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178 L. Ed. 2d 296
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Petition for writ of certiorari to the United States Court of Appeals for the Eighth Circuit denied.
Same case below, 598 F.3d 1051.
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493 U.S. 850
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C. A. 3d Cir. Certiorari denied.
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429 U.S. 1100
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C. A. 5th Cir. Certiorari denied.
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500 U.S. 932
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Ct. App. Cal., 4th App. Dist. Certiorari denied.
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479 U.S. 859
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Sup. Jud. Ct. Mass. Certiorari denied.
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357 U.S. 906
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C. A. 2d Cir. Certiorari denied.
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302 U.S. 733
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Petition for writ of certiorari to the Supreme Court of Florida, and motion for leave to proceed further in forma pawperis, denied.
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510 U.S. 806
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Sup. Ct. Haw. Motion of Air Transport Association of America for leave to file a brief as amicus curiae granted. The Solicitor General is invited to file a brief in this case expressing the views of the United States.
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565 U.S. 1264
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C. A. 9th Cir. Certiorari denied.
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2 Cust. Ct. 588
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Opinion by
Kincheloe, J.
Following the authorities cited in Abstract 15400 the court dismissed the protests.
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566 U.S. 908
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C. A. 8th Cir. Cér-tiorari denied.
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10 Ct. Int'l Trade 131
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Memorandum Opinion and Order
DiCarlo, Judge:
Plaintiff challenges the United States Customs Service (Customs) classification of merchandise invoiced as "Clinging Snoopy/Woodstock" imported from the Republic of Korea. The Snoopy figures were classified under item 737.30, Tariff Schedules of the United States (TSUS), as "toy figures of animate objects: not having a spring mechanism: stuffed: valued over 10 cents per inch of height" at nine percent ad valorem and the Woodstock figures were classified under item 737.25, TSUS, as "toy figures of animate objects: not having a spring mechanism: stuffed: valued not over 10 cents per inch of height" at twenty-eight percent ad valorem.
Plaintiff argues the merchandise should be classified as an entirety, under item 737.30, TSUS.
Defendant moves and plaintiff cross-moves for summary judgment. In their statements of material issues of fact submitted pursuant to Rule 56(i) of the Rules of this Court the parties agree that the merchandise consists of two stuffed figures modeled after the Peanuts comic strip characters Snoopy and Woodstock; that in its imported condition, the Snoopy figure embraces the Woodstock figure by means of a velcro fastener on the ends of its front paws; that the merchandise was designed, packaged, sold, and purchased as a unit; and that plaintiff sells numerous different sizes and types of stuffed and other kinds of Snoopy and Woodstock figures as individual items, but does not individually sell Snoopy and Woodstock figures identical to those before the court.
The parties also agree that the two figures have an "individual identity and play value." They do not agree whether the two figures have an individual "commercial value." The parties have stipulated that the Court will make a finding of fact with respect to this issue.
Plaintiff argues that since the merchandise is designed, packaged, sold, and purchased as a unit, it is properly classified as an entirety.
But these facts are not determinative of the entirety inquiry. United States v. Altray, 54 CCPA 107, 110, C.A.D. 919 (1967); Lang Co. v. United States, 15 CCPA 341, 342, T.D. 42495 (1927); Mattel, Inc. v. United States, 8 CIT 323, Slip Op. 84-133 (December 11, 1984). In Mattel doll stands designed, imported, and sold with "Pretty Changes Barbie" dolls which could be used with other dolls were held not to be an entirety with the Barbie dolls. Applying the "somewhat discordant principles" of entireties law, the Court said that the stands and the dolls were not entireties because: "When merged, they do not form a new and distinct article of commerce having a different character or use. Further, because neither is essential to the completeness of the other, and since neither bears a natural affinity or relation to the other, they must be classified and assessed duty separately." Mattel, Slip Op. at 4-6.
Plaintiffs catalog contains an illustration of nine stuffed Snoopy figures and three stuffed Woodstock figures of various sizes sold individually by plaintiff. The Snoopy and Woodstock figures before the Court appear substantially similar to several of these Snoopy and Woodstock figures. The important physical distinction apparent to the Court between other figures sold by plaintiff and the merchandise before the Court is the velcro fastener on the end of Snoopy's paws. Both the figures before the Court can be used separately or with other toys, including other Snoopy and Woodstock figures sold by plaintiff. Examining a sample of the merchandise, plaintiffs catalog, other exhibits before the Court, and the parties' statements of material issues of fact submitted pursuant to Rule 56(i), the Court finds as a matter of fact, on the basis of this record, that the Snoopy and Woodstock figures have an individual commercial value.
In the opinion of the Court, the addition of the velcro fastener is insufficient to make either the Snoopy or the Woodstock figure essential to the completeness of the other or to give the figures a "natural affinity or relation" to each other, as those terms have been ap plied in entireties law. See United States v. John Wanamaker, Philadelphia, Inc., 20 CCPA 367, 369 (1933); Mattel, supra. As the Court of Customs and Patent Appeals said in United States v. Altray Co., 54 CCPA 107, 110, C.A.D. 919 (1967):
where the design of the combination in issue by its very nature contemplates its disassembly and the utilization of the constituents in the manner for which they are otherwise used and when articles very similar to those constituents are on sale as separate items, the combination is not, in the sense of the customs law, an entirety.
Cases cited by plaintiff are inapposite. Unlike the "two-piece shirt-short sets" or "cabana sets" at issue in Miniature Fashions, Inc. v. United States, 54 CCPA 11, C.A.D. 894 (1966), or the "cotton flannel shirts and corduroy longie sets" at issue in Nissho American Corp. v. United States, 64 Cust. Ct. 378, C.D. 4005 (1970), the Snoopy and Woodstock figures before the Court have an independent commercial value and the character and use of the figures are substantially the same whether the figures are used together, individually, or with other merchandise. Unlike the cotton pads impregnated with inhalant and their cylindrical holders at issue in Donalds Ltd., Inc. v. United States, 32 Cust. Ct. 310, 315, C.D. 1619 (1954), the individual identities of the figures before the Court are not subordinate to the identity of the unit.
It is axiomatic that the entireties doctrine is merely an aid to ascertain the intent of Congress. Miniature Fashions, Inc. v . United States, 54 CCPA 11, 16, C.A.D. 894 (1966). Congress has determined that less expensive stuffed figures are dutiable at a substantially higher rate than more expensive figures. The Court would frustrate the intent of Congress if it considered the figures before the Court an entirety, and dutiable at the lower rate.
The Court holds that the merchandise is not an entirety. Judgment for the defendant will be entered accordingly. So ordered.
Transcript of Telephone Conference, January 28,1986, at 2-6.
The Snoopy figure before the court is 11 inches tall, and the Woodstock figure is 7 inches tall. According to plaintiff's cat* alog, plaintiff also sells an 11 inch "Baby Plush Snoopy", an 18 inch "Medium Plush Snoopy", an 18 inch "Sleepy Snoopy", a 6 inch "Velveteen Woodstock", a 9 inch "Plush Swinging Woodstock", and a 9 inch "Plush Woodstock."
An entire line of "Snoopy's Wardrobe" clothing available for the "Baby Plush Snoopy", may be used with the Snoopy figure before the Court. There is also a line of accessories, including a wardrobe trunk, chairs, sleeping bags, and tent, which could be used with the figures.
Customs is presumed to have found every subsidiary fact necessary to suport its classification. United States v. New York Merchandise Co., Inc., 58 CCPA 53, 57-59, C.A.D. 1004, 435 F.2d 1315, 1317-1319 (1970), and plaintiff has the burden to show by a preponderance of the evidence that the facts found by Customs in making its classification are incorrect. See 19 U.S.C. § 2639(aXl) (1982); Jarvis Clark Co. v. United States, 733 F.2d 873, 876, reh. denied, 739 F.2d 628 (Fed. Cir. 1984). Customs must have found that the figures had an independent commercial value to classify them, and assess ad valorem duty, separately, and the Court finds that plaintiff has not overcome its burden to demonstrate the incorrectness of this finding.
Plaintiff argues that the Snoopy and Woodstock figures together have an "enhanced play value." But plaintiff does not allege that the figures are, or are intended to be, used predominately in their "clinging" position, or that the figures have any special significance in that position.
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111 U.S. 379
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Mr. Justice Matthews
delivered the opinion of the court.
This was an action at law originally brought in the Court of Common Pleas of Fulton County, Ohio, by John Swan, S- C. Rose, F. M. Hutchinson, and Robert McMann, as partners under the name of Swan, Rose- & Go., against the plaintiffs in error. The object of the suit was the recovery of damages for alleged breaches of a contract for the construction of the railroad of the defendants below. It was commenced June 10th, 1871.
Afterwards on October 28th, 1879, the cause being at issue, the defendants below filed a petition for its removal to the Circuit Court of the United States. They aver therein that one of the petitioners is a corporation created by the laws of Ohio alone, and the other, a corporation consolidated under the laws of Michigan and Ohio, the constituent corporations having been organized under the laws of those States respectively, and that they are, consequently, citizens, one of Ohio, and one of both Michigan and Ohio. It is also alleged, in the petition for removal, "that the plaintiffs, John Swan and Frank M. Hutchinson, at the time of the commencement of this suit, were, and still are, citizens of the State of Pennsylvania; that the said Robert H. McMann was then (according to your petitioners' recollection) a citizen of the State of Ohio, but that he is not now a citizen of that State, but where he now resides of whereof he is now a citizen (except that he is a citizen of one of the States or Territories comprising the United States), your petitioners are unable to state ; that he went into ban'll ruptcy in the bankruptcy court held at Cleveland, in the State of Ohio, several years since, and since" the alleged claim of the plaintiffs arose, but your petitioners cannot now state whether he has now an assignee in bankruptcy or not, but they are informed and believe that he has not; that the said Stephen C. Rose, at the time of the commencement of this suit, was' a citizen of the State of Michigan; that he died therein during the pendency of this suit, and the said Lester E. Rose is the administrator of the estate of the said Stephen O. Rose in the State of Michigan, he holding such office under and by virtue of the laws of that State only, the said Lester E. Rose being a citizen of the State of Michigan when so appointed and now, but that he is not a necessary party as plaintiff in this suit, for the reason, that the suit being prosecuted by the plaintiffs as partners under the firm name and style of Swan, Rose & Co., and for the collection of an alleged debt or claim due to them as such partners, and which arose wholly out of their dealings as partners, if it exists at all, upon the death of the said Stephen C. Rose the cause of action survived to the other partners."
The petition, being accompanied with a satisfactory bond, was allowed, and an order made for the removal of the cause.
The plaintiffs below afterwards, on December 13th, 1879, moved to remand the cause on the ground, among others, that the Circuit Court had no jurisdiction, because the " real and substantial controversy in the cause is between real and substantial parties who are citizens of the same State and not of different States." But the motion was denied.
Subsequently a trial took place upon the merits, which resulted in a verdict and judgment in favor of the plaintiffs, the defendants in error, for $238,116.18 against the defendants jointly, and the further sum of $116,468.32 against one of them.
Many exceptions to the rulings of the court during the trial were taken and are embodied in a bill of. exceptions, on which errors have been assigned, and the writ of error is prosecuted by the defendants below to reverse this judgment.
An examination of the record, however, discloses that the Circuit Court had no jurisdiction to try the action; and as, for this reason, we are constrained to reverse the judgment, we have not deemed it within our province to consider any other questions involved in it.
It appears from the petition, for removal, and not otherwise by the record elsewhere, that, at the time the action was first brought in the State court, one of the plaintiffs, and a necessary party, McMann, was a citizen of Ohio, the same State of which the defendants were citizens. It does not affirmatively appear that at the time of the removal he was a citizen of any other State. The averment is, that he was not then a citizen of Ohio, and that his actual citizenship was unknown, except that he was a citizen of one of the States or Territories. It is consistent with this statement, that he was not a citizen of any State, lie may have been a citizen of a Territory, and, if so, the requisite citizenship would not exist. New Orleans v. Winter, 1 Wheat. 91. According to the decision in Gibson v. Bruce, 108 U. S. 561, the difference of citizenship on which the right of removal depends must have existed at the time when the suit was begun, as well as at the time of the removal. And according to the uniform decisions of this- court, the jurisdiction of the .Circuit Court fails, unless the necessary citizenship affirmatively appears in the pleadings or elsewhere in the record. Grace v. American Central Insurance Company, 109 U. S. 278, 283; Robertson v. Cease, 97 U. S. 646. It was error, therefore, in the Circuit Court to assume'jurisdiction in the case, and not to remand it, on. the motion of the plaintiffs below.'
It is true that the plaintiffs below, against whose objection the error was committed, do-not complain of being prejudiced by it; and it seems to be an anomaly and a hardsliip that the party at whose instance it was committed should be permitted to derive an advantage from it; but the rule, springing from the nature and limits of the judicial power of the United States, is inflexible and without exception, which requires this court, of its own motion, to deny its own jurisdiction, and, in the exercise of its appellate power, that of all other courts of the United States, in all cases where such jurisdiction does not affirmatively appear iri the record on which, in the exercise of that power, it is called to act. On every writ of error or appeal, the first and fundamental question is that of jurisdiction, first, of this court, and then of the court from which the record comes. This question the court is bound to ask and answer for itself,, even when not- otherwise suggested, and without respect to the relation of the parties to.it. This rule was adopted in Capron v. Van Noorden, 2 Cranch, 126, decided in 1804, where a judgment ivas reversed, on the application of the party against whom it had been rendered in the Circuit Court, for want of the allegation of his own citizenship, which he ought to have 'made to establish ,the jurisdiction which he had invoked. This case was cited with approval by Chief Justice Marshall in Brown v. Keene, 8 Pet. 112.
In Jackson v. Ashton, 8 Pet. 148, the court itself raised and insisted on the point of jurisdiction in the Circuit Court; and in that case, it was expressly ruled, that because it did not appear that the Circuit Court had jurisdiction, this court, on appeal, had no jurisdiction except for the purpose of reversing the decree appealed from, on that ground. And in the most recent utterance of this court upon the point in Börs v. Preston, ante, 252, it was said by Mr. Justice Harlan: " In cases of which the Circuit Courts may take cognizance only by reason of the citizenship of the parties, this court, as its decisions indicate, has, except under special circumstances, • declined to express any opinion upon the merits, on appeal or writ of error, where the record does not affirmatively show jurisdiction in the court below; this, because the courts of the Union, being courts of limited jurisdiction, the presumption in every stage of the cause is, that it is without their jurisdiction, unless the contrary appears from the record." The reason of the rule, and the necessity of its application, are stronger and more obvious, when, as in the present case; the failure of the jurisdiction of the Circuit Court arises, not merely because the record omits the averments necessary to its existence, but because it recites facts which contradict it.
In the Dred Scott Case, 19 How. 393-400, it was decided that a judgment of the Circuit Court, upon the sufficiency of a plea in abatement denying its jurisdiction, was open for review upon a writ of error sued out by the party in whose favor the plea had been overruled. And in this view Mr. Justice Curtis, in his dissenting opinion, concurred; and we adopt from that opinion the following statement of the law on the point: " It is true," he said, 19 How. 5C6, " as a general rule, that the court will not allow a party to rely on anything as cause for reversing a judgment, which was for his advantage. In this, we follow an ancient rule of. the common law. But so careful was that law of the preservation of the course of its courts, that it made an exception out of that general rule, and allowed a party to assign for error that which was for his advantage, if it were a departure by the court itself from its settled course of procedure. The cases on this subject are collected in Bac. Ab. Error H, 4. And this court followed this practice in Capron v. Van Noorden, 2 Cranch, 126, where the plaintiff below procured the reversal of a judgment for the defendant on the ground that the plaintiff's allegations of •citizenship had not shown -jurisdiction. But it is not necessary to determine whether the defendant can be allowed to assign want of jurisdiction as an error in a judgment in his own favor. The true question is, not what either of the parties may be • allowed to do, but whether this court will affirm or. reverse a judgment of the Circuit Court on the merits, when it appears on the record, by a plea to the jurisdiction, that it is a case to which the judicial-power of the United States does not extend. . The course of the court is, where no motion is made by either party, on its own motion, to reverse such a. judgment for want of jurisdiction, not only in cases where it is shown negatively, by a plea to.the jurisdiction, that jurisdiction does , not exist, but even when it does not appear affirmatively that it does exist. Pequignot v. The Pennsylvania, Railroad Company, 16 How. 104. It acts upon the principle that the-judicial power of the United States must not be exerted-in a case to which it does not extend, even if both parties desire to have it exerted. Cutler v. Rae, 1 How. 129. I consider, therefore, that when there was a plea-to the jurisdiction of the Circuit Court in a case brought here by a writ of error, the first duty of this court is, sua sponte, if not moved to it by either party, to examine the sufficiency of that plea, and thus ' to take care that' neither the Circuit Court nor this court shall use the judicial power of the United States in a case to which the Constitution and laws of' the United States have not •extended that power."
This is precisely applicable to the present case, for the •motion of the plaintiffs below to remand the cause ivas equivalent to a special plea to the jurisdiction of the court; but the doctrine applies, equally.in every case where the jurisdiction does not appear from the record.-
It Avas so -applied in the case of United States v. Huckabee, 16 Wall. 414. There the United States ha'd commenced proceedings in- the Circuit Court, under the confiscation acts, to condemn certain real estate, Avhich had been sold by its owners, the defendants in error, to the Confederate goArernment. The United States had, in fact, captured the property during the flagrancy of Avar, it being an iron-foundry and Avorks used for the manufacture, of munitions of Avar, and had aftenvards sold it to Lyon. Iluckabee intervened as a claimant, and ansAvered the libel, setting up. a claim of title in himself and associates. Lyon also filed an ansAver, setting up his title, and Avas made a co-plaintiff Avith the United States. A decree Avas made dismissing the libel, and confirming the title of Iluckabee. The United States and Lyon prosecuted a Avrit of error to reverse this judgment. This court decided that the Circuit Court Ava§ Avithout jurisdiction of the -subject matter, as it -Avas not a case contemplated by the confiscation acts, and that it could not be treated as a private suit in equity- hetAveen the claimants for the determination of their conflicting titles, because the remedy» at laAV Avas .adequate, and' also because they Ávere citizens of the same State! It •decided, therefore, that the Circuit Court had no jurisdiction to render any decree in the case upon the merits of the controArersy. In stating the conclusion of the court, Mr. Justice Clifford, Avho delivered its opinion, said, p. 435: " Usually Avliere a court has no jurisdiction of a case, the correct practice is to dismiss the suit, but a different rule necessarily preArails in an appellate court in cases Avhere the. subordinate court Avas AAdthout jurisdiction and has'- given judgment or decree for the plaintiff, or improperly decreed affirmative relief to a claimant. In such a case, the judgment or decree in the court beloAv must be reversed, else the party which prevailed there Avould have the benefit of such judgment or decree, though rendered by a court Avhich had no authority to hear and determine the matter in controyersy."
There, it avíII be observed, the plaintiffs in error Avere seeking to reverse on the merits an adverse decree, Aresting, title in the opposing party, in a- proeeeding instituted by themselves. The court reversed that decree to their advantage, for Avant' of the jurisdiction in the court beloAv Avhich they had invoked and set in motion.
An analogous principle Avas acted on in Barney v. Baltimore, 6 Wall. 280, Avhere a decree of the Circuit Court, dismissing a bill on the merits, was. reversed because that court had no jurisdiction, and a decree of dismissal Avithout prejudice directed; and in Thompson v. Railroad Companies, 6 Wall. 134, where the question, was one purely of procedure, whether the remedy was at law or in equity, although, in that class of cases, where the jurisdiction relates to the subject matter and is administered by the same court, but in another form of proceeding, it would seem more reasonable that the objection might be waived by the conduct of the parties. See, also, Hurt v. Hollingsworth, 100 U. S. 100. And in Williams v. Nottawa, 104 U. S. 209, it was held to be the duty of the Circuit Court to execute the provisions of the 5th section of the act of March 3d, 1815, c. 131, 18 Stat. pt. 3, p. 410, by dismissing a suit of its own motion, whenever it appeared that it did not really and substantially involve a dispute or controversy properly within its jurisdiction, and equally so of this court, when, on error or appeal, it appeared that the Circuit Court had failed to do so, in a proper case, to reverse its judgment or decree for that reason, and to remand the cause with direction .to dismiss the suit.
In Grace v. American Central Insurance Company, 109 U. S. 218, it is true that this court passed upon all the questions in the case affecting its merits, although it reversed the judgment because the jurisdiction of the Circuit Court was not apparent ; but it was thought convenient and proper to do so, in that case, because the record itself made it probable that its omission >of the statements' necessary to show jurisdiction was inadvertent, and might be supplied for a future trial in.the same court. In the.present case, however, the want of jurisdiction appears affirmatively from the record.
For these reasons the judgment of the Circuit Court must be reversed, and the cause remanded with directions to remand the same to the Court of Common Pleas of Fulton County, Ohio.
It remains, however, to dispose of the question of costs.
It is clear that the plaintiffs in error, having wrongfully caused the removal of the cause from the State court, ought to pay the costs incurred in the Circuit Court, and there is no want of power in the court to award a judgment against them to that effect. By sec. 5 of the act of March 3d, 1875, the Circuit Court is directed, in remanding a cause, to "make such order as to costs as shall be just; " and the bond given by the removing party under sec. 3 is a bond to pay " all costs that may be awarded by the said Circuit Court, .if said court shall hold that such suit was wrongfully or improperly removed thereto." These provisions were manifestly designed to avoid the application of the general rule, which, in cases where the suit failed for want of jurisdiction, , denied the authority of the court to award judgment against the losing party, even for costs. McIver v. Wattles, 9 Wheat. 650; The Mayor v. Cooper, 6 Wall. 247.
As to costs in this court, the question is not covered by any statutory provision, and must be settled on other grounds. Ordinarily, by the long established practice and universally recognized rule of the common law, in actions at law, the prevailing party is entitled to recover a judgment for costs, the exception being that where there is no jurisdiction in the court to determine the litigation, the cause must be dismissed for that reason, and, as the court can render no judgment for or against either'party, it cannot render a judgment even for costs. Nevertheless there is a judgment or final order in the cause dismissing it for want of jurisdiction. Accordingly, in Winchester v. Jackson, 3 Cranch, 514, costs were allowed where a writ of error was dismissed for want of jurisdiction, the parties not appearing upon the record to be citizens of different States, the plaintiff in error being plaintiff below. But in respect to that case, it is to be observed, that the want of jurisdiction disclosed by the record was that of the Circuit Court, and that there was jurisdiction in this court to consider and determine the question of the jurisdiction of the Circuit Court, and to reverse its judgment, had it been the other way, for want of jurisdiction. And the judgment for costs in that case is justified on that ground, and seems to have been rendered against the plaintiff in error, because he was the losing party in the sense of having ineffectually invokeá the jurisdiction of the Circuit Court. And this is just what has taken place in the present suit. Here the plaintiffs in error wrongfully removed the cause to the Circuit Court. <They seek by a writ of error to this court to reverse upon the merits the judgment rendered against them, and bring here the whole record. That discloses the want of jurisdiction in the Circuit Court to render any judgment, and this court, in the exercise of its jurisdiction, reverses the judgment for that reason alone, its jurisdiction extending no further. It could not dismiss the writ of error for Avant of jurisdiction in the Circuit Court, for that Avould be to give effect to such Avant of jurisdiction; and this court has jurisdiction of the Avrit of error to reverse the judgment on that ground. Assessor v. Osbornes, 9 Wall. 567-575.
In Montalet v. Murray, 4 Cranch, 46, the judgment Avas reversed, because it did not appear from the record that the Circuit Court had jurisdiction, and Avith costs, folloAving Winchester v. Jackson, ubi supra, and thereupon, it is stated in the report, that, " on the last day of the term, the court gave the following general directions to the clerk: that in cases of reversal, costs do not go of course, but in all cases of affirmance they do; and that Avhen a judgment is reversed for Avant of jurisdiction, it must be Avithout costs." No formal rule of the court covers the case of a reversal on that ground, although paragraph 3 of Rule 24, Avhich provides, that in " cases of reversal of any judgment or decree in this court, costs shall be alloAved to the plaintiff in error or appellant, unless othenvise ordered by the court," leaves room for the exercise of discretion in its application to such cases. The Avhole subject Avas very much discussed by Mr. Justice Woodbury in the case of Burnham v. Rangeley, 2 Woodb. & Min. 417-424, Avhere he collects a large number of authorities on the subject. In the present case, the Avrit of error is not dismissed for Avant of jurisdiction in this court; on the contrary, the jurisdiction of the court is exercised in reversing the judgment for want of jurisdiction in the Circuit Court; and although, in a formal and nominal sense the plaintiffs in error prevail in obtaining a reversal of a judgment against them, the cause of that reversal is their oavu fault in invoking a jurisdiction to Avhich they had no right to resort, and its effect is, to defeat the entire proceeding Avhich they originated and have prosecuted. In a true and proper sense, the plaintiffs in error are the losing and not the prevailing party, and this court having jurisdiction upon their writ of error so to determine, and in that determination being compelled to reverse the' judgment, of which on other grounds they complain, although denying their right to be heard for that purpose, has jurisdiction, also, in order to give effect to its judgment upon the whole case against them, to do what justice and right, seem to require, by awarding judgment against them for the costs that have accrued in this court.
The, judgment of the Circuit Court is accordingly reversed, with Costs against the plaintiffs in error, and the, cause is remanded to the Circuit Court, with directions to render a judgment against them for costs in that court, and to remand the cause to the Court of Common Pleas of Fulton County, Ohio; and
It is so ordered.
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181 L. Ed. 2d 57
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Petition for writ of certiorari to the Appellate Division, Supreme Court of New York, Second Judicial Department, denied.
Same case below, 73 App. Div. 3d 1108, 900 N.Y.S.2d 887.
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435 U.S. 918
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Ct. App. D. C. Certiorari denied.
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396 U.S. App. D.C. 133
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Opinion for the Court filed by Circuit Judge GINSBURG.
GINSBURG, Circuit Judge:
The Commissioner of Internal Revenue appeals a decision of the Tax Court holding taxpayer Dorothy Jean Simmons was entitled to claim deductions in 2003 and 2004 for donating to the L'Enfant Trust, Inc. conservation easements on the fagades of two buildings located in an historic district. The Commissioner argues Simmons may not take these deductions because her contribution was not "exclusively for conservation purposes," as required by 26 U.S.C. § 170(h)(1)(C), and because she failed to obtain "qualified appraisals" meeting the standards of Treasury Regulation § 1.170A-13(c)(3)(ii). We hold the Tax Court did not clearly err in concluding the factual circumstances supporting Simmons's deductions met the applicable statutory and regulatory requirements.
I. Background
During the years at issue, Simmons owned two properties in the Logan Circle neighborhood of Washington, D.C. — one on the Circle and one nearby on Vermont Avenue. The two properties were and are subject to the District of Columbia's Historic Landmark and Historic District Protection Act of 1978, D.C.Code § 6-1101 et seq. The D.C. Historic Preservation Office may fine any person who violates the District's preservation laws and can compel that person to restore a structure that he impermissibly altered. Id. § 6-1110.
A. The Conservation Easement Deeds
The L'Enfant Trust, Inc. is a tax-exempt organization under 26 U.S.C. § 501(c)(3), dedicated to the preservation of historic properties. In 2003 Simmons executed a "Conservation Easement Deed of Gift" granting to L'Enfant "an easement in gross, in perpetuity, in, on, and to the Property, the Building and the Fagade" on Logan Circle. In 2004 she granted to L'Enfant another, essentially identical easement on the Vermont Avenue property.
Each deed prohibits Simmons from materially altering the fagade of the property without the written consent of L'Enfant, and requires her to maintain the properties in good repair, periodically clean the fagades, and ensure any change to a fagade will comply with "applicable federal, state and local governmental laws and regulations." The deeds give L'Enfant the right to inspect the fagades and to seek equitable remedies for any violation of the easements. By their terms, the easements are binding upon Simmons and her "successors, heirs and assigns," run "in perpetuity with the land," and "survive any termination of Grantor's or the Grantee's existence."
The deeds allow L'Enfant "to give its consent (e.g., to changes in a Fagade) or to abandon some or all of its rights" thereunder. The deeds also acknowledge the properties were already encumbered by deeds of trust securing loans to a mortgage company, but recite that the lenders have agreed to subordinate their rights in the property to the rights of L'Enfant "and join in the execution" of the easement deed for this limited purpose. Attached to each deed are "Lender Acknowledgements" signed by a representative of the lenders.
B. Simmons's Claim of Charitable Deductions
Simmons filed tax returns for 2003 and 2004 claiming charitable deductions of, respectively, $162,500 and $93,000 for having donated the conservation easements to L'Enfant. A taxpayer generally may not take a charitable deduction for the gift of a partial interest in property. 26 U.S.C. § 170(f)(3)(A). There is an exception, however, for a "qualified conservation contribution," id. § 170(f)(3)(B)(iii), defined as the contribution "(A) of a qualified real property interest, (B) to a qualified organization, (C) exclusively for conservation purposes," id. § 170(h)(1). The parties agree the easements are "qualified real property interest[s]" and L'Enfant is a "qualified organization." See id. § 170(h)(2)(C), (3).
As required by the applicable Treasury regulations, see Treas. Reg. § 1.170A-13(c)(2) — (3), Simmons obtained appraisals performed by a licensed and certified appraiser, estimating the fair market value of each easement, which appraisals she submitted with her tax returns. The appraiser, James Donnelly, determined that prior to the easement the fair market value of the Logan Circle property was $1,250,000 and that of the Vermont Avenue property was $845,000. Donnelly estimated dona tion of the easement would diminish the value of the former by $162,500 (13 percent), and that of the latter by $93,000 (11 percent).
Before the Tax Court, the Commissioner argued Simmons could not claim a charitable deduction because (1) the easements were not granted "exclusively for conservation purposes," (2) Simmons had failed to submit "qualified appraisals" proving the fair market value of the easements, and (3) as shown by an appraisal done by an employee of the Internal Revenue Service, the easements were of no value. The Tax Court disagreed in all respects but held the easements were worth only $56,250 and $42,250 respectively. Simmons v. Comm'r, 98 T.C.M. (CCH) 211, 212 (2009).
II. Analysis
On appeal the Commissioner argues the Tax Court erred in holding (1) the easements donated by Simmons were "exclusively for conservation purposes," § 170(h)(1)(C), and (2) Simmons had obtained "qualified appraisals" as required by Treasury Regulation § 1.170A-13(c)(3)(h). Because his arguments raise mixed questions of fact and law, our review is only for clear error. See Jombo v. Comm'r, 398 F.3d 661, 663 (D.C.Cir.2005).
A. Exclusively for Conservation Purposes
To reiterate, a taxpayer may take a deduction for a "conservation contribution" only if it constitutes a qualified interest in real property given exclusively for a "conservation purpose[ ]." For a contribution to be deemed exclusively for a conservation purpose, that purpose must be "protected in perpetuity." 26 U.S.C. § 170(h)(5)(A). A regulation promulgated by the Department of the Treasury states further that "any interest in the property retained by the donor . must be subject to legally enforceable restrictions . that will prevent uses of the retained interest inconsistent with the conservation purposes of the donation." Treas. Reg. § 1.170A-14(g)(l).
The Commissioner argues Simmons is not entitled to deductions for charitable contributions because the easements she granted L'Enfant satisfy neither the statute nor the regulation quoted above. More specifically, the Commissioner points to the clause in the deeds stating "nothing herein contained shall be construed to limit the Grantee's right to give its consent (e.g., to changes in a Fagade) or to abandon some or all of its rights hereunder." This clause, he maintains, is inconsistent with conservation in perpetuity because it leaves L'Enfant free to consent to an ahistorical change in the fagade and to abandon altogether its right to enforce the restrictions set out in the deeds. The Commissioner also asserts the deeds will not prevent uses of the properties "inconsistent with" their conservation because neither easement includes a clause providing for the perpetuation of the easements in the event L'Enfant ceases to exist or simply abandons its right to enforce the easements.
Simmons objects that each deed states explicitly the parties' intent to preserve the subject property and that, in any event, both she and L'Enfant are limited in what they can change by the District's historic preservation laws. She also points out that L'Enfant's interest in preserving its tax-exempt status will prevent it from approving changes inconsistent with the conservation purposes of — let alone aban doning — the easements. Finally, Simmons maintains if L'Enfant is dissolved, then the easements will be transferred to another organization that engages in similar activities, citing the testimony of the State Historic Preservation Officer.
We conclude the easements meet the requirement of perpetuity in § 170(h)(5)(A). The deeds impose an affirmative obligation upon Simmons "in perpetuity" to maintain the properties in a manner consistent with their historic character and grant L'Enfant the authority to inspect the properties and to enforce the easements. By their terms, the deeds will "survive any termination of Grantor's or the Grantee's existence." Although the deeds do not spell out precisely what would happen upon the dissolution of L'Enfant, D.C. law provides the easements would be transferred to another organization that engages in "activities substantially similar to those of' L'Enfant. D.C.Code § 29-801.48, 29-301.56. More specifically, the State Historic Preservation Officer testified the easement initially reverts to the District of Columbia, which then seeks to assign it to a conservation organization. Accordingly, the deeds do all the Commissioner can reasonably demand to "prevent" uses of the properties inconsistent with conservation purposes, as required by Treasury Regulation § 1.170A-14(g)(l).
The clauses permitting consent and abandonment, upon which the Commissioner so heavily relies, have no discrete effect upon the perpetuity of the easements: Any donee might fail to enforce a conservation easement, with or without a clause stating it may consent to a change or abandon its rights, and a tax-exempt organization would do so at its peril. As the amici curiae — the National Trust for Historic Preservation, L'Enfant, and the Foundation for the Preservation of Historic Georgetown — further explain, this type of clause is needed to allow a charitable organization that holds a conservation easement to accommodate such change as may become necessary "to make a building livable or usable for future generations" while still ensuring the change is consistent with the conservation purpose of the easement.
Moreover, the Commissioner has not shown the possibility L'Enfant will actually abandon its rights is more than negligible. L'Enfant has been holding and monitoring easements in the District of Columbia since 1978, yet the Commissioner points to not a single instance of its having abandoned its right to enforce. Simmons's deeds in particular make express L'Enfant's intention to ensure her properties "remain essentially unchanged." Treasury Regulation § 1.170A-14(c)(l) also provides "an eligible donee" — as L'Enfant undisputedly is — must have a "commitment to protect the conservation purposes of the donation" and "the resources to enforce the restrictions." Simmons's entitlement to a deduction for a "qualified conservation contribution" under 26 U.S.C. § 170(f)(3)(B)(iii), therefore, is supported by the limitation in Treasury Regulation § 1.170A-14(g)(3):
A deduction shall not be disallowed under section 170(f)(3)(B)(iii) and this section merely because the interest which passes to, or is vested in, the donee organization may be defeated by the performance of some act or the happening of some event, if on the date of the gift it appears that the possibility that such act or event will occur is so remote as to be negligible.
Simmons's deductions cannot be disallowed based upon the remote possibility L'Enfant will abandon the easements. See Stotler v. Comm'r, 53 T.C.M. (CCH) 973, 980-81 (1987) (concluding easement was granted in perpetuity even though grantee could abandon it because possibility future events would undermine perpetuity was "so remote as to be negligible").
We also note any change in the fagade to which L'Enfant might consent would have to comply with all applicable laws and regulations, including the District's historic preservation laws. In short, because the donated easements will prevent in perpetuity any changes to the properties inconsistent with conservation purposes, we hold Simmons has made a contribution "exclusively for conservation purposes," in accordance with 26 U.S.C. § 170(h)(1)(C).
B. Qualified Appraisals
Section 155(a) of the Deficit Reduction Act of 1984, Pub.L. No. 98-369, 98 Stat. 494, 691, directs the Secretary of the Treasury to prescribe regulations requiring an individual claiming a charitable deduction pursuant to § 170 for property valued at more than $5,000 to obtain "a qualified appraisal for the property contributed." The regulations contain "substantiation requirements," viz., that the appraisal include, as relevant here:
(J) The method of valuation used to determine the fair market value, such as the income approach, the market-data approach, and the replacement-cost-less-depreciation approach; and
(K) The specific basis for the valuation, such as specific comparable sales transactions or statistical sampling....
Treas. Reg. § 1.170A-13(c)(2)-(3).
The Commissioner argues the Tax Court erred in holding Simmons's appraisals were "qualified." First, he contends Donnelly failed to explain the "method of valuation" he used and to include a substantive basis for the valuation, as required by paragraphs (J) and (K), set out above. In doing the appraisals, Donnelly had relied upon an article prepared by Mark Primoli, an IRS employee, which stated, "Internal Revenue Service Engineers have concluded that the proper valuation of a fagade easement should range from approximately 10% to 15% of the value of the property." Internal Revenue Service, Fagade Easement Contributions (2000). The Commissioner suggests Donnelly arbitrarily picked a percentage between 10 and 15 rather than stating any identifiable method to determine the "after-easement" value.
Simmons argues that because there was no market price for conservation easements, Donnelly properly used the "before and after approach," Hilborn v. Comm'r, 85 T.C. 677, 688-89 (1985): He calculated the "difference between the fair market value of the property" prior to donation and "the fair market value of the encumbered property after the granting of the restriction," as permitted by § 1.170A-14(h)(3). To estimate the fair market value of each property once subject to the easement, Donnelly examined sales of similarly encumbered properties and took into account factors a buyer would consider in valuing such a property. The Commissioner, however, complains Donnelly did not identify the properties examined or the parties with whom he spoke and therefore did not provide adequate detail; instead, he said he had considered "subjective and conjectural factors" that would lower the value of the properties after being encumbered by easements.
We hold the Tax Court did not clearly err in concluding the appraisals sufficiently identified the method and basis for the valuations. To determine the fair market value of the property before being encumbered, Donnelly consulted sales of similar properties and identified some of these sales in the appraisals. In ascertaining the fair market value after encumbrance, Donnelly explained he spoke with and considered "the mindset of competent buyers and sellers" and took account of the "considerations they have actually had, or are likely to have, in the buying or selling of a property encumbered by a fagade easement." For example, each appraisal noted the property would lose some value because the easement imposed more onerous requirements than does D.C. law. It also listed several factors that would lower the value of the encumbered property, such as potential legal exposure if the donor were to breach the easement and L'Enfant's right of prior approval for any change to the fagade.
