give to the job the time it properly required. Horace Taylor served as President of the National Association of Chain Drug Stores for three 1-year terms, and T. P. Taylor, Jr., was President of the Southern Drug Stores Association for two terms. Both brothers are widely known in the chain drug store business and have the reputation of first-class executives and operators of chain drug stores.

When the Company was organized in 1932 the Taylor brothers adopted the policy of holding salaries to a minimum until the company was on a sound financial basis. No salaries were paid to either of the brothers during 1932 or 1933. In 1934 each was paid a salary of $5,000. In 1935 neither one received any salary. They received no base salaries in 1936, but each was paid a percentage of the profits of the corporation if the profits amounted to $25,-000 or more. T. P. Taylor, Jr.’s, percentage was 10% and Horace Taylor’s percentage was 5'% due to the fact that he was devoting a part of his time to his duties as President of the Board of Aldermen of the City of Louisville. These payments amounted to $3,435.14 to T. P. Taylor, Jr., and $1,717.56 to Horace Taylor. In 1937 base salaries were fixed for each of the brothers at $5,000 plus 5% of the profits if they amounted to $25,000 or more. In 1938 the base salary was raised to $7,500 with the same arrangement with respect to profits as in 1937. This base salary has not been changed since 1938, but in 1939 the percentage compensation was raised to 7% of the profits, and in 1940 to 10% of the profits, and in 1941 to 10% of the profits, if they were less than $50,000, 12%% of the profits if they were $50,000 or more and less than $75,000, and 15% if they were $75,000 or more. Under these arrangements of base salary plus a percentage of the profits each brother received $7,412.23 in 1937, $8,935.96 in 1938, $9,968.-68 in 1939, $11,781.17 in 1940, and $22,834.-56 in 1941. At the times when the Board of Directors of the Company raised the percentage compensation of the President and Vice President they also raised the percentage compensation for their four junior executives, namely, P. I. Taylor, Bruce Keith, Zachary Cox and Jones Howard, the last three of whom held no stock interest in the corporation. The percentage increases to these junior executives were greater in proportion than the percentage increases to the President and Vice President. In 1939 the compensation of the junior executives averaged about $3,400 per year each. In 1940 it averaged about $4,-000 per year each. In 1941 it averaged about $9,000 per year each.

In 1933, which was the first full year of operation, the net sales of the plaintiff company totaled $376,122.16. In 1939 they had increased to $1,075,634.81. In 1940 they totaled $1,236,459.25. In 1941 they increased to $1,715,199.86. The net profits of the Company, after all compensation and before all income taxes, increased from $3,590.99 in 1933 to $47,021.39 in 1941. At the end of 1932 the surplus of the plaintiff company was $6,456.21. At the end of 1941 it had increased to $127,-633.54.

The plaintiff paid 5l% dividends, or $3,-000 per year, on its preferred stock every year after it was issued. No dividends were paid on the common stock until 1937, at which time it paid a dividend of 40%, totaling $10,000. No dividend was paid in 1938, but in both 1939 and in 1940 it paid a 20% dividend, totaling $5,000 each year, and in 1941 it again paid a 40% dividend of $10,000.

The revenue agent who examined the income tax returns of the plaintiff for the years 1940 and 1941 took the position that any increase in compensation paid to T. P. Taylor, Jr., and Horace Taylor in those years over the amount paid them in 1939, which was $9,968.68, was unreasonable and not a proper deduction. Accordingly, the deductions taken for these salary payments were reduced for the year 1940 from $11,781.17 apiece to $9,968.68 apiece, and for the year 1941 from $22,834.56 apiece to $9,968.68 apiece. This resulted in a deficiency income tax assessment as follows:

(1) Corporate income tax, plus interest for 1940......... $ 1,025.67

(2) Corporate excess profits tax plus interest for 1940 811.99

(3) Corporate income tax, plus interest for 1941......... 5,352.12 Declared value ' excess profits tax, plus interest for 1941 ................ 296.55

(4) Corporate excess profits tax, plus interest for 1941 11,231.00

Total............... $18,717.33

The total of this deficiency assessment was paid by the plaintiff .to the defendant, Collector of Internal Revenue for the District of Kentucky, on March 25, 1944. On April 10, 1944, the plaintiff filed claims for refunds. The Commissioner of Internal Revenue failed to act upon said claims for more than six months, and on November 28, 1944, the plaintiff filed this action to recover the amounts so paid with interest.

The question presented is controlled by Section 23 of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code § 23. This section provides in computing net income there shall be allowed as deductions “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; * * The only question before the Court is whether or not the total compensation paid by the plaintiff to T. P. Taylor, Jr., and Horace Taylor in 1940 and 1941 was in each instance a reasonable allowance for personal services actually rendered.