After examining sales of easement-encumbered properties and speaking with interested parties, Donnelly concluded the donation of each easement would diminish the value of the property by from 10 to 15 percent, as contemplated by Primoli's article. Specifically, he determined the Logan Circle and the Vermont Avenue properties would lose, respectively, 13 and 11 percent of their value. Although the appraisals might have elaborated further upon the specific bases for reaching each valuation, and thus avoided litigation of this issue, it was not clear error for the Tax Court to conclude Simmons satisfied the substantiation requirements concerning valuation.
In a footnote, the Commissioner "suggests" the appraisals "failed to satisfy other requirements of [Treasury Regulation] § 1.170A-13(c)(3)(ii)" but acknowledges the "omissions might seem venal [sic] sins." It is not our practice, however, to indulge "cursory arguments made only in a footnote." Spirit of the Sage Council v. Norton, 411 F.3d 225, 229 n. * (D.C.Cir. 2005) (internal quotation marks omitted). Accordingly, we hold the Tax Court did not err in holding Simmons provided the Commissioner with "qualified appraisals."
III. Conclusion
For the foregoing reasons, the judgment of the Tax Court that Simmons was entitled to claim the deductions at issue is
Affirmed.
The issue whether the Tax Court improperly valued the easements is not before us because, as the Commissioner clarified during oral argument, he did not raise this point as an independent basis for objecting to the judgment of the Tax Court.
The Commissioner makes the rather niggling argument that, because of certain administrative shortcomings, compliance with the District's preservation scheme would not perpetuate the conservation purposes of the deeds. Appearing as it does for the first time in the reply brief, the argument is forfeit and we do not address it. See Sitka Sound Seafoods, Inc. v. NLRB, 206 F.3d 1175, 1181 (D.C.Cir.2000).
The Commissioner also contends the requirements of § 1.170A-13(c)(3) are mandatory rather than directory and therefore cannot be satisfied by merely substantial compliance. Cf. Bond v. Comm'r, 100 T.C. 32, 41 (1993) (if Treasury regulations "are procedural or directory in that they are not of the essence of the thing to be done ., they may be fulfilled by substantial, if not strict compliance") (quoting Taylor v. Comm'r, 67 T.C. 1071, 1077-78 (1977)). For her part, Simmons argues the requirements in § 1.170A-13(c)(3) are directory because they do not go to "the essence" of whether a charitable contribution has been made under § 170. See Bond, 100 T.C. at 40-41 (reporting requirements of § 1.170A-13(c)(2)(i)(A) and (3) are "directory and not mandatory"). We need not, however, resolve the issue whether a taxpayer can fulfill the requirements of § 1.170A-13(c)(3) through substantial compliance because we conclude above that the Tax Court did not clearly err in finding Simmons fully "complied with the substantiation requirements" by including "all of the required information." 98 T.C.M. (CCH) at 216.
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565 U.S. 1252
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C. A. 11th Cir. Certiorari denied.
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44 B.T.A. 978
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OPINION.
Mellott :
Respondent has determined that petitioner is taxable as an insurance company other than life or mutual under section 204 of the Revenue Acts of 1934 and 1936. Petitioner contends that it is a life insurance company within the meaning of section 201 (a) of these acts and entitled to be taxed as such. The section relied upon by petitioner, which is the same under each act, is shown in the margin.
Petitioner contends that the only reserve it maintained during the taxable years was for the fulfillment of its life contracts; that it had no reserve for its health and accident coverage and none was required by the laws of the state of its incorporation; and that any designation of its unearned premium account as a "reserve" by the Missouri Superintendent of Insurance is immaterial. Respondent argues that petitioner's unearned premium account is a reserve within the meaning of the phrase "total reserve", used in .section 201 (a), supra. Petitioner concedes that if this is true then it is taxable as an insurance company other than life or mutual.
Petitioner places its chief reliance upon Maryland Casualty Co. v. United States, 251 U. S. 342, quoting from the Court's opinion the following:
The term "reserve" or "reserves" has a special meaning in the law of insurance. While its scope varies under different laws, in general it means a sum of money, variously computed or estimated, which, with accretions from interest, is set aside, "reserved", as a fund with which to mature or liquidate, either by payment or reinsurance with other companies, future unacerued and contingent claims, and claims accrued, but contingent and indefinite as to amount or time of payment.
*
Reserves, as we have seen, are funds set apart as a liability in the accounts of a company to provide for the payment or reinsurance of specific, contingent liabilities. They are held not only as security for the payment of claims, but also as funds from which payments are made.
Petitioner contends that in the light of the above definition three essentials of a reserve are lacking in its unearned premium account— first, it is not calculated upon any table of experience or eontin- gencies; second, it is not calculated -with reference to accretions from interest; and, third, it can not be used to pay the claim when the contingency forming the basis of the insurance occurs.
The quoted portion of the opinion might indicate that the Court would have held, if such an issue had been before it, that a reserve for unearned premiums was not an insurance reserve. That no such holding would have been made, however, is indicated by the following language: "Unearned premium reserve and special reserve for unpaid liability losses are familiar types of insurance reserves * ⅝
Under date of October 4, 1935, petitioner entered into an agreement with the Superintendent of Insurance of the State of Missouri wherein it agreed to maintain "unearned premium reserves" in the amounts specified in the agreement. The reserve here involved was set aside pursuant to the terms of this agreement. The evidence does not convince us that it differs in any material respect from the unearned premium reserve usually maintained by insurance companies in connection with health, accident, fire, and other kinds of insurance, except life insurance. Its "chief purpose is to enable the company to rid itself of liability for future possible claims when continued excessive losses threaten to use up its surplus and impair its capital to such an extent as may endanger the security of the policyholders, either by paying back the unearned premiums and canceling the policies, or by paying them over to a new insurer to assume and carry out the policy risks." State ex rel Missouri Life Insurance Co. v. Gehner, 320 Mo. 691; 8 S. W. (2d) 1068; Trenton v. Insurance Co., 77 N. J. Law 757; 73 Atl. 606. State laws usually require that the unearned premium reserve fund consist of the unearned portion of the gross premiums on unexpired and unterminated risks and policies. McKinney's Consolidated Laws of New York, Annotated, Book 27, sec. 73, p. 104; Page's Ohio General Code, Annotated, vol. 6, sec. 9362; Michigan Statutes, Annotated, vol. 17, sec. 24.218; Annotated Laws of Massachusetts, ch. 175, sec. 10. Because of the difficulties incident to examining a large number of policies to determine the unearned portion of the premiums, however, some state statutes provide that the reserve be calculated by taking a certain portion of the gross premiums collected. Purdon's Pennsylvania Statutes, Annotated, title 40, sec. 91; Heubner-Property Insurance. That, apparently, was what the Superintendent of Insurance of the State of Missouri was doing when he prevailed upon petitioner to set aside the portion of the gross premiums referred to in the stipulation shown in our findings.
In considering the definition of a reserve in Maryland Casualty Co. v. United States, supra, it should he kept in mind that the Court recognized that the scope of the word varied and it prefaced its definition with the words "in general it means." The unearned premium reserve of an insurance company other than life or mutual differs from a life insurance reserve in that it ordinarily does not involve a calculation based upon a table of contingency or experience, or take into consideration earnings or interest on the fund, and is not usually used to pay contingent claims when the contingency insured against occurs. It is, however, a basic insurance reserve, a fund set apart to meet certain contingencies, one being the possibility that certain policyholders might cancel their policies and demand the unearned portion of premiums, and the other being that excessive losses and consequent impairment of capital might require the company to cancel the policies and return the unearned premiums to the policyholders, or, in the alternative, pay them over to a new insurer to assume and carry out the policy risks.
In Aetna Ins. Co. v. Hyde, 34 Fed. (2d) 185, 197, Circuit Judge Stone, speaking for a statutory court of three judges sitting in the Western District of Missouri, described the unearned premium reserve of a fire insurance company in the following language:
As to the reserve: This has to do with losses under the policies. Although such losses are the exception, they occur. They may happen at any time upon any of such contracts and should, under the contract, he promptly paid. The insurer must be always in a financial position to make such payment. Good business intelligence and integrity would require the maintenance of a liquid fund proportioned to the existing risks. When an insurance business starts, this fund is provided by the capital stock. State statutes usually require a minimum capitalization. As the business grows and the total of assumed risks increases, the fund must be correspondingly increased. Well managed companies carry such "surplus" as seems advisable for such purposes. Naturally, the management of companies would differ as to how much of its income (including premiums) should be thus reserved and how much paid out in dividends. To assure a sufficient reservation for the protection of the policy-holder, the States have enacted laws. The basic thought in most of such laws is to secure this protection through reinsurance in some other and solvent company. This is worked out by requiring a fund sufficient for that purpose. As premium rates are the same in all companies—by law or by business necessity—the premiums for the unexpired terms of the policies are sufficient for the above purpose. Hence, the usual requirement is that the fund at all times equal the premiums on the unexpired terms of the policies in force. To describe this amount, it is called the "unearned" premium. The balance of the premium is called "earned" premium. This term "unearned" premium does not mean that the entire premiums have not been earned, in the sense that they are absolutely the property of the insurer. It does not mean that the insurer must take nine out of every particular $10 paid as premium on each policy and set that specific $9 aside. It does not mean that any trust or agency or other legal relation exists as to any part of any specific premium. What it does mean is that the insurer shall have and keep a fund of that amount constantly available for that purpose and that purpose alone. In short, it cannot distribute that much of its assets in dividends nor use it for otter corporate purposes. In order to be sure that this fund is secure, different requirements are made. Some states require this segregation to be by physical deposit of approved securities in designated depositories. Ordinarily, it is merely a matter of bookkeeping by the insurer, enforced by examination of its books and securities by representatives of the state.
On brief petitioner places some stress on the fact that its unearned premium reserve was not required by the laws of Missouri. This, however, is immaterial. Section 201 (a), supra, does not provide that a reserve must be required by law. It provides that a company is a life insurance company if more than 50 percent of its total reserve funds are held for the fulfillment of life insurance contracts. The fact that petitioner's unearned premium reserve is not required by law does not alter its character as a reserve. It must be assumed that Congress was aware of the distinction between reserves maintained by insurance companies for life insurance coverage and unearned premium reserves maintained for coverage other than life, such as health, accident, and fire insurance. Both types of reserves in our opinion must be taken into consideration in computing the "total reserves" of an insurance company for classification purposes.
Petitioner's argument to the effect that its unearned premium account is the equivalent of cash and belongs to the insured has not been overlooked. This contention seems to be based upon the fact that the health and accident policies issued by it are cancelable by either party, and, in the event of cancellation, a definite obligation, involving no contingencies, arises. Petitioner relies upon Helvering v. Inter-Mountain Life Insurance Co., 294 U. S. 686. In the cited case the Court was concerned with the meaning that Congress intended by the language "4 percentum of the mean of the reserve funds required by law" in section 245 (a) of the Revenue Acts of 1921 and 1924. The question was whether the amounts set aside by the company to retire matured, unsurrendered, and unpaid coupons attached to policies of life insurance issued by it, which provided that the matured amount thereof could be applied to the payment of premiums, be withdrawn in cash, or be left with the company at compound interest, should be considered as part of its reserves. The Court held that they should not be, pointing out that they did not directly pertain to insurance, but represented a matured liability, dependent upon no contingency. There might be some substance to petitioner's argument if the amounts reserved belonged absolutely to the policyholders; but they do not. "He [the policyholder] has no legal or equitable interest therein. All that he has is the contract obligations of the company." Aetna Ins. Co. v. Hyde, supra. The reserve is set up for the purpose of assuring the fulfillment of such obligations. It belongs to the company and is invested by it "precisely as any other monies it may have."
We are of the opinion and hold that petitioner's unearned premium reserve is a reserve within the meaning of section 201 (a), sv/pra. The gross premiums on its health and accident contracts set aside in this reserve comprised more than 50 percent of its total reserve funds. It follows, therefore, that petitioner is taxable as an insurance company other than life. The Commissioner committed no error in determining the deficiencies in tax.
Reviewed by the Board.
Decision will he entered for the respondent.
SEC. 201. TAX ON LIES INSURANCE COMPANIES.
(a) Definition.—When used in this title the term "life insurance company" means an insurance company engaged in the business of issuing life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), the reserve funds of which held for the fulfillment of such contracts comprise more than 50 per centum of its total reserve funds.
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454 U.S. 1088
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C. A. 3d Cir. Certiorari denied.
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127 F.3d 763
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MURPHY, Circuit Judge.
The district court dismissed the 42 U.S.C. § 1983 action of Everett R. Lyon, an Iowa prisoner, for failure to pay the filing fee required by § 804(d) of the Prisoner Litigation Reform Act (PLRA), Pub.L. No. 104-134, 110 Stat. 1321, § 801-810 (Apr. 26, 1996) (to be codified at 28 U.S.C. § 1915(g)), but on reconsideration it concluded that the section is unconstitutional and reinstated the action with leave for Lyon to request in forma pauperis status. The state defendants filed a petition requesting review of the district court's decision that section 1915(g) violated Lyon's right to equal protection because it deprived him of court access, and their request for interlocutory review was granted.
Lyon brought this action against Iowa prison officials and Chavbad Lubaviteh, alleging that they prevented him from practicing his religion in violation of 42 U.S.C. § 1983. He requested damages and equitable relief, including permission to participate in Jewish services and community meals and to purchase Kosher food. Lyon had previously filed some twelve other civil actions while in prison, four of which had been dismissed as frivolous. When Lyon filed this complaint in May 1996, he had $138.40 in his prison account and $64.52 in his prison savings account and was receiving $67.20 in prison wages each month. His initial request for in forma pauperis status was denied because he had at least three prior actions which had been dismissed as frivolous and section 1915(g) therefore requires full payment of the filing fee unless the prisoner is in "imminent" physical danger.
After Lyon moved for reconsideration on the basis of constitutional challenges, the United States intervened to uphold the statute. The district court concluded that the statute violated Lyon's equal protection rights in that it burdened his fundamental right to court access and strict scrutiny revealed that the provision was not narrowly tailored to prevent abusive prisoner litigation since it only curbs repeat litigation by prisoners who can not afford the filing fee and does not take into account the varying sentences and circumstances of different prisoners.
The United States and Iowa prison officials argue in response that section 1915(g) does not violate Lyon's equal protection rights. They contend that the district court erred in applying strict scrutiny because the statute does not burden a fundamental right and prisoners and indigents are not suspect classes. They also assert that section 1915(g) is rationally related to the legitimate government interest of preventing abusive litigation.
Congress enacted PLRA with the principal purpose of deterring frivolous prisoner litigation by instituting economic costs for prisoners wishing to file civil claims. See, e.g., H.R. Conf. Rep. No. 104-378, at 166-67 (1995); 141 Cong. Rec. S14626 (daily ed.) (Sept. 29, 1995) (statement of Sen. Dole). The in forma pauperis statute now requires all prisoners to pay court filing fees for civil cases. It differentiates among prisoners on method of payment, however. Prisoners who have not had three prior cases dismissed as frivolous need only pay a percentage of the fee at the outset and the remainder over time, and these litigants will not be barred from pursuing a claim by inability to make the initial required partial payment. 28 U.S.C. § 1915(b)(l)-(4). In contrast, section 1915(g), commonly known as the "three strikes" provision, directs that prisoners who have had three previous civil suits or appeals dismissed as malicious, frivolous, or for failure to state a claim must prepay the entire filing fee. They otherwise cannot proceed on their claim unless they are "under imminent danger of serious physical injury." 28 U.S.C. § 1915(g). The section states:
In no event shall a prisoner bring a civil action or appeal a judgment in a civil action or proceeding under this section if the prisoner has, on 3 or more prior occasions, while incarcerated or detained in any facility, brought an action or appeal in a court of the United States that was dismissed on the grounds that it is frivolous, malicious, or fails to state a claim upon which relief may be granted, unless the prisoner is under imminent danger of serious physical injury. '
28 U.S.C. § 1915(g).
Since the enactment of PLRA, a number of circuits have examined the constitutionality of its provisions. They have concluded that its fee requirements do not employ suspect classifications, deprive prisoners of the right to court access, or violate rights to equal protection. See, e.g., Carson v. Johnson, 112 F.3d 818, 821-22 (5th Cir.1997) (citations omitted) (section 1915(g)); Hampton v. Hobbs, 106 F.3d 1281, 1286-87 (6th Cir.1997); Roller v. Gunn, 107 F.3d 227, 233-34 (4th Cir.1997) (citations omitted). Several have also concluded that the fee requirements of PLRA do not have an impermissible retroactive effect, e.g., Mitchell v. Farcass, 112 F.3d 1483, 1487 (11th Cir.1997), including where the triggering three dismissals occurred before the passage of the statute. E.g., Adepegba v. Hammons, 103 F.3d 383, 387 (5th Cir.1996); Green v. Nottingham, 90 F.3d 415, 420 (10th Cir.1996).
In order for Lyon to raise his constitutional challenge to section 1915(g) he must show that he has standing. Allen v. Wright, 468 U.S. 737, 750, 104 S.Ct. 3315, 3324, 82 L.Ed.2d 556 (1984). The core component of standing is that the "plaintiff must allege personal injury fairly traceable" to the challenged action. Id. at 751, 104 S.Ct at 3324. In the context of alleging an unconstitutional burden on the right of access to court, it is not sufficient for standing to show that court access could be impeded. Rather, a prisoner must show that it actually has been. Lewis v. Casey, — U.S. -, -, 116 S.Ct. 2174, 2179, 135 L.Ed.2d 606 (1996).
Lyon has not shown that the fee requirements imposed by PLRA have deprived him of his access to court. The record shows that Lyon had sufficient funds to pay the filing fee. Reasonable costs may be imposed on persons who want to sue without unconstitutionally burdening the right to court access. Lumbert v. Illinois Dep't of Corrections, 827 F.2d 257, 259 (7th Cir.1987). There is no constitutional requirement that court fees always be waived if a litigant is indigent. See e.g., United States v. Kras, 409 U.S. 434, 450, 93 S.Ct. 631, 640, 34 L.Ed.2d 626 (1973); but see M.L.B. v. S.L.J., — U.S. -, -, -, 117 S.Ct. 555, 560-64, 569-70, 136 L.Ed.2d 473 (summarizing cases where court fees must be waived if they prevent litigants from vindicating basic fundamental rights). At the time Lyon filed his complaint, he had over $180 in his prison accounts and was receiving $67.20 in prison wages each month. This is more than the $120 then required as a filing fee. Lyon has most of his basic necessities provided as a prisoner, and payment of the fee would not have forced him to go without these essentials. He would still have had over $60 remaining after paying the fee; that amount and his monthly wages would have been available to purchase other necessary incidentals. Cf. Myers v. Hundley, 101 F.3d 542, 544 (8th Cir.1996).
Section 1915(g) does not prohibit prisoners from pursuing legal claims if they have had "three strikes" or three prior dismissals. It only limits their ability to proceed in forma pauperis. Lyon is thus free to pursue his action if he pays the required fees, and section 1915(g) has not caused an actual injury to him because he was not without the necessary resources to bring his claim to court.
Since Lyon has not shown that section 1915(g) has caused an actual injury, he does not have standing to assert that this deprivation violates his right to equal protection. We therefore do not have jurisdiction to eon sider the constitutional issues raised, and the appeal must be dismissed.
The interlocutory appeal is dismissed, and the case is remanded so that the district court may set a time by which Lyon must pay the filing fee or have his underlying first amendment claim dismissed.
. Chavbad Lubaviteh has since been dismissed as a defendant.
. At oral argument, counsel indicated that one of Lyon's prior dismissals had resulted from a letter sent to the district court which had been assigned a file number and then dismissed. Because of our disposition of this appeal, we do not have occasion to consider what type of prior dismissal may legitimately be counted under § 1915(g). We take judicial notice of the fact that some courts now notify prisoners when a seemingly frivolous complaint is filed that it could count against them in the future, and permit them an opportunity to dismiss it voluntarily.
. The dissent characterizes Lyon's claim as "precisely the type of fundamental rights claim for which we have vigilantly guarded a prisoner's access to the courts," but the record reveals very little about the nature of the claim because the proceedings in the district court to this point have related only to preliminary issues, not to the merits. If the case had been further developed and an appeal taken in the regular course, we would have a fuller record. The lack of a developed record is of course one of the problems associated with interlocutory appeals.
The dissent also cites cases, decided before the passage of PLRA, for the proposition that a prisoner should not be precluded from in forma pauperis status just because he has some minimal financial resources available. Section 1915(g) does not restrict in forma pauperis status on the basis of the prisoner's resources, but because the prisoner has previously filed several frivolous cases. We need not reach the constitutional issues raised by Lyon under the particular facts presented because his access to court has not been foreclosed.
. Lyon also asserted in the district court that § 1915(g) violated due process and had an impermissible retroactive effect because it changed the legal consequences of previous dismissals; the district court concluded the statute was not retroactive and did not have notice problems.
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484 U.S. 1060
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C. A. 11th Cir. Certiorari denied.
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305 U.S. 391
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Mr. Justice Brandéis
delivered the opinion of the Court.
Indianapolis Brewing Company, Inc., an Indiana corporation, manufactures beer in that State. Under appropriate licenses it has for some years sold and shipped to dealers in Michigan its product in interstate commerce. In July, 1937, the Michigan Liquor Control Act was amended so as to prohibit Michigan dealers in beer from selling any beer manufactured in a state which by its laws discriminates against Michigan beer. By § 40 of the amended Act, the Michigan Commission is directed to declare what states discriminate as that term is defined by the Act. It named ten states. Among these is In diana, which by its Liquor Control Act of 1935, as amended in 1937, prohibits licensed Indiana wholesalers from importing any beer which is not their absolute property; and requires that in order to secure the privilege of importing' beer from other states each must obtain a "port of entry" permit, of which no fewer than ten and no more than one hundred are to be granted, pay a license fee of $1500 and give a bond of $10,000, in addition to the license fee and bond required of those who sell only Indiana beer.
The Indianapolis Company, suing on behalf of itself and others similarly situated, brought, in the federal court for eastern Michigan, this suit to enjoin the enforcement of that provision of the Michigan law on the ground that it violates the Federal Constitution. The members of the Michigan Liquor Control Commission and other officers of the State were made defendants. As a temporary, as well as a permanent, injunction was sought, a three-judge court was convened to hear the application for a temporary injunction. Defendants moved to dismiss the bill. It was conceded that if the law was unconstitutional the plaintiff was entitled to equitable relief. No question except that of the constitutionality of the law was presented. The court held the law valid; denied the temporary injunction; and dismissed the bill. 21 F. Supp. 969.
The plaintiff contends that although the Twenty-first Amendment declares:
"The transportation or importation into any State, Territory or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited"
the Michigan law should be held void as violating the commerce clause and the due process and equal protection clauses of the Fourteenth Amendment. It characterizes the law as "retaliatory"; argues, among other things, that the Amendment may not be interpreted as permitting retaliation;, and insists that such interpretation would defeat its purpose, as thereby Michigan would be allowed to punish Indiana for doing what, under the rule applied in State Board of Equalization v. Young's Market Co., 299 U. S. 59, 63, is permitted. Whether the Michigan law should not more properly be described as á protective measure, we have no occasion to consider. For whatever its character, the law is valid. Since the Twenty-first Amendment, as held in the Young case, the right of a state to prohibit or regulate the importation of intoxicating liquor is not limited by the commerce clause; and, as held by that case and Mahoney v. Joseph Triner Corp., 304 U. S. 401, discrimination between domestic and imported intoxicating liquors, or between imported intoxicating liquors, is not prohibited by the equal protection clause. The further claim that the law violates the due process clause is also unfounded. The substantive power of the State to prevent the sale of intoxicating liquor is undoubted. Mugler v. Kansas, 123 U. S. 623.
Affirmed.
Amended § 40 of Michigan Act No. 281. Public Acts of 1937, p. 509, provides: ". . . The commission shall forthwith adopt a regulation designating the states, the laws, or the rules or regulations of which are found to require a licensed wholesaler of beer therein to pay an additional fee for the right to purchase, import, or sell beer manufactured in this state; or which deny the issuance of a license authorizing the importation of beer to any duly licensed wholesaler of beer therein who may make application for such license; . . . the regulation adopted shall prohibit all licensees from purchasing, receiving, possessing, or selling any beer manufactured in any state therein designated, said regulation to become effective ninety days after its adoption. Any licensee or person adversely affected shall be entitled to review by certiorari to the proper court the question as to whether the commission has acted illegally or in excess of authority in making its finding with respect to any state."
The regulation of the Liquor Control Commission issued December 14, 1937, is as follows: "Pursuant to Act No. 8, Public Acts, Extra Session of the year 1933 of the State of Michigan, as amended by Act No. 241 of the Public Acts for the year 1935, and Act No. 281 of the Public Acts for the year 1937, particularly Section 40 thereof, the Michigan Liquor Control Commission promulgates the following rule and regulation designating as discriminatory according to Section 40 of said Act the following States: Maine, Maryland, Nevada, Indiana, New Hampshire, North Carolina, Pennsylvania, Tennessee, Vermont, Washington. These designations are made after a careful examination of the laws and rules and regulations of the aforementioned states."
Indiana Alcoholic Beverage Act of 1935, c. 226, amended by Act of 1937, c. 197, § 9, 40 (a), 41, Burns Revised Statutes 1933, Supp., § 12-508, 12-801, 12-901.
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136 F.3d 1296
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MICHEL, Circuit Judge.
Respondent-Appellant, the Acting Secretary of Veterans Affairs (the "Secretary"), appeals the judgment of the Court of Veterans Appeals which vacated and remanded the Board of Veterans' Appeals' (the "Board's") denial of Claimant-Appellee Ethel L. Jones's claim for incremental benefits which allegedly accrued and were due and unpaid to her late husband, as a married veteran, when he died. Jones v. Brown, 8 Vet.App. 558 (1996). The appeal was submitted for our decision following oral argument on January 6, 1998. Because the interpretation by the Court of Veterans Appeals of the statutory provisions governing applications and entitlements for accrued benefits was incorrect as a matter of law, we reverse.
BACKGROUND
In 1986, Willie T. Jones, a veteran, applied for and received a non-serviee-conneeted disability pension. Mr. Jones's application also sought an increased monthly payment on the ground that he was married to Ethel L. Jones and so should be paid at the higher married, rather than single, rate. The Department of Veterans Affairs (the "Department") regional office responsible for processing Mr. Jones's request did not rule upon that portion of his request because it found information in the claims file indicating that Mr. Jones had been married to two other women but found no evidence there regarding the termination of those marriages. Consequently, in February 1987, the regional office requested by letter that Mr. Jones provide evidence of the termination of these two prior marriages. Mr. Jones responded by letter indicating that these two relationships had resulted in common-law marriages and that he no longer resided with either woman. In April 1987, the regional office replied to his submission, requesting that Mr. Jones provide additional information regarding the termination of these marriages. Because Mr. Jones did not respond to this letter within one year, his claim for addition al pension benefits based upon his marriage to Ethel Jones was never decided and was deemed abandoned as of April 1988. Mr. Jones died on August 12, 1988, without having provided the requested information and, hence, without a favorable decision or a pending, unadjudicated claim.
On September 26, 1988, Mrs. Jones filed an application with the Department for death benefits. This application included a request for "accrued benefits" previously sought by Mr. Jones comprised of the difference between the disability benefits actually paid to Mr. Jones and the amount he would have received had he been paid at the higher, married, rate. Mrs. Jones's claim for a pension as the surviving spouse of a veteran was granted, but her application for Mr. Jones's "accrued benefits" was denied. The reason given was that Mr. Jones died without his claim pending.
Mrs. Jones appealed this denial to the Board which affirmed on February 11, 1993. Mrs. Jones next appealed to the Court of Veterans Appeals which vacated the Board's decision and remanded the case for further proceedings consistent with its opinion. See Jones, 8 VetApp. at 563. In its opinion, the Court of Veterans Appeals determined that, because the statute required that evidence be in the claimant's file at the date of death supporting payment at the married rate, the Board properly determined that the Department was not estopped from refusing to grant such benefits despite its concession after Mr. Jones's death that the marriage was valid for purposes of a claim for a surviving spouse's pension. See id. at 561. However, the court concluded that the Board erred by requiring that a claim for accrued benefits be pending at the date of the veteran's death rather than merely that sufficient evidence be in the claims file to support such a claim. See id. at 562. Moreover, the court also determined that, because there was some evidence of the validity of the marriage at the date of the veteran's death, the Board erred by concluding that the claim was not well-grounded. See id. Consequently, the Court of Veterans Appeals remanded the ease to the Board for further factual findings regarding what evidence was in the claims file at the date of the veteran's death and whether the two prior relationships were in fact common-law marriages pursuant to 38 C.F.R. § 3.205(a)(6) (1997). See id. at 562-68. The Secretary timely appealed the judgment of the Court of Veterans Appeals to this court.
On appeal the Secretary contends that the Court of Veterans Appeals erred by not deferring to the Department's reasonable interpretation of the statutory provisions governing claims for accrued benefits. The Secretary also disputes Mrs. Jones's assertion that this court lacks jurisdiction to hear this appeal.
ANALYSIS
I.
Jurisdiction to hear appeals from final decisions of the Court of Veterans Appeals is conferred upon this court by 38 U.S.C. § 7292 (1994). Under the express terms of that statute, however, we "may not review (A) a challenge to a factual determination, or (B) a challenge to a law or regulation as applied to the facts of a particular case." 38 U.S.C. § 7292(d)(2). Contrary to Mrs. Jones's contention, the Secretary's appeal involves no question of factual determination or application but merely the interpretation of the statutory provisions governing claims for accrued benefits, an issue clearly within our jurisdiction. Furthermore, Mrs. Jones's argument that, because a remand was ordered, the decision of the Court of Veterans Appeals is not final for purposes of review by an Article III appellate court is similarly without merit. As we have previously held, decisions of the Court of Veterans Appeals rendering an interpretation of a statutory provision and remanding for further proceedings in accordance with that interpretation constitute final and appealable decisions. Travelstead v. Derwinski 978 F.2d 1244, 1248 (Fed.Cir.1992) (holding that a Court of Veterans Appeals decision interpreting 38 U.S.C. § 8713, overruling the Secretary's prior interpretation and remanding back to the Board was a final and appealable decision); see also Sullivan v. Finkelstein, 496 U.S. 617, 625, 110 S.Ct. 2658, 2663-64, 110 L.Ed.2d 563 (1990) (holding that a district court's remand order effectively invalidating certain regulations of the Secretary of Health and Human Services was an immediately appealable order). Accordingly, we have jurisdiction to hear this appeal and to decide the statutory interpretation question it presents.
II.
Under 38 U.S.C. § 5101(a) (1994), "[a] specific claim in the form prescribed by the Secretary . must be filed in order for benefits to be paid or furnished to any individual under the laws administered by the Secretary" (emphasis added). Applications for accrued benefits are governed by 38 U.S.C. § 5121, which states in relevant part:
periodic monetary benefits . under laws administered by the Secretary to which an individual was entitled at death under existing ratings or decisions, or those based on evidence in the file at date of death ( . referred to as "accrued benefits") and due and unpaid for a period not to exceed one year, shall, upon the death of such individual be paid as follows:
(2) Upon the death of a veteran, to the living person first listed below:
(A) The veteran's spouse;
38 U.S.C. § 5121(a) (1994) (emphasis added). The Secretary argues that the Court of Veterans Appeals erred by rejecting the Secretary's interpretation of these provisions to require that, if such a claim has not been granted, a claim must at least be pending at the time of the veteran's death for the surviv- or to be eligible for accrued benefits. The Court of Veterans Appeals held that:
contrary to the Secretary's argument, the appellant is not required to show either that the veteran had a claim pending at his death on this issue, or that he had established entitlement to these additional pension benefits by obtaining a favorable decision or rating. Any other conclusion would impose a restriction on the statutory provision that accrued benefits may be based on evidence in the file at the date of the veteran's death.
Jones, 8 Vet.App. at 562 (citations omitted) (emphasis added).
Our review of the Court of Veterans Appeals' interpretation of statutory provisions is de novo. Prenzler v. Derwinski, 928 F.2d 392, 393 (Fed.Cir.1991). We are persuaded by the Secretary that the Department's interpretation of the statutory provisions governing accrued benefits is correct. Reading sections 5101 and 5121 together compels the conclusion that, in order for a surviving spouse to be entitled to accrued benefits, the veteran must have had a claim pending at the time of his death for such benefits or else be entitled to them under an existing rating or decision. Section 5101(a) is a clause of general applicability and mandates that a claim must be filed in order for any type of benefit to accrue or be paid. Section 5121(a) refers to a particular species of benefit—accrued benefits—and governs the hierarchy of eligibility for such benefits upon the death of the veteran. This latter section explains that accrued benefits are only those "to which an individual was entitled at death under existing ratings and decisions, or those based on evidence in the file at date of death . and due and unpaid." The "individual," at least in this case, is the veteran himself.
We do not agree with the Court of Veterans Appeals that the Secretary's interpreta tion would "impose a restriction on the statutory provision that accrued benefits may be based on evidence in the file at the date of the veteran's death." Jones, 8 Vet.App. at 562. Rather, such a restriction is expressly imposed on not only accrued benefits but benefits of all kinds by section 5101(a). The Court of Veterans Appeals failed to consider this provision in reaching its decision here. But section 5121 is, like all other specific benefit provisions, limited by section 5101.
Moreover, the Secretary's interpretation also comports with our decision in Zevalkink v. Brown, 102 F.3d 1236 (Fed.Cir.1996). In Zevalkink we held that a surviving spouse's "accrued benefits claim is derivative of the veteran's claim" and so concluded that, absent unconsidered new and material evidence in the file as of the date' of death, a surviving spouse could only receive accrued benefits based on "existing ratings and decisions" and could not reopen or reargue a claim. Id. at 1241-42 (emphasis omitted). Thus, a consequence of the derivative nature of the surviving spouse's entitlement to a veteran's accrued benefits claim is that, without the veteran having a claim pending at time of death, the surviving spouse has no claim upon which to derive his or her own application. Just as the surviving spouse in Zevalk-ink could not reopen the veteran's accrued benefits claim, so here the surviving spouse may not file an accrued benefits claim in lieu of the veteran.
CONCLUSION
Because the Court of Veterans Appeals' interpretation of section 5121 governing the payment to survivors of accrued benefits to which a veteran was entitled, but upon the veteran's death were due and unpaid, conflicts with the generic command in the plain language of section 5101 that a claim must have been filed by the veteran, the judgment of the Court of Veterans Appeals is
REVERSED.
. 38 C.F.R. § 3.158(a) (1997) provides, in relevant part, "where evidence requested in connection with an original claim, a claim for increase or to reopen or for the purpose of determining continued entitlement is not furnished within 1 year after the date of request, the claim will be considered abandoned."
. We give respectful consideration to the Secretary's construction of the veterans' benefits statutes due to his experience and expertise in this area. However, given the plain meaning of the statutory provisions at issue, it is irrelevant for purposes of this appeal whether deference is warranted under Chevron v. Natural Resources Defense Council, 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). For similar reasons, the mandate of Brown v. Gardner, 513 U.S. 115, 118, 115 S.Ct. 552, 555, 130 L.Ed.2d 462 (1994), that "interpretive doubt is to be resolved in the veteran's favor" has no bearing on the resolution of this case.
. We recognize that the Court of Veterans Appeals' decision in Jones was rendered prior to publication of our opinion in Zevalkink.
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519 U.S. 1073
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C. A. 11th Cir. [Certiorari granted, 518 U. S. 1056.] Writ of certiorari dismissed as improvidently granted.
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425 U.S. 912
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C. A. 5th Cir. Certiorari denied.
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392 U.S. 937
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Ct. Sp. App. Md. Certiorari denied.
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534 U.S. 1022
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Sup. Ct. Ark. Certiorari denied.
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317 U.S. 213
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Mr. Justice Murphy
delivered the opinion of the Court.
Petitioner seeks to review an order of the Supreme Court of Kansas denying his application for writ of habeas corpus. In 1935 petitioner was convicted by a jury in a Kansas state court upon an information charging him with the crimes of murder and robbery. A motion for a new trial was overruled, and he was sentenced to life imprisonment under his conviction for murder, and to a term of from 10 to 21 years for robbery. On appeal the judgment was affirmed by the Supreme Court of Kansas. State v. Pyle, 143 Kan. 772, 57 P. 2d 93.
On November 20, 1941, petitioner, a layman acting in his own behalf, filed an original application for writ of habeas corpus in the Supreme Court of Kansas. The crude allegations of this application charge that his imprisonment was the result of a deprivation of rights guaranteed him by the Constitution of the United States, in that the Kansas prosecuting authorities obtained his conviction by the presentation of testimony known to be perjured, and by the suppression of testimony favorable to him. Filed with this application were a brief and an abstract, also apparently prepared by petitioner himself, which are part of the record before us. These documents elaborate the general charges of the application, and specifically allege that "one Truman Reynolds was coerced and threatened by the State to testify falsely against the petitioner and that said testimony did harm to the petitioner's defense"; that "one Lacy Cunningham who had been previously committed to a mental institution was threatened with prosecution if he did not testify for the State"; that the testimony of one Roy Riley, material to petitioner's defense, "was repressed under threat and coercion by the State"; that Mrs. Roy Riley and Mrs. Thelma Richardson were intimidated and their testimony suppressed; and, that the record in the trial of one Merl Hudson for complicity in the same murder and robbery for which petitioner was convicted, held about six months after petitioner's direct appeal from his conviction, reveals that the evidence there presented is inconsistent with the evidence presented at petitioner's trial, and clearly exonerates petitioner.
Certain exhibits accompanied the application; among these were copies, sworn by petitioner to be true and correct copies of the originals, of an affidavit executed by Truman Reynolds in 1940, and a letter dated.February 28, 1941, from the former prosecuting attorney who represented the State at petitioner's trial. The affidavit contained a statement that affiant "was forced to give perjured testimony against Harry Pyle under threat by local authorities at St. John, Kansas and the Kansas State Police, of a penitentiary sentence for burglary if I did not testify against Mr. Pyle." The letter stated, "Your conviction was a grave mistake," and further that, "The evidence at the trial of Merl Hudson certainly shattered the conclusions drawn from the evidence produced at your trial."
In connection with his application, petitioner moved for the appointment of counsel to represent him, for subpoenas duces tecum to bring up the records in the trials of Merl Hudson and one Bert (Bud) Richardson, for the subpoenaing of certain witnesses allegedly material to his case, and for his presence in court. The record does not show what disposition, if any, was made of these various motions.
No return was made to the application for the writ. On December 11, 1941, the court below entered an order "that said petition be filed and docketed without costs, and thereupon, after due consideration by the court, it is ordered that said petition for writ of habeas corpus be denied." There was no opinion. A motion to rehear was also denied without opinion. We brought the case here on certiorari, 316 TJ. S. 654, because of the constitutional issues involved^
Habeas corpus is a remedy available in the courts of Kansas to persons imprisoned in violation of rights guaranteed by the Constitution of the United States. Cochran v. Kansas, 316 U. S. 255, 258. Petitioner's papers are inexpertly drawn, but they do set forth allegations that his imprisonment resulted from perjured testimony, knowingly used by the State authorities to obtain his conviction, and from the deliberate suppression by those same authorities of evidence favorable to him. These allegations sufficiently charge a deprivation of rights guaranteed by the Federal Constitution, and, if proven, would entitle petitioner to release from his present custody. Mooney v. Holohan, 294 U. S. 103. They are supported by the exhibits referred to above, and nowhere are they refuted or denied. The record of petitioner's conviction, while regular on its face, manifestly does not controvert the charges that perjured evidence was used, and that favorable evidence was suppressed with the knowledge of the Kansas authorities. No determination of the verity of these allegations appears to have been made. The case is therefore remanded for further proceedings. Cochran v. Kansas, supra; Smith v. O'Grady, 312 U. S. 329; cf. Waley v. Johnston, 316 U. S. 101, 104. In view of petitioner's inexpert draftsmanship, we of course do not foreclose any procedure designed to achieve more particularity in petitioner's allegations and assertions.
Reversed.
In re Pyle, 153 Kan. 568, 112 P. 2d 354, is not such a determination. That was an appeal by petitioner from the dismissal of another petition for writ of habeas corpus by the Kansas district court for the Leavenworth district.
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526 U.S. 1116
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Sup. Ct. Mich. Certiorari denied.
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543 U.S. 1077
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C. A. 6th Cir. Certiorari denied.
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408 U.S. 934
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Ct. Crim. App. Tex.
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31 Cust. Ct. 365
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Lawrence, Judge:
This matter is presently before me on a remand from a classification proceeding decided by the third division of this court in W. B. Zanes & Co. v. United States, 24 Cust. Ct. 468, Abstract 54346, "for determination of dutiable value under section 501, Tariff Act "of 1930, as amended by section 16 (c) of the Customs Administrative Act of 1938 [28 U. S. C. § 2636 (d)]."
The subject merchandise in these proceedings consists of wool knit sweaters imported from Scotland. Entry was made under duress (section 503 (b) of the Tariff Act of 1930 (19 U. S. C. § 1503 (b))).
According to the certificate accompanying the entry papers herein, the involved merchandise was entered at values stated to be higher than the value as defined in section 402 (d) of said act (19 U. S. C. § 1402 (d)) and the goods were so entered because of advances by the appraiser in similar cases then pending before this court on appeal for a reappraisement. The cases enumerated in said duress certificate, namely, reappraisement 142112-A and reappraisement 142111-A, were decided by this court in favor of the plaintiff in Wm. S. Pitcairn Corp. v. United States, 12 Cust. Ct. 358, Reap. Dec. 5976 (affirmed United States v. Wm. S. Pitcairn Corporation, 14 Cust. Ct. 367, Reap. Dec. 6121, and id. v. id., 33 C. C. P. A. (Customs) 183, C. A. D. 334); and Wm. S. Pitcairn Corp. v. United States, 17 Cust. Ct. 328, Reap. Dec. 6395, respectively.
The matter now before the court was submitted for decision by the parties hereto upon a stipulation to the effect that the issues as to value herein are the same in all material respects as the issues decided in United States v. Wm. S. Pitcairn Corp., 33 C. C. P. A. (Customs) 183, C. A. D. 334, and that the record in said case may be incorporated herein. The parties also stipulated and agreed that the entered values of the merchandise involved in this case, less the additions made by the importer on entry because of advances by the appraiser in similar cases, are equal to the prices, at the time of exportation of such merchandise to the United States, at which such or similar merchandise was freely offered for sale to all purchasers in the principal markets of the country from which exported, in the usual wholesale quantities and in the ordinary course of trade, for exportation to the United States, and that the foreign value of such or similar merchandise was no higher.
Upon the agreed facts, I find the export value, as that value is defined in section 402 (d) of the Tariff Act of 1930 (19 U. S. C. § 1402 (d)), to be the proper basis for determining the value of the involved merchandise and that such values are the entered values, less the additions made by the importer on entry because of advances by the appraiser in similar cases.
In this proceeding, I am directed by the judgment of the third division and by statute (28 U. S. C. § 2636 (d)), to "determine the proper dutiable value of the merchandise." Accordingly, I find the proper dutiable value of the merchandise to be the entered values, less the additions made by the importer on entry because of advances by the appraiser in similar cases.
Judgment will be entered accordingly.
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176 L. Ed. 2d 1195
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Petition for writ of cer-tiorari to the United States Court of Appeals for the Fifth Circuit denied.
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398 U.S. 943
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C. A. 9th Cir. Certiorari denied.
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411 U.S. 934
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Ct. Crim. App. Tenn. Certiorari denied.
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502 U.S. 1111
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Sup. Ct. Wash. Certiorari denied.
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469 U.S. 1311
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Justice Rehnquist,
Circuit Justice.
Applicants are members of a class of Cuban nationals who unlawfully entered the United States as part of the Mariel boatlift in 1980. They have been detained in the federal penitentiary in Atlanta pending Cuba's willingness to accept their return, and have had final orders of exclusion entered against them by the Board of Immigration Appeals. Matter of Leon-Orosco and Rodriguez-Colas, Interim Decision 2974 (1983). The instant proceedings are the most recent stage of litigation which has lasted for more than four years. Attorneys for the class have sought to reopen the administrative exclusion hearings of two individual class members on the theory that they belong to a "social group," defined as the Mariel boatlift participants, whose members allegedly would be subject to persecution if returned to Cuba, thus making them eligible for consideration for asylum. See 8 U. S. C. § 1101(a)(42) (A), 1158. The parties stipulated that the decisions on the two individual motions to reopen "will be binding on all asylum/withholding of deportation issues relating to membership in the Freedom Flotilla as a social group," but they also expressly provided that the decisions would have no binding effect over the determinations of other class members "with respect to statutory and regulatory exceptions to asylum/withholding eligibility."
The Board of Immigration Appeals denied the two test motions to reopen on the ground that the aliens had not presented a prima facie case of persecution. The District Court ruled on October 15, 1984, that the aliens had presented sufficient evidence of a likelihood of persecution and, therefore, that the Board had abused its discretion in failing to reopen the test cases. Fernandez-Roque v. Smith, 599 F. Supp. 1103 (1984). The District Court remanded the test cases to the Board and set aside all outstanding orders of exclusion.
Meanwhile, the United States and Cuba on December 14, 1984, concluded an agreement on immigration matters in which Cuba consented to the return of 2,746 named boatlift participants in exchange for the resumption of this country's normal processing of preference immigration visas for Cuban nationals. The agreement limits the number of boatlift participants that may be returned to 100 per month, except that, if fewer than 100 are returned in a calendar month, the shortfall may be made up in subsequent months up to a total of 150 returnees per month. The Cuban Government apparently has indicated that it will not mistreat anyone returned under the agreement. Respondents contend that the United States will be severely prejudiced by any delay in carrying out this agreement because Cuba may refuse at some future time to complete its end of the bargain after it has received the domestic political benefits of the eased immigration to this country. •
Respondents appealed the District Court's October 15, 1984, order and sought a stay pending appeal, which was denied by the District Court. The Court of Appeals for the Eleventh Circuit granted a partial stay on January 16, 1985, which it modified by order of January 25, 1985. The net effect of the stay as modified is threefold: first, to stay the vacation and remand of all outstanding orders of exclusion; second, to acknowledge the Government's voluntary agreement not to deport any class members until February 8, 1985; and third, to prohibit the Government from taking any "action to return to Cuba any of those class members identified in the stipulations who claim eligibility for asylum on the ground that they have a well-founded fear of persecution because of membership in the social group, and who are not returnable under subsection 2 of 8 U. S. C. § 1253(h), until such time as the issues on this appeal are resolved or until further order of this court" (footnotes omitted). Applicants seek to have this stay set aside or further modified.
A stay granted by a court of appeals is entitled to great deference from this Court because the court of appeals ordinarily has a greater familiarity with the facts and issues in a given case. See Bonura v. CBS, Inc., 459 U. S. 1313 (1983) (White, J., in chambers); O'Connor v. Board of Education, 449 U. S. 1301, 1304 (1980) (Stevens, J., in chambers); Coleman v. PACCAR, Inc., 424 U. S. 1301, 1304 (1976) (Rehnquist, J., in chambers). There is no need to evaluate applicants' likelihood of success on the merits; they simply have not made a showing of irreparable injury which would warrant interference with the partial stay granted by the Court of Appeals. The Court of Appeals merely refused to further delay deportation of class members who would not be eligible for asylum under the "social class" theory even if the two individual test motions were ultimately successful on the merits. These are persons who are excludable and not entitled to asylum under 8 U. S. C. § 1253(h)(2) because they have committed serious crimes or they otherwise pose a danger to the security of the United States. There is no reason to grant these individuals automatic relief simply because some of their fellow class members may be eligible to be considered for asylum.
Under the partial stay, every class member may pursue his own individual remedies during the pendency of the appeal and, if he is not excludable under § 1253(h)(2), prevent his deportation. In fact, the terms of the partial stay shift to the Government the burden of proving that the alien is within that statutory provision before he may be excluded, when ordinarily the burden would be on the alien to prove his entitlement to remain in this country. Applicants' principal argument against the partial stay is that requiring individual motions to reopen would present significant administrative difficulties. Each of the more than 1,500 class members will have to file individual motions to reopen. The necessary balancing of these difficulties against the prejudice to the Government from further delay is something the Court of Appeals is in a far better position than this Court to do. The specificity of the partial stay order indicates that it was drafted with some care and that it endeavors to reflect a considered balancing of the various interests at issue. This Court is not in a position to second-guess a balancing of this kind.
The application is denied.
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540 U.S. 869
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C. A. 9th Cir. Certiorari denied.
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510 U.S. 1123
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C. A. 6th Cir. Certiorari denied.
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377 U.S. 908
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C. A. 9th Cir. Certiorari denied.
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179 L. Ed. 2d 629
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Petition for writ of certiorari to the Supreme Judicial Court of Maine denied.
Same case below, 6 A.3d 283.
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516 U.S. 977
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Sup. Ct. Ill. Certiorari denied.
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522 U.S. 1020
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C. A. 5th Cir. Certiorari denied.
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489 U.S. 1033
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C. A. 5th Cir. Motion of Maritime Law Association of the United States for leave to file a brief as amicus curiae granted. Certiorari denied.
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524 U.S. 940
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C. A. 2d Cir. Certiorari denied.
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24 T.C. 342
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OPINION.
Withet, Judge:
The petitioner takes the position that the respondent having determined that the value of the decedent's interest in The Howell Theatre partnership business was $45,000, that amount became the basis of such interest for the purpose of deductions for exhaustion ; and that respondent erred in determining that no part of such basis was deductible by the decedent's estate in determining the distributable net income of the estate and in accordingly disallowing the deductions of $14,210.52, $14,210.52, and $4,736.86 taken by the estate for 1948, 1949, and 1950, respectively, on account of exhaustion of such interest, and previously allowed in determining her distributable net income from the estate for such years. The respondent takes the position that the decedent's interest in the partnership was not "the type of asset" with respect to which an allowance for exhaustion properly can be made.
The parties are in agreement, and properly so, that the portion of the profits of the business paid by Widmyer to the decedent's estate during the years in controversy was not income to Widmyer but was income to the decedent's estate. Charles F. Coates, 7 T. C. 125. Furthermore, there is no controversy between them as to the propriety of the respondent's action in including in the decedent's gross estate his interest in the partnership. Each party has proceeded herein on the premise that such action was correct and proper. We too will proceed likewise.
Aside from the respondent's reliance on the holding in Estate of Boyd C. Taylor, 17 T. C. 627, affd. 200 F. 2d 561, we are unable to ascertain from his brief or from the record as a whole the reasons upon which he relies in support of his position that the interest in controversy was not "the type of asset" on account of which an allowance for exhaustion is proper.
In the Taylor case, the decedent at the time of his death was a member of a partnership engaged in the insurance underwriting business in which it represented insurance companies pursuant to contracts with them. Such representation was revocable by the insurance companies upon 90 days' notice. The personal services and contacts of the partners were the basis of the retention of the representation of such insurance companies. Capital and tangible assets were of no importance in the creation and retention of the partnership business. By virtue of a partnership contract in effect at the time of the decedent's death, his estate was given an option to become an inactive member of a new partnership with the surviving members of decedent's partnership for a stated term. The decedent's estate exercised the option, became a member of a new partnership, and shared in the net income thereof. Having found that the partnership of which the decedent was a member was a personal service enterprise which required no capital or tangible propei'ty and to wdiich none of the partners had contributed capital, and being unable to find that the right held by the estate constituted a capital asset which it received from the decedent, the Court relying on Bull v. United States. 295 U. S. 247, concluded that the estate was not entitled to deduct allowances for exhaustion with respect to the right.
In the Bull case, the decedent at the time of his death was a member of a partnership engaged in the business of shipbrokers. The enter prise required no capital, none was ever invested by the partners, and no tangible property was involved in the partnership transactions. The partnership agreement in effect, at the time of the decedent's death provided that in the event of the death of a partner, the survivors should continue the business for 1 year subsequent to his death and his estate should receive the same interests or participate in the losses to the same extent as the deceased partner would if living, or his estate at its option could withdraw his interest from the firm within 30 days after the probate of the will and all adjustments of profits or losses should be made as of the date of such withdrawal. The estate did not exercise the option to withdraw. The business continued to be conducted, and the profits thereof distributed, as contemplated by the agreement. Among the questions presented were whether it was proper for a value to be placed on the right of continuance of the partnership relation inuring to the decedent's estate and include such value as a part of the corpus of the decedent's estate, and whether it was proper to include the amount received pursuant to such right as income of the estate. Stressing the fact that the partners had contributed no capital to the business and owned no tangible property connected therewith, the Supreme Court held that in the circumstances presented it was not permissible to place a value on the right inuring to the decedent's estate and include such value in the corpus of the estate and that no estate tax was due with respect to the portion of the partnership profits arising subsequent to decedent's death and paid to his estate. However, such portion of partnership profits was held to be income to the estate and taxable as such.
The Howell Theatre partnership involved in the instant case required the use of capital. Both the decedent and Widmyer had made investments in the enterprise at the time the partnership was formed and continued to have investments therein at the time of decedent's death. After the decedent's death his investment -was continued in the enterprise and at the risks of the business. The partnership also had made investments in tangible property used in connection with the business. This property was represented by leasehold improvements to the theatre premises which the partnership made pursuant to the requirements of its lease of March 3, 1945. At the expiration of the lease these improvements passed to the then owners of the theatre premises. By determining a value of $45,000 for decedent's interest in the Colonial Theatre business based "on a consideration of the adjusted value of the assets, earnings and other relevant factors," respondent gave recognition to the fact that the partnership had and employed capital and had invested in and used the foregoing property in the conduct of its business. Prior to, and at the time of decedent's death, the decedent and Widmyer each individually owned undivided one-third interests in the theatre premises used under lease in the conduct of the partnership business. Decedent's interest in those premises continued to be used in the business after his death, first as an asset of his estate and then as an asset of Widmyer after its sale by petitioner to Widmyer on February 1,1949, for $26,430.27. Considering the foregoing in connection with the factual situations presented in the Bull case and the Taylor case, it is apparent that the instant case involves a factual situation materially different from that presented in either of them. Because of such difference, it is our opinion that the holdings in those cases are not applicable or determinative here. Accordingly, we conclude that the decedent's interest iff the theatre business was an asset of a type with respect to which an allowance for exhaustion is proper.
The right of decedent's estate to share in the profits of the theatre business clearly was a valuable asset. The life of that asset was definitely limited to the period beginning with the decedent's death on March 6,1947, and ending on May 2,1950. For estate tax purposes the respondent lias determined the value of the asset at $45,000. In the absence of evidence to the contrary, such value is deemed to have been its fair market value at the time of its acquisition by the estate and its basis for the purpose of exhaustion allowances. Estate of John W. F. Hobbs, 16 T. C. 1259; Begs. Ill, sec. 29.113 (a) (5).
In accordance with the foregoing, we find that the respondent erred in disallowing to the estate of the decedent the deductions taken for 1948, 1949, and 1950 on account of exhaustion of the interest in question, and increasing accordingly the amounts of the petitioner's distributable shares of net income from the estate for the respective years.
Decision will be entered wider Bule 50.
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479 U.S. 881
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Appeal from C. A. 7th Cir. Further consideration of question of jurisdiction postponed to hearing of case on the merits, which is limited to Question 1 presented by the jurisdictional statement.
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27 B.T.A. 980
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OPINION.
Smith :
The respondent has determined a deficiency in petitioner's income tax for the calendar year 1923 in the amount of $2,317.06. In his petition, the petitioner alleges that the respondent erred in disallowing a deduction for taxes paid in that year in the amount of $34,057.25. The respondent has denied the deduction on the grounds that the amount in dispute was a part of the purchase price of the property which was acquired by the petitioner at the time the taxes were paid. The facts are stipulated as follows:
1. On or about November 26, 1923, the petitioner purchased a one-half interest in certain real estate situate within the Compton-Delevan Irrigation District in Colusa County, California.
2. At the time of and in connection with the purchase the petitioner paid his proportionate share of certain county taxes levied by the said Colusa County and certain taxes levied by the said Compton-Delevan Irrigation District which had become delinquent and were a lien upon the property. The petitioner similarly paid the current 1923-24 county taxes and irrigation district taxes already assessed and a lien upon the property. Following is a statement of the taxes so paid during the year 1923:
Colusa County Taxes
Total Petitioner's Share (%)
Total Delinquent Taxes paid November, 1923_$5, 964.44 $2, 982. 22
First Half 1923-24 Taxes paid_ 3,151.06 1, 575.53
Total_$9,115. 50 $4, 557. 75
Compton-D elevan Irrigation District Taxes
Petitioner's Total Share (%)
Interest on Irrigation District Bonds — Delinquent $19,965.75 $9,982.87
Interest on Irrigation District Bonds — Current 1923-24_ 14, 792.47 7, 396.24
For Interest & Penalties on Delinquent Taxes_ 13, 917. 39 6, 973. 69
For General Expenses — Delinquent_ 2,104.70 1, 052.35
For General Expenses — Current 1923-24_ 8, 208.70 4,104.35
Total___ $29, 509. 50
3. In his Federal Income Tax [return] for the calendar year 1923 the petitioner sought to take a deduction in the amount of $34,066.75 on account of the taxes paid as hereinbefore stipulated.
4. In determining the deficiency proposed in the deficiency letter herein the respondent has disallowed the proposed deduction.
The following provisions of the Revenue Act of 1921 and the statutory laws of the State of California are applicable:
Revenue Act of 1921:
Sec. 214. (a) That in computing net income there shall be allowed as deductions:
*
(3) Taxes paid or accrued within the taxable year except (c)
taxes assessed against local benefits of a kind tending to increase the value of the property assessed, *
Sec. 215. (a) That in computing net income no deduction shall in any case be allowed' in respect of—
*
(2) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate.
General Laws of California, Leering, 1923, Part One, Act 3854, being the California Irrigation District Act:
§ 35. Duty of assessor. The assessor must, between the first Monday in March and the first Monday in June, in each year, assess all real estate in the district, to the persons who own, claim or have possession or control thereof, at its full cash value, *
§ 40. Assessment lien, when. The assessment upon land is a lien against the property assessed from and after the first Monday in March for any year. *
§ 41. Uotiee that assessments are due. When delinquent. On or before the first day of November, the secretary must deliver the assessment-boot to the collector of the district, who shall within twenty days publish a notice in a newspaper published in each county in which any portion of the district may lie, that said assessments are due and payable and will become delinquent at 6 o'clock P. M. on the last Monday of December next thereafter,
We held in Andrew Little, 21 B. T. A. 911, that the interest assessed and paid as a tax under the irrigation district statutes of the State of Idaho, which are not materially different from those of the State of California, was a tax and not a payment of interest within the meaning of section 214 (a) (2) of the Revenue Act of 1921, and, not being a tax of a kind tending to increase the value of the property assessed, was deductible under section 214 (a) (3) of the act. For the purpose of the question in issue in this proceeding all of the above amounts, representing the taxes paid to Colusa County and the interest on the irrigation district bonds, are to be treated as taxes.
It is stipulated that the disputed amounts were paid by the petitioner " at the time of and in connection with the purchase " of his one-half interest in the real estate situated within the irrigation district. The purchase took place on November 26, 1923. A portion of both the taxes and interest paid was then past due and delinquent and a portion was for the current years 1923 and 1924, not then delinquent but assessed and constituting a lien on the property by statute.
In Grand Hotel Co., 21 B. T. A. 890, we held that certain payments of taxes to the State of Washington, under circumstances almost identical with those in the instant proceeding, were not deductible as taxes paid, but constituted a part of the purchase price of the property which the taxpayer previously acquired in that year. The facts here are even less favorable to the petitioner because, there, the taxes were paid some time after purchase of the property and not " at the time of and in connection with the purchase," as in the instant case. In that opinion we said:'
Of course it is needless to say that tbe taxes within the intendment of the statute are the taxpayer's own taxes. For the entire period of 1921 the hotel real estate was owned by J. E. Ransome and the taxes for that year were assessed against the property while it stood in his name and became a lien on the property on March 1, 1921. It is true that when petitioner bought the property in 1922 the 1921 taxes were not yet delinquent, but nevertheless the lien had attached and when the petitioner paid the taxes which for a prior year accrued at a time when it was not the owner of the property, its action in paying the taxes can only be regarded as the payment of a part of the purchase price. Surely petitioner would not pay taxes which had accrued against property in a prior year when it was not the owner, without having due allowance made for this payment in the agreed purchase price.
At the time the petitioner purchased the property there was a lien against it held by the New York Life Insurance Oo. and as a part of the purchase price petitioner paid off the mortgage and all the accrued interest and full allowance was made for this payment in the adjustment of the purchase price. This lien by the New York Life Insurance Co. was no more valid and outstanding against the property than was the lien which the State of Washington had for 1921 taxes. Both stand on the same footing.
In People of the State of New York v. Maclay, 287 U. S. 590, the Supreme Court said:
By the statutes of New York, " every such tax of fee [including the annual franchise tax to be paid by corporations] shall be a lien and binding upon the real and personal property of the corporation liable to pay the same until the same is paid in full." N. Y. Tax Laws, Consolidated Laws, e. 60, see. 197. The lien thus created is effective for many purposes though its amount is undetermined. It is notice to mortgagees or purchasers, who are held to loan or purchase at their own risk if they take their mortgages or deeds before the tax has been assessed or paid. Carey v. Keith, Inc., 250 N. Y. 216; Engelhardt v. Alvino Realty Co., Inc., 248 N. Y. 374. In that respect it is similar to the lien of a transfer tax or duty upon the estate of a decedent. Midurban Realty Co. v. F. Dee & Realty Corporation, 247 N. Y. 307; Stock v. Mann, 255 N. Y. 100, 104.
The stipulated facts in this proceeding do not afford any grounds for a reversal of the respondent's determination that the total amount paid by the petitioner on account of both the delinquent and current taxes and interest on the irrigation district bonds was a part of the purchase price of the property acquired by him at that time, and is therefore not deductible from gross income in the year when paid.
Judgment will be entered for the respondent.
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287 U.S. 610
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Petition for writ of certiorari to the Circuit Court of Appeals for the Fourth Circuit denied.
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5 Cust. Ct. 275
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Opinion by
Dallinger, J.
In accordance with stipulation of counsel and on •the authority of Abstract 43372 the tape measures in question were held dutiable at 40 percent under paragraph 339 as claimed.
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506 U.S. 1040
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C. A. 10th Cir. Certiorari denied.
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29 Cust. Ct. 458
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OliveR, Chief Judge:
The appeals for reappraisement listed in schedule "A," hereto attached and made a part hereof, have been submitted for decision upon the following stipulation of counsel for the parties hereto:
It is hereby stipulated, by and between counsel for the respective parties hereto, subject to the approval of the court:
1) That the merchandise marked "A" on the invoices and initialed TLW by Customs Examiner T. L. Walton, involved in the appeals listed in the attached schedule, consists of merchandise exported from France, and appraised at values which included the so-called production or unique tax (also known as the French Fiscal Reform Law tax) in the amounts as shown by the invoices and accompanying certificates of pending reappraisement.
2) That merchandise such or similar to the imported merchandise, marked "A" in paragraph I, when sold or offered for sale at the time of exportation, in France for home consumption, or for exportation to countries other than the United States, in the ordinary course of trade to all purchasers, and in the usual wholesale quantities, was sold or offered for sale at the appraised values herein, less the French Fiscal Reform Tax (Production or Unique tax) as referred to above in paragraph 1 and as added by the importer on entry, plus 1.01 percent Armament tax when not included in the appraised value, packed, and that the export value was no higher.
3) That all other claims of the plaintiffs, as raised by these appeals, are hereby abandoned, and that upon this stipulation these eases are submitted.
On the agreed facts I find the foreign value, as that value is defined in section 402 (c) of the Tariff Act of 1930, or as amended by section 8 of the Customs Administrative Act of 1938, to be the proper basis for the determination of the value of the merchandise represented on the invoices by the items marked "A" and initialed TLW by Customs Examiner T. L. Walton, and that such values were the appraised values, less' the French fiscal reform tax (production or unique tax) as added by the importers on entry, plus 1.01 per centum armament tax when not included in the appraised value, packed.
The appeals having been abandoned insofar as they relate to all other merchandise, to that extent the appeals are hereby dismissed.
Judgment will be rendered accordingly.
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352 U.S. App. D.C. 77
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GARLAND, Circuit Judge:
Attorney David Power seeks a writ of mandamus compelling the Social Security Administration (SSA) to approve a fee agreement he submitted to recover fees for representing a claimant before the SSA. The district court dismissed Power's complaint, finding that he had failed to satisfy the strict requirements for mandamus. Because neither Power's right to relief nor the SSA's duty to provide it is clear, and because Power failed to avail himself of an adequate alternative remedy, we affirm the district court's determination that a grant of the extraordinary remedy of mandamus is inappropriate in this case.
I
Under the Social Security Act, 42 U.S.C. § 406(a), an attorney who represents a person with a claim for Social Security benefits before the SSA has a right to a reasonable fee, fixed in accordance with regulations prescribed by the Commissioner of Social Security. Id. § 406(a)(1). In 1980, the SSA issued regulations establishing a "fee petition" process for the purpose of determining a reasonable fee. See 20 C.F.R. § 404.1720-.1725, .1730. Those regulations require the attorney to submit a petition listing such information as the services rendered, the amount of time expended, and the fee desired. Id. § 404.1725(a). The SSA then evaluates the petition based on such factors as the complexity of the case, the level of skill required of the attorney, and the results achieved for the claimant. Id. § 404.1725(b)(1).
In 1990, Congress amended § 406(a), adding a new subsection, § 406(a)(2). See Omnibus Budget Reconciliation Act of 1990, Pub.L. No. 101-508, § 5106(a), 104 Stat. 1388, 1388-266. That subsection authorizes an attorney who assists a claimant with an administrative claim to receive compensation pursuant to a "fee agreement" entered into with the claimant. Such an agreement must satisfy three prerequisites: (i) it must be submitted to the Commissioner in writing prior to the time the Commissioner makes a determination on the claim; (ii) it must specify a fee that does not exceed the lesser of 25% of the past-due benefits awarded or $4,000; and (iii) the Commissioner must make a determination favorable to the claimant. 42 U.S.C. § 406(a)(2)(A). If these requirements are satisfied, "then the Commissioner of Social Security shall approve that agreement at the time of the favorable determination, and . the fee specified in the agreement shall be the maximum fee." Id. As with fee petitions, when a fee agreement is approved, the SSA certifies the fee for payment out of the past-due benefits owed to the claimant. See id. § 406(a)(4); 20 C.F.R. § 404.1730(b).
This case originated in a claim for disability benefits filed by Jerome Fleeton in 1997. At that time, Fleeton lived in Ohio and was represented before the agency there by John A. McNally, III. Fleeton signed an "Appointment of Representative" form and a fee agreement naming McNally as his attorney. See Joint Appendix (J.A.) at 19-20. Fleeton's initial application for disability benefits was denied, and he requested a hearing before an Administrative Law Judge (ALJ). Before the hearing took place, however, Fleeton moved to Maryland and had the hearing transferred to the Washington, D.C. hearing office.
Fleeton engaged Power, the plaintiff here, to represent him before the ALJ in Washington. Fleeton signed a second Appointment of Representative form and another attorney fee agreement, this time with Power. See J.A. at 21, 27. The ALJ awarded Fleeton past-due benefits on October 24, 1998, and issued an order "approving] the fee agreement between the claimant and his representative." J.A. at 24.
The SSA soon realized that two attorneys had represented Fleeton over the course of his claim. On July 6, 1999, the Deputy Chief ALJ of the SSA's Office of Hearings and Appeals issued an order disapproving Power's fee agreement. In a letter to Power, the Deputy Chief ALJ explained that "[s]ince the claimant appointed more than one representative, and all did not sign a single, common fee agreement or waive charging and collecting a fee, the Social Security Administra tion cannot process your fee under the fee agreement process." J.A. at 25. In order to collect a fee, the letter advised, Power would have to "file a fee petition." Id.
Power did not file a fee petition, nor did he seek a fee waiver from McNally. Instead, he filed suit in the United States District Court for the District of Columbia under 28 U.S.C. § 1361, seeking a writ of mandamus ordering the SSA to approve his fee agreement. The district court dismissed Power's complaint, holding that § 406(a) does not grant an attorney a clear right, nor impose upon the SSA a clear duty, with respect to approval of a fee agreement when two or more attorneys have submitted agreements regarding the same claim. The court also held that, given the availability of the fee petition process, Power had failed to show that mandamus was the only adequate remedy available. We review the district court's dismissal of the complaint de novo, accepting the complaint's allegations as true for purposes of this appeal. See Gray v. Poole, 243 F.3d 572, 575 (D.C.Cir.2001).
II
The "remedy of mandamus is a drastic one, to be invoked only in extraordinary circumstances." Allied Chemical Corp. v. Daifion, Inc., 449 U.S. 33, 34, 101 S.Ct. 188, 66 L.Ed.2d 193 (1980). Mandamus is available only if: "(1) the plaintiff has a clear right to relief; (2) the defendant has a clear duty to act; and (3) there is no other adequate remedy available to plaintiff." Northern States Power Co. v. U.S. Dep't of Energy, 128 F.3d 754, 758 (D.C.Cir.1997) (quoting Council of and for the Blind of Delaware Cty. Valley, Inc. v. Regan, 709 F.2d 1521, 1533 (D.C.Cir.1983) (en banc)). The party seeking mandamus "has the burden of showing that 'its right to issuance of the writ is clear and indisputable.' " Northern States Power, 128 F.3d at 758 (quoting Gulfstream Aerospace Corp. v. Mayacamas Corp., 485 U.S. 271, 289, 108 S.Ct. 1133, 99 L.Ed.2d 296 (1988)). The plaintiff has failed to satisfy that burden here.
A
Power bases his claim that he has satisfied the first two requirements of mandamus — that plaintiffs right to relief and defendant's duty to act be clear — on the language of 42 U.S.C. § 406(a)(2)(A). That provision declares that the Commissioner of Social Security "shall approve" a fee agreement if the agreement meets the three prerequisites of the subsection described above. As the SSA points out, however, § 406(a)(2) is silent as to what the Commissioner should do if she is presented with more than one fee agreement. Indeed, the three statutory prerequisites, as well as the "shall approve" clause, are all written in the singular — indicating that Congress did not contemplate a scenario in which multiple attorneys presented agreements. Moreover, as the SSA further argues, if there were a mandatory duty to approve any agreement that met the three prerequisites, and if two agreements in a single case did so, then approval of both could conflict with an important purpose of § 406(a)(2)(A)(ii): to cap the amount that a claimant may agree to pay in attorneys' fees at the lesser of 25% of his recovery or $4,000. Accordingly, the SSA concludes— as set forth in its July 6 letter — that where there are agreements with more than one attorney, the attorneys must file fee petitions so that the agency can review the requested fees for their overall reasonableness.
Power concedes that the statute is silent on the question of how the SSA should handle multiple fee agreements. He argues, however, that the SSA need not resort to the fee petition process of § 406(a)(1) to handle the problem of multiple fees that in combination may exceed the statutory maximum. As Power points out, an alternative solution is offered by § 406(a)(3)(A), which empowers the Commissioner to reduce a fee agreement if the agreed-upon fee is "clearly excessive for services rendered." Nonetheless, the fact that there are alternative solutions to the problem posed by multiple fee agreements does not impose a clear duty on the SSA to choose the alternative preferred by the plaintiff.
Power also contends that the SSA's position in this case is inconsistent with its prior interpretation of § 406(a)(2). Following the trail of agency pronouncements on this subject poses only slightly less difficulty than following the trail of bread crumbs left by Hansel and Gretel. Power rests his claim on an attachment to a 1992 internal memorandum written by Daniel L. Skoler, who at the time was the Associate Commissioner of the SSA's Office of Hearings and Appeals. The attachment to the memorandum states that, even if an ALJ mistakenly approves one of multiple fee agreements, the SSA should continue to process the agreement because the agency's exception to paying under multiple agreements is "not statutory." J.A. at 43. The SSA responds to Power's argument by advising that it has replaced the Skoler memorandum with a new interpretation of the statutory requirements of § 406(a)(2), an interpretation that the agency says is reflected in its current Program Operations Manual System (POMS). See Letter from SSA to Power (July 6, 1999) (citing POMS GN 03940.025C.4) (J.A. at 25). Under this new interpretation, the agency says, a fee request must be made by petition where two or more attorneys represent a claimant. Id.; see SSA Br. at 13-14. Power replies that the POMS does not have the authority of the internal memo, and is in any event inconsistent with yet another agency pronouncement, this time made in question-and-answer format in the latest edition of the SSA's Hearings, Appeals and Litigation Law Manual (HALLEX). That pronouncement, Power contends, states that when there are multiple fee agreements, the ALJ should honor the most recent agreement. See Power Br. at 10 (citing HALLEX, Temp. Instr. 1-5-109). In surreply, the SSA counters that Power has misconstrued the HALLEX, and that the cited Q&A refers only to multiple agreements between a claimant and the same attorney. SSA Br. at 16.
There is no reason for us to ventee further into this thicket to determine which SSA interpretation is most current or most authoritative, or whether the agency has adequately explained any
changes in its views. Both Power and the SSA agree that all three of the interpretive documents noted above lack the administrative formality or other attributes that would justify substantial judicial deference under Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), and hence that they would at best qualify for the more limited form of deference accorded under Skidmore v. Swift & Co., 323 U.S. 134, 65 S.Ct. 161, 89 L.Ed. 124 (1944). See United States v. Mead Corp., 533 U.S. 218, 230-31, 121 S.Ct. 2164, 150 L.Ed.2d 292 (2001); SSA Br. at 14; Power Br. at 34. Under Skidmore, we grant an agency's interpretation only so much deference as its persuasiveness warrants. See Mead, 533 U.S. at 235, 121 S.Ct. 2164 (citing Skidmore, 323 U.S. at 140, 65 S.Ct. 161). Thus, even were we to choose the document to which we should pay heed, the degree of deference we would apply would hardly be sufficient to transform § 406(a)(2)'s silence on the subject of multiple fee agreements into the "clear duty" required to justify a grant of mandamus. As we have just recently reiterated, where an alleged "duty is not . plainly prescribed, but depends on a statute or statutes the construction or application of which is not free from doubt, it is regarded as involving the character of judgment or discretion which cannot be controlled by mandamus." Consolidated Edison Co. of N.Y. v. Ashcroft, 286 F.3d 600, 605 (D.C.Cir.2002) (quoting Wilbur v. United States, 281 U.S. 206, 218-219, 50 S.Ct. 320, 74 L.Ed. 809 (1930)).
B
Power's petition also fails to satisfy the third requirement of mandamus: that there be no other adequate remedy available. "[T]he alternative remedies that might call for refusal to resort to writ of mandamus encompass judicial remedies . as well as administrative ones." Cartier v. Secretary of State, 506 F.2d 191,199 (D.C.Cir.1974) (citations omitted); see Ganem v. Heckler, 746 F.2d 844, 852 (D.C.Cir.1984). In this case, the SSA advised Power that he could obtain his fee by filing an administrative fee petition pursuant to 20 C.F.R. § 404.1725. Power has failed to satisfy his burden of showing that the fee petition alternative was either unavailable or inadequate.
There is no question that the petition alternative was available, as the SSA expressly advised Power in its July 6 letter. At various places in his briefs, Power suggests that the petition route was unavailable, contending that, in adding § 406(a)(2), "Congress intended the fee agreement process to replace the fee petition process." Power Br. at 4; see Power Reply Br. at 5-7. But nothing in the statutory language indicates such an intention; the 1990 addition of § 406(a)(2) simply left the fee petition provision of § 406(a)(1) undisturbed. In support of his argument, Power cites the Conference Report on the 1990 amendments, which he says makes Congress' intent clear. But that report merely reflects Congress' understanding that the new subsection would "generally replace the fee petition process with a streamlined process," and goes on to state that "[i]f a fee was requested for a claim which did not meet the conditions for the streamlined approval process, it would be reviewed under the regular fee petition process." H.R. Conf. Rep. No. 101-964, at 933 (1990) (emphasis added). In the SSA's view, the latter is precisely the circumstance presented by this case. Finally, even if we did have any lingering doubts as to whether fee petitions and fee agreements continue to coexist as alternative means for requesting payment, the Supreme Court's recent description of the § 406(a)(2) fee agreement provision as "an alternative to fee petitions" is sufficient to dispel them. Gisbrecht v. Barnhart, 535 U.S. 789, -, 122 S.Ct. 1817, 1821, 152 L.Ed.2d 996 (2002).
Nor has Power persuaded us that proceeding by fee petition would be an inadequate remedy. He does not contend that he would receive less money by proceeding pursuant to petition rather than agreement; indeed, he expressly disavows such a claim. See Power Reply Br. at 16, 18. The petition regulations themselves certainly do not suggest that Power's award would be lower were he to take that route. To the contrary, while awards pursuant to fee agreements are statutorily capped at $4,000, there is no such cap on awards granted pursuant to petition.