The plaintiff has the burden of proving the reasonableness of the compensation so paid and that these amounts were paid as compensation for services actually rendered. Botany Mills v. United States, 278 U.S. 282, 49 S.Ct. 129, 73 L.Ed. 379. When it appears that the officers of the corporation receiving the compensation being questioned are also the owners and directors of the corporation, the evidence must be carefully scrutinized to determine whether the so-called compensation for services is not in reality a distribution of profits. L. Schepp Co. v. Commissioner, 25 B. T. A. 419. The form or method of fixing compensation is not decisive as to deductibility. While any form of contingent compensation invites scrutiny as a possible distribution of earnings of the enterprise, it does not follow that payments on a contingent basis are to be treated fundamentally on any basis different from that applying to compensation at a flat rate. Generally speaking, if contingent compensation is paid pursuant to a free bargain between the employer and the individual made before the services are rendered, not influenced by any consideration on the part of the employer other than that of securing on fair and advantageous terms the services of the individual, it should be allowed as a deduction even though in the actual working out of the contract it may prove to be greater than the amount which would ordinarily be paid. Section 19.23 (a)-6, Treasury Regulations 103.

The question involved in this case has heretofore been considered by this Court in J. D. VanHooser & Co. v. Glenn, Collector, 50 F.Supp. 279. It was pointed out in the opinion in that case that a bonus either in a lump sum or being a percentage of earnings, paid to a stockholder employee corporation at the end of the year, in addition to a fixed salary, does not prevent the total amount paid by the corporation from being reasonable compensation for services; that the size of the amount received, even though large, or a material increase in the amount received in any one year over preceding years does not in itself prevent the payment from being reasonable compensation; that the policy of agreeing to pay a percentage of the earnings before they are earned, or even a lump sum in the nature of a bonus after they are earned, is based primarily upon sound business principles, in that it stimulates the activity, diligence and ambition of the employees and enables the corporation to justly compensate its employees without beforehand incurring the obligation; and that there is no fixed standard or yardstick by which the question of reasonableness of the compensation in any particular case can be measured and that each case must stand upon the facts proved in that particular case. See also Wm. S. Gray & Co. v. United States, 35 F.2d 968, 68 Ct.Cl. 480; United States v. Reitmeyer, D.C., 11 F.2d 648; Wood & Ewer Co. v. Ham, D.C., 14 F.2d 995.

The growth and expansion of the plaintiff’s business and its very successful operation from its beginning in 1932 through 1941, shown by the figures hereinabove set out, demonstrates the capable and efficient management which it has had. Defendant’s contention that it is largely the result of war-time conditions is not borne out by a review of the statistical data presented. A steady growth and successful operation is shown for a number of years prior to any possible war-time influence. The program of expansion was planned and carried out almost in its entirety before the war influ-, enees had their effect on Louisville retail business. Only one of their ten stores was opened subsequent to 1939, and it was started before the United States entered the war. The growth and successful operation was accomplished in competition with some of the best operated units in the retail drug business. During the period under consideration the operations of some of its competitors in Louisville decreased or ceased while the plaintiff’s operations expanded. In addition to the conclusions necessarily drawn from the statistical data introduced in evidence, two well qualified witnesses also testified to the experience and ability of Horace Taylor and T. P. Taylor, Jr., as chain-store executives. In 1929 Horace Taylor declined a salary of $25,000 offered to induce his return to the retail drug business. The president of a large chain of successfully operated drug stores in the South, who was well acquainted with both Horace Taylor and T. P. Taylor, Jr., and the business of the plaintiff, testified that the top salary received by them in 1941 was below their normal earning power and that a salary from $25,000 to $30,000 per year would be a minimum for the services rendered. In opposition to this the evidence of the defendant was very meager and failed to meet the real issue involved. It consisted of but a single witness who was the field agent of the Internal Revenue Department who investigated the plaintiff’s return for the two years in question. Although this witness had a good educational background, some ten years of accounting experience with New York insurance companies and several years experience with the Internal Revenue Department, yet he had no experience in business management of any kind and no experience in the retail drug business. He disallowed the salary deductions in part largely because in his opinion the increased earnings resulted from the war economy which was not a proper basis for increased salaries. Nevertheless on cross examination he admitted that the compensation paid for the year 1940 was not unreasonable and that payments for 1941 not in excess of $15,000 a piece were also not unreasonable. No witness was offered by the Government who was experienced in business management or who had firsthand experience with the details and problems of the chain drug store business or what salaries capable and successful executives received. If the compensation received by Horace Taylor and T. P. Taylor, Jr., in the years 1940 and 1941 was unreasonable for the services rendered, certainly the Government could have produced some experienced witness from the retail drug business who would have said so. The lack of such evidence operates very strongly against the defendant’s contention.

The Court holds on the evidence before it that the compensation paid by the plaintiff company to Horace Taylor and T. P. Taylor, Jr., in the years 1940 and 1941 was in each case reasonable compensation for personal services actually rendered, and proper deductions in the plaintiff’s income tax returns for those years. See Toledo Grain & Milling Co. v. Commissioner, 6 Cir., 62 F.2d 171; Herff Motor Co. v. Mc-Cabe, D.C., 41 F.Supp. 1011, affirmed per curiam, 6 Cir., 122 F.2d 1022.