Power argues that, regardless of whether he would receive less money through petition than agreement, the avenue of petition is inadequate because the right he seeks to vindicate is approval of the fee agreement and not payment of the fee. See Power Br. at 15-16; Power Reply Br. at 14-15, 18. This argument, however, misconstrues both § 406(a) and the nature of mandamus relief. If the SSA does owe any duty to Power under § 406(a), it is a duty to pay him a fee for his services out of the benefits that he recovered for the claimant. See 42 U.S.C. § 406(a)(1), (2). The petition and agreement procedures are merely alternative means to that end. See Gisbrecht, 535 U.S. at -, 122 S.Ct. at 1821. Indeed, were we to define the means to the end as the end itself, we would simply write the third prong out of the mandamus test. The point of that prong is to ensure that where there are alternative means of vindicating a statutory right, a plaintiffs preference for one over another is insufficient to warrant a grant of the extraordinary writ.
This principle is well illustrated in our mandamus cases. In Council of and for the Blind, the plaintiffs sought to compel the Office of Revenue Sharing to use administrative means to enforce a provision of the Revenue Sharing Act, 31 U.S.C. § 1242, that prohibited state and local governments from using revenue sharing funds in discriminatory programs. See 709 F.2d at 1524-25. This court held that mandamus relief was not appropriate because the plaintiffs could achieve the purpose of the statutory provision, which ultimately was "to guarantee that the federal government does not finance discriminatory practices by recipients of federal funds," by suing those governments directly under the private citizen suit provision of the Act. Id. at 1532 (citation omitted); see id. at 1532-33.
Similarly, in Northern States Power, we again denied (in part) a petition for mandamus on the ground that the plaintiffs had another adequate remedy. See 128 F.3d at 761. In doing so, we first reiterated an earlier holding that the Nuclear Waste Policy Act, 42 U.S.C. § 1013(a)(2), imposed an unconditional duty on the Department of Energy to begin accepting nuclear waste for disposal by January 31, 1998. Id. at 758-59. Yet, notwithstanding the Department's announcement that it would not accept such waste by the statutory deadline, we declined to grant the plaintiff utilities' petition for a writ to compel the Department to do so. Contractual remedies under a standard contract between the parties, we said, provided the plaintiffs with "another potentially adequate remedy" in the event the Department failed to perform on time. Id. at 759.
As in Council of and for the Blind and Northern States Power, there is an alternative, adequate remedy available to vindicate Power's statutory interests in this case: the fee petition. Accordingly, Power is unable to satisfy the third requirement of mandamus relief.
Ill
Because Power has failed to demonstrate that his "right to issuance of the writ is clear and indisputable," Gulfstream, 485 U.S. at 289, 108 S.Ct. 1133 (internal quotation omitted), a grant of the extraordinary remedy of mandamus is-unwarranted. The judgment of the district court is therefore
Affirmed.
. Pursuant to a petition, the Commissioner may authorize a fee even if the claimant was unsuccessful in obtaining benefits. 20 C.F.R. § 404.1725(b)(2).
. This amount was increased to $5,300 effective February 2002. See 42 U.S.C. 406(a)(2)(A) (allowing the Commissioner of Social Security to increase the maximum fee agreement award); Maximum Dollar Limit in the Fee Agreement Process, 67 Fed. Reg. 2477 (Jan. 17, 2002).
. Section 1361 provides: "The district courts shall have original jurisdiction of any action in the nature of mandamus to compel an officer or employee of the United States or any agency thereof to perform a duty owed to the plaintiff."
. Section 406 (a)(2)(A) provides:
In the case of a claim of entitlement to past-due benefits under this subchapter, if—
(i)an agreement between tire claimant and another person regarding any fee to be recovered by such person to compensate such person for services with respect to the claim is presented in writing to the Commissioner of Social Security prior to the time of the Commissioner's determination regarding the claim,
(ii) the fee specified in the agreement does not exceed the lesser of—
(I) 25 percent of the total amount of such past-due benefits ., or
(II) $4,000, and
(iii) the determination is favorable to the claimant, then the Commissioner of Social Security shall approve that agreement at the time of the favorable determination, and (subject to paragraph (3)) the fee specified in the agreement shall be the maximum fee.
42 U.S.C. § 406(a)(2)(A) (emphasis added).
. At oral argument, Power suggested that it would be difficult for him to provide support for a fee petition because, in reliance on tire more streamlined fee agreement process, he had not kept time records. The plaintiff did not suggest this potential inadequacy of the fee petition process in his opening or reply briefs, and it is simply too late to raise it for the first time in oral argument. See Galvan v. Federal Prison Indus., Inc., 199 F.3d 461, 468 (D.C.Cir.1999). Moreover, responding to this point at argument, counsel for the SSA said he believed that, in the absence of original records, the agency would accept a fair estimate of time expended because benefits cases of this kind are fairly standardized.
. See also DRG Funding Corp. v. Secretary of HUD, 76 F.3d 1212, 1214 (D.C.Cir.1996) (rejecting the plaintiffs' petition for a writ of mandamus to enforce a judgment against the Secretary of Housing and Urban Development, on the ground that the plaintiffs could also obtain payment through the administrative process, followed by a lawsuit if necessary).
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522 U.S. 923
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Super. Ct. Pa. Certiorari denied.
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5 Cust. Ct. 493
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Tilson, Judge:
The appeals listed in schedule A, hereto attached and made a part hereof, have been submitted for decision upon a stipulation to the effect that the market values or prices at or about the dates of exportation of the instant merchandise, at which such or similar merchandise was freely offered for sale to all purchasers in the principal markets of China for export to the United States, in usual wholesale quantities and in the ordinary course of business, including all costs, charges, and expenses specified in section 402 (d) of the Tariff Act of 1930, are the appraised values, less any amount added under duress.
Accepting this stipulation as a statement of fact, I find and hold the proper dutiable export values of the merchandise covered by said appeals to be the values found by the appraiser, less any amount added under duress. Judgment will be rendered accordingly.
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507 U.S. 907
|
Petition for writ of habeas corpus denied.
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483 U.S. 1020
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Ct. Mil. App. Certiorari denied.
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42 Cust. Ct. 388
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Opinion by
Wilson, J.
In accordance with stipulation of counsel that the merchandise consists of iron pictures the same in all material respects as those the subject of Marshall Field & Co. v. United States (45 C.C.P.A. 72, C.A.D. 676), the merchandise was held dutiable as follows: Certain items at 22% percent under the provision in paragraph 397, as modified by the General Agreement on Tariffs and Trade (T.D. 51S02), for articles or wares in chief value of base metal, not specially provided for; others at 21 percent under said paragraph, as modified by the Sixth Protocol to the General Agreement on Tariffs and Trade (T.D. 54108) ; and others at 20 percent under said paragraph, as modified by T.D. 54108.
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469 U.S. 984
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C. A. 6th Cir. Certiorari Denied. Reported Below: 740 F. 2d 969.
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25 Cust. Ct. 27
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Lawrence, Judge:
Certain filter press plates and frames imported from Canada were classified by the collector of customs as "Articles or wares not specially provided for, if composed wholly or in chief value of iron, steel, or other metal" within the scope of paragraph 397 of the Tariff Act of 1930 (19 U. S. C. § 1001, par. 397) and duty thereon was accordingly assessed at the rate of 45 per centum ad valorem.
It is the plaintiffs' sole contention that the importation should have been assessed with duty at 27K per centum ad valorem as "parts" of machines, finished or unfinished, not specially provided for, within the purview of paragraph 372 of said act (19 U. S. C. § 1001, par. 372).
At the trial of this case, the testimony of two witnesses for the plaintiffs was presented and there were received and marked in evidence plaintiffs' exhibits 1, 2, 3, and 4. Exhibits 1 and 2 are invoices of the Vulcan Iron Works, Limited, Winnipeg, Manitoba, Canada; exhibit 3 is a photograph; and exhibit 4 is a blueprint of a complete filter press.
The first witness to appear on behalf of the plaintiffs, Walter R. Page, stated that he had served as vice president of the Waverly Sugar Company. He identified exhibits 1 and 2 as invoices issued by the Vulcan Iron Works, Limited, in Winnipeg, Manitoba, Canada (the exporter of the controverted merchandise), each covering one complete set of filter press plates and frames, and exhibit 3 as a photograph of a Sperry Filter Press with a hydraulic closing device and one extra plate and frame, marked "P" and "F," respectively, to illustrate the plates and frames in question.
Henry E. Jacoby, a mechanical engineer in the employ of D. R. Sperry & Co. for the past 30 years, upon being called as plaintiffs' second witness, testified that he had specialized in chemical process equipment, principally filtration apparatus, and identified exhibit 3 as illustrative of a filter press of which the present importation forms a part. He stated that he was familiar with the operation of the machine depicted in exhibit 3 and blueprinted in exhibit 4 and that it is as follows:
The machine is made of what we call the skeleton or framework, which is the body of the machine proper. In it are a series of alternating plates and frames, between which are a series of either cloths or other filter medium, through which the solution to be filtered is forced. They alternate, plates, frame, plates and frame, between the two main heads of the machine. When they are as we called dressed, the electric motor is started, which operates a hydraulic pump, pumping oil into this cylinder-
Q. Pointing to the cylinder which is on the head? — A. What we call the closing cylinder.
Q. Will you draw a circle in ink around the closing device on the machine on Exhibit 3 and mark it "C"? — A. (Witness complies with instructions.) The closing cylinder moves the head and clamps all of the plates and frames in position to the degree that the joints between them are liquid tight. The solution, in this case a sugar solution, is then pumped into one end of the press. There it is divided into a series of branch openings which flow into these frames and turn through the cloth on to the plate and discharge through a series of discharge spigots, what we designate as the "cock outlet" on the drawing. The residue, whether dirt, impurities, or whatever it may be, remains behind in the frame on the filter cloth. When that operation is completed, .the closing operation is reversed by reversing the motor, moving the head back, and each plate is then moved forward, the frame in turn cleaned out, the cloths taken out — sometimes washed out with a hose in the machine, and they are ready for the next operation.
With regard to the automatic closing device, the witness testified as follows:
Q. Looking at Exhibit 4, will you please describe to the court the automatic closing device which is a part of the filter press machine in question? — A. To move the head in order to close up the press, there is a shaft or rod, which we call the ram, between this head and a piston in a hydraulic cylinder. [At this point the witness outlined the piston in question on exhibit 4 and marked it "Piston."] In order for that piston to move forward and push this .head, oil under pressure is pumped into the cylinder behind it. That pumping is accomplished by a motor driven pump in this box, marked "Motor Box". That pump driven by that motor forces oil under pressure of approximately 800 to a thousand pounds per square inch, pushes that piston forward, and thereby moves this head forward to close up this unit and make the joints water-tight so that the filtration will not leak all over the place.
He stated further that the automatic closing device, consisting of an electric motor and a hydraulic pump, is permanently attached to the machine and constitutes an integral part thereof; that this particular machine would not function without the closing device; that the automatic closing device does not function while the process of filtering is going on but that it is just for closing or sealing "to put the machine you might say in condition to operate," and to release or open the plates after the filtration to permit cleaning; and that the liquid to be filtered is pumped into the filter press by a separate pump. With reference to the supply pump, the witness stated:
There are two pumps in question; the hydraulic pump which moves the part of the machine and is built permanently into the machine. The other pump, which delivers the sugar solution which is to be filtered, is not built into the machine. ' The motor and pump which produces the hydraulic pressure are integral parts of the machine.
He further stated that there are 70 frames and 69 plates on the apparatus represented by exhibit 3 and they do not in themselves have any mechanically operating features.
At the conclusion of the plaintiffs' case, the Government did not introduce any evidence. However, a motion was made on its behalf to dismiss protest 141442-K as untimely. The motion being uncontested, and an examination of the record disclosing that said protest was not filed within 60 days after liquidation of the entry, as required by section 514 of the Tariff Act of 1930 (19 U. S. O. § 1514), the motion is granted and protest 141442-K of Norman G. Jensen is accordingly hereby dismissed.
There remains for decision on the merits protests numbered 141443-K and 141444-K of Waverly Sugar Company, hereinafter referred to as plaintiff. The defendant in its brief virtually concedes that the classification of the importations by the collector under paragraph 397, sufra, is erroneous, stating—
The filter presses of which the imported plates and frames are parts are articles having as an essential feature an electrical element, within the purview of paragraph 353, supra. Consequently, the imported plates and frames are parts of articles having as an essential feature an electrical element. Paragraph 353, supra, being more specific than the catch-all provisions of paragraph 372, supra, under which plaintiff claims, it follows that even though the Collector's classification is erroneous, the importer's claim is not right. In consequence, whereof, the protests filed herein should be overruled without approving the Collector's classification.
In support of its contention, defendant cites United States v. Dryden Rubber Co., 22 C. C. P. A. (Customs) 51, T. D. 47050; Ralph C. Coxhead Corp. v. United States, 22 C. C. P. A. (Customs) 96, T. D. 47080; and John A. Steer & Co. v. United States, 24 C. C. P. A. (Customs) 293, T. D. 48737. In the Dryden and Coxhead cases, supra, our appellate court set forth, the principles governing the application of paragraph 353 of the Tariff Act of 1930, which paragraph was a new provision in tariff legislation. In the Dryden case, in discussing the meaning of the third provision of said paragraph, namely—
Articles having as an essential feature an electrical-element or device, such as electric motors, fans, locomotives, portable tools, furnaces, heaters, ovens, ranges, washing machines, refrigerators, and signs;
the court stated:
There are two inquiries, therefore, when the question of the classifiability of an article under this division of the paragraph is under consideration: First, is it essentially an electrical article? The electrical feature must be an essential feature, without which the article will not function, normally, for the purposes intended, for, it must be manifest, that if it be not an electrical article, it does not come within the division at all. Second, if it is such an electrical article, is it an article named in the language, or within the class of articles named in this paragraph?
In applying these principles to the Steer case, supra, the appellate court was lead to a conclusion which, by analogy, must be conclusive of this phase of the case now before us. The Steer case involved the proper classification of an anhydrous ammonia plant composed of compressors, heaters, tanks, condensers, and refrigerators, used in the production of liquid anhydrous ammonia from two gases, hydrogen and nitrogen, by a process of synthesis. The apparatus constituted an entirety and was classified by the collector under the provision for "articles having as an essential feature an electrical element or device, such as electric heaters" in paragraph 353 of the Tariff Act of 1930. The importer thereof claimed the mechanism to be properly dutiable under paragraph 372 of said act as "all other machines, finished or unfinished." The trial court found that the imported apparatus was within the purview of said paragraph 353 because of the presence of two heating units, and not because of any other electrical feature in the assembly. The purpose of said heating units was described by the appellate court as follows:
Aside from the motor which is used as above stated to drive the compressor, there are two other electrical elements, namely, two heaters. These are used in the operation of the plant as follows: In each heater there is a ribbon of Ni-chrome. This ribbon is suspended with suitable insulators in a forging in the shape of a hollowed-out vessel. When it is desired to start the apparatus, an electric current passes through these ribbons of Ni-chrome and heats the same so that the gas, in going into the synthesis vessel, passes the heaters and becomes warm enough for the ammonia reaction to start. As soon as the reaction starts, it is self-perpetuating, enough heat being derived from the process of synthesis to keep the operation going. As soon as the reaction starts, these electrical heaters are turned off and are no longer used except when it is again necessary to start the process.
After reviewing the principles laid down in the Dryden and Coxhead cases, supra, the court stated:
The particular devices which are named in the statute as exemplars, are devices which are operated electrically, and which are able to function because of their electrical elements. That is true only in a very small degree in the case of an anhydrous ammonia plant, such as the one here imported. The continuance of its operation does not at all depend upon an electrical element. It has, it is true, an electrical heating element by which the synthesis of the gases is inaugurated, but so, to the same extent, does a gasoline automobile which has its electrical starting device, or an oil burner for a furnace which has its spark plug to start ignition. Yet we dare say no one would seriously contend that such devices should be classified within paragraph 353, even though there were no specific provisions for automobiles or oil burners within the tariff act. Such devices would still be gasoline automobiles and oil furnaces. In other words, they would not be electric machines, and the articles, to be classified under the third subdivision of said paragraph 353, are, as we said in the Dryden Rubber Co. case, supra, required to be electric machines; that is,, machines where the essential operating power of the device is electricity.
The judgment of the trial court was accordingly reversed and the cause remanded with directions to order reliquidation of the entry on the basis of classification as a machine within the purview of paragraph 372, supra.
It is our view that since the limited operation of the electrical units was sufficient to remove the machine in the Steer case from the provisions of paragraph 353, supra, by the same token, the limited operation of the electric motor and hydraulic pump in the functioning of a filter press likewise deprives the machine of which the imported filter plates and frames are essential and integral parts from classification in said paragraph 353. As disclosed by the evidence referred to above, prior to the filtering operation, which is the prime function of filter presses, an automatic closing device, consisting of a hydraulic pump powered by an electric motor, presses the filter plates and frames together to "make the joints water-tight so that the filtration will not leak all over the place." The electric motor is then shut off and remains inoperative during the filtering process and is only turned on again if it is necessary to re-tighten the plates or for cleaning purposes.
It is, therefore, evident that a filter press of the type here under consideration does not meet the requirements laid down in the Dryden case, supra, as reiterated in the Steer case, supra, that machines to be classified under the third subdivision of paragraph 353, supra, with which we are here concerned, must be "electric machines; that is, machines where the essential operating power of the device is electricity."
In the light of the foregoing considerations, we find untenable the contention of defendant that the filter plates and frames in controversy are parts of articles having as an essential feature an electrical element within the purview of said paragraph 353.
This conclusion, however, does not preclude classification of the importations as parts of machines, not specially provided for, in paragraph 372, supra, as claimed by the plaintiff. It is to that phase of the case we now direct our attention.
From the record and exhibits before us it is disclosed that the filter press with which we are here concerned consists of a skeleton principally comprising two horizontal metal rods supported at each end by vertical metal pieces. Attached to each end of the rods are so-called main heads; one head is fixed and the other moveable, the moveable head being designed to slide back and forth horizontally along the rods. Fitted to the rods in a vertical position are the plates and frames the subject of the present controversy, between which plates and frames either cloth or other filter medium is inserted. Permanently attached to, and an integral part of the apparatus, and located at the end haying the moveable head, is' an electric motor, a hydraulic pump, a cylinder, and a piston for causing the moveable head to slide horizontally along the rods, so as to compress or release the plates, frames, and filter material, as desired.
, It is evident from the foregoing description that in itself the filter press constitutes a machine in that it is a mechanical contrivance which by means of the electric motor and hydraulic pump, which are permanently attached and essential to its functioning, utilizes, applies, or modifies energy or force. Simon, Buhler & Baumann (Inc.) v. United States, 8 Ct. Cust. Appls. 273, T. D. 37537.
Filter presses in some respects similar to those'here under consideration were the subject of United States v. J. E. Bernard & Co., Inc., 28 C. C. P. A. (Customs) 182, C. A. D. 142, which, as pointed out in the brief of plaintiff, is clearly distinguishable. The filters there in issue were claimed to be parts of á machine within the meaning of paragraph 372, supra. The apparatus of which the filters were claimed to be parts consisted of three general units, namely, a pump, a filter, and a container-filling device. The pump, which was not an integral part of the device but an independent mechanism, forced the liquid out of a tank into, or through, the filter sheets that were between filter plates embraced in a frame, and thence to the container-filling unit. The court there found—
Prom the evidence in the case it is apparent that the filters are devices which possess no mechanically operating features. Liquids are conveyed to and forced through them by an independent mechanism — a pump — which, so far as the record discloses, might readily be used for pumping in other connections. After passing through the filters, the liquids are conveyed by means of tubes to a container-filling device which, so far as the record shows, might be used for the same purpose in an entirely different relationship. While the combined units may fall within the broad designation of machinery, it must be borne in mind that there is a distinction between "machinery" and "machines," and that paragraph 372, supra, while providing for parts of machines does not provide for parts of machinery.
The judgment of the trial court sustaining the claim of plaintiff in that case for classification of the importation within the purview of paragraph 372 of the Tariff Act of 1930 was accordingly reversed.
In the present case, however, the filter press under consideration does possess as integral parts thereof mechanically operating features, to wit, a hydraulic pump powered by an electric motor comprising the automatic closing device, and, as has been stated, supra, constitutes a machine as that term has been judicially determined.
Since it is not controverted that the filter plates and frames comprising the present importations are essential and necessary parts of such filter presses, we find and hold, upon the record as made, together with the concessions of defendant in its brief, that the claim of plaintiff for classification of the articles as "parts" of machines, finished or unfinished, not specially provided for, as described in paragraph 372, supra, should be and hereby is sustained, and the merchandise covered by protests 141443-K and 141444-K is therefore held dutiable at the rate of 27K per centum ad valorem.
Judgment will issue in accordance with the views above expressed;
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568 U.S. 976
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Ct. App. Cal., 2d App. Dist.;
Sup. Ct. Fla.;
C. A. 4th Cir.;
C. A. 5th Cir.; and
C. A. 10th Cir. Motions of petitioners for leave to proceed in forma pauperis denied. Petitioners are allowed until November 19, 2012, within which to pay the docketing fees required by Rule 38(a) and to submit petitions in compliance with Rule 33.1 of the Rules of this Court.
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540 U.S. 998
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C. A. 9th Cir. Certiorari denied.
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57 Cust. Ct. 202
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Wilson, Senior Judge:
The merchandise under protest consists of 70 bales of "Used Wool Paper Makers Felt" invoiced in several series according to color.
The collector classified the importations as "Wool Waste" under paragraph 1105(a) of the Tariff Act of 1930, as modified by Presidential proclamation, T.D. 52739, and assessed duty at 9 cents per pound. The Government's brief at page 1 states that:
It is claimed by the Government that the classification of the Collector was intended to embrace the appellation "wool rags" but as such was technically incorrect. Therefore, while the classification may not be sustained the protest should nevertheless be overruled and the merchandise held to be properly classifiable as wool rags under paragraph 1105(a) of the same Act, as modified by T.D. 49753, and assessed with duty at the same rate, namely 9 cents per pound, pursuant to the holding in the case of P. Silverman & Son v. United States, 15 Cust. Ct. 303, Abs. 50611 .
The foregoing statement in defendant's brief raises the claim therein set forth for the first time in this proceeding. ISTo such claim is found either in the official papers or the stenographer's minutes.
Plaintiffs contend that the merchandise is properly subject to duty at 4 per centum ad valorem as "waste, not specially provided for," under paragraph 1555 of the Tariff Act of 1930, as modified by said T.D. 52739.
As modified, the relevant portions of the paragraphs of said act involved are:
As classified: Paragraph 1105, as modified by T.D. 52739:
Wool wastes not specially provided for_per lb.
As claimed in defendant's brief: Paragraph 1105, as modified by the trade agreement with the United Kingdom, T.D. 49753:
Wool rags-per lb.
As claimed by plaintiff: Paragraph 1555, as modified by said T.D. 52739:
Waste, not specially provided for_4% ad val.
Plaintiffs called one witness, C. R. Friend, and offered seven exhibits. The testimony and exhibits will be referred to hereinafter as deemed necessary. The defendant offered no evidence.
Mr. Friend testified in substance that he has been the vice president and general manager of Imperial Rug Mills, Inc., the plaintiff-consignee, for about 8 years; that the firm has been in business since 1951; that they manufacture hand-woven broadloom and braided carpets and rugs from papermill felts only. He administers overall sales through distributors throughout the United States, and handles direct purchases of raw material for the manufacturing process. The firm has been importing these felts for about 3% years.
He further testified that he is familiar with the merchandise here involved because he handled its purchase. He produced a sample of the item invoiced as series "B and C" ivory and light tan, which was received as plaintiffs' exhibit 1. The felts come generally in panels 6 and 12 feet wide, but sometimes are up to 20 feet in width in continuous lengths up to 40, 50, and as much as 100 feet. After importation they are put through a washing and dyeing process. In the washing procedure, the felts are scoured with acids and various commercial detergents, and while in the washing machines they are colored with various dyes, depending upon the color desired. The felts are then dried and cut into smaller panels usually from 20 to 40 inches in width and in desired lengths, determined by size and pattern being produced. A sample of the felt after being washed, dried, and cut into 20-inch panels was received as plaintiffs' exhibit 2.
After being cut into panels, the felts are stacked to form patterns of various rugs made in the mill. The panels are then sewn together in continuous lengths, depending on the size of the rug being made, and then cut into small slit pieces 1% inches in width and running up to 300 or 400 feet long. Plaintiffs' exhibit 3 is said to be one of such strips. Braided rugs and hand-sewn rugs are made from the strips. In making the braided rugs from the strips, they are run through a looper machine to fold them and thereafter through a braiding machine which forms the "typical 3-type of braid." The braids are then taken to tables where they are sewn together to a desired size. A sample of slitted pieces was received as exhibit 3. A sample of a braided rug was received as plaintiffs' exhibit 4 and consists of various strips woven together. Securely attached to exhibit 4 is a label setting forth that it is a "custom braided wool rug," fashioned from a superb wool felt, further strengthened with nylon.
Mr. Friend testified that hand-woven rugs are only made in rectangles, 2 feet 6 inches to 20 feet 6 inches in width and in lengths up to approximately 100 feet. Such, rugs are made from strips which are simply folded, placed in bobbins, and taken to the hand-operated looms, where they are made into rugs of desired size. A sample was received as plaintiffs' exhibit 5. Securely attached to exhibit 5 is a label setting forth that it is a "custom loomed carpet" containing 80 percent wool and 20 percent nylon.
The witness stated that exhibits 4 and 5 are representative of the completed product except as to size. According to the witness, tests made by the importer's dyers indicate that exhibit 1 is 80 percent wool and 20 percent nylon. He testified that the imported felts are also reprocessed into blankets but not by his firm and that they carry a similar label showing 80 percent wool and 20 percent nylon.
Upon the court's order, exhibit 1 was sent to the Government laboratory at San Francisco for analysis and report. That report by the customs chemist was received as plaintiffs' exhibit 7, and states: "The fibers constituting the woven fabric are all wool."
As noted, supra, there is nothing of record to support defendant's assertion that the "classification of the Collector was intended to embrace the appellation 'wool rags' but as such was technically incorrect." The red ink notation on the special customs invoice, "wool wastes n.s.p.f.," which is usually made by the examiner, was adopted by the appraiser and by the collector. The liquidating clerk sent Customs Form 4371 to the appraiser requesting further information. The appraiser's reply states: "Advisory classification adhered to. Wool waste is specifically provided for under Par. 1105." [Emphasis copied.] "Wool waste" is provided for in paragraph 1105(a) of the tariff act, as modified by T.D. 52739. The language now claimed in the Government's brief, "wool rags," is provided for under paragraph 1105 (a) of the act, as modified by T.D. 49753. The latter, therefore, could not have been intended by either the examiner, the appraiser, or the collector in the use and adoption of the words "wool wastes n.s.p.f." or "wool waste." There is nothing to support the alleged intention of the collector, nor has defendant offered evidence to establish that the imported felts are in fact "wool rags" as now claimed and urged in its brief.
The classification which defendant concedes is "technically incorrect" is deemed disavowed. Therefore, the actual original classification does not carry any presumption of correctness ordinarily attached to such official action. Nor does the asserted "intended" classification carry such presumptions. E. Dillingham, Inc. v. United States, 56 Cust. Ct. 222, C.D. 2629 (appeal 5251 dismissed June 21,1966), citing and quoting from United States v. White Sulphur Springs Co., 21 CCPA 203, T.D. 46728, and International Vitamin Corp. v. United States, 19 Cust. Ct. 76, C.D. 1071, which cites Smith & Nichols (Inc.) v. United States, 18 CCPA 16, T.D. 43974.
Accordingly, plaintiffs' contention mnst be considered without giving credence by way of presumptions to either the original classification as "wool waste" under paragraph 1105(a) of the above act, as modified by T.D. 52739, or the "intended" classification, supra, as "wool rags" under the modification in T.D. 49753. The former was repudiated by defendant's counsel, while the latter has not been established as factual by evidence introduced by the defendant.
The evidence in behalf of the plaintiffs shows that the imported felts are 100 percent wool. These felts, as shown by the uncontroverted evidence, are imported in lengths of 40, 50, or up to 100 feet by 6, 12, and up to 20 feet in width. After importation, the felts are made into hand-woven or braided carpets and rugs by process of manufacture which includes washing, dyeing, cutting into strips or panels by rotary knives; put through a looper machine to fold; put through a braiding machine, and sewed on large commercial sewing machines. The various steps in the production of the rugs are envisaged by an examination of exhibit 1, the merchandise under consideration in its condition as imported, and exhibits 2 to 5 heretofore mentioned. It is obvious from a visual examination of exhibit 1 that the imported felts are no longer usable for their original intended use as paper-makers felts. A sample is a potent witness. Alex Block & Company, Inc. v. United States, 53 Cust. Ct. 202, C.D. 2496; Joseph Markovits, Inc. v. United States, 45 Cust. Ct. 151, C.D. 2216; United States v. The Halle Bros. Co., 20 CCPA 219, T.D. 45995; United States v. Fred. Gretsch Mfg. Co., Inc., 28 CCPA 26, C.A.D. 120.
The classification of imported merchandise must rest upon its condition as imported. United States v. Baker Perkins, Inc., R. F. Downing Co., Inc., 46 CCPA 128, 131, C.A.D. 714; Worthington v. Robbins, 139 U.S. 337, 341; Dwight v. Merritt, 140 U.S. 213, 219; United States v. Citroen, 223 U.S. 407, 414, and cases cited. The felts are for manufacture into rugs and blankets. Thus the use of the products manufactured from these felts after importation may affect the sale and use of very inferior domestic wool and/or wool products. The rugs and blankets manufactured from the imported felts may be to some degree competitive with inferior wool and products made therefrom.
In United States v. Maurice Lobsitz, 35 CCPA 146, C.A.D. 386, the trial court (17 Cust. Ct. 191, Abstract 51341) was affirmed. In that case, the merchandise was described in invoices as "white wool felts" and "wool felt clips." The trial court stated that they "are pieces or strips of white wool felt, bearing definite indication that they are cuttings from a bolt or large sheet of material. Their appearance [the court found] more accurately responds to the definition of a 'remnant' — 'the piece left after the last cutting, as of cloth' — (Funk & Wagnalls New Standard Dictionary) rather than a 'rag,' defined in the same lexicographic authority as 'A fragment of cloth tom or partly torn from its original connection; especially, a worn,, frayed, or torn bit of a garment; hence, figuratively, a fragment, small amount, or semblance of anything; as linen rags' " [Emphasis copied.] After importation, the merchandise was subjected to a chemical treatment and washing process, removing all adhesives and other undesirable substances, and softening the material prior to being processed through a shredder to make it available for its ultimate chief use as stuffing and batting material and as roofing paper. It was wholly unsuitable for spinning purposes and did not compete with the woolen industry, the court found.
The wool felts and wool clips in the Lobsitz case, supra, were classified as wool rags and assessed with duty at 9 cents per pound under paragraph 1105 (a) of the Tariff Act of 1930, as modified by the reciprocal trade agreement with the United Kingdom, T.D. 49753,74 Treas. Dec. 253. The court held that the wool felts were not wool rags. The Government in the case at bar claims the material involved to be wool rags. The trial and appellate courts in the Lobsitz case, supra, held that the merchandise there involved was properly subject to duty as alternately claimed by the importer as "Waste, not specially provided for" under paragraph 1555 of the 1930 act, as modified by the above T.D. 49753 at 7% per centum ad valorem. This is the same as claimed by the importer herein except that the duty is now 4 per centum ad valorem under the same paragraph.
In arriving at its decision in the Lobsitz case, supra, the appellate court states that the trial court therein was of the view that the legal principle there applicable was announced in the upper court's decisions in P. Silverman & Son v. United, States, 27 CCPA 324, C.A.D. 107, and P. Silverman & Son v. United States, 32 CCPA 99, C.A.D. 292, and that the only question to be determined was one of fact; that is, "whether or not the instant merchandise comes in competition with wool." The court indicates that in these two cases it reviewed numerous decisions and that it gave careful study to the legislative history of paragraph 1105, supra, which was of "great potency in construing paragraph 1105, supra."
The merchandise involved in the first of the above two Silverman cases was described as follows:
The merchandise consists of so-called Palmer or sanforizing blankets which are in a worn-out condition and no longer serviceable for their original purpose. When new, they are chiefly used in textile finishing operations, and "discarded when they have become so worn and burnt by heat and friction as to render them unsuitable for their original purpose." They are then sold for waste for whatever they will bring. When so dealt in, they are commonly known as dryer felts. They are imported in sizes varying from 3 feet to 40 feet in width and from 5 feet to 50 feet in length. Soane of the merchandise is imported in rolls which have to be unrolled and cut into pieces.
The court found the merchandise fit only for certain special uses, one of which was in the steel industry to brush away the oxidation of steel before it went into the roll, after which it is thrown away. It was unsuitable for any textile or woolen remanufacture.
The merchandise in the first Silvermcm case was classified as "woolen rags" under paragraph 1105, supra, and claimed as "Waste, not specially provided for," under paragraph 1555, Tariff Act of 1930. The Customs Court in that case (2 Cust. Ct. 655, Abstract 41031) held that both the classification and claims were erroneous and that the merchandise fell within the provision for "all other wool wastes," not specially provided for, in paragraph 1105, supra. It was conceded before the appellate court that the classification was erroneous and that court gave no consideration "to the woolen rag question" but as between "wool wastes," not specially provided for, in paragrajah 1105, supra, and "waste," not specially provided for, in paragraph 1555, the court held the latter applicable. In so holding, the appellate court stated, after having reviewed the legislative history at length:
From the foregoing it seems reasonable to conclude that Congress, in preparing the wool waste provision, was only concerned about wastes of wool which would influence and affect the sale and use of wool, and we think that a waste which happens to be composed of wool but which cannot, under any circumstances, replace or be competitive with wool, Avas not intended to be subjected to the high rate of duty of 24 cents per pound. [In paragraph 1105.]
The merchandise in the second of the above two Silverman cases consisted of discarded papermill felts ranging from 15 to 18 feet in width and 50 to 75 feet in length. The appellate court in Lobsitz, supra, quotes from the decision of the trial court therein (12 Cust. Ct. 37, C.D. 827, affirmed C.A.D. 292, supra), which had accepted as accurate the following description of merchandise involved therein as given in the importer's brief:
Old paper-mill felts are a discarded article of the paper-making industry. They represent felts which have outlived their usefulness in the manufacture of paper, and have no further commercial vahoe except for the recovery of their component wool fibers by being processed to a fibrous condition known as wool shoddy. Their chief use, after being discarded by papermills, is in the manufacture of wool shoddy. These felts are shredded to reduce them to fiber form and then carded or gametted so as to produce a mass of wool fibers suitable for use in the spinning of yarn to be made into cloth. [Italics quoted.]
The above old papermill felts were classified as "wool wastes," not specially provided for, under paragraph 1105, supra. An alternative claim by the importer that the merchandise should be classified as "waste," not specially provided for, under paragraph 1555, supra, was expressly waived before the appellate court. The claim relied upon there was that the merchandise was classifiable as "wool rags" either directly or by similitude under paragraph 1105, supra, dutiable at 9 cents per pound. That claim was overruled by the Customs Court. That decision was affirmed by the appellate court which did not approve the above-stated collector's classification.
As noted, supra, the only question to be determined in the Lobsitz case was one of fact, whether or not the merchandise there involved consisting of pieces or strips of wool felt comes in competition with wool as stated by the trial court therein. The trial court, based upon the oral testimony, coupled with consideration of the samples, held that the merchandise was "in fact, wool waste and not wool rags" and held the merchandise dutiable as "Waste," not specially provided for, under paragraph 1555. Its ultimate chief use, the court found to be as stuffing and batting material, and for roofing paper. The appellate court stated that there was substantial evidence to support the trial court's findings and affirmed that court's holding that the merchandise was classifiable as "waste," not specially provided for, under paragraph 1555 of the Tariff Act of 1930, as modified by T.D. 49753, at 7y2 per centum ad valorem.
Thus, worn-out and burnt blankets, not usable in the woolen industry were held to be "waste, not specially provided for" under paragraph 1555. (First Silverman case.) Discarded old papermill felts 15 to 18 by 50 to 75 feet, made into shoddy, thus usable in the woolen industry, by reason of the legislative history were held neither classifiable under paragraph 1105 as "wool waste," not specially provided for, nor as "wool rags" under said paragraph. The claim for paragraph 1555 as "waste, not specially provided for," was expressly waived before the appellate court. However, the implication is plain that the claim for "waste, not specially provided for," would have been upheld if properly presented. (Second Silverma/n case.)
The merchandise involved in the first of the two Silverman cases and in the Lobsitz case is not the same as that here under consideration. The merchandise in the second Silverman, case is substantially the same as is herein involved. The use is somewhat different, one used for shredding to fiber to be used in the spinning of yarn, the other for use as carpets, rugs, or blankets. Their ultimate use was as a substitute for cheap, inferior wool or wool products, and thus usable in the woolen industry. By reason of the legislative history the merchandise in the second Silvermcm case was held not classifiable under paragraph 1105 as "wool wastes," not specially provided for, nor as "wool rags" under said paragraph.
Defendant's ¡brief alleges that the classification of the merchandise in the case at bar as "wool waste," not specially provided for, is "technically incorrect." It is deemed by the court to be disavowed. There is no evidence of record in respect to the claim made by defendant for "wool rags." This claim is, therefore, unsupported. Plaintiffs' protest herein claims the merchandise is dutiable as "waste," not specially provided for. Though the imported felts are used in competition with domestic wool or wool products, we believe the decision in the second Silverman case makes clear that Congress did not intend that the imported felts such as now under consideration should be classified as "wool wastes," not specially provided for, under paragraph 1105.
The court in the second Silverman case, C.A.D. 292, supra, expressly pointed out, page 104, that—
the mere fact alone that the instant merchandise is competitive with wool is not sufficient, in view of other considerations to which we shall presently allude, to require a holding that the instant merchandise properly responds to the term "all other wool wastes not specially provided for."
We are of the opinion that Congress, in framing the provision for "all other wool wastes not specially provided for," did not contemplate that merchandise of the kind at bar should find classification under that provision. We are brought to this conclusion by a consideration of the context of said paragraph and the legislative history bearing thereon.
After discussing the legislative history of the provision under consideration, the court reached the following conclusion, page 107:
It would be difficult to understand why Congress would want to place the same rate of duty on discarded wool paper-mill felts, as much as 75 feet in length, unshredded, as it would upon the finished shoddy, because the record shows, and the textbooks on wool confirm the fact, that much processing and labor must be expended upon the instant merchandise to produce shoddy. It is to be noted that Congress provided in the same paragraph for a duty of 18 cents per pound upon wool rags. It is easy to believe that Congress desired a lower rate of duty on rags before they went into the making of shoddy, than upon the shoddy itself.
From this reasoning, it would seem to follow that Congress did not contemplate that merchandise like that at bar, in its crude unshredded state, should take the same duty (24 cents per pound) as do wool wastes not specially provided for and as does shoddy itself. This is especially true when we consider the fact that the instant merchandise, as the record undeniably shows, is used for the_ same purpose as the better grade of wool rags, namely, for the making of shoddy, and the fact that practically the same process is used to convert them into shoddy. It would also seem that on account of the size of the instant merchandise, perhaps a little more labor would be required to convert it into shoddy than is required in the case of the average size rags.
Tlie trial court in tlie above Silverman case (C.D. 827) rejected the claim for "wool rags" under amended paragraph 1105 as the size of the felts there involved do not conform to the dictionary definitions of "fragments." The size of the imported felts here involved likewise precludes their classification as "wool rags," a claim now asserted by defendant herein, without proof that they are in fact "wool rags." We think the holding in the Silverman case applicable here.
It would, therefore, appear, following the logic of the foregoing two Silverman cases and the Lobsitz case, that the "Used Wool Paper Makers Felt [s'] " involved herein should be classifiable as claimed by plaintiffs, as "Waste," not specially provided for, at 4 per centum ad valorem under paragraph 1555, as modified by T.D. 52739. This would be in accord with the second Silverman case, where more or less similar papermill felts in size to the involved merchandise, were usable in the woolen industry as are the felts before us. The only difference is that in the second Silverman case the claim under paragraph 1555, supra, was expressly waived before the appellate court while herein such a claim is properly presented.
The case of P. Silverman & Son v. United States, 15 Cust. Ct. 303, Abstract 50611, cited in defendant's brief, is not controlling herein. A stipulation by counsel was held by the court "sufficient for a case on commercial designation and establishes, as a matter of fact, that the merchandise in question is wool rags." In the case at bar, the defendant likewise concedes that the collector's classification as "wool waste," not specially provided for, is incorrect and there is no stipulation as to commercial designation and no evidence to support a holding that the herein involved felts are "wool rags." "It is fundamental that commercial designation is a fact which must be proved in each case, like any other fact, by the weight of competent evidence." The Specialty House, Inc., Bryant & Heffernan, Inc., et al. v. United States, 32 Cust. Ct. 146, 160, C.D. 1596, affirmed in United States v. The Specialty House, Inc.. Bryant & Heffeman, Inc., et al., 42CCPA136, C.A.D. 585.
In United States v. Schumacher & Co., 3 Ct. Cust. Appls. 301, 306, T. D. 32586, the court stated:
It may further be noted that the present importers are not foreclosed from their contention, because other importers in other cases formerly maintained a directly opposite claim, even though the present importers personally may have profited by the practice thereby established.
The doctrine of stare decisis, urged by defendant with reference to the holding in Silverman, supra, Abstract 50611, is not persuasive. The importer herein was not a party to the stipulation therein and is not bound thereby. The case of United States v. Dodge & Olcott, Inc., 47 CCPA 100, C.A.D. 737, relied upon by defendant herein as applicable on the theory of stare decisis is also inapplicable. The appellant, United States, and appellee, Dodge & Olcott, Inc., were the same parties as in Dodge & Olcott, Inc. v. United States, 45 CCPA 113, C.A.D. 683, which decision was followed in the later case. The parties, pertinent facts, statutory and treaty provisions, contentions, and issues were the same in both cases. That is not the situation in respect to the case at bar and the Silverman case, supra, Abstract 50611.
In Mattoon & Co., Inc., (a/c Philip Senegram Co.) v. United States, 42 CCPA 19, C.A.D. 563, merchandise described as "New Pastel Worsted Noodles" and as "New Worsted Sweater Clips," were held to be dutiable as "waste," not specially provided for, -under paragraph 1555 and T.D. 49753 and T.D. 50797 at ly2 per centum ad valorem, following Lobsitz, siopra, rather than as "wool rags" under paragraph 1105(a) and T.D. 49753, as classified.
In United States v. J. Eisenberg, Inc., 43 CCPA 105, C.A.D. 616, fragments of new cloth, consisting of wool "clips" and "noodles" were held to be rags, dutiable as "wool rags" under paragraph 1105(a) and T.D. 51802, rather than as "waste," not specially provided for, under paragraph 1555 and T.D. 52739. The merchandise was stipulated to be waste pieces of knitted wool fabric, the same as the "clips" in Mattoon, supra, and "noodles" the same as the "noodles" in Mattoon, supra. They were stipulated to be chiefly used in the woolen industry for remanufacture into yarn, and ultimately into cloth, the merchandise having been subjected to a picking or shredding process, and a garnetting process to convert it into wool shoddy, a fibrous mass. The court stated that there is nothing in the first two Silverman cases, supra, "which would negative such a classification" (as "wool rags"). It is of more than passing interest to observe that the court stated:
For the reasons given, we conclude that the instant merchandise is properly classifiable as "Wool rags" under paragraph 1105'(a), supra. Therefore, the decisions in the Mattoon and Lobsitz cases, supra, are hereby overruled so far as they are inconsistent with the instant decision.
If the decision in the Eisenberg case, supra, is to be followed, the herein involved felts are not fragments, hence not "rags" because of their size. They ai'e not dutiable as "wool rags," especially as there is no evidence to that effect. Though the imported felts are used for manufacture into carpets, rugs, and blankets, because of the legislative history they would be dutiable as "waste," not specially provided for, under paragraph 1555, as claimed, at 4 per centum ad valorem. Consistent with such determination is the decision of the majority in E. Dillingham, Inc. v. United States, 56 Cust. Ct. 222, C.D. 2629, decided March 17,1966. In that case, tailor's cuttings were held dutiable under paragraph 1555 and T.D. 52739 at 4 per centum ad valorem, as "waste," not specially provided for, rather than under 1105(a) and T.D. 49753 as "wool rags" as classified at 9 cents per pound, or under 1105(a) and T.D. 52739 as "wool wastes," not specially provided for, at 9 cents per pound. The dissenting opinion turned on the question of commingling under section 508, the judge stating, "I agree with the court that dehors section 508, Tariff Act of 1930, the merchandise is not wool rags and the Government has not sustained the burden the court says it assumed."
Based upon the record before us and after careful consideration of the law as enunciated in the above cases, we are of the opinion and hold that the involved imported felts in the case at bar are dutiable under paragraph 1555 of the Tariff Act of 1930, as modified by T.D. 52739, at 4 per centum ad valorem, as "Waste, not specially provided for."
Accordingly, judgment will be entered sustaining the protest.
To avoid repeated use of the Quoted words, the imported merchandise will be referred to merely as "felt" or "felts."
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534 U.S. 1171
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C. A. 5th Cir. Cer-tiorari denied.
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7 Cust. Ct. 274
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Opinion by
Dallinger, J.
At the hearing it was established that the protests in question were filed more than 60 days after liquidation. In accordance therewith the protests were dismissed as untimely.
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53 Cust. Ct. 11
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Eao, Judge:
Pursuant to the provision in paragraph 1003 of the Tariff Act of 1930 for "Jute yarns or roving, single, coarser in size than twenty-pound," the collector of customs at the port of San Francisco levied duty at the rate of 2y2 cents per pound upon an importation of merchandise invoiced as 80-pound jute yarn, "D" grade, single ply-
It is the contention of plaintiffs herein that said merchandise is properly free of duty as oakum, as provided in paragraph 1729 of said act.
The merchandise in issue is identified in the instant record as plaintiffs' exhibit 1. It was described by plaintiffs' witness, Kenneth R. Reynolds, vice president of the Reynolds Corporation as 80-pound "D" grade yarn, a very low-grade jute yarn or rove single.
Mr. Reynolds also testified that his company, with which he has been associated in various capacities since 1934, is engaged in a general cords and twine business and imports twine and cordage products. It is the United States representative for certain Japanese cordage and jute mills. Fie stated that, during the year 1954, he became acquainted with a man who had an idea for making a new improved kind of oakum, known as white oakum. Together, they developed that product, and, in the process, found that 80-pound "D" grade jute yam had the requisite fluffiness and absorbency for use in the manufacture of white oakum.
A sample of white oakum, produced by Sealite, Inc., was introduced into evidence as plaintiffs' exhibit 2. Mr. Reynolds stated that he was a member of the board of directors and secretary of Sealite, Inc.; that he is familiar with the way in which plaintiffs' exhibit 2 is made; and that he had often handled sales of that merchandise, especially in the Hawaiian Islands. He described the process of converting the imported "D" grade yam into white oakum as follows:
Depending upon the diameter of the oakum they want to make, they pull this material through a water bath, so each strand picked up a better moisture, and then through a powder, which is a trade secret, and up through a braider and a jacket is put around it, and it holds it in a rope form.
This witness further testified that white oakum is used by plumbers and sewer contractors for closing bell and spigot pipes; that its uses are solely those illustrated by Sealite Bulletin No. 600, which was received in evidence as plaintiffs' exhibit 3; that his company imports merchandise like plaintiffs' exhibit 1 for no other purposes than for use in white oakum; and that he had never seen grade "D" 80-pound jute yam sold as such in this country.
On cross-examination, this witness stated that he was familiar with "M" grade jute yarn, which he described as similar to "D" grade. He called it a very loose term for low-grade rope made in Siam from a mixture of cannub and jute. He further testified that plaintiffs' exhibit 2 is %-inch white oakum, composed of 38 strands of jute rove, drawn through water, through a powder, through a braider, and then enclosed in a glass fiber jacket to hold it in rope form. The number of strands of jute roving nsed will determine the diameter of the white oakum, and the smallest they make is % inch, composed of 7 strands.
Mr. Reynolds also testified that the only 80-pound jute yarn single which his company imports is used in the manufacture of oakum. He did not believe that this grade would be capable of being manufactured into tying twine, nor used as a filler in the manufacture of electric or telephone cables, nor in the manufacture of material for acoustical purposes.
Testifying on behalf of defendant was William E. Kichline. He stated that, except for a period of 5 years from 1947, all of his business experience has been with the Ludlow Corp., a firm which manufactures jute, flax, and hemp products, primarily. His affiliation with the company since 1928 has included service in the mills, working with machinery; in India, where the company has one of its large plants; as mill superintendent of a small plant in the eastern portion of this country; and in the sales department.
Mr. Kichline testified that his firm uses approximately one-half million pounds of 80-pound jute yarn singles in its manufacturing operations in the United States during the course of a year. However, it does not import material of the quality of plaintiffs' exhibit 1. The material which it does import is used largely in the manufacture of 2-, 3-, or 4-ply tying twine. Some of it was also used by a manufacturer of "this stranded oakum," located in Salt Lake City, until such time as that manufacturer was able to make a foreign connection for his supply. This witness had not observed the process by which the manufacturer converted jute yarn single into oakum. Nor had he ever seen merchandise like exhibit 1 plied into tying twine. It was his opinion, without regard to its possible adverse effect on this case, that "in this market you couldn't sell a thing as poor as this [plaintiffs' exhibit 1] as tying twine."
Apparently, it is the contention of plaintiffs herein that the subject merchandise has been established by the evidence of record in this case to be the commodity provided for in paragraph 1729 of the Tariff Act of 1930 under the name of oakum, as that term has been judicially construed in the case of General Twine Corp. v. United States, 42 Cust. Ct. 121, C.D. 2075. But whether the point relied upon is that the instant material is oakum per se, or material to be processed into oakum, or unfinished oakum, seems not too clearly brought out in the arguments advanced in the brief filed in behalf of plaintiffs. Initially, it is urged that since the involved jute yam has been shown to be unfit for manufacture into rope or twine; possesses the requisite fluffiness and absorbency for processing into oakum; and is only used in the manufacture of oakum, it possesses the same characteristics as the twisted jute packing involved in the General Twine case, supra, and therein held to be oakum. Then, it is contended that the fact that the subject yarn must be processed beyond its imported condition before it is ultimately used for closing pipes does not detract from its status as oakum. And, finally, it is argued that since the imported material is not suitable for any other commercial use, it must be considered to be oakum. Cited in support of the last-stated proposition are the cases of Waltham Watch Co. v. United States, 25 CCPA 330, T.D. 49425; Nyman & Schultz v. United States, 14 Ct. Cust. Appls. 432, T.D. 42060; Oxford University Press, N.Y., Inc. v. United States, 20 Cust. Ct. 78, C.D. 1088; and Swank, Inc. v. United States, 26 Cust. Ct. 454, Abstract 55650, authorities which, as will be developed, infra, at most suggest that the instant material is unfinished oakum.
Counsel for defendant argues that the presumption of correctness of the collector's classification of the instant merchandise has not been overcome. It is urged that the proof does not negate the fact that the importation consists of jute yarns; that, in their imported condition, the subject yams are not oakum, nor a substance used for the purposes for which oakum is used; and that said yarns are merely material which the importer used for the manufacture of oakum.
In the case of General Twine Corp. v. United States, supra, this court considered the tariff provision for oakum, in connection with an importation of untarred, dry, twisted jute packing, which, in its imported condition, was ready for use as a calking substance. After examining a somewhat voluminous record, containing the sharply divergent testimony of witnesses for the respective parties, and reviewing dictionary definitions and some Tariff Commission information on the subject of "oakum" and "twisted jute packing," we stated:
From the foregoing, we are inclined to the view that oakum is a material which assuredly is not characterized solely by reason of its physical state, structure, and composition. It may be, and in the case of recognized marine oakum is, a product of hemp or sunn fiber, or as in the case of what is admittedly plumbers' oakum, a product of jute. It may be in the form of separated fiber, or in the form of a sliver resulting from one or more processes of carding the raw material, and concededly may be, and sometimes is, put through the operations of a drawing frame.
Since, as we had thus observed, whether or not a substance was oakum could not be ascertained from physical condition alone, we deemed it appropriate, under authority of the case of United States v. Quon Quon Company, 46 CCPA 70, C.A.D. 699, to consider use as a determining factor. Accordingly, we stated:
There can be little doubt from the instant record that both plumbers' oakum and twisted jute packing subserve the same ultimate purposes. They are both used as calking materials. Whether in the sliver, single-twisted strand, or multiple-twist put-up, this material is chiefly used to fill a joint in a pipe or a crevice in a deck or building to contain the compound which seals them. And apparently that form is used which suits the individual preference of the user.
If, as construed in the General Twine case, oakum is a fibrous substance which, is chiefly used in its condition as imported, as a calking material, it is obvious that the instant merchandise does not respond to that description. It is not here contended, and seemingly could not be, that the involved jute yarns are usable, as imported, as calking materials. What they are, and what the record plainly shows them to be, is material for processing into a product which is useful for calking purposes. To that extent, the subject merchandise is different from the twisted jute packing in the General Twine case, and does not warrant classification as oakum per se.
It remains to be seen, however, whether the authorities called to our attention by counsel for plaintiffs require us to consider this merchandise to be unfinished oakum, that is, material so far advanced in its manufacture as to be dedicated to use in the making of oakum, and having no other practical commercial use, would, therefore, be properly classifiable as oakum.
The merchandise involved in Waltham Watch Co. v. United States, supra, consisted of unfinished watch pillar or bottom plates. These articles were designed to be used, after further processing, solely as pillar plates for watch movements. In their condition, as imported, they were identifiable as pillar plates, unfinished, and, according to the court, fell within the rule expressed in United States v. Riga, 171 Fed. 783, that "when the article as imported affords evidence as to the use to which it is to be applied and has reached a form and stage wherein it is fit for no other useful purpose than as a part [of a designated article] then, for tariff purposes, it may safely be regarded as within the provision for parts [of said designated article]."
The case of Nyman & Schultz v. United States, supra, was concerned with perforated strips of steel, so treated prior to exportation as to be suitable for use as safety-razor blades after further processing in this country. As imported, the steel had been tempered, polished, and punched with holes to fit the posts of safety razors. In holding that said steel strips were unfinished safety-razor blades, the court quoted the following from United States v. American Bead Co., 9 Ct. Cust. Appls. 27, T.D. 37873:
An article commercially suitable and commercially used for the making of different things is a material which is just as much adapted to the production of all of them as it is to the production of any one of them, and until it has been finally appropriated to some definite manufacturing use and has been given the distinguishing characteristics which clearly identify it as one of the components ultimately to be assembled into a particular completed whole, it can not be regarded as a part of any specified manufacture.
Similar evidence of dedication to an ultimate specific use influenced the conclusions in Oxford University Press, N.Y., Inc. v. United States, supra, and Swank, Inc. v. United States, supra, that the articles there respectively under consideration, to wit, electrotype shells and belts, without buckles, though unfinished, were properly classifiable as if imported in their finished condition.
While the evidence in the instant case tends to show that the particular grade of jute yarn here under consideration has no substantial commercial use other than in the manufacture of white oakum, although the proof is by no means conclusive in this respect, it is questionable whether, as imported, it possesses the distinguishing characteristics indicative of dedication to that use. It is not so marked by manufacturing processes as to be identifiable as an unfinished stage of white oakum, but, seemingly, remains, until completion of the processing described by the witness Reynolds, as a mere material for making oakum. Under these circumstances, we are of opinion that the authorities relied upon by counsel for plaintiffs are distinguishable and that the principles expressed in the cases of United States v. The Harding Co., 21 CCPA 307, T.D. 46830; The Harding Co. et al. v. United States, 23 CCPA 250, T.D. 48109; and American Import Co. v. United States, 26 CCPA 72, T.D. 49612, are more appropriately controlling.
The merchandise in the first Harding case, supra, was material in running lengths for making brake linings for automobile brakes. It was classified as manufactures of asbestos yarn in paragraph 1501(a) of the Tariff Act of 1930 and claimed to be unfinished parts of automobiles within the provisions of paragraph 369 (c) of said act. It appears that all that remained to be done to convert the imported lengths of brake lining into automobile brake linings was cutting to required lengths and drilling of holes to correspond with the holes that are on brake shoes. The material was not, however, marked in any way to indicate where it should be cut, since brake linings normally vary in length.
While it is true that since the evidence in the case established that the material in issue was capable of being adapted to other commercial uses, it could not be held to be dedicated to use as brake linings and, for that reason, was regarded by the court as material, only, it is significant that the court, nevertheless, observed:
But even if it could be said to be dedicated to the exclusive use of making brake linings for automobiles, it would be, nevertheless, a mere material for such use, just as silk cloth in the piece, designed to be used as linings fo,r clothing, is a mere material out of which such linings are to be cut.
Proof in the second Harding case established that the brake lining material was exclusively used in the manufacture of brake linings for automobiles, and thus removed from consideration the question of commercial capability for alternative uses. But this additional evidence did not change the court's conviction that, in the form and condition in which it was imported, this merchandise continued to be a material, and could not be classified as the article into which the material was subsequently manufactured.
The issue of the effect of exclusivity of use was squarely posed in the case of American Import Co. v. United States, supra, wherein lengths of si Hr fishing leader gut were held to be manufactures of silk in paragraph 1211 of the Tariff Act of 1930, rather than leaders, finished or unfinished, in paragraph 1535 of said act, despite evidence that, as imported, the chief, if not the exclusive, use of the material was the making of fishing leaders. The court's conclusion to that effect rested, in part, upon the dictum of the first Harding case, hereinabove quoted, and its own observations to the following effect:
The mere fact that the instant merchandise ip chiefly used, or for that matter exclusively used for leaders (and if it has any other use it is a fugitive one), does not take it out of the "material" class. Hundreds of articles might be suggested which are in the nature of material and which have found but one use. The mere fact that a thing has but one use does not require that it be considered as an article unfinished. If the material has been so far processed from the "material" stage to a partly-completed article, then it loses its character as material and takes on the characteristics of the article for which the material was intended.
There is nothing about the instant merchandise that characterizes it as oakum. It is a material which possesses qualities which make it suitable for use in the manufacture of oakum, and, doubtless, it is not much good for any other purpose, but it has not been shown to have been so processed as to bear unmistakable evidence of its intended ultimate use or to have had its potential use for other purposes destroyed. Cf. Athenia Steel & Wire Co. v. United States, 1 Ct. Cust. Appls. 494, T.D. 31528. As imported, it is the raw material for the manufacture of oakum, in the form and condition of jute yarns or rovings, single, coarser in size than 20-pound, and was properly so classified by the collector.
All claims in the instant protest are, therefore, overruled.
Judgment will be entered accordingly.
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21 B.T.A. 1245
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OPINION.
Trammell:
The respondent has denied the petitioners the deduction under section 214 of the amount of the loss sustained by the partnership upon the sale of the shares of stock of the Bay State Road Co., but has allowed it as a capital loss within the meaning of section 208 of the Revenue Act of 1926. This section of the statute provides, in part, as follows:
(a) For the purposes of this title—
*
(2) The term " capital loss " means deductible loss resulting from the sale or exchange of capital assets;
*
(8) The term " capital assets " means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business.
It is admitted that the shares of stock in question were held by the partnership for more than two years, but the petitioners contend that the stock was held primarily for sale in the course of business and is therefore excluded from " capital assets " under the definition given in the statute.
We do not think however that this stock was held for sale by the petitioners in the cowrse of their trade or business. In order to be excluded from " capital assets " the stock must not only be held for sale, but held for sale in the course of petitioners' trade or business. The petitioners' trade or business was that of engineering and contracting, not the purchase and sale of stock. In the course of that business they did not hold the stock for sale. Property held by a taxpayer for more than two years whether or not connected with his trade or business is under the statute " capital assets," but only if it is held " primarily for sale in the course of his trade or business " is it excluded. We think that the above quoted language from the statute refers to property which might be called stock in trade or what is being sold in the course of the business being carried on and not to other kinds of property.
Since the stock comes within the general provision as to " capital assets " and is not excluded by either of the subsequent provisions as to what shall not be included therein it is our opinion that the stock in question constituted " capital assets " and that the capital gain or loss provisions are applicable.
Reviewed by the Board.
Judgment will be entered for the respondent.
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394 U.S. 991
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C. A. 8th Cir. Certiorari denied.
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181 L. Ed. 2d 211
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Petition for writ of certiorari to the United States Court of Appeals for the Fifth Circuit denied.
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886 F.2d 1405
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OPINION OF THE COURT
MANSMANN, Circuit Judge.
Debtors in bankruptcy here appeal from the decision of the district court which granted a creditor's motion to revoke confirmation of a chapter 13 plan. We are asked to determine whether the secured creditor may be deemed to have accepted the plan by failing to object to it timely or, if the bankruptcy court's failure to apply provisions of 11 U.S.C.A. § 1325(a)(5)(B)(ii) (West 1979), relating to present value constitutes grounds for vacating the plan. In addition, we must determine whether the trustee in bankruptcy and the bankruptcy court are independently required to verify that a Chapter 13 plan meets all statutory requirements or whether they may rely on the lack of objection thereto.
We conclude that the district court erred by reversing the bankruptcy court's confirmed action of the debtor's plan. Although the present value provision found in § 1325(a)(5)(B)(ii) was not applied by the bankruptcy court in determining the amount of the creditor's claim, this does not constitute grounds for vacating a confirmed plan where the creditor has not timely objected to the plan. We further conclude that, although prior to confirmation the bankruptcy court and trustee do have a responsibility to verify that a Chapter 13 plan complies with the Bankruptcy Code provisions, after the plan is confirmed the policy favoring the finality of confirmation is stronger than the bankruptcy court's and the trustee's obligations to verify a plan's compliance with the Code. Therefore, we will reverse the order of the district court and remand for the issuance of an appropriate order reinstating the judgment of the bankruptcy court.
I.
On July 7, 1987, Fred and Denise Szostek filed a Chapter 13 bankruptcy petition. On August 3, 1987, the bankruptcy court issued an order scheduling the meeting of creditors, establishing a deadline for objections to the Szosteks' Chapter 13 plan and scheduling a hearing on confirmation of the plan for December 15, 1987. Pursuant to Bankr.Rules 3020(b) and 9014, the court's order stated that any objections to the con-
firmation of the debtor's plan shall be filed no later than ten days before the confirmation hearing. The filing deadline was thus December 5, 1987.
The Kissell Company ("Kissell"), creditor and appellee, received notice of the deadline for filing objections. On August 18, 1987, Kissell filed a secured claim, based on a purchase money mortgage in the amount of $29,242.41. A few weeks later, on September 8, 1987, the Szosteks filed an objection to Kissell's claim on the ground that Kissell had violated the Truth in Lending Act ("TILA"), 15 U.S.C.A. § 1601 et seq in the course of the residential loan transaction and, therefore, claimed they were entitled to a $1,000 recoupment. On the same day, the Szosteks also filed their First Amended Chapter 13 Plan, which proposed payments totalling approximately $40,-000.00. The plan did not, however, provide for interest to be paid on allowed secured claims, i.e., present value. A hearing on the Szosteks' objection to Kissell's claim was scheduled for December 15, 1987, the same date as the confirmation hearing.
On October 14, 1987, Kissell filed an amended proof of claim which was in the same amount as previously requested, $29,-242.41. The Szosteks subsequently filed an amended objection to Kissell's claim on the ground that the value of the mortgage exceeded the value of the home and that the secured claim had to be bifurcated into two portions, secured and unsecured. The Szosteks sought both a determination of the amount of KisselPs security interest pursuant to 11 U.S.C.A. § 506(a), (d), as well as the relief pursuant to the TILA.
Szosteks' counsel served a copy of Szos-teks' First Amended Plan upon Kissell's counsel on November 16, 1987. Sometime prior to December 15, 1987, the attorneys for the Szosteks and for Kissell had a conversation in which Kissell's counsel requested a continuance of the hearing on Szosteks' objection to Kissell's claim so that an appraisal of Szosteks' property could be obtained. During this conversation, Kissell's counsel did not request a continuance of the confirmation hearing on the plan, which was also scheduled for December 15, 1987.
Kissell's counsel later testified that he assumed that Szosteks' counsel had agreed to both postponement of the hearing on Szosteks' objection to Kissell's claim and to postponement of the confirmation hearing. Szosteks' counsel later testified that he understood the continuance request was only for the hearing on Szosteks' objection to Kissell's proof of claim.
On December 15, 1987, the bankruptcy court held the confirmation hearing as scheduled at which the Szosteks appeared, but Kissell did not. Since no objections to the plan had been filed, upon recommendation of the standing Chapter 13 trustee, the Szosteks' First Amended Plan was confirmed by the court on December 15, 1987. The confirmed plan provided for payments as follows: (1) $4,003.00 to the trustee; (2) payment in full on Kissell's allowed secured claim; and, (3) the balance to the holders of allowed unsecured claims. Subsequently, the confirmed plan provided for 100% payment on the unsecured claims. On the same date, the hearing on the Szos-teks' objection to Kissell's proof of claim was continued to January 25, 1988.
By letter dated December 16, 1987, Kis-sell's counsel confirmed a telephone call to him from Szosteks' counsel, which advised that the hearing on the Szosteks' objection to Kissell's proof of claim had been continued to January 25, 1988. (The actual date
of the telephone call is not noted in the appendix.)
Three days after confirmation of the plan and thirteen days after the deadline for filing objections to the plan, Kissell filed an objection to the Szosteks' First Amended Chapter 13 Plan and an answer to the Szosteks' objection to Kissell's proof of claim. Kissell objected to Szosteks' plan on the grounds that it failed to provide adequately for payment in full of Kissell's secured claim, i.e., it did not provide for present value. No responsive pleading by the Szosteks was required under the Bankruptcy Rules.
The hearing on Szosteks' objections to Kissell's proof of claim was held On January 25, 1988. It was at this hearing that Kissell's attorney first learned that the Szosteks' plan had been confirmed. It appears from the record that Kissell's attorney took no action to challenge confirmation of the plan at that time. Consequently, no appeal was filed within ten days of the plan confirmation as required by Bankr.Rule 8002(a), nor did Kissell's attorney seek to file any appeal after learning of the confirmed plan on January 25, 1988.
On March 21, 1988, the bankruptcy court issued a memorandum and order determining Kissell's secured claim to be $25,110.00 and its unsecured claim to be $3,132.41. The March 21, 1988 order was, in part, based upon the parties' agreement that Kissell had violated the TILA and that a $1,000.00 recoupment was appropriate. The court apportioned the recoupment between Kissell's secured and unsecured claims. As part of its order, the bankruptcy court specifically noted that any challenge to the December 15, 1987 confirmation of the Szosteks' plan was not an issue before the court.
As a result of prevailing on the TILA objection, Szosteks' counsel filed a motion for attorneys fees pursuant to 15 U.S.C.A. § 1640. Kissell opposed the motion on the ground that, as part of the parties' agreement that there was a TILA violation, Szos-teks' counsel had agreed to waive attorneys fees.
On May 20, 1988, four months after learning of the plan's confirmation, Kissell filed a motion seeking dismissal of the debtors' petition, revocation of confirmation under 11 U.S.C.A. § 1330, and alternatively, modification of the plan or relief from the automatic stay. Kissell's motion was based on alleged fraud by the Szosteks in obtaining confirmation of the plan and the contention that the plan should not have been confirmed because it did not provide for paying Kissell interest on its secured claim, i.e., present value.
The bankruptcy court held two hearings in June of 1988 on Szosteks' motion for attorneys fees and on Kissell's motion to dismiss, revoke confirmation, and modify the plan. On December 6, 1988, the bankruptcy court awarded attorneys fees and costs under TILA in the amount of $1,009.50 and denied Kissell's motion to dismiss, revoke confirmation, and modify the plan, 93 B.R. 399 (Bkrtcy.E.D.Pa.1988). The bankruptcy court held that Kissell's allegation that confirmation of the plan was procured by fraud was not supported by the evidence and thus, the plan was not revocable under § 1330(a).
A timely appeal was taken to the United States District Court for the Eastern District of Pennsylvania where, although the district court affirmed the finding that there was no fraud, the court reversed the bankruptcy court's order denying Kissell's motion to dismiss, revoke confirmation and modify the plan. The district court vacated confirmation of Szosteks' Chapter 13 plan and remanded the case on the basis that neither the bankruptcy court nor the trustee had fulfilled its independent obligation of insuring that the Szosteks' plan complied with 11 U.S.C.A. § 1325(a)(5). However, the district court affirmed the bankruptcy court's award of attorneys fees. The Szosteks appeal.
Since the district court sits as an appellate court in reviewing cases from the bankruptcy court, the district court is neither a finder of fact, nor is any more qualified than the court of appeals to evaluate the decision of the bankruptcy court. Consequently, our review on appeal from the district court in a bankruptcy case is plenary. Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101-02 (3d Cir.1981).
II.
We are faced here with a clash between two seemingly divergent policies involved in the Bankruptcy Code. On the one hand is the policy of finality, as evidenced by § 1327, which provides that, absent fraud, confirmation of a debtor's plan binds both the debtor and the creditors. Under § 1327, a confirmation order is res judica-ta as to all issues decided or which could have been decided at the hearing on confirmation. On the other hand is the language of § 1325(a) which provides that a court shall confirm a plan which meets the conditions listed in that section. The conflict resulted here when a confirmation order was entered for a plan which did not provide for the calculation of present value of the creditor's claim, a requirement of § 1325(a)(5)(B)(ii). Thus, we must determine whether, in the absence of fraud, the failure of a creditor to attend the confirmation hearing, object timely to the plan, or appeal the order of confirmation, regardless of the reason, precludes the creditor from obtaining full recovery of the present value of its claim when such was not provided for in the confirmed plan.
A.
To understand the tension between the code sections, we must first look at one of the relevant portions of the Bankruptcy Code. We find that 11 U.S.C.A. § 1327(a) provides as follows:
Effect of confirmation (a) The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted or has rejected the plan.
11 U.S.C.A. § 1327 (West 1979). One leading commentator has recently interpreted this section as follows:
it is quite clear that the binding effect of a chapter 13 plan extends to any issue actually litigated by the parties and any issue necessarily determined by the confirmation order, including whether the plan complies with sections 1322 and 1325 of the Bankruptcy Code. For example, a creditor may not after confirmation assert that the plan was not filed in good faith, . that the creditor should have been paid interest; that the debtor is ineligible for chapter 13 relief; or that the plan is otherwise inconsistent with the Code in violation of Section 1322(b)(10) or section 1325(a)(1).
5 Collier on Bankruptcy, § 1327.01 (5th ed.1988).
The finality of confirmed plans was discussed by the Supreme Court in Stoll v. Gottlieb, 305 U.S. 165, 59 S.Ct. 134, 83 L.Ed. 104 (1938). At issue in Stoll was a corporate debtor's plan which included cancellation of a guaranty to pay a bond. Pri- or to confirmation, there had been no objections to the plan. After confirmation, however, the creditor filed an action in state court to recover on the guaranty. The Supreme Court held that the finality of the bankruptcy confirmation order barred the creditor from litigating its claim.
Several of our recent cases have followed this rationale. For example, in United States ex rel. I.R.S. v. Norton, 717 F.2d 767 (3d Cir.1983), we held that the Internal Revenue Service (I.R.S.) could not retain overpayment of a debtor's taxes as security on the debt to the I.R.S. when the I.R.S. did not object to the debtor's plan, because, upon confirmation, the I.R.S. became bound by the plan's provisions. Similarly, in In re Penn Central Transportation Company, 771 F.2d 762 (3d Cir.1985), we held that a creditor who received notice of a railroad reorganization and failed to participate in the proceedings was barred from litigating an antitrust claim. We stated that
the purpose of bankruptcy law and the provisions for reorganization could not be realized if the discharge of debtors were not complete and absolute; that if courts should relax provisions of the law and facilitate the assertion of old claims against discharged and reorganized debtors, the policy of the law would be defeated; that creditors would not participate in reorganization if they could not feel that the plan was final, and that it would be unjust and unfair to those who had accepted and acted upon a reorganization plan if the court were thereafter to reopen the plan and change the conditions which constituted the basis of its earlier acceptance.
In re Penn Central, 771 F.2d at 767, citing Duryee v. Erie R.R. Co., 175 F.2d 58, 61-63 (6th Cir.), cert. denied, 338 U.S. 861, 70 S.Ct. 103, 94 L.Ed. 527 (1949).
Other courts of appeals have upheld the binding effects of a bankruptcy confirmation order. A creditor was bound by a plan that released the third party guarantor in Republic Supply Co. v. Shoaf, 815 F.2d 1046 (5th Cir.1987). The court stated that, regardless of whether the plan provision to release the guarantor was inconsistent with the bankruptcy laws or within the authority of the bankruptcy court, it was nonetheless included in the plan. Since the plan was confirmed without objection, nor was an appeal taken, the plan was not reviewable on its merits. 815 F.2d at 1050.
A case with facts analogous to the case here is Neeley v. Murchison, 815 F.2d 345 (5th Cir.1987). In Neeley, the creditor filed his objection to dischargeability ten days after the time limitation period. The bankruptcy court held that when the creditor's attorney erroneously relied on both oral statements by the bankruptcy court's clerks as to time limitation and the blank space on a form received from the bankruptcy clerk as to the deadline to file objections, his reliance was misplaced because the bankruptcy rules plainly stated the time deadline. The bankruptcy court found the creditor's objection time-barred. The Court of Appeals for the Fifth Circuit affirmed. 815 F.2d at 347.
Similarly, in Matter of Gregory, 705 F.2d 1118 (9th Cir.1983), the Court of Appeals for the Ninth Circuit held that the failure to raise an objection at the confirmation hearing, or to appeal from the confirmation order, should preclude an attack on the plan or any provision therein as being illegal in a subsequent proceeding. The court of appeals noted that the creditor's treatment seemed "grossly unfair" because of a zero-payment plan provision where the debtor, a convicted embezzler, owed $17,-000 to his employer. Nonetheless, the court concluded, if a creditor ignores the bankruptcy proceedings, he does so at his peril. 705 F.2d at 1123.
Kissell relies on one case, In re Britts, 18 B.R. 203 (Bkrtcy.N.D.Ohio 1982), to argue that we have the power to grant relief notwithstanding the confirmation of a plan. The bankruptcy court in Britts held that, even if a clause staying a creditor's pursuit of a co-debtor is not inconsistent with the Bankruptcy Code, such clause can only bind the creditor who specifically adopts the proposed plan. The creditor in Britts was permitted to proceed against the co-debtor, even though the plan had been confirmed with a contrary provision.
Britts can be distinguished from the case here in several ways. First, In re Britts involved claims against a co-debtor. Second, the creditor was not aware of the clause which limited its rights against the co-debtor until the day of the creditors' meeting because the clause was not included in the notice. The court found that this failure violated the notice provisions of the Code. Additionally, Britts has been criticized by the Bankruptcy Court for the Eastern District of Pennsylvania for the failure of the Britts court to discuss the final effects of 11 U.S.C.A. § 1327. See In re Bonanno, 78 B.R. 52, 55 (Bkrtcy.E.D.Pa.1987).
Here, the district court recognized well settled law that a confirmed plan is final. However, the court, relying on In re Chinichian, 784 F.2d 1440 (9th Cir.1986), stated that it is equally well established that a violation of 11 U.S.C.A. § 1325(a) can, under certain circumstances, warrant vacating a confirmation order. But Chinichian is distinguishable from the Szosteks' case in several aspects. First, in Chinichian there was not a final confirmation of the plan. The bankruptcy court had only partially confirmed the plan pending a later ruling on a proposal to reject a land sale contract. Second, the bankruptcy court determined the debtor's plan had been filed in bad faith and subsequently rejected the plan. On appeal, the Court of Appeals for the Ninth Circuit held that a partial confirmation is not a final order and therefore the plan was properly rejected by the bankruptcy court. 784 F.2d at 1442-44. Neither situation is present here and the district court cites no other authority to vacate a confirmed plan.
B.
We must now examine the provisions of 11 U.S.C.A. § 1325(a), which directs the handling of secured claims, against this policy of finality. The Bankruptcy Code's criteria for treatment of secured claims in Chapter 13 plans are set forth in 11 U.S. C.A. § 1325(a)(5). According to § 1325(a)(5), in order for a plan to be confirmed, with respect to each allowed secured claim provided for by the plan, one of the following three conditions must be met:
(A) the holder of such claim has accepted the plan;
(B)(i) the plan provides that the holder of such claim retain the lien securing such claim; and
(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; or
(C) the debtor surrenders the property securing such claim to such holder....
11 U.S.C.A. § 1325(a)(5)(A)-(C).
The district court determined that surrendering the property in question was not a consideration in this case. Therefore, the subpart (C) condition of 11 U.S.C.A. § 1325(a)(5) was not an issue. The question then becomes whether the Szosteks' plan met either the conditions of subparts (A) or (B). Kissell reasons that since the Szosteks' plan does not provide for present value on his secured claim pursuant to sub-part (B)(ii), the plan should not have been confirmed and, consequently, must be revoked. Thus, Kissell interprets the Code to require that only if the plan meets the conditions of § 1325(a)(5) can it be confirmed.
If the provisions of § 1325(a)(5) are mandatory, as Kissell contends, then a plan cannot be confirmed if it does not meet the requirements of that section. We must determine whether § 1325(a)(5)(B)(ii) is mandatory, as Kissell contends, or whether the section is discretionary, ie., it guarantees confirmation if a plan comports with the statutory provisions, but does not mandate that the provisions be met in order for confirmation to occur.
We note at the outset that the Code section which explicitly contains mandatory requirements for confirmation of a debtor's Chapter 13 plan is 11 U.S.C.A. § 1322, which unequivocally states "the plan shall" do three things. Section 1322 provides in relevant part:
(a) The plan shall—
(1)provide for the submission of all or such portion of future earnings or other future income of the debtor to the supervision and control of the trustee as is necessary for the execution of the plan;
(2) provide for the full payment, in deferred cash payments of claims entitled to full priority under section 507 of this title, unless the holder of a particular claim agrees to a different treatment of such claims; and
(3) if the plan classifies claims, provide the same treatment for each claim within a particular class.
11 U.S.C.A. § 1322(a). By comparison, the language of § 1325(a) states that a "court shall confirm a plan if" certain things occur. However, it does not state "only if" the described events occur. Thus, the logical interpretation is that if the conditions of § 1325(a) occur, the court must confirm the plan. On the other hand, if the conditions of § 1325(a) are not met, although the requirements of § 1322 are fulfilled, the court has the discretion to confirm the plan. If Congress had intended for § 1325(a) to be mandatory, it could have included that requirement with the requirements already listed in § 1322.
Review of a comparable bankruptcy section, one dealing with the confirmation of chapter 11 plans, supports the conclusion that § 1325(a) is not mandatory. The text of 11 U.S.C.A. § 1129 specifically states that "The court shall confirm a plan only if all of the following requirements are met"_ (Emphasis added.) Thus, the distinction between § 1322 and § 1325(a) and the inclusion of the "only if" language in § 1129, which is absent from § 1325(a), show an unmistakable intent on the part of Congress that a plan may be confirmed even if it does not comport with the requirements of § 1325(a)(5).
We find additional guidance in a recent bankruptcy court decision which described § 1325(a)(5) as follows:
Section 1325(a)(5) does not really require that creditors receive the value of this secured claim in order for the plan to be confirmed. Section 1325 provides that the court shall confirm the plan if the six listed criteria are met. § 1325(a) contains sufficient conditions for confirmation of a chapter 13 plan, but not necessary conditions for confirmation of a chapter 13 plan. Thus, as written, § 1325(a) does not contain requirements for confirmation.
In re Brady, 86 B.R. 166, 169 (Bkrtcy.D. Minn.1988).
Kissell relies on Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427 (6th Cir.1982), to support his position that a plan must comply with § 1325(a) of the Code. Memphis Bank & Trust involved the procedure established by the Court of Appeals for the Sixth Circuit to be followed by the bankruptcy courts in reviewing a Chapter 13 plan involving secured claims. The court of appeals held that the bankruptcy court is to determine the amount of interest to be paid on secured claims. In so directing, the court stated, "section 1325(a)(5)(B) seems to require the Bankruptcy Court to assess interest on the secured claim for the present value of the collateral (if it is not to be paid immediately) in order not to dilute the value of that claim through delay in payment." Memphis Bank & Trust, 692 F.2d at 429.
It is important to note, however, that although Memphis Bank & Trust involved an appeal to the district court from the bankruptcy court order confirming the debtor's plan, there is nothing in the decision that indicates a timely appeal was not taken. Therefore, Memphis Bank & Trust does not support the contention by Kissell that a confirmed plan can be challenged where no timely appeal was filed.
Kissell also points to language in the confirmation order which states
upon consideration of the plan submitted by the debtor under chapter 13 of title 11 U.S.C. and the standing trustee's report which has been filed; and it appearing that:
sfc * #
B. the plan complies with the provisions of 11 U.S.C. § 1322 and 1325 and with other applicable provisions of title 11 .
to argue that the provisions of § 1325(a) are mandatory. We are not persuaded that one line in a form order was intended to make the requirements of a statutory provision mandatory. Rather, we consider the language to be in compliance with Bankr. Rule 3020(c) which provides that the "order of confirmation shall conform to Official Form No. 31...."
We conclude that the provisions of § 1325(a) are not mandatory. Instead, § 1325(a) requires the bankruptcy court to conform a plan which complies with the statute, although it leaves an area of discretion for the court to confirm a plan which comports with the mandatory provisions of § 1322, but does not meet the conditions of § 1325(a)(5)(B)(i)-(iii). Thus, the cases on which Kissell relies must be considered and compared with the cases which hold that the failure of a secured creditor to make a timely objection results in the creditor being deemed to have accepted the plan pursuant to 11 U.S.C.A. § 1325(a)(5). Where acceptance under that subsection exists, the requirement for present value need not be satisfied, since only one of the three requirements of § 1325(a)(5) need be met. Cf. 5 Collier on Bankruptcy § 1327.01.
Indeed, based on the policy of finality as discussed in section A above, if Kissell can be deemed to have accepted the plan by failure to make an objection, the first condition of § 1325(a)(5) is satisfied. A recent decision by the Court of Appeals for the Tenth Circuit supports our conclusion that Kissell's failure to make a timely objection constitutes acceptance of the plan. In In re Ruti-Sweetwater, Inc., 836 F.2d 1263 (10th Cir.1988), the bankruptcy court had ruled that a non-objecting creditor was deemed to have accepted a Chapter 11 plan and the district court affirmed. The creditor in In re Ruti-Sweetwater, Inc. made the same objection that Kissell made in the instant case: that there must be an affirmative acceptance of a plan which does not provide for present value on a Secured claim. The Court of Appeals for the Tenth Circuit affirmed the district court's holding that the creditor's inaction constituted an acceptance of the plan. The court reasoned:
to hold otherwise would be to endorse the proposition that a creditor may sit idly by, not participate in any manner in the formulation and adoption of the plan in reorganization and thereafter, subsequent to the adoption of the plan, raise a challenge for the first time. Adoption of (this) approach would effectively place all reorganization plans at risk in terms of reliance and finality.
836 F.2d at 1266.
The general rule is that the acceptance of the plan by a secured creditor can be inferred by the absence of an objection. Cf. Ruti-Sweetwater, 836 F.2d at 1266. The district court here erroneously concluded that this acceptance is generally limited to situations where the creditor's claim is within the "cram-down provision" because the creditor is then assured his payments will have a present value equal to his allowed secured claim, thereby securing his constitutionally protected property right. The district court further reasoned that, since the Szosteks' plan did not contain a cram-down provision, neither the trustee or the court could reasonably infer acceptance. The district court's reasoning is contradicted by our holdings in previous cases as well as the opinion of the Court of Appeals for the Tenth Circuit in In re Ruti-Sweetwater.
A similar situation arose in Republic Supply Co. v. Shoaf 815 F.2d 1046 (5th Cir.1987), where the creditor advocated much the same position as the district court here, i.e., that the alleged failure of a plan to comply with the provisions of the Code effectively rendered that plan revocable despite the confirmation order. In Republic Supply Co., the Court of Appeals for the Fifth Circuit recognized that the release of a guarantor was arguably prohibited by the Code. However, the court held that it was an issue which should have been addressed on appeal from the confirmation order. The court stated,
Regardless of whether that provision is inconsistent with bankruptcy laws or within the authority of the bankruptcy court, it is nonetheless included in the Plan, which was confirmed by the bankruptcy court without objection and was not appealed. [The creditor], in effect, is now seeking to appeal the confirmed Plan and asking us to review it on its merits. Questions of the propriety or legality of the bankruptcy court confirmation order are indeed properly addressable on direct appeal. [The creditor], however, is now foreclosed from that avenue of review because it chose not to pursue it.
815 F.2d at 1050.
We conclude that, once the Szosteks' plan was confirmed, it became final under § 1327 and, absent a showing of fraud under § 1330(a), it could not be challenged under § 1325(a)(5)(B)(ii) for failure to pay Kissell the present value of its claim.
III.
Kissell's final argument, the one which was accepted by the district court resulting in the revocation of the confirmation order, is that the bankruptcy court and the trustee did not fulfill their obligations when they approved a plan which was not in compliance with 11 U.S.C.A. § 1325(a)(5). The role of the court in this context was discussed in In re Bowles, 48 B.R. 502 (Bkrtcy.E.D.Va.1985), where the bankruptcy court held that it had an independent duty to examine a plan for compliance with the code even though no objections by creditors were made. In agreement are In re Steinhorn, 27 B.R. 43 (Bkrtcy.S.D.Fla.1983), and In re Lucas, 3 B.R. 252 (Bkrtcy.S.D.Cal.1980), where the bankruptcy courts held that the court itself has a responsibility to determine whether a debtor's plan meets code requirements. However, these cases involved the court questioning the provisions of the plan prior to confirmation, not afterward. Moreover, in both Bowles and Steinhorn, the court found that the creditors' plans were not proposed in good faith.
Even though the court in In re Bowles recognized a duty to see that the plan meets the Bankruptcy Code requirements, the court also recognized that it has discretion in performing this duty. The Bowles court explained that "Congress has chosen a standard in § 1322(b)(1) [referring to contents of a plan] which in the administration of cases in Chapter 13 and the confirmation of plan under § 1325 necessarily involves the exercise of the court's discretion." Bowles, 48 B.R. at 509. Cf. In re Lucas, 3 B.R. 252 (Bkrtcy.S.D.Cal.1980) (court did not confirm plan because it was felt the debtor, a single mother of three, could not realistically comply with the provisions). None of the cases offered by Kissell to show that the bankruptcy court has an independent duty to examine the plan, however, is analogous to the Szosteks' situation, since the cases did not involve confirmed plans nor did they involve the present value provisions of § 1325(a)(5)(B)(ii).
While we do not understate the importance of the obligation of the bankruptcy court or the trustee to determine that a plan complies with the appropriate sections of the Bankruptcy Code prior to confirmation of the plan, we nonetheless recognize that the affirmative obligation to object to the Szosteks' plan rested with Kissell, not with the bankruptcy court or the trustee. As noted by the Court of Appeals for the Tenth Circuit in In re Ruti-Sweetwater, Inc., 836 F.2d 1263 (10th Cir.1988), creditors are obligated to take an active role in protecting their claims. See also In re Record Club of America, 38 B.R. 691, 696 (M.D.Pa.1983) (the Bankruptcy Code contemplates that concerned creditors will take an active role in protecting their claims). Otherwise, Rules 3017 and 3020(b), which set a deadline for filing objections to a plan, would have no substance. Kissell's position that, even in the absence of fraud, a confirmed plan which does not comply with the present value provision in § 1325(a)(5)(B)(ii) can be vacated is inconsistent with the general policy favoring the finality of confirmed plans as evidenced by the Supreme Court's decision in Stoll.
IV.
We hold that the Szosteks' plan was accepted by the Kissell Corporation since Kis-sell failed to object timely to the plan's confirmation. Moreover, we find that the provisions in 11 U.S.C.A. § 1325(a)(5) are not mandatory and do not require the revocation of the confirmed plan under the facts of this case. Because the district court based its determination that the bankruptcy court and trustee had failed to fulfill their obligations on an improper construction of § 1325, we will reverse the order of the district court which vacated the bankruptcy court's order confirming the reorganization plan and remand for the entry of an appropriate order reinstating the order of the bankruptcy court.
. The meaning of present value was explained by the bankruptcy court in In re Fisher, 29 B.R. 542 (Bkrtcy.D.Kan.1983) as follows:
"Present value" or the "time value of money" is not a legal concept, but rather it is a term of art in the financial community. It simply means that a dollar received today is worth more than a dollar to be received in the future. To compensate the creditor for not receiving its money today, the debtor is charged an additional amount of money. The charge is based on a rate of interest called a "discount rate." The discount rate is used to calculate how much the creditor should be paid so it will have the same amount of money in the future as it would have had if it did not have to wait to be paid.
29 B.R. at 543.
. The date is not clear from the record.
. The bankruptcy court noted in its opinion that the attorneys' stipulation to continue the hearing date was not filed with the Clerk of the Bankruptcy Court, nor was there an order of the court allowing the stipulation.
At oral argument, counsel for Kissell explained that he was under the impression that the court could not enter a confirmation order if there was a question as to the amount of a claim, and further, he thought that the confirmation hearing was to be continued. We caution counsel that all stipulations or agreements as to continuances of bankruptcy proceedings should be filed with the court to avoid any misunderstandings such as apparently occurred here.
. Kissell later withdrew its request for relief from the automatic stay.
. Kissell also argued for the application of 11 U.S.C.A. § 1330(a), allowing for revocation on the basis of fraud. Bankruptcy Code 11 U.S. C.A. § 1330(a) provides as follows:
Revocation of an order of confirmation (a) On request of a party in interest at any time within 180 days after the date of the entry of an order of confirmation under section 1325 of this title, and after notice and a hearing, the court may revoke such order if such order was procured by fraud.
Both the bankruptcy court and the district court held that there was no fraud in securing the confirmation of the Szosteks' plan. We note that Kissell has abandoned its claim that the Szosteks' confirmed plan was procured by fraud. Clearly, there can be no revocation of the plan based on § 1330(a).
. See also In re Zimble, 47 B.R. 639 (Bkrtcy.D.R.I.1985), where the bankruptcy court denied the creditor's motion to obtain an increased interest rate to equal the prevailing market rate after a plan had been confirmed. The creditor had notice of the plan but did not object. The court stated that, in the absence of a confirmed plan, the creditor's claim would be colorable; however, once the plan was confirmed the creditor lost his right to assert any rights other than those provided for by the confirmed plan because the plan became final under § 1327.
. In addition, Kissell relies on General Motors Acceptance Corp. v. Lefevre, 38 B.R. 980 (Bkrtcy.D.Vt.1983), and In re Trent, 42 B.R. 279 (Bkrtcy.W.D.Va.1984), to support the argument that the requirements of 11 U.S.C.A. § 1325(a)(5) must be met in order for a Chapter 13 plan to be confirmed. In General Motors Acceptance Corp., the district court affirmed the bankruptcy court's rejection of the debtor's Chapter 13 plan because the plan did not provide for the payment of interest (present value) on the creditor's secured claim. In In re Trent, a Chapter 13 plan was rejected by the bankruptcy court when it did not provide for the payment of interest on the creditor's secured claim where a timely objection was made by the creditor. These cases do stand for the proposition that a Chapter 13 plan must provide for interest (present value) on secured claims. However, in both cases, the issue was raised timely and litigated during the court's consideration of whether to confirm the proposed plan. Therefore, neither case directly supports Kissell's argument that a confirmed plan can be vacated for failure to have provided for interest on a secured claim.
. "Cram-down" means that if a secured creditor does not accept a Chapter 13 plan it can be forced upon him by providing for payments of the present value of his claim. In re Brady, 86 B.R. at 170.
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382 U.S. 889
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The motions to expedite consideration are granted and the defendants are directed to file responses to the motions for leave to file bills of complaint on or before November 10, 1965.
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310 U.S. App. D.C. 63
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Opinion PER CURIAM.
PER CURIAM:
Sean Haddon, a former White House chef, filed an employment discrimination suit against Gary Walters, the White House Chief Usher. The district court dismissed the complaint for want of subject-matter jurisdiction. We find that the court erred in so finding; but because we hold that Mr. Had-don has failed to state a claim on which relief could be granted, we affirm the judgment.
I. Background
A. Factual and Procedural History
Mr. Haddon is a white male who served as an assistant chef at the White House ("White House" or "Executive Residence") from July 1988 to March 25, 1994. He claims that he was passed over for promotion at least in part because of his engagement to a black woman. He also alleges that he confronted Mr. Walters in, an attempt to resolve his grievance but that his employment discrimination complaint was rejected on the ground that the White House staff were not subject to Title VII of the Civil Rights Act of 1964.
In June 1993, Mr. Haddon filed suit in the U.S. District Court for the District of Columbia alleging that the Executive Residence had violated Title VII, as amended. After briefing and argument, the district court granted Mr. Walters' motion to dismiss for lack of subject-matter jurisdiction. Haddon v. Walters, 836 F.Supp. 1, 3 (D.D.C.1993). Mr. Haddon filed a timely notice of appeal. While his appeal was pending, Mr. Haddon moved the district court for relief from its final order on the ground that further research had revealed additional evidence of prior White House compliance with Title VII. The district court denied the motion.
B. Statutory Framework
In 1972, Congress amended Title VII to extend its prohibition of discrimination based on race, color, religion, sex, or national origin to personnel actions affecting most federal employees. 42 U.S.C. § 2000e-16 (1988 & Supp. Ill 1991) ("section 2000e-16"). In pertinent part, section 2000e-16 applies to "employees . in executive agencies as defined in section 105 of Title 5." 42 U.S.C. § 2000e-16(a). Section 105 of Title 5 in turn defines an executive agency as "an Executive department, a Government corporation, [or] an independent establishment." 5 U.S.C. § 105 (1988). In 1991, Congress further amended Title VII to cover certain Presidential appointees not already covered by section 2000e-16. 2 U.S.C. § 1219 (Supp. Ill 1991) ("1991 Amendments" or "section 1219").
Sections 2000e-16 and 1219 prescribe different paths for obtaining judicial review. Section 2000e-16 authorizes a party who has exhausted his administrative remedies and who is aggrieved "by the final disposition of his complaint, or by the failure to take final action on his complaint," to file a civil action in the district court. 42 U.S.C. § 2000e-5(f)(3) & 2000e-16(c) (1988 & Supp. Ill 1991). Section 1219, however, provides that a Presidential appointee may file a complaint with the Equal Employment Opportunity Commission, "or such other entity as is designated by the President by Executive Order," and that any party aggrieved by a final order disposing of such a complaint may petition for review by the United States Court of Appeals for the Federal Circuit. 2 U.S.C. § 1219(a)(2) & (3)(A). Thus, whether or not section 1219 applies to Mr. Haddon, it cannot be the basis for jurisdiction in the district court. The question before us, then, is whether he is covered by section 2000e-16.
II. Discussion
Mr. Haddon argues that the district court erred when it concluded that he was not covered by section 2000e-16. That section provides, in pertinent part:
All personnel actions affecting employees or applicants for employment . in executive agencies as defined in section 105 of Title 5 (including employees and applicants for employment who are paid from nonappropriated funds) . shall be made free from any discrimination based on race, color, religion, sex, or national origin.
42 U.S.C. § 2000e-16(a) (emphasis added). This case turns on whether the Executive Residence is an "executive agency" within the meaning of section 2000e-16. As defined by reference to 5 U.S.C. § 105, executive agency "means an Executive department, a Government corporation, and an independent establishment." The Executive Residence is not included in Title 5's exclusive list of Executive departments. 5 U.S.C. § 101 (1988). Nor does it fit within Title 5's definition of a Government corporation. 5 U.S.C. § 103 (1988). By process of elimination, section 2000e-16 applies to Mr. Haddon if and only if the Executive Residence is an "independent establishment."
Title 5 defines "independent establishment" to mean
(1) an establishment in the executive branch (other than the United States Postal Service or the Postal Rate Commission) • which is not an Executive department, military department, Government corporation, or part thereof, or part of an independent establishment; and
(2) the General Accounting Office.
5 U.S.C. § 104 (1988). Although this definition of independent establishment does not clearly foreclose Mr. Haddon's argument, he fails to explain how the Executive Residence fits within the compass of that term. We conclude that it does not for two reasons.
First, we note that elsewhere Congress has used the term "independent establishment" in distinction to the Executive Residence. Specifically, Congress has authorized "[t]he head of any department, agency, or independent establishment of the executive branch of the Government [to] detail, from time to time, employees of such department, agency, or establishment to the White House Office, the Executive Residence at the White House, the Office of the Vice President, the Domestic Policy Staff, and the Office of Administration." 3 U.S.C. § 112 (1988) (emphasis added). That Congress distinguished the Executive Residence from the independent establishments, whatever they may be, suggests that Congress does not regard the Executive Residence to be an independent establishment, as it uses that term.
Second, while Title 5 relates to government organization and employees and prescribes pay and working conditions for agency employees, see, e.g., 5 U.S.C. § 7103(a) (1988 & Supp. Ill 1991), Title 3 addresses similar concerns with respect to the President's advisors and the staff of the Executive Residence. See, e.g., 3 U.S.C. § 105(b)(1) (1988) (authorizing the President "to appoint and fix the pay of employees in the Executive Residence at the White House without regard to any other provision of law regulating the employment or compensation of persons in the Government service"). Accordingly, as Mr. Walters argues, section 2000e-16's incorporation of Title 5's definition of executive agency further suggests that it does not apply to the staff of the Executive Residence.
Mr. Haddon contends, finally, that the administrations of prior Presidents read section 2000e-16 more broadly than we do and that their interpretations of the statute deserve great deference. In support of this contention, he cites a conelusory Executive Order issued by President Carter and a "Stipulation of Compromise" that was entered into by the Nixon Justice Department in a case involving a discrimination claim. Neither explains why it should be concluded that the "White House Office" is subject to section 2000e-16; nor are these documents analogous to an administrative agency's construction of a statute it has been entrusted to administer, with respect to which we generally require a reasoned explanation for a departure from past practice. Therefore, we hold that the Executive Residence is not an executive agency within the meaning of section 2000e-16.
While Mr. Haddon's section 2000e-16 claim fails to present a cause of action on which relief could be granted, we cannot accept the district court's conclusion that it lacked subject-matter jurisdiction over it even though we are aware that at least one circuit has reached the same conclusion under similar circumstances. See Dumas v. Town of Mt. Vernon, 612 F.2d 974, 980 (5th Cir.1980). Mr. Haddon's claim arises under the laws of the United States. That suffices to establish the district court's jurisdiction "[u]nless the alleged claim clearly appears to be immaterial and made solely for the purpose of obtaining jurisdiction, or [is] wholly insubstantial and frivolous." Kleiman v. Department of Energy, 956 F.2d 335, 339 (D.C.Cir.1992) (internal quotation marks, ellipsis and citation omitted). As the Supreme Court stated in Bell v. Hood, 327 U.S. 678, 682, 66 S.Ct. 773, 776, 90 L.Ed. 939 (1946):
Jurisdiction . is not defeated . by the possibility that the averments might fail to state a cause of action on which petitioners could actually recover____ Whether the complaint states a cause of action on which relief could be granted is a question of law and just as issues of fact it must be decided after and not before the court has assumed jurisdiction over the controversy. If the court does later exercise its jurisdiction to determine that the allegations in the complaint do not state a ground for relief, then dismissal of the case would be on the merits, not for want of jurisdiction.
See also Associated Dry Goods Corp. v. EEOC, 419 F.Supp. 814, 818 (E.D.Va.1976) ("Defendant's assertion that the sections of federal law cited by plaintiff are not applicable to the instant case does not defeat jurisdiction, but rather contests whether the plaintiff has stated a cause of action.").
Although Mr. Haddon brought this action under Title VII of the Civil Rights Act "as amended," and although he may have alleged facts that would support a claim for relief under the 1991 Amendments, we do not remand the case in order to allow him to pursue this alternative theory. Were we to do so, the district court would quite properly dismiss the claim for want of jurisdiction. See 2 U.S.C. § 1219(a)(2) & (3)(A).
III. Conclusion
Because we hold that Mr. Haddon has failed to present a claim on which the district court could grant relief and because "we may affirm on different grounds the judgment of a lower court if it is correct as a matter of law," Kleiman, 956 F.2d at 339 (internal quotation marks and citation omitted), we affirm the judgment of the district court. We do so, however, without prejudice to any right Mr. Haddon may have to pursue a section 1219 claim in the appropriate forum.
So ordered.
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564 U.S. 1023
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C. A. 4th Cir. Certiorari denied.
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422 U.S. 1009
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C. A. 9th Cir. Certiorari denied.
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506 U.S. 990
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C. A. 5th Cir. Certiorari denied.
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48 Cust. Ct. 331
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Opinion by
Lawrence, J.
In accordance with stipulation of counsel that the merchandise and issues herein are similar in all material respects to those the subject of United States v. Schmidt Pritchard & Co. et al. (47 C.C.P.A. 152, C.A.D. 750), the claim of the plaintiff was sustained.
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568 U.S. 856
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C. A. 4th Cir. Certiorari denied.
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488 U.S. 850
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C. A. 2d Cir. Certiorari denied.
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323 U.S. 802
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Petition for writ of certiorari to the Court of Claims denied.
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51 Cust. Ct. 178
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Opinion by
Wilson, J.
In accordance with stipulation of counsel that the merchandise consists of woven fabrics in chief value of wool and in part of braid similar in all material respects to those the subject of Abstract 67278, the claim of the plaintiff was sustained.
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324 U.S. 876
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Petition for writ of certiorari to the Court of Appeals of New York denied.
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5 Cust. Ct. 397
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Opinion by
Kincheloe, J.
It was stipulated that the mats in question are similar to those the subject of United States v. Penn (27 C. C. P. A. 242, C. A. D. 93). The claim at 90 percent under paragraph 1529 (a) was therefore sustained.
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111 Ct. Cl. 228
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Howell, Judge,
delivered the opinion of the court:
This case is brought by Mitchell Canneries, Inc., a Florida corporation, engaged in the packing of canned food products. On the 29th of May 1944, the name of Mitchell Canneries, Inc., was changed to Mitchell Properties, Inc. In addition, the owners, Fondren Mitchell, Guyton Mitchell, and Virginia S. Mitchell had formed a partnership and were doing business under the name and style of Mitchell Canneries. Thereafter on November 30, 1944, the corporation, Mitchell Properties, Inc., was dissolved and all assets were transferred to Fondren Mitchell, Guyton Mitchell, and Virginia S. Mitchell, who were the sole and only stockholders, who continued the business under the partnership, Mitchell Canneries.
The original petition in this court was filed in the name of Fondren Mitchell, Guyton Mitchell, and Virginia S. Mitchell, who were doing business as partners under the name of Mitchell Canneries. This petition was filed on Au gust 14, 1946. Subsequently the assets of this partnership were transferred to the plaintiff corporation, Mitchell Canneries, Inc., a Florida corporation, which was incorporated under the laws of Florida November 27, 1926. Thereafter, an amended petition was filed in this court on July 28,1947, changing the name of the plaintiff from Fondren Mitchell, Guyton Mitchell, and Virginia S. Mitchell to Mitchell Canneries, Inc.
On May 29,1942, Mitchell Canneries, Inc., the predecessor Georgia corporation, entered into Army contract No. W-1307-QM-868 with the United States Government for the delivery of canned blackberries. This contract called for a supply of 18,000 dozen #10 cans of blackberries at a unit price of $6.57 per dozen.
Deliveries under this contract were made to the extent of 4,732 dozen cans. Thereafter, due to adverse weather conditions, it became impossible for Mitchell Canneries, Inc., to make further deliveries to the United States Government and on July 15, 1942, a letter was addressed to Major E. J. Brugger at the California Quartermaster Depot, explaining that the full contract could not be completed and requesting permission to make shipments from a location other than that called for in the contract. The plant had been moved to a new location in an effort more nearly to complete the contract. This letter was supplemented on July 23, 1942, by a telephone conversation between Mitchell Canneries. Inc., and Major Brugger, to the effect that the adverse weather conditions would prevent any further deliveries under the contract.
The Army contract under which the blackberries were to be supplied was the standard form used by the Army in purchasing supplies and provided specifically for the steps to be taken when there were delays or failure to complete. In the event that the contractor failed to make deliveries the government was, by the terms of the contract, permitted to purchase similar material or supplies in the open market and the contractor held liable for any excess cost, but it further provided that the contractor was not to be held liable for excess costs incurred when the delay or failure to deliver was due to unforeseeable causes beyond the control and' without the fault or negligence of the contractor, including but not restricted to numerous named causes among which was unusually severe weather.
Between September .7, 1942, and September 28, 1942, the defendant made purchases in Oregon and Washington against the account of Mitchell Canneries, Inc., at cost of $15,838.45.
Major E. J. Brugger, who was the contracting officer for the incomplete contract No. W-1307-QM-868 had, prior to this, made inquiry of the Department of Agriculture as to the' weather conditions in the area from which Mitchell Canneries, Inc., proposed to deliver the blackberries. Further inquiries had been made of Department of Agriculture representatives in Georgia, Florida, Texas, and Maryland. All information Major Brugger received from the Department of Agriculture indicated that crops were short, all packs were short and that weather conditions were decidedly important in causing the-contract not to be filled. The agricultural representatives reported that the entire pack of Mitchell Canneries, Inc.,-was applied against the contract, that the heavy rains had shortened the blackberry crop, interfered with picking, kept all surplus labor in the peanut fields and produced a continual struggle with wineries for the small crop. .
On October 14, 1942, the Army Quartermaster office had written Mitchell'Canneries, Inc., requesting remittance of an excess cost of $15,610.07 due to the failure to make deliveries under the contract. This amount was adjusted to $15,338.45, when the Comptroller General issued certificates. By letter of October -22d the contractor had replied protesting assessment of- cost on the ground that the bid was based on reasonable expectation on ability to complete; that every effort had been made to complete the contract, the entire pack of Mitchell Canneries, Inc., had been applied against the contract and that failure to complete was due to conditions beyond the control of Mitchell Canneries, Inc.; namely, labor shortage, unfavorable weather conditions and competition for a limited supply of berries.
On October 30,1942, Major Brugger, the contracting officer, issued his findings to the effect that the failure of Mitchell Canneries, Inc., to complete contract No. W-1307-QM-868 was due to unforeseeable causes beyond the control and without the fault or negligence of Mitchell Canneries, Inc.
On August 30, 1943, Mitchell Canneries, Inc., entered into contract No. W-04-115-QM-1305 with the War Department whereby they undertook to sell and deliver canned blackberries for the contract price of $14,034.20. These blackberries were delivered by Mitchell Canneries and accepted by the defendant.
On May 14, 1944, the partners had entered into Army contract No. W-28-021-QM-13339 with the War Department whereby they undertook to sell and deliver to the United States Government canned grapefruit juice for the contract price of $54,821.98. In accordance with the terms of said contract the partnership, Mitchell Canneries, delivered the grapefruit juice to the defendant who accepted it.
On April 17, 1944, the Comptroller of the United States issued certificate No. 0813328 setting off the $14,034.20 due the plaintiffs under Army contract No. W-04-115-QM-1305 against the amount of $15,338.45 claimed to be due for excess costs incurred by the government in making purchases in the open market after failure of Mitchell Canneries to- complete the first blackberry contract of May 29, 1942.
On September 27, 1944, the Comptroller General issued certificate No. 0876723 setting off $1,304.25 due Mitchell Canneries under Army contract No. W-28-021-QM-13339, for grapefruit juice, against the balance claimed to be due for excess costs under the first blackberry contract of May 29,1942.
On April 16, 1945, plaintiff requested the Comptroller General to review these claims of set-off. On July 18, 1945, the Comptroller General affirmed his earlier rulings and stated that he found there was no legal basis for relieving Mitchell Canneries from liability for the excess costs incurred by the United States by reason of their default under Army contract No. W-1307-QM-868.
The principal question in this case is whether or not the findings of the contracting officer, to the effect that the failure to complete the performance of contract No. W-1307-QM-868 was due to an unforeseeable cause without fault or negligence of the contractor, were correct and binding and that whether the contractor, under the terms of the contract, was thereby relieved of any liability for excess costs incurred by the defendant because of the contractor's inability to complete the contract.
, This pertinent provision of the contract is as follows:
DELAYS — DAMAGES
If the contractor refuses or fails to make deliveries of the materials or supplies within the time specified in the purchase order, or any extension thereof, the Government may by written notice terminate the right of the contractor to proceed with deliveries or such part or parts thereof as to which there has been delay. In such event, the Government may purchase similar material or supplies in the open market or secure the manufacture and delivery of the materials and supplies by contract or otherwise, and the contractor and his sureties shall be liable to the Government thereby; Provided, that the contractor shall not be charged with any excess cost occasioned the Government by the purchases of materials or supplies in the open market or under other contracts when the delay of the contractor in making deliveries 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 subcontract are procurable in the open market if the contractor shall notify the contracting officer in writing of the cause of any such delay within ten (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 purchaser, grant for the giving of such notice. The contracting officer shall then ascertain the facts and extent of delay and his findings of fact therein, a copy of which shall be furnished the contractor, shall be final and conclusive on the parties hereto, subject only to appeal within thirty (80) 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 shall be final and conclusive on the parties hereto.
Attention is directed particularly to the last sentence of the above paragraph wherein it is provided:
The contracting officer shall then ascertain the facts, and the extent of the delay and his findings of fact therein, a copy of which shall be furnished to the contractor, shall be final and conclusive on the parties hereto .
The established principle of law that the findings of fact of a contracting officer are binding upon both the Government and the contractor if there is no fraud, gross error or arbitrariness by the contracting officer amounting to bad faith, has been considered by this court and the Supreme Court many times. United States v. McShain, 308 U. S. 512, 60 S. Ct. 138, 84 L. ed. 101 (1939); Plumley v. United States, 226 U. S. 545, 33 S. Ct. 139, 57 L. ed. 342 (1912); United States v. Gleason, 175 U. S. 588, 20 S. Ct. 228, 44 L. ed. 284 (1899); Kihlberg v. United States, 97 U. S. 398, 24 L. ed. 1106 (1878); McCloskey v. United States, 103 C. Cls. 254 (1945); Carroll et al. v. United States, 76 C. Cls. 103 (1932); Penn Bridge Co. v. United States, 59 C. Cls. 892 (1924).
It has also been stated that where the contracting officer acted fairly and impartially in making his findings and there is substantial evidence to support such findings, they should not be reversed. Rego Building Corporation v. United States, 99 C. Cls. 445; Maurice L. Bein v. United States, 101 C. Cls. 144.
The evidence shows that the findings of the contracting officer were based principally upon reports of the United States Department of Agriculture representatives who it must be agreed were disinterested persons. In his findings the contracting officer recited that the Department of Agriculture representative at Thomasville, Georgia, reported that heavy rains had shortened the crop. This representative also explained that the rains had kept all surplus labor in the peanut fields. However, the contracting officer did not rely solely on the Department of Agriculture representative at Thomasville, which was the immediate vicinity in which the plaintiff was attempting to obtain blackberries. He also obtained additional information from other representatives which showed that in Georgia, Florida, Texas, and Maryland, the blackberry crop was short and that all canneries who had Army contracts were using their entire packs to meet their government contracts.
Mitchell Canneries, Inc., had previously notified the contracting officer that due to unusual weather conditions they were unable to furnish any more berries under the contract; that they had made every effort to secure blackberries within a radius of 600 miles, and that they had moved their cannery in an attempt to fulfill the contract. After a consideration of these matters of fact, the contracting officer on October 30,1942, made this finding:
I therefore find that failure of Mitchell Canneries, Inc., to complete contract No. W-1307-qm-868, was due to unforeseeable causes beyond the control and without the fault or negligence of the contractor.
(S) E. J. Brtxgger,
Mayor, Q. M. Corps.
The Comptroller General in his letter to Mitchell Canneries, of July 18, 1945, ruled that there was no basis for relieving the contractor from responsibility on the ground that the findings of the contracting officer were not findings of fact but conclusions of law and hence not binding on the parties. The plaintiff urges that the findings made by the contracting officer were ones of fact. The United States Supreme Court has recently held that the unforeseeability of floods is a question of fact which, in the absence of a finding of fact conclusive upon the contractor, must be decided by the Court of Claims. United States v. Brooks-Callaway Co., 318 U. S. 120, 63 S. Ct. 474, 87 L. ed. 653 (1943). Under the contract involved in that case there was a clause similar to the one here involved, excusing the contractor from damages from unforeseeable causes including floods. The court there held that under the contract the flood to be excusable must be unforeesable, and as there was no showing of a conclusive finding that the flood was unforeseeable, the case was returned to this court.
Tlie defendant-insists that the findings of the contracting officer amount to a construction of the contract in that they construe the contract as providing that blackberries should be supplied only from a certain area. We cannot agree that this is the case. The contracting officer was instructed by the terms of the contract to find as a fact whether unforeseeable and unusually severe weather resulted in the contractor's inability to deliver on the date specified in the contract. It is certainly a question of fact whether or not there existed unforeseeable and unusually severe weather, which resulted in the inability to perform the contract. If this is not considered as a question of fact, it is hard to conceive of any case where the findings of the contracting officer are to be considered ones of fact. Such a view would result in all cases under government contracts involving findings by contracting officers being brought into the courts. Certainly this is contrary to the intent of the standard form of government contract which contemplates that most cases of non performance will be disposed of by the contracting officer.
From the facts before us in this case we can find no evidence of fraud, gross error, or arbitrariness on the part of the contracting officer and on the contrary find that he acted fairly and impartially and that the evidence upon which he based his findings was substantial.
The defendant has contended that the liquidated damages clause in the contract which is set out in full in this opinion makes findings of the contracting officer final only in cases of delay and not in cases of failure to perform. Wé cannot agree with this construction, especially in view of this specific language:
If the contractor refuses or fails to make deliveries .
This certainly indicated that "delay" as used in this provision of the contract is intended to cover both the concepts of delay and failure. The principal intent is apparently to make provision for all situations where the government is forced to purchase goods in the open market because of failure to' receive those due under the contract. It is certainly not intended that the government could purchase goods only in the event of delays and could not do so if the contractor failed to deliver. It would indeed be a queer result if the contracting officer could make no findings when an entire blackberry crop failed and deliveries, were made impossible, but could do so where seasonal delays caused late deliveries. In both situations the government might terminate the right of the contractor to make deliveries, but interpretation of the clause to cover only delays in performance would lead to this inevitable result. The word "delay" was properly employed because of this right of the government to terminate the privilege of the contractor to proceeu with deliveries. Once the right is terminated it makes no difference to the government whether or not the contractor could have eventually made deliveries. Any failure to make deliveries on time is a delay whether there is ability to perform late or not at all. In this respect we are of the opinion that the findings of the contracting officer on the contractor's inability to make deliveries are also binding.
The defendant in its brief has dealt at some length with the cases of Sunseri v. Garcia & Maggini, 298 Pa. 249, 148 A. 81 (1929); Newell v. New Holstein Canning Company, 119 Wis. 635, 97 N. W. 487 (1903); McFarland v. Savannah River Sales Company, 247 F. 652 (C. C. A. 3d 1918); Pacific Sheet Metal Works v. Californian Canneries Company, 164 F. 980 (C. C. A. 9th, 1908). Suffice it to say, none of the contracts involved in these cases involve the standard form of government contract. None of them contain such complete coverage of the procedure to be.followed in the event of failure to deliver goods on time, as is contained in the standard form here under question.
It might be pointed out here that regardless of whether or not a contract provides for findings, there must be some reasonable limit to the area from which a contractor can be •expected to acquire raw materials in performance of a contract. If the doctrine that a contractor may not be excused when materials are available anywhere, at any price, were •carried to its logical conclusion, it would follow that there would have to be complete crop failure over the entire surface of the world before a contractor could be relieved from damages. If some small quantity of materials had been available in some distant country, a contractor could not be excused. The blackberry crops in Oregon and Washington from which the government purchased materials in the open market when the contractor could not complete the contract here involved, were so far from the contractor as to be practically out of his reach. The contract was máde during time of war to be performed when transportation was difficult and space in refrigerator cars for shipment of perishable goods was painfully inadequate. These facts have bearing on the reasonableness of the contracting officer's findings. It would be an unconscionable result to hold the contractor liable for damages for failure to complete the contract when the raw material was actually unobtainable.
The defendant has also argued that mere intervention of conditions which render performance more expensive do not relieve a contractor as a general proposition of the law. This is not involved in this case because the situation just does not exist. We have no way of knowing whether the contractor by paying a high price out of all reason could have obtained enough blackberries to fill his contract. The defendant has pointed out that there is no finding that if the contractor had received all the blackberries in its area he still would have "been unable to fulfill the contract. We do not think such a finding is necessary as a condition precedent to relief of a contractor from damages. United States v. Brooks-Callaway, supra.
The defendant also contended that the assignments by which this claim was transferred to plaintiff are invalid as against the United States. The prohibition against assignment of claims (R. S. Sec. 8477; 54 Stat. 1029 ; 31 U. S. C. 203) is inapplicable. Legal title to the claim'under contract No. W-04-115-QM-1305 on which $14,034.20 was withheld, under claim of set-off, was transferred from' the predecessor corporation, Mitchell Canneries, Inc., to the partners who were at all times the equitable owners, being the sole and only stockholders of the corporation. The partners who did business as Mitchell Canneries were the owners of the claim under contract No. W-28-021-QM-13339 under which $1,304.25 was withheld on a claim of set-off. Both of these claims passed to. the present plaintiff corporation when the business of the partnership was reincorporated under the laws of the State of Florida. The government itself in making the set-offs has already acknowledged that the identity of the partnership, Mitchell Canneries, and the corporation, Mitchell Canneries, Inc., are essentially the same. It has been specifically held that transfers by operation of law or in conjunction with changes of corporation structure are not assignments prohibited by the statute. Seaboard Air Line Railway v. United States, 256 U. S. 655, 41 S. Ct. 611, 65 L. ed. 1149 (1921) ; Novo Trading Corporation v. Commissioner of Internal Revenue, 113 F. (2d) 320 (C. C. A. 2d 1940); Kingan & Company v. United States, 44 F. (2d) 447 (C. Cls. 1930); Roomberg v. United States, 40 F. Supp. 621 (D. C. E. D. Pa. 1941).
Judgment will be entered in favor of the plaintiff in the amount, of $15,338.45; It is so ordered.
Madden, Judge; Whitakee, Judge; LittletoN, Judge; and JoNes, Chief Justice, concur.
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565 U.S. 1246
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C. A. 4th Cir. Certiorari denied.
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109 S. Ct 1930
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Petition for writ of certiorari to the United States Court of Appeals for the Federal Circuit.
Denied.
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430 U.S. 983
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C. A. 5th Cir. Certiorari denied. Reported below: 545 F. 2d 406.
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449 U.S. 945
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Ct. App. Cal., 1st App. Dist. Motion of respondents Engert and Gamble for leavé to proceed in forma pauperis and certiorari granted. Judgment vacated and case remanded to the Court of Appeal to consider whether its judgment is based upon federal or state constitutional grounds, or both. See California v. Krivda, 409 U. S. 33 (1972).
Justice Brennan, Justice Stewart, and Justice Stevens dissent.
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180 L. Ed. 2d 310
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OPINION OF THE COURT
[564 U.S. 264]
Justice Sotomayor
delivered the opinion of the Court.
This case presents the question whether the age of a child subjected to police questioning is relevant to the custody analysis of Miranda v. Arizona, 384 U.S. 436, 86 S. Ct. 1602, 16 L. Ed. 2d 694 (1966). It is beyond dispute that children will often feel bound to submit to police questioning when an adult in the same circumstances
[564 U.S. 265]
would feel free to leave. Seeing no reason for police officers or courts to blind themselves to that commonsense reality, we hold that a child's age properly informs the Miranda custody analysis.
I
A
Petitioner J. D. B. was a 13-year-old, seventh-grade student attending class at Smith Middle School in Chapel Hill, North Carolina, when he was removed from his classroom by a uniformed police officer, escorted to a closed-door conference room, and questioned by police for at least half an hour.
This was the second time that police questioned J. D. B. in the span of a week. Five days earlier, two home break-ins occurred, and various items were stolen. Police stopped and questioned J. D. B. after he was seen behind a residence in the neighborhood where the crimes occurred. That same day, police also spoke to J. D. B.'s grandmother—his legal guardian—as well as his aunt.
Police later learned that a digital camera matching the description of one of the stolen items had been found at J. D. B.'s middle school and seen in J. D. B.'s possession. Investigator DiCostanzo, the juvenile investigator with the local police force who had been assigned to the case, went to the school to question J. D. B. Upon arrival, DiCostanzo informed the uniformed police officer on detail to the school (a so-called school resource officer), the assistant principal, and an administrative intern that he was there to question J. D. B. about the break-ins. Although DiCostanzo asked the school administrators to verify J. D. B.'s date of birth, address, and parent contact information from school records, neither the police officers nor the school administrators contacted J. D. B.'s grandmother.
The uniformed officer interrupted J. D. B.'s afternoon social studies class, removed J. D. B. from the classroom, and
[564 U.S. 266]
escorted him to a school conference room. There, J. D. B. was met by DiCostanzo, the assistant principal, and the administrative intern. The door to the conference room was closed. With the two police officers and the two administrators present, J. D. B. was questioned for the next 30 to 45 minutes. Prior to the commencement of questioning, J. D. B. was given neither Miranda warnings nor the opportunity to speak to his grandmother. Nor was he informed that he was free to leave the room.
Questioning began with small talk— discussion of sports and J. D. B.'s family life. DiCostanzo asked, and J. D. B. agreed, to discuss the events of the prior weekend. Denying any wrongdoing, J. D. B. explained that he had been in the neighborhood where the crimes occurred because he was seeking work mowing lawns. DiCostanzo pressed J. D. B. for additional detail about his efforts to obtain work; asked J. D. B. to explain a prior incident, when one of the victims returned home to find J. D. B. behind her house; and confronted J. D. B. with the stolen camera. The assistant principal urged J. D. B. to "do the right thing," warning J. D. B. that "the truth always comes out in the end."App. 99a, 112a.
Eventually, J. D. B. asked whether he would "still be in trouble" if he returned the "stuff." Ibid. In response, DiCostanzo explained that return of the stolen items would be helpful, but "this thing is going to court" regardless. Id., at 112a; ibid. ("[W]hat's done is done[;] now you need to help yourself by making it right"); see also id., at 99a. DiCostanzo then warned that he may need to seek a secure custody order if he believed that J. D. B. would continue to break into other homes. When J. D. B. asked what a secure custody
[564 U.S. 267]
order was, DiCostanzo explained that "it's where you get sent to juvenile detention before court." Id., at 112a.
After learning of the prospect of juvenile detention, J. D. B. confessed that he and a friend were responsible for the break-ins. DiCostanzo only then informed J. D. B. that he could refuse to answer the investigator's questions and that he was free to leave. Asked whether he understood, J. D. B. nodded and provided further detail, including information about the location of the stolen items. Eventually J. D. B. wrote a statement, at DiCostanzo's request. When the bell rang indicating the end of the school-day, J. D. B. was allowed to leave to catch the bus home.
B
Two juvenile petitions were filed against J. D. B., each alleging one count of breaking and entering and one count of larceny. J. D. B.'s public defender moved to suppress his statements and the evidence derived therefrom, arguing that suppression was necessary because J. D. B. had been "interrogated by police in a custodial setting without being afforded Miranda warning[s]," Id., at 89a, and because his
[564 U.S. 268]
statements were involuntary under the totality of the circumstances test, id., at 142a; see Schneckloth v. Bustamonte, 412 U.S. 218, 226, 93 S. Ct. 2041, 36 L. Ed. 2d 854 (1973) (due process precludes admission of a confession where "a defendant's will was overborne" by the circumstances of the interrogation). After a suppression hearing at which DiCostanzo and J. D. B. testified, the trial court denied the motion, deciding that J. D. B. was not in custody at the time of the schoolhouse interrogation and that his statements were voluntary. As a result, J. D. B. entered a transcript of admission to all four counts, renewing his objection enial of his motion to suppress, and the court adjudicated J. D. B. delinquent.
A divided panel of the North Carolina Court of Appeals affirmed. In re J. D. B., 196 N.C. App. 234, 674 S.E.2d 795 (2009). The North Carolina Supreme Court held, over two dissents, that J. D. B. was not in custody when he confessed, "declin [ing] to extend the test for custody to include consideration of the age . of an individual subjected to questioning by police." In re J. D. B., 363 N.C. 664, 672, 686 S.E.2d 135, 140 (2009)
We granted certiorari to determine whether the Miranda custody analysis includes consideration of a juvenile suspect's age. 562 U.S. 1001, 131 S. Ct. 502, 178 L. Ed. 2d 368 (2010).
II
A
Any police interview of an individual suspected of a crime has "coercive aspects to it." Oregon v. Mathiason, 429 U.S. 492, 495, 97 S. Ct. 711, 50 L. Ed. 2d 714 (1977) (per curiam). Only those interrogations that occur while a suspect is in police custody, however, "heighte[n] the risk" that statements obtained are not the
[564 U.S. 269]
product of the suspect's free choice. Dickerson v. United States, 530 U.S. 428, 435, 120 S. Ct. 2326, 147 L. Ed. 2d 405 (2000).
By its very nature, custodial police interrogation entails "inherently compelling pressures." Miranda, 384 U.S., at 467, 86 S. Ct. 1602, 16 L. Ed. 2d 694. Even for an adult, the physical and psychological isolation of custodial interrogation can "undermine the individual's will to resist and . . . compel him to speak where he would not otherwise do so freely." Ibid. Indeed, the pressure of custodial interrogation is so immense that it "can induce a frighteningly high percentage of people to confess to crimes they never committed." Corley v. United States, 556 U.S. 303, 321, 129 S. Ct. 1558, 173 L. Ed. 2d 443 (2009) (citing Drizin & Leo, The Problem of False Confessions in the Post-DNA World, 82 N.C. L. Rev. 891, 906-907 (2004)); see also Miranda, 384 U.S., at 455, n. 23, 86 S. Ct. 1602, 16 L. Ed. 2d 694. That risk is all the more troubling—and recent studies suggest, all the more acute—when the subject of custodial interrogation is a juvenile. See Brief for Center on Wrongful Convictions of Youth et al. as Amici Curiae 21-22 (collecting empirical studies that "illustrate the heightened risk of false confessions from youth").
Recognizing that the inherently coercive nature of custodial interrogation "blurs the line between voluntary and involuntary statements," Dickerson, 530 U.S., at 435, 120 S. Ct. 2326, 147 L. Ed. 2d 405, this Court in Miranda adopted a set of prophylactic measures designed to safeguard the constitutional guarantee against self-incrimination. Prior to questioning, a suspect "must be warned that he has a right to remain silent, that any statement he does make may be used as evidence against him, and that he has a right to the presence of an attorney, either retained or appointed." 384 U.S., at 444, 86 S. Ct. 1602, 16 L. Ed. 2d 694; see also Florida v. Powell, 559 U.S. 50, 60, 130 S. Ct. 1195, 175 L. Ed. 2d 1009 (2010) ("The four warnings Miranda requires are invariable, but this Court has not dictated the words in which the essential information must be conveyed"). And, if a suspect makes a statement during custodial interrogation, the burden is on the Government to show, as a "prerequisitje]" to the statement's admissibility as evi dence
[564 U.S. 270]
in the Government's case in chief, that the defendant "voluntarily, knowingly and intelligently" waived his rights. Miranda, 384 U.S., at 444, 475-476, 86 S. Ct. 1602, 16 L. Ed. 2d 694; Dickerson, 530 U.S., at 443-444, 120 S. Ct. 2326, 147 L. Ed. 2d 405.
Because these measures protect the individual against the coercive nature of custodial interrogation, they are required " 'only where there has been such a restriction on a person's freedom as to render him "in custody." ' " Stansbury v. California, 511 U.S. 318, 322, 114 S. Ct. 1526, 128 L. Ed. 2d 293 (1994) (per curiam) (quoting Mathiason, 429 U.S., at 495, 97 S. Ct. 711, 50 L. Ed. 2d 714). As we have repeatedly emphasized, whether a suspect is "in custody" is an objective inquiry.
"Two discrete inquiries are essential to the determination: first, what were the circumstances surrounding the interrogation; and second, given those circumstances, would a reasonable person have felt he or she was at liberty to terminate the interrogation and leave. Once the scene is set and the players' lines and actions are reconstructed, the court must apply an objective test to resolve the ultimate inquiry: was there a formal arrest or restraint on freedom of movement of the degree associated with formal arrest." Thompson v. Keohane, 516 U.S. 99, 112, 116 S. Ct. 457, 133 L. Ed. 2d 383 (1995) (internal quotation marks, alteration, and footnote omitted).
See also Yarborough v. Alvarado, 541 U.S. 652, 662-663, 124 S. Ct. 2140, 158 L. Ed. 2d 938 (2004); Stansbury, 511 U.S., at 323; Berkemer v. McCarty, 468 U.S. 420, 442, and n. 35, 104 S. Ct. 3138, 82 L. Ed. 2d 317 (1984). Rather than demarcate a limited set of relevant circumstances, we have required police officers and courts to "examine all of the circumstances
[564 U.S. 271]
surrounding the interrogation," Stansbury, 511 U.S., at 322, 114 S. Ct. 1526, 128 L. Ed. 2d 293, including any circumstance that "would have affected how a reasonable person" in the suspect's position "would perceive his or her freedom to leave," id., at 325, 114 S. Ct. 1526, 128 L. Ed. 2d 293. On the other hand, the "subjective views harbored by either the interrogating officers or the person being questioned" are irrelevant. Id., at 323, 114 S. Ct. 1526, 128 L. Ed. 2d 293. The test, in other words, involves no consideration of the "actual mindset" of the particular suspect subjected to police questioning. Alvarado, 541 U.S., at 667, 124 S. Ct. 2140, 158 L. Ed. 2d 938; see also California v. Beheler, 463 U.S. 1121, 1125, n. 3, 103 S. Ct. 3517, 77 L. Ed. 2d 1275 (1983) (per curiam).
The benefit of the objective custody analysis is that it is "designed to give clear guidance to the police." Alvarado, 541 U.S., at 668, 124 S. Ct. 2140, 158 L. Ed. 2d 938. But see Berkemer, 468 U.S., at 441, 104 S. Ct. 3138, 82 L. Ed. 2d 317 (recognizing the "occasional!] . . . difficulty" that police and courts nonetheless have in "deciding exactly when a suspect has been taken into custody"). Police must make in-the-moment judgments as to when to administer Miranda warnings. By limiting analysis to the objective circumstances of the interrogation, and asking how a reasonable person in the suspect's position would understand his freedom to terminate questioning and leave, the objective test avoids burdening police with the task of anticipating the idiosyncrasies of every individual suspect and divining how those particular traits affect each person's subjective state of mind. See id., at 430-431, 104 S. Ct. 3138, 82 L. Ed. 2d 317 (officers are not required to "make guesses" as to circumstances "unknowable" to them at the time); Alvarado, 541 U.S., at 668, 124 S. Ct. 2140, 158 L. Ed. 2d 938 (officers are under no duty "to consider . . . contingent psychological factors when deciding when suspects should be advised of their Miranda rights").
B
The State and its amici contend that a child's age has no place in the custody analysis, no matter how young the child subjected to police questioning. We cannot agree. In some circumstances, a child's age "would have affected how a reasonable
[564 U.S. 272]
person" in the suspect's position "would perceive his or her freedom to leave." Stansbury, 511 U.S., at 325, 114 S. Ct. 1526, 128 L. Ed. 2d 293. That is, a reasonable child subjected to police questioning will sometimes feel pressured to submit when a reasonable adult would feel free to go. We think it clear that courts can account for that reality without doing any damage to the objective nature of the custody analysis.
A child's age is far "more than a chronological fact." Eddings v. Oklahoma, 455 U.S. 104, 115, 102 S. Ct. 869, 71 L. Ed. 2d 1 (1982); accord, Gall v. United States, 552 U.S. 38, 58, 128 S. Ct. 586, 169 L. Ed. 2d 445 (2007); Roper v. Simmons, 543 U.S. 551, 569, 125 S. Ct. 1183, 161 L. Ed. 2d 1 (2005); Johnson v. Texas, 509 U.S. 350, 367, 113 S. Ct. 2658, 125 L. Ed. 2d 290 (1993). It is a fact that "generates commonsense conclusions about behavior and perception." Alvarado, 541 U.S., at 674, 124 S. Ct. 2140, 158 L. Ed. 2d 938 (Breyer, J., dissenting). Such conclusions apply broadly to children as a class. And, they are self-evident to anyone who was a child once himself, including any police officer or judge.
Time and again, this Court has drawn these commonsense conclusions for itself. We have observed that children "generally are less mature and responsible than adults," Eddings, 455 U.S., at 115-116, 102 S. Ct. 869, 71 L. Ed. 2d 1; that they "often lack the experience, perspective, and judgment to recognize and avoid choices that could be detrimental to them," Bellotti v. Baird, 443 U.S. 622, 635, 99 S. Ct. 3035, 61 L. Ed. 2d 797 (1979) (plurality opinion); that they "are more vulnerable or susceptible to . . . outside pressures" than adults, Roper, 543 U.S., at 569, 125 S. Ct. 1183, 161 L. Ed. 2d 1; and so on. See Graham v. Florida, 560 U.S. 48, 68, 130 S. Ct. 2011, 176 L. Ed. 2d 825 (2010) (finding no reason to "reconsider" these observations about the common "nature of juveniles"). Addressing the specific context of police interrogation, we have observed that events that "would leave a man cold and unimpressed can overawe and overwhelm a lad in his early teens." Haley v. Ohio, 332 U.S. 596, 599, 68 S. Ct. 302, 92 L. Ed. 224 (1948) (plurality opinion); see also Gallegos v. Colorado, 370 U.S. 49, 54, 82 S. Ct. 1209, 8 L. Ed. 2d 325 (1962) ( "[N]o matter how sophisticated," a juvenile subject of police interrogation "cannot be compared" to an
[564 U.S. 273]
adult subject). Describing no one child in particular, these observations restate what "any parent knows"—indeed, what any person knows—about children generally. Roper, 543 U.S., at 569, 125 S. Ct. 1183, 161 L. Ed. 2d 1.
Our various statements to this effect are far from unique. The law has historically reflected the same assumption that children characteristically lack the capacity to exercise mature judgment and possess only an incomplete ability to understand the world around them. See, e.g., 1 W. Blackstone, Commentaries on the Laws of England *464-*465 (hereinafter Blackstone) (explaining that limits on children's legal capacity under the common law "secure them from hurting themselves by their own improvident acts"). Like this Court's own generalizations, the legal disqualifications placed on children as a class—e.g., limitations on their ability to alienate property, enter a binding contract enforceable against them, and marry without parental consent—exhibit the settled understanding that the differentiating characteristics of youth are universal.
[564 U.S. 274]
Indeed, even where a "reasonable person" standard otherwise applies, the common law has reflected the reality that children are not adults. In negligence suits, for instance, where liability turns on what an objectively reasonable person would do in the circumstances, "[a]ll American jurisdictions accept the idea that a person's childhood is a relevant circumstance" to be considered. Restatement (Third) of Torts § 10, Comment b, p. 117 (2005); see also id., Reporters' Note, pp. 121-122 (collecting cases); Restatement (Second) of Torts § 283A, Comment b, p. 15 (1963-1964) ("[T]here is a wide basis of community experience upon which it is possible, as a practical matter, to determine what is to be expected of [children]").
As this discussion establishes, "[o]ur history is replete with laws and judicial recognition" that children cannot be viewed simply as miniature adults. Eddings, 455 U.S., at 115-116, 102 S. Ct. 869, 71 L. Ed. 2d 1. We see no justification for taking a different course here. So long as the child's age was known to the officer at the time of the interview, or would have been objectively apparent to any reasonable officer, including age as part of the custody analysis requires officers neither to consider circumstances "unknowable" to them, Berkemer, 468 U.S., at 430, 104 S. Ct. 3138, 82 L. Ed. 2d 317, nor to "anticipat[e] the frailties or idiosyncrasies" of the particular suspect whom they question, Alvarado, 541 U.S., at 662, 124 S. Ct. 2140, 158 L. Ed. 2d 938 (internal quotation marks omitted). The same "wide basis of community experience" that makes it possible, as an objective matter, "to determine what is to be expected" of children in other contexts, Restatement (Second) of Torts § 283A, at 15; see supra, at 273, 180 L. Ed. 2d, at 324, and n. 6, likewise makes it possible to know what to expect of children subjected to police questioning.
[564 U.S. 275]
In other words, a child's age differs from other personal characteristics that, even when known to police, have no objectively discernible relationship to a reasonable person's understanding of his freedom of action. Alvarado holds, for instance, that a suspect's prior interrogation history with law enforcement has no role to play in the custody analysis because such experience could just as easily lead a reasonable person to feel free to walk away as to feel compelled to stay in place. 541 U.S., at 668, 124 S. Ct. 2140, 158 L. Ed. 2d 938. Because the effect in any given case would be "contingent [on the] psycholog [y]" of the individual suspect, the Court explained, such experience cannot be considered without compromising the objective nature of the custody analysis. Ibid. A child's age, however, is different. Precisely because childhood yields objective conclusions like those we have drawn ourselves— among others, that children are "most susceptible to influence," Eddings, 455 U.S., at 115, 102 S. Ct. 869, 71 L. Ed. 2d 1, and "outside pressures," Roper, 543 U.S., at 569, 125 S. Ct. 1183, 161 L. Ed. 2d 1—considering age in the custody analysis in no way involves a determination of how youth "subjectively affect[s] the mindset" of any particular child, Brief for Respondent 14.
In fact, in many cases involving juvenile suspects, the custody analysis would be nonsensical absent some consideration of the suspect's age. This case is a prime example. Were the court precluded from taking J. D. B.'s youth into account, it would be forced to evaluate the circumstances present here through the eyes of a reasonable person of average years. In other words, how would a reasonable adult understand his situation, after being removed from a seventh-grade social studies class by a uniformed school resource
[564 U.S. 276]
officer; being encouraged by his assistant principal to "do the right thing"; and being warned by a police investigator of the prospect of juvenile detention and separation from his guardian and primary caretaker? To describe such an inquiry is to demonstrate its absurdity. Neither officers nor courts can reasonably evaluate the effect of objective circumstances that, by their nature, are specific to children with out accounting for the age of the child subjected to those circumstances.
Indeed, although the dissent suggests that concerns "regarding the application of the Miranda custody rule to minors can be accommodated by considering the unique circumstances present when minors are questioned in school," post, at 297, 180 L. Ed. 2d, at 339 (opinion of Alito, J.), the effect of the schoolhouse setting cannot be disentangled from the identity of the person questioned. A student— whose presence at school is compulsory and whose disobedience at school is cause for disciplinary action—is in a far different position than, say, a parent volunteer on school grounds to chaperone an event, or an adult from the community on school grounds to attend a basketball game. Without asking whether the person "questioned in school" is a "minor," ibid., the coercive effect of the schoolhouse setting is unknowable.
Our prior decision in Alvarado in no way undermines these conclusions. In that case, we held that a state-court decision that failed to mention a 17-year-old's age as part of the Miranda custody analysis was not objectively unreasonable under the deferential standard of review set forth by the Antiterrorism and Effective Death Penalty Act of 1996 (AEDPA), 110 Stat. 1214. Like the North Carolina Supreme Court here, see 363 N.C., at 672, 686 S.E.2d, at 140, we observed that accounting for a juvenile's age in the Miranda custody analysis "could be viewed as creating a subjective inquiry," 541 U.S., at 668, 124 S. Ct. 2140, 158 L. Ed. 2d 938. We said nothing, however, of whether such a view would be correct under the law. Cf. Renico v. Lett, 559 U.S. 766, 778, n. 3, 130 S. Ct. 1855, 176 L. Ed. 2d 678 (2010) ("[W]hether
[564 U.S. 277]
the [state court] was right or wrong is not the pertinent question under AEDPA"). To the contrary, Justice O'Connor's concurring opinion explained that a suspect's age may indeed "be relevant to the 'custody' inquiry." Alvarado, 541 U.S., at 669, 124 S. Ct. 2140, 158 L. Ed. 2d 938.
Reviewing the question de novo today, we hold that so long as the child's age was known to the officer at the time of police questioning, or would have been objectively apparent to a reasonable officer, its inclusion in the custody analysis is consistent with the objective nature of that test. This is not to say that a child's age will be a determinative, or even a significant, factor in every case. Cf. ibid. (O'Connor, J., concurring) (explaining that a state-court decision omitting any mention of the defendant's age was not unreasonable under AEDPA's deferential standard of review where the defendant "was almost 18 years old at the time of his interview"); post, at 296, 180 L. Ed. 2d, at 339 (suggesting that "teenagers nearing the age of majority" are likely to react to an interrogation as would a "typical 18-year-old in similar circumstances"). It is, however, a reality that courts cannot simply ignore.
III
The State and its amici offer numerous reasons that courts must blind themselves to a juvenile defendant's age. None is persuasive.
[564 U.S. 278]
To start, the State contends that a child's age must be excluded from the custody inquiry because age is a personal characteristic specific to the suspect himself rather than an "external" circumstance of the interrogation. Brief for Respondent 21; see also id., at 18-19 (distinguishing "personal characteristics" from "objective facts related to the interrogation itself' such as the location and duration of the interrogation). Despite the supposed significance of this distinction, however, at oral argument counsel for the State suggested without hesitation that at least some undeniably personal characteristics—for instance, whether the individual being questioned is blind—are circumstances relevant to the custody analysis. See Tr. of Oral Arg. 41. Thus, the State's quarrel cannot be that age is a personal characteristic, without more.
The State further argues that age is irrelevant to the custody analysis because it "go[es] to how a suspect may internalize and perceive the circumstances of an interrogation." Brief for Respondent 12; see also Brief for United States as Amicus Curiae 21 (hereinafter U. S. Brief) (arguing that a child's age has no place in the custody analysis because it goes to whether a suspect is "particularly susceptible" to the external circumstances of the interrogation (some internal quotation marks omitted)). But the same can be said of every objective circumstance that the State agrees is relevant to the custody analysis: Each circumstance goes to how a reasonable person would "internalize and perceive" every other. See, e.g., Stansbury, 511 U.S., at 325, 114 S. Ct. 1526, 128 L. Ed. 2d 293. Indeed, this is the very reason that we ask whether the objective circumstances "add up to custody," Keohane, 516 U.S., at 113, 116 S. Ct. 457, 133 L. Ed. 2d 383, instead of evaluating the circumstances one by one.
[564 U.S. 279]
In the same vein, the State and its amici protest that the "effect of... age on [the] perception of custody is internal," Brief for Respondent 20, or "psychological," U. S. Brief 21. But the whole point of the custody analysis is to determine whether, given the circumstances, "a reasonable person [would] have felt he or she was . at liberty to terminate the interrogation and leave." Keohane, 516 U.S., at 112, 116 S. Ct. 457, 133 L. Ed. 2d 383. Because the Miranda custody inquiry turns on the mindset of a reasonable person in the suspect's position, it cannot be the case that a circumstance is subjective simply because it has an "internal" or "psychological" impact on perception. Were that so, there would be no objective circumstances to consider at all.
Relying on our statements that the objective custody test is "designed to give clear guidance to the police," Alvarado, 541 U.S., at 668, 124 S. Ct. 2140, 158 L. Ed. 2d 938, the State next argues that a child's age must be excluded from the analysis in order to preserve clarity. Similarly, the dissent insists that the clarity of the custody analysis will be destroyed unless a "one-size-fits-all reasonable-person test" applies. Post, at 293, 180 L. Ed. 2d, at 337. In reality, however, ignoring a juvenile defendant's age will often make the inquiry more artificial, see supra, at 275-276, 180 L. Ed. 2d, at 325-326, and thus only add confusion. And in any event, a child's age, when known or apparent, is hardly an obscure factor to assess. Though the State and the dissent worry about gradations among children of different ages, that concern cannot justify ignoring a child's age altogether. Just as police officers are competent to account for other objective circumstances that are a matter of degree such as the length of questioning or the number of officers present, so too are they competent to evaluate the effect of relative age. Indeed, they are competent to do so even though an interrogation room lacks the "reflective atmosphere of a [jury] deliberation room," post, at 295, 180 L. Ed. 2d, at 338. The same is true of judges, including those whose childhoods have long since passed, see post, at 293, 180 L. Ed. 2d, at 337. In short, officers and judges need no imaginative powers, knowledge of developmental psychology, training in cognitive science, or expertise
[564 U.S. 280]
in social and cultural anthropology to account for a child's age. They simply need the common sense to know that a 7-year-old is not a 13-year-old and neither is an adult.
There is, however, an even more fundamental flaw with the State's plea for clarity and the dissent's singular focus on simplifying the analysis: Not once have we excluded from the custody analysis a circumstance that we determined was relevant and objective, simply to make the fault line between custodial and noncustodial "brighter." Indeed, were the guiding concern clarity and nothing else, the custody test would presumably ask only whether the suspect had been placed under formal arrest. Berkemer, 468 U.S., at 441, 104 S. Ct. 3138, 82 L. Ed. 2d 317; see ibid. (acknowledging the "occasional!] . . . difficulty" police officers confront in determining when a suspect has been taken into custody). But we have rejected that "more easily administered line," recognizing that it would simply "enable the police to circumvent the constraints on custodial interrogations established by Miranda." Ibid.; see also ibid., n. 33.
Finally, the State and the dissent suggest that excluding age from the custody analysis comes at no cost to juveniles' constitutional rights because the due process voluntariness test independently accounts for a child's youth. To be sure, that test permits consideration of a child's age, and it erects its own barrier to admission of a defendant's inculpatory statements at trial. See Gallegos, 370 U.S., at 53-55, 82 S. Ct. 1209, 8 L. Ed. 2d 325; Haley, 332 U.S., at 599-601, 68 S. Ct. 302, 92 L. Ed. 224 (plurality opinion); see also post,
[564 U.S. 281]
at 297, 180 L. Ed. 2d, at 340 ("[C]ourts should be instructed to take particular care to ensure that [young children's] incriminating statements were not obtained involuntarily"). But Miranda's procedural safeguards exist precisely because the voluntariness test is an inadequate barrier when custodial interrogation is at stake. See 384 U.S., at 458, 86 S. Ct. 1602, 16 L. Ed. 2d 694 ("Unless adequate protective devices are employed to dispel the compulsion inherent in custodial surroundings, no statement obtained from the defendant can truly be the product of his free choice"); Dickerson, 530 U.S., at 442, 120 S. Ct. 2326, 147 L. Ed. 2d 405 ("[R]eliance on the traditional totality-of-the-circumstances test raise [s] a risk of overlooking an involuntary custodial confession"); see also supra, at 268-270, 180 L. Ed. 2d, at 321-322. To hold, as the State requests, that a child's age is never relevant to whether a suspect has been taken into custody—and thus to ignore the very real differences between children and adults—would be to deny children the full scope of the procedural safeguards that Miranda guarantees to adults.
The question remains whether J. D. B. was in custody when police interrogated him. We remand for the state courts to address that question, this time taking account of all of the relevant circumstances of the interrogation, including J. D. B.'s age at the time. The judgment of the North Carolina Supreme Court is reversed, and the case is remanded for proceedings not inconsistent with this opinion.
It is so ordered.
SEPARATE OPINION
. Although the State suggests that the "record is unclear as to who brought J. D. B. to the conference room, and the trial court made no factual findings on this specific point,'' Brief for Respondent 3, n. 1, the State agreed at the certiorari stage that "the SRO [school resource officer] escorted petitioner'' to the room, Brief in Opposition 3.
. The North Carolina Supreme Court noted that the trial court's factual findings were "uncontested and therefore . . . binding'' on it. In re J. D. B., 363 N.C. 664, 668, 686 S.E.2d 135, 137 (2009). The court described the sequence of events set forth in the text. See id., at 670-671, 686 S.E.2d, at 139 ("Immediately following J. D. B.'s initial confession, Investigator DiCostanzo informed J. D. B. that he did not have to speak with him and that he was free to leave'' (internal quotation marks and alterations omitted)). Though less than perfectly explicit, the trial court's order indicates a finding that J. D. B. initially confessed prior to DiCostanzo's warnings. See App. 99a.
Nonetheless, both parties' submissions to this Court suggest that the warnings came after DiCostanzo raised the possibility of a secure custody order but before J. D. B. confessed for the first time. See Brief for Petitioner 5; Brief for Respondent 5. Because we remand for a determination whether J. D. B. was in custody under the proper analysis, the state courts remain free to revisit whether the trial court made a conclusive finding of fact in this respect.
. J. D. B.'s challenge in the North Carolina Supreme Court focused on the lower courts' conclusion that he was not in custody for purposes of Miranda v. Arizona, 384 U.S. 436, 86 S. Ct. 1602, 16 L. Ed. 2d 694 (1966). The North Carolina Supreme Court did not address the trial court's holding that the statements were voluntary, and that question is not before us.
. Amici on behalf of J. D. B. question whether children of all ages can comprehend Miranda warnings and suggest that additional procedural safeguards may be necessary to protect their Miranda rights. Brief for Juvenile Law Center et al. 13-14, n. 7. Whatever the merit of that contention, it has no relevance here, where no Miranda warnings were administered at all.
. Although citation to social science and cognitive science authorities is unnecessary to establish these commonsense propositions, the literature confirms what experience bears out. See, e.g., Graham v. Florida, 560 U.S. 48, 68, 130 S. Ct. 2011, 176 L. Ed. 2d 825 (2010) ("[D]evelopments in psychology and brain science continue to show fundamental differences between juvenile and adult minds").
. See, e.g., 1 E. Farnsworth, Contracts § 4.4, p. 379, and n. 1 (1990) ("Common law courts early announced the prevailing view that a minor's contract is 'voidable' at the instance of the minor" (citing 8 W. Holdsworth, History of English Law 51 (1926))); 1 D. Kramer, Legal Rights of Children § 8.1, p. 663 (rev. 2d ed. 2005) ("[W]hile minor children have the right to acquire and own property, they are considered incapable of property management" (footnote omitted)); 2 J. Kent, Commentaries on American Law *78-*79, *90 (G. Comstock ed., 11th ed. 1867); see generally id., at *233 (explaining that, under the common law, "[t]he necessity of guardians results from the inability of infants to take care of themselves . . . and this inability continues, in contemplation of law, until the infant has attained the age of [21] "); 1 Blackstone *465 ("It is generally true, that an infant can neither aliene his lands, nor do any legal act, nor make a deed, nor indeed any manner of contract, that will bind him"); Roper v. Simmons, 543 U.S. 551, 569, 125 S. Ct. 1183, 161 L. Ed. 2d 1 (2005) ("In recognition of the comparative immaturity and irresponsibility of juveniles, almost every State prohibits those under 18 years of age from voting, serving on juries, or marrying without parental consent").
. Thus, contrary issent's protestations, today's holding neither invites consideration of whether a particular suspect is "unusually meek or compliant," post, at 289, 180 L. Ed. 2d, at 335 (opinion of Alito, J.), nor " 'expand[s]' ' the Miranda custody analysis, post, at 289, 180 L. Ed. 2d, at 334, into a test that requires officers to anticipate and account for a suspect's every personal characteristic, see post, at 291-292, 180 L. Ed. 2d, at 335-336.
. This approach does not undermine the basic principle that an interrogating officer's unarticulated, internal thoughts are never—in and of themselves—objective circumstances of an interrogation. See supra, at 270-271, 180 L. Ed. 2d, at 322-323; Stansbury v. California, 511 U.S. 318, 323, 114 S. Ct. 1526, 128 L. Ed. 2d 293 (1994) (per curiam). Unlike a child's youth, an officer's purely internal thoughts have no conceivable effect on how a reasonable person in the suspect's position would understand his freedom of action. See id., at 323-325, 114 S. Ct. 1526, 128 L. Ed. 2d 293; Berkemer v. McCarty, 468 U.S. 420, 442, 104 S. Ct. 3138, 82 L. Ed. 2d 317 (1984). Rather than "overtur[n]" that settled principle, post, at 293, 180 L. Ed. 2d, at 337, the limitation that a child's age may inform the custody analysis only when known or knowable simply reflects our unwillingness to require officers to "make guesses'' as to circumstances "unknowable'' to them in deciding when to give Miranda warnings, Berkemer, 468 U.S., at 430-431, 104 S. Ct. 3138, 82 L. Ed. 2d 317.
. The State's purported distinction between blindness and age—that taking account of a suspect's youth requires a court "to get into the mind'' of the child, whereas taking account of a suspect's blindness does not, Tr. of Oral Arg. 41-42—is mistaken. In either case, the question becomes how a reasonable person would understand the circumstances, either from the perspective of a blind person or, as here, a 13-year-old child.
. Contrary issent's intimation, see post, at 288, 180 L. Ed. 2d, at 334, Miranda does not answer the question whether a child's age is an objective circumstance relevant to the custody analysis. Miranda simply holds that warnings must be given once a suspect is in custody, without "paus[ing] to inquire in individual cases whether the defendant was aware of his rights without a warning being given." 384 U.S., at 468, 86 S. Ct. 1602, 16 L. Ed. 2d 694; see also id., at 468-469, 86 S. Ct. 1602, 16 L. Ed. 2d 694 ("Assessments of the knowledge the defendant possessed, based on information as to age, education, intelligence, or prior contact with authorities, can never be more than speculation; a warning is a clearcut fact" (footnote omitted)). That conclusion says nothing about whether age properly informs whether a child is in custody in the first place.
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2 Cust. Ct. 721
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Opinion by
Tilson, J.
On the record presented it was found that there was no intention to defraud the revenue of the United States. The petition was therefore granted.
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414 U.S. 1075
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Sup. Ct. La. Certiorari denied.
Mr. Justice Douglas would grant certiorari.
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8 Wall. 202
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Mr. Justice SWAYNE
delivered the opinion of the court.
The contract which lies at the foundation of this suit, was entered into by Jeremiah Price and Henry Seymour on the 9th of May, 1835. Upon looking into it carefully, we find it contains the following provisions:
Price agreed that he would devote his time and attention and exercise his best judgment, in purchasing lands to an amount- not exceeding $5000, in the States of Indiana-, Illinois, and Ohio, and in the Territories of Michigan and Wisconsin, or in such of them as he should find most advantage- o.us for the interest of Seymour: the contracts were to be made and the conveyances to be taken in Seymour's name: the purchases were to be made after full and careful search for the most profitable investments "in of near the sites or expected sites of towns or places of business," and in general in tracts of land of moderate éxtent: Seymour agreed to furnish $5000 wherewith to make the purchases contemplated: that the land so purchased should be sold within five years from the date of the contract: that after charging the investment, the taxes, and 7 per cent, interest on the investment, there should be paid to Price one-half of the profits which should be made : it was agreed that this half of the profits should be in full for Price's services and expenses of every kind in making the explorations and searches, and in doing all such other things as' should be requisite and proper in making the purchases: the purchases were to be -made during the current year: nothing was to be paid by Seymour for Price's services or expenses, except from the profits.as aforesaid. The premises in controversy were bought by Price, and the titles vested in Seymour, pursuant to the contract. The property consisted of 2440t2525 acres of laud in the State of Illinois, and several lots in the village of Joliet, in that State.
It was agreed by the parties to this suit, that at the expiration of the five years within which the premises were to be sold,'they were unsalable, "and that it is entirely uncertain how much they could have been sold for, or whether they would even have brought enough to pay the original investment and interest."
Before the commencement of the suit the property had become very valuable; 200 acres had been sold for $69,200.
Seymour died in 1887, and Price in 1854. The five years within which the property was to be sold, expired in 1840.
The duties and obligations with which the contract clothed Price, were those of an agent. He was to make the requisite searches and explorations in the States and Territories named, and to receive and invest the money of Seymour as he might deem best for Seymour's interest. He was to contribute his time, labor, skill,.and judgment, but no money except wbat might be expended in the service he had undertaken to perform. The titles were all to be taken in the name of the principal, who was to advance the money. These functions were performed by Price. His duties and responsibilities thereupon came to an end, and those of Seymour to him commenced. For his expenditures, whatever they might be, he was to receive no immediate or certain return. The same remark is applicable in respect to his labor and services, and the exercise of his skill and judgment. Everything to be done by the agent he was to do, without any charge to his principal.
Seymour was to receive the titles of the property purchased, as if the purchases had been made by himself at home. All •the burdens incident to the acquisition of the property were to be borne by Price, with only the contingency of reimbursement and compensation provided in the contract.
The lands were to be sold within five years. It is not stated by whom, but as the legal title was vested in Seymour, the duty of selling, by the clearest implication, devolved upon him. Price had no power to move in the matter, nor to exert any control, except the right to insist that the property should be sold by Seymour, within the time limited, and that the sales should be fairly conducted. By an implication equally clear, Seymour was to pay all the taxes upon the property which might accrue.
It is proper here to consider the legal and equitable relations of the parties arising out of the contract.
We think Seymour took the legal title in trust for the purposes specified. A trust is where there are rights, titles, and interests in property distinct, from the legal ownership. In such eases, the legal title, in the eye of the law, carries with it, to the holder, absolute dominion; but behind it lie beneficial rights and interests in the sáme property belonging to another. These rights, to the extent to which they exist, are a charge upon the property, and constitute an equity which a court of equity will protect and enforce whenever its aid for that purpose is properly invoked. Interests in real .estate, purely contingent, may be made the subjects of contract and equitable cognizance, as between the proper parties. The object of the trust here was to sell the property within the time limited, and, after deducting from the proceeds the outlaj7, with interest and taxes, to pay over to Price one-half of the residue.- To this extent, Seymour was a trustee, and Price the cestui que trust. They had a joint interest in the property. Seymour held the legal title, but the rights of Price were as valid in equity as those of Seymour were at law.
If Seymour, within the five years, had conveyed the property to one of his children, by way of advancement, or to a stranger, otherwise than upon a bond fide sale for its fair value, the grantee would have taken the title, subject to the trust upon which Seymour held it, and a court-of equity would have followed the property and dealt with it in ail respects as if the title had still remained in Seymour. If a valid sale had been made, the trust would have followed and bound the proceeds in like manner as it bound the property.
Upon the death of Seymour, the legal estate passed to his devisees.
The principle of equitable conversion has an important bearing upon the case. Equity considers that as done which is agreed to be done. Money which, according to a will or agreement, is to be invested in laud, is regarded, in equity,, as real estate; and land which is to be converted into money ? is regarded as money, and treated accordingly. In this view of the subject, the personal representative of Price is the proper person to maintain this suit, and it is not necessary that his heirs-at-law should be parties.
There is another view7 of the subject, which we think may properly be taken. The agreement, that the property should be sold, and half of the profits paid to Price, was a charge upon the property, and gave him a lien to the'extent of the amount to which he should be found entitled-upon the execution of the agreement, according to its terms. The principle involved in this proposition, is á familiar one in equity, and constantly applied in the administration of its jurisprudence.
It is insisted by the appellees that the contract made the parties copartners in respect to the lands to be bought. We cannot adopt that view of the subject. The adjudications which bear upon it are conflicting and irreconcilable. The case of Berthold et al. v. Goldsmith is conclusive in this forum against the proposition. We deem it sufficient to refer to that authority, without reproducing the considerations which control the judgment of the court.
But the result is the same as if we held that the parties were copartners. In that event, Seymour would still have held the properly as trustee for the .firm, according to the rights of the respective members.
The appellants contend, that for any violation of the contract to the injury of Price, he had a remedy at law, and that neither he nor his legal representative could have any other. An action at law, sounding in damages, may, undoubtedly, be maintained in such cases for -the breach of an express; agreement by the trustee, but this in nowise affects the right to proceed in equity to enforce the trust and lien created by the contract. They are concurrent remedies. Either, which is preferred, may be selected. The remedy in equity is the better oné. The right to resort to it, under the circumstances of this case, admits of no doubt, either upon principle or authority. Such, in our judgment, were the effect and consequeuces of the contract.
At the end of the 'five years, limited for its complete fulfilment, a new element, not anticipated by the parties, and, hence, not provided for, intervened. The property, if then sold, would have afforded no profit. There would have been nothing to divide. It is uncertain whether it would have yielded enough to reimburse the cost and interest. According to the views we have expressed, there was a trust and lien for the benefit of Price. They could be destroyed only by some thing subsequently to occur. - Either Price or Seymour's devisees might have insisted upon the sale of the property according to the contract. This would have extinguished the rights of both parties touching the lands, but it would have benefited neither. There would have been no profit for either party. Price would have lost his expenditures of time, money, and skill. The devisees might have lost the interest upon the investment, and, perhaps, a part of the principal..
The devisees might have held the property, and denied' that, under the circumstances, the trust subsisted any longer. If Price acquiesced, his rights would have been at an end.
Price niight, also, have expressly or tacitly abandoned his claim. This would have worked the same result. Both parties might have concluded to continue their existing relations, and to wait for a more auspicious period for the disposition of the property. - Their interests were the same. What would benefit or injure one could not fail to have the same effect upon theothers. If the purchases werejudiciously made, the course last suggested was obviously the wisest and best for both parties. Was either of the alternatives adopted ? and if so, which one ?
This is the turning-point of the case.
The burden of the proof as to the two former rests upon the appellants.
. Upon a careful examination of the record we have failed to find the slightest proof of any disclaimer by the devisees, or of any renunciation by Price. If such evidence exist we must suppose it is contained in the correspondence between tfye parties They are annexed to the bill accounts, showing the receipts and disbursements of Price down to the time of his death. The receipts, after the death of Seymour, commence on the 24th December, 1841, and terminate on the 16th of June, 1854. All the moneys were received from Messrs. John F. and Horatio Seymour. It appears, by a stipulation in the record, that the sums with which Price debited himself had all been verified by comparing them with the original receipts in the possession of the counsel of the appellants. The Messrs. Seymour lived in the State of New York, and Price at Chicago. The moneys were all remitted by checks. It is apparent, from the face of the accounts, that the receipt of the money, in many instances, if not in all, must have been acknowledged by letter. None of these letters have been produced. Why not? The inference is a fair one, to say the least, that they contain nothing, unfavorable to the claim of the appellee. This negative feature of the ease is not undeserving of consideration. If Price, neither by expression nor acquiescence, did anything to impair his rights, they must still subsist in full force.
We think there is proof in the record, that he and his personal representative considered the time within which the sales were to be made, prolonged until they could be made profitably, and, that in all other respects, the contract remained as if it had originally contained this modification.
We can hardly conceive how the devisees, who advanced the money to pay the taxes, and with whom Price must have corresponded, could have understood his position differently. It is admitted that from the time of the'purchases down to the time of his- death, Price had the care and charge of the property,, and paid the taxes upon it, the devisees furnishing the money. His accounts are long, and the items numerous. There is no proof that he ever made any charge, or claimed anything for his services. His accounts are silent upon the subject. How can this be accounted for, unless he expected to be compensated by his share of the profits of the lands, to be realized when the proper time for selling should arrive ? _
Upon his death, High, his administrator, succeeded to the agency. He was employed, by the devisees, and performed the same duties as his predecessor. He negotiated the sales mentioned in the bill, and at once claimed a-share of the profits for Price's estate, according to the contract. The claim was resisted by the devisees, and he thereupon instituted this suit.
, The theory insisted upon by the appellees is consistent with all the evidence in the case. It is in conflict with nothing which has been developed. It is alleged, in one of the answers, that Price " never pretended to the defendants to have any interest, . . . but claimed that he ought, to be allowed a reasonable compensation for his services as agent, and not under the contract." When, where, and how was the claim made? If by letter, why is not the letter produced? The fact is important, but the allegation is wholly unsupported by anything in the record.
The-answers set up the bar of the statute of limitations. Where there is no disclaimer the statute has no application to an express trust, such as we have found to exist in this case.
It is said there is a misjoinder of parties iu the bill with respect to the executors of Seymour. The doctrine of equitable conversion renders tlieir presence in the case necessary, if not indispensable. If the objection were well taken, the bill as to1 them would be dismissed. The error would have no other effect.
It is alleged, also, that there is a defect of non-joinder as to the heirs-at-law of Price. The application of the same doctrine is a sufficient answer to this objection.
Conceding that the appellee is entitled to have the contract specifically executed, the appellants insist that the court below erred in decreeing that it should be done' by a receiver instead of themselves. There being a trust and a lien a court of equity had unquestionable authority to apply' its flexible and comprehensive jurisdiction in such manner as might be necessary to the right administration of justice between the parties. The devisees are numerous. The death of any one of them might seriously retard and embarrass the execution of a decree shaped as the appellants suggest. The appointment of the solicitor of the appellants as receiver, and the stipulation, which appears in the record, that he might sell at private sale, protects in the best manner the interests of all concerned.
The court below held that the contract made the parties to it copartners, and the decree was framed accordingly. But, as the provisions of the decree conform in all respects to our view's, this theoretical error constitutes no ground of reversal. A wrong reason was given for what was properly done.
" The litigation appéars to have been conducted in a spirit of candor and fairness on both sides, which is eminently creditable to the parties.
We find no error in the record, and the decree of the Circuit Court is. ' Affirmed.
Mr. Justice FIELD delivered the following dissenting opinion.
Mann v. Butler, 2 Barbour's Chancery, 368.
2 Story's Equity, § 964 ; Sturt a. Mellish, 2 Atkyns, 612.
Phyfe v. Wardell et al., 5 Paige, 268; Armour v. Alexander, 10 Id. 571.
Oliver v. Piatt, 3 Howard, 401; Taylor v. Plumer, 3 Maule & Selwyn, 662; Sweet v. Jacocks, 6 Paige, 355; Wylie v. Coxe, 15 Howard, 416.
Anstice's Administrator v. Brown et al., 6 Paige, 448.
Pinch v. Anthony and others, 8 Allen, 539; Legard v. Hodges, 1 Vesey, Jr. 477; Roundell v. Breary, 2 Vernon, 482; Gardner v. Townshend, Cooper's Equity Cases, 303; 2 Story's Equity, § 1, 214-16-17; Denston v. Morris, 2 Edwards' Chancery, 37.
24 Howard, 536.
Anderson v. Lemon, 4 Selden, 236.
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1 Cust. Ct. 472
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Opinion by
Tilson, J.
The record showed that certain items consist of wearing apparel, knit, similar to that involved in United States v. International Clearing House (24 C. C. P. A. 117, T. D. 48416). The claim under paragraph 1114 was therefore sustained.
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96 U.S. 724
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Mr. Chief Justice Waite
delivered the opinion of the court.'
None of the objections to this appeal are, in our opinion, well taken, except the one which relates to the approval of the bond. That, we think, must be sustained. The security required upon writs of error and appeals must be taken by the judge or justice. Rev. Stat., sect. 1000. He cannot delegate this power to the' clerk. Here the approval of the bond was by the clerk alone. The judge has never acted; but, as the omission was undoubtedly caused by the order of the court permitting the clerk to take the bond, the case .is a proper one for the application of the rule by which this court sometimes refuses to dismiss appeals and-writs of error, except on failure to comply with such terms as may be imposed for the purpose of supplying defects in the proceedings. Martin v. Hunter's Lessee, 1 Wheat. 361; Dayton v. Lash, 94 U. S. 112.
If "the appellant desires that the appeal shall 'operate as a supersedeas, the bond may be in the sum of' $>7,000; other wise, in the sum of §250, The security may be approved by any judge or justice authorized to sign a citation, upon an appeal in the cause ; but this cause will stand dismissed, unless the appellant- shall;, on or. before the first Monday in March .next, file with the clerk of this -court a bond, with good and sufficient security, conditioned according to law, for the purpose» of thé appéal; and it is
'iSo ordered'.
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2 Cust. Ct. 728
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Opinion by
McClelland, P. J.
It was stipulated that the merchandise consists of cloth brushes and hat brushes similar to those passed upon in United States v. Heinrich (26 C. C. P. A. 292, C. A. D. 30). The claim at only 50 percent under paragraph 1506 was therefore sustained.
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379 U.S. 950
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C. A. 7th Cir. Certiorari denied.
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467 U.S. 1205
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C. A. 9th Cir. Certiorari denied.
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6 Cust. Ct. 507
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Opinion by
Brown, J.
The petition was formally abandoned. It was therefore dismissed.
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87 T.C. 548
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GOFFE, Judge:
The Commissioner determined deficiencies in petitioner's Federal income tax for the taxable year 1974 in the amount of $80,813,428 and for the taxable year 1975 in the amount of $166,316,320. Petitioner and respondent, by motion granted on November 10, 1983, agreed that certain issues would be severed and tried at a special trial session, which was held at Dallas, Texas.
One of the group of issues tried was designated by the parties as "Constructive Dividends and Payables." This group requires the resolution of three issues: (1) Did the retroactive adjustment of marine charter hire rates between two subsidiaries of Gulf result in a constructive dividend to Gulf; (2) did the diversion of a portion of the profit from the sale of an oil tanker ship by one subsidiary to another subsidiary by means of an increase in the marine freight rate charged by the second subsidiary to the buyer of the tanker result in a constructive dividend to Gulf; and (3) do the uncollected balances owed by Gulf to two of its foreign subsidiaries at the end of the taxable year 1974 constitute investment in U.S. property within the meaning of section 956, resulting in dividend income to petitioner?
FINDINGS OF FACT
Some of the facts have been stipulated. The stipulation of facts and accompanying exhibits are so found and incorporated by this reference.
Gulf Oil Corp. (hereinafter referred to as petitioner or Gulf) is a corporation organized under the laws of the Commonwealth of Pennsylvania with its principal office in Pittsburgh, Pennsylvania. During the taxable years at issue, Gulf and certain of its subsidiary corporations constituted an "affiliated group" as that term is defined in section 1504. Petitioner, directly and through its foreign subsidiaries and affiliates, is engaged in world-wide exploration, development, production, purchase, transportation, and marketing of petroleum products. Petitioner maintained its books of account for the taxable years in issue on the accrual method of accounting using the calendar year as its taxable year. Gulf, as the common parent of an affiliated group of corporations, timely filed consolidated Federal income tax returns for its taxable years 1974 and 1975 on behalf of itself, and certain of its subsidiary corporations, with the Office of the Internal Revenue Service at Pittsburgh, Pennsylvania.
For convenience, we will set forth separate findings of fact for each of the three issues addressed in this opinion.
Adjustment of Freight Rates Between Afran and Gulftankers
There are generally three types of chartering arrangements common in the marine transportation industry: bare boat charters, voyage charters, and time charters. Under a bare boat charter the vessel and the equipment necessary to make it seaworthy are delivered to the charterer in "bare" condition. The charterer must bear the costs of crew and supplies plus all voyage costs, which include the cost of fuel and port charges. Under a voyage charter the owner bears all capital, operating, and voyage costs and the charterer simply pays a single charge for the use of the vessel. Under a typical time charter the charterer, who must pay all voyage costs in addition to the charter rate, has use of the vessel for a period of time. The charter rate is quoted as a dollar figure per dead weight ton of the vessel per month.
A charter can be set between the parties for any length of time. Charters are generally classified as either long-term, short-term, or spot charters. A short-term charter is in effect for up to 2 years; a charter for a period of more than 2 years is considered to be long-term. A spot charter lasts only for the length of time it takes for the vessel to complete a specific voyage or voyages.
To assist in the communication and comparison of worldwide charter rates, the marine transportation industry developed the worldscale rate index approximately 25 years ago. Each worldscale rate is calculated by assuming a standard vessel and calculating all of the costs of that vessel for each route over which tankers operate in the world. The worldscale rates are adjusted semiannually by a group of London and U.S. tanker brokers to reflect current costs. To illustrate the usefulness of the worldscale rate index, assume a charterer desired to charter a tanker from Puerto La Cruz, Venezuela, to Philadelphia and was quoted a rate of "Worldscale 50," a shorthand expression meaning 50 percent of the worldscale rate. In order to determine the actual cost of the charter, the charterer would consult the worldscale rate schedule. If the worldscale rate for this voyage was $4 per ton of cargo carried, expressed as 100 on the worldscale index, the charterer would know the rate he was being quoted was $2 per ton of cargo.
To further assist in the comparison of marine freight rates, the Average Freight Rate Assessment (AFRA) was developed. AFRA is a calculation by a group of London tanker brokers of actual average freight rates on a monthly basis. Stated in terms of worldscale index rates, AFRA is a composite figure that represents the weighted average rate of all charters currently in effect including long-term, short-term, and spot charters. AFRA is calculated separately for six size classes of vessels.
Both the worldscale rate and AFRA indices have become accepted tools in the industry. While the worldscale rate reflects an estimate of the costs of operating a vessel on a specified voyage, AFRA represents actual current charter rates. However, because the worldscale rate and AFRA reflect the cost of shipping one ton of freight, the indices must be converted into a dollar figure per dead weight ton of vessel so that they may be used to quote time charter rates. Furthermore, because both AFRA and worldscale rates include all costs of moving freight, voyage costs, including fuel and port charges, must be subtracted from these rates to approximate the appropriate rate for a time charter of a vessel.
During the taxable year 1974, Gulftankers, a Liberian corporation, and Afran, also a Liberian corporation, were both wholly owned subsidiaries of petitioner. During the taxable years in issue, Gulftankers and Afran were engaged in the marine transportation business. Afran owned, but did not operate, much of petitioner's oil tanker fleet. During the taxable years in issue, Afran was engaged in the business of time chartering tankers exclusively to Gulftankers, which operated the tanker fleet. Gulftankers, in turn, transported oil world-wide on behalf of Gulf subsidiaries and affiliates. However, as much as 25 percent of the gross income of Gulftankers was generated by spot chartering surplus vessels to unrelated parties.
From 1971 through the taxable years in issue, Afran chartered vessels to Gulftankers by way of consecutive 1-year time charter agreements. These agreements required the payment by Gulftankers of arm's-length time charter rates for each vessel. The rates were established at the beginning of the year based upon an analysis of short-term time charter rates being charged at that time.
To arrive at the arm's-length figure for charter hire rates between Afran and Gulftankers, the assistant comptroller of worldwide marine transportation for Gulf wrote to the director of the foreign flag chartering department for Gulf at the beginning of each year requesting current worldscale rates for the vessels under charter to Gulftankers. After receiving this information, the comptroller's office converted the worldscale rates into time charter rates for use in assessing intercompany charges against Gulftankers on behalf of Afran.
In 1975, Afran had 17 vessels under charter to Gulftank-ers. In early 1975, Chester Nowak of Gulf's comptroller's office wrote to W.R. Shaunessy of Gulf's chartering department requesting information to make the intercompany charter charges between Afran and Gulftankers. By letter dated February 7, 1975, Shaunessy provided an estimate of 1975 arm's-length charter rates for the vessels owned by Afran that were chartered to Gulftankers. The rates supplied by Shaunessy were based upon worldscale rates reported for the last quarter of 1974 and upon his informal discussions with unrelated tanker brokers, and reflected a projection of arm's-length rates for 1975. This information was used by the comptroller's office to establish the intercompany charter charges for 1975.
During 1975, but after the charter hire rates between Afran and Gulftankers were set, the world-wide demand for tankers declined severely with the result that charter hire rates dropped substantially. The drop in charter hire rates was reflected in concommitant declines in the worldscale rates and AFRA indices. Because the spot charter rates are more volatile than short- and long-term time charters, the drop in the spot charter rates was dramatic.
The Tax Reduction Act of 1975, Pub. L. 94-12, 89 Stat. 26, made several changes in subchapter N, part III, subpart F, Controlled Foreign Corporations, of the Internal Revenue Code (hereinafter referred to as subpart F) regarding the taxation of controlled foreign corporations effective for taxable years beginning after December 31, 1975. Confronted with these changes, Gulf decided that the structure of its foreign shipping operations around several foreign subsidiaries would become disadvantageous after 1975. Therefore, Gulf decided to transfer to Afran all of the assets of Gulftankers, including the time charter agreements between Afran and Gulftankers. Gulftankers was then liquidated into Gulf effective December 29, 1975. Gulftank-ers' preliquidation balance sheet as of December 29, 1975, reflected a receivable from Afran arising out of the transfer of its assets in the amount of $74,768,947.
On January 13, 1976, before the books of Gulftankers were closed for the taxable year 1975, F. Leo Faust, Jr., of Gulf's tax department instructed Chester Nowak of the comptroller's office to adjust the charter hire rates between Afran and Gulftankers retroactively for the taxable year 1975. The charter rates were adjusted to an amount calculated by a composite of 75 percent of the average spot charter rate for most of 1975, obtained from an industry publication, and 25 percent of the full composite AFRA rates for 1975. The combination of spot and AFRA, like the rate determined at the beginning of 1975, had to be adjusted to eliminate voyage costs and converted to a per-dead-weight-ton figure for use as a charter rate. Heavily weighting the volatile spot component of the composite adjustment factor caused a substantial reduction in the charter rates used between Afran and Gulftankers. In one instance, the comptroller's department had to increase the figure used for the spot component of the adjustment because adjusting based upon actual spot would have resulted in a negative charter rate. This adjustment reduced the 1-year charter rate between Afran and Gulftankers in the total amount of $8,805,000. The adjustment in charter hire rates had the effect of increasing the receivable from Afran on Gulftank- ers' preliquidation balance sheet by $8,805,000. The Gulftankers' receivable from Afran, which was held by Gulf after the liquidation of Gulftankers, was satisfied in full in March 1976.
The adjustment made on January 13, 1976, was the first such retroactive adjustment made to the charter rates between Afran and Gulftankers since they first entered into 1-year time charter agreements in 1971. The director of foreign flag chartering was not contacted concerning the decision to adjust the charter hire rates between Afran and Gulftankers. Such an adjustment of short-term time charter was virtually unknown in the industry and only occurred in the event of hardship to one of the parties to a time charter agreement. Furthermore, the use of a composite of AFRA and spot rates was not a methodology used in the industry to set time charter rates.
For the taxable year 1975, the Commissioner determined that Gulf realized a constructive dividend from Afran in the amount of $7,247,000 based upon the downward adjustment of the charter rates charged by Afran to Gulftankers under the 1-year time charter in effect for that year. As of December 31, 1975, the current or accumulated earnings and profits of Afran equaled or exceeded the amount determined by the Commissioner to be a constructive dividend distribution.
Sale of La Santa Maria
By agreement dated November 22, 1969, between Gulf and Astilleros y Talleres del Noroeste, S.A. (Astano), an unrelated Spanish shipbuilding corporation, Astano agreed to construct an oil tanker of approximately 324,000 dead weight tons, which was later named La Santa Maria. Because La Santa Maria was to operate as a Spanish-flag vessel, Gulf at all times intended to transfer ownership of La Santa Maria to a Spanish corporation, Compania Marítima Rio Gulf, S.A. (Marítima). Gulf indirectly owned 39.7 percent of Marítima through Transocean Gulf Oil Co. (Transocean), a wholly owned Delaware subsidiary, and the remaining 60.3 percent indirectly through other subsidiaries. Gulf was a party to the construction contract only because Astano so insisted.
Marítima and Gulf arranged for initial long-term financing of up to $35 million to pay for La Santa Maria from three French banks, Banque WORMS, Banque de l'lndochine, and Credit Industriel et Commercial. Financing was arranged through the French banks to take advantage of favorable interest withholding provisions in a Franco-Spanish tax treaty. The terms of the initial loan agreement, executed by Marítima and the banks on March 26, 1972, called for the repayment of all advances in 40 semi-annual installments. In order to obtain approval for the loan from the central bank of Spain, Banco de España, which was required for all borrowing by Spanish corporations from non-Spanish sources, Marítima could not prepay the loan for 10 years. Security for this loan was provided by dollar deposits made by another Gulf subsidiary for the account of the three French banks in amounts equal to the advances made under the loan to Marítima. Gulf was not a party to the loan agreement or the security agreement.
Before La Santa Maria was completed, the decision was made to increase the size of the vessel to approximately 360,000 dead weight tons. In March 1974, the construction contract with Astano was amended to reflect the increased size and cost of the vessel. By letter dated October 2, 1974, Gulf formally assigned the Astano construction contract concerning the incomplete La Santa Maria to Marítima.
Prior to completion of La Santa Maria, officials of Gulf and Marítima determined that the tanker could not be utilized as planned, in part because of the failure of the Spanish Government to improve the seaport at Huelva, Spain, to accomodate very large vessels such as La Santa Maria. Therefore, Gulf and Marítima decided to sell La Santa Maria to Refinería de Petróleos del Norte, S.A. (Petronor), a Spanish corporation, 40-percent owned by Gulf, that operated an oil refinery near the deep water port at Bilbao, Spain.
The transfer of La Santa Maria was to be accomplished by the assignment of the Astano construction contract from Marítima to Petronor. So that Petronor could avoid certain Spanish taxes on the transaction, Gulf and Marítima agreed to make all remaining payments due under the construction contract prior to the assignment to Petronor. In view of the new specifications agreed to by Astano and Gulf, the decision to prepay the construction contract required that Marítima acquire additional financing to complete payment of the final cost of the vessel, $53.2 million. As a result, with the permission of Banco de España, in May 1975, Marítima entered into a loan agreement with two of the same French banks that provided the initial financing, Banque WORMS and Credit Industriel et Commercial. The supplemental financing agreement provided for a $20-miUion short-term loan to Marítima prepayable at any time. This loan was secured by guarantees provided by Gulf rather than dollar deposits.
Petronor ultimately agreed to pay the equivalent of $62.2 million as the purchase price for La Santa Maria. After subtracting the total cost of $53.2 million, which Petronor paid in an equivalent amount of Spanish pesetas, Marítima realized a profit of $9 million. Marítima and Petronor agreed that the profit would be reduced by $2 million as a retroactive reduction in the price of certain crude oil purchases by Petronor. The reason for this adjustment was that certain deliveries of crude oil to Petronor contained excessive amounts of basic sediment and water. Gulf originally contemplated that the remaining profit on the sale of La Santa Maria would be paid via increased freight rates paid by Petronor to Marítima retroactively to January 1, 1974. Ultimately, however, Petronor agreed to divert the remaining $7 million profit from Marítima to Gulftankers, another Gulf subsidiary, by way of increased freight rates paid by Petronor to Gulftankers, which delivered crude oil to Petronor in its non-Spanish flag vessels in the regular course of its business. Marítima received no consideration from Gulftankers, Petronor, or Gulf for the agreement to give up its profit on the sale of La Santa Maria.
The exchange of the $53.2 million in pesetas for dollars necessary to repay the French loans required the approval of Banco de España. Marítima was allowed to exchange $20 million in pesetas immediately and repaid the supplemented short-term loan from the French banks. However, permission was not immediately granted to exchange the remaining $33.2 million in pesetas for dollars to repay the initial loan. Without special permission the $33.2 million in pesetas could only be converted in an amount equal to that required to make the regular installment payments due under the loan until the 10-year prepayment prohibition expired. As Marítima had no business use for pesetas in Spain, the "blocked" pesetas created considerable concern among the management of Gulf and Marítima. Numerous internal correspondence and memoranda at Gulf discussed ways to expatriate the "blocked" pesetas or, at a minimum, to shield those pesetas from interest rate, devaluation, and political risks. The internal documents of Gulf make clear that Gulf, and not solely Marítima, was the party most interested in repatriating the blocked pesetas. Ultimately, permission to convert the blocked pesetas to dollars was granted by Banco de España and the loan was repaid after the taxable years in issue.
The freight rate adjustment to which Petronor agreed was reflected as "deferred revenue" in the total amount of $6,611,844 on the financial records of Gulftankers. The deferred revenue account was transferred to Afran prior to the liquidation of Gulftankers into Gulf on December 29, 1975. The transfer to Afran of the deferred revenue account resulted in an increase in the payable from Afran to Gulftankers arising out of the transfer of all of the assets of Gultankers.
The Commissioner determined that Gulf received a constructive dividend for the taxable year 1975 equal to the freight rate adjustment of $6,611,844. The Commissioner determined, in the alternative, that Transocean, a wholly owned Gulf subsidiary, realized a constructive dividend in the same amount for the taxable year 1975. As of December 31, 1975, the current or accumulated earnings and profits of Petronor and Marítima each equaled or exceeded $6,611,844.
Payables to OS & D and Gulf Overseas
During the taxable years in issue, Gulf and its affiliates maintained a centralized cash management system to record and offset intercompany payables and receivables. This system was designed to minimize cash transfers among affiliated companies and to maximize the availability of cash for investment opportunities. In the most general terms, these goals were met, in the case of transactions between an affiliate and an unrelated person, by having Gulf actually disburse or receive any cash payments required in the transaction on behalf of its affiliate. Movements of cash in transactions between affiliates were minimized by having those payment obligations represented as intercompany receivables or payables subject to offset by other transactions of the affiliates with Gulf or other affiliates.
The centralized cash management system was reflected in the bookkeeping records of Gulf in four accounts, designated in its uniform system of accounts as accounts 1950, 1960, 1970, and 1980. Account 1950 is used to record the balance of long-term intercompany receivables and payables between Gulf and its affiliates. A separate 1950 account was maintained with respect to each affiliate in the unconsolidated financial records of Gulf and the balance shown therein reflected the intercorporate receivable due Gulf from the affiliate or payable due the affiliate from Gulf. Each affiliate also maintained an account 1950 in its financial records reflecting the same amount shown on Gulf's records as due from or owing to Gulf.
The operation of the cash management system may be illustrated, in the case of transactions with unrelated parties, as follows: Affiliate, in the ordinary course of its business, manufactures and sells products to unrelated parties. Affiliate also purchases necessary materials from unrelated parties. Upon the purchase of materials, Affiliate requests Gulf to disburse the cash to the materials vendor. Upon making the payment on behalf of Affiliate, Gulf records a credit to "cash" and a debit to the intercompany receivable account established for Affiliate, "1950-Affiliate," in the amount of the payment. On its books of account, Affiliate shows the amount of the payment in its 1950 account as a credit to reflect the payable to Gulf, and debits its purchases account in the same amount. When Affiliate sells its product, the purchaser is directed to remit the purchase price directly to Gulf, which deposits the cash in its bank account, debits "cash," and credits "1950-Affiliate" on its books of account in the amount that was received as payment for the product. Simultaneously, Affili ate would record the sale in its books of account as a debit to its 1950 account to show the receivable from Gulf and credit "sales" for the amount of the price charged for the product sold.
Generally, all transactions between Gulf and its affiliates and among its affiliates are accomplished without the actual transfer of cash. Under Gulfs cash management system, such intercompany transactions are ultimately reflected as a single balance representing either an amount owed to the affiliate or owed to Gulf in account 1950. However, unlike a transaction with an unrelated party, the path to a single 1950 balance between Gulf and each of its affiliates is less direct.
Generally, receivables and payables generated by transactions by an affiliate with Gulf or with other affiliates are initially recorded in account 1970. An affiliate has a separate 1970 account for each affiliate with which it does any business. For example, if Affiliate A purchases material from Affiliate B and sells finished products to Affiliate C, Affiliate A will record in its books of account a credit to its account "1970-Affiliate B" in the amount of the purchases and a debit to its account "1970-Affiliate C" in the amount of the sales price for the finished products. Correspondingly, Affiliates B and C will record these transactions in their "1970-Affiliate A" account as a debit and a credit, respectively. At the end of each month, each affiliate's 1970 account balances are cleared by way of reversing journal entries and the aggregate amount from these accounts is recorded as a receivable or payable directly with Gulf in account 1960. The transfers to account 1960 consolidate multiple intercompany receivable and payable balances into a single amount either due to or owed by Gulf with respect to each affiliate. A 1970 account will not be cleared to account 1960 in the event one of the affiliates that was a party to an intercompany transaction failed, because of human error or otherwise, to record the receivable or payable in its 1970 account for the other affiliate. Only if both affiliate's respective 1970 accounts are in balance will they be subject to the monthly clearinghouse effect of account 1960.
Account 1980 closely resembles account 1970 in purpose. However, unlike 1970 accounts, a company that uses account 1980 instead of or in combination with account 1970 will not automatically clear the account on a monthly basis, but only after overt action by the comptroller's office. There are various reasons why an affiliate might use account 1980; one of which is that foreign subsidiaries may be required under the currency regulations of the country of their incorporation to settle receivables and payables in cash rather than by intercompany offset.
The balances in account 1960 between Gulf and each affiliate are reviewed on a quarterly basis. At the close of the following month, the balances in the 1960 accounts are recharacterized as long-term receivables or payables and transferred to account 1950 for later settlement.
Although each 1950 account represents a net payable or receivable between Gulf and one of its affiliates, there is no set time for settlement. No formal notes were executed between Gulf and its affiliates in regard to the obligation evidenced by the balances in the cash management accounts. No interest was charged or paid on the amounts reflected in the cash management accounts during the taxable year in issue.
At issue in this case are the tax consequences of the payable balances in accounts 1950 maintained by Gulf for two of its foreign subsidiaries, Gulf Overseas Co., Inc. (Gulf Overseas) and Gulf Supply and Distribution (GS & D). During the taxable year 1974, Gulf owned 100 percent of Gulf Overseas, a Panamanian corporation. During the taxable years 1974 and 1975, Gulf owned 100 percent of GS & D, a Bahamian corporation, indirectly through other wholly owned subsidiaries. Gulf Overseas engaged in the business of trading liquidified petroleum gas (LPG) products and GS & D purchased and sold aviation fuel.
Pursuant to Gulf's cash management system, the proceeds of the sale of LPG product sold by Gulf Overseas and the proceeds of the sale of aviation fuel sold by GS & D were paid directly to Gulf by the purchasers and recorded in the appropriate 1950 accounts. Also pursuant to the cash management system, the intercompany obligations incurred in the purchases of LPG and aviation fuel by Gulf Overseas and GS & D were initially recorded in the 1970 or 1980 account established by Gulf Overseas and GS & D for the affiliate with which the purchase transactions occurred. In accordance with the cash management system, the balances shown in the respective accounts 1970 and 1980 were ultimately converted into a single net receivable or payable between Gulf and Gulf Overseas and GS & D by transfer to account 1960, the balance of which was transferred to account 1950 on a quarterly basis.
Shown below are the end of month balances of Gulf Overseas for accounts 1950, 1960, and the aggregate end of month balances of accounts 1970 and 1980 as shown on the books of account of Gulf Overseas:
GULF OVERSEAS CO., INC.
Analysis of Gulf Receivables and Payables in Accounts 1950, i960 and Aggregate Accounts 1970 and 1980 Balances for the Period FROM 12/31/73 TO 12/31/75
Long-term 1950 Short-term Short-term 1960 1970 Short-term 1980
($100) December 1973 $3,734,165 (1)
(100) Jaquary 5,474,458 (1)
(100) February 6,482,215 (2)
(100) March 15,848,437 (1)
(3,017) April 21,254,822 (2)
(5,074) May 24,403,795 (2)
(5,074) June 30,605,277 (2)
(5,074) 39,402,887 July 1
(5,074) 44,311,137 August (2)
(5,431) 14,467,050 September (2)
(5,431) 17,905,758 October (1) ($5,871,779)
(5,431) 21,341,065 November (5,871,780) (3,579,613)
(5,431) 13,999,541 December 1974 (1)
(5,431) 17,789,245 January (1) (2,825,790)
(5,431) 24,367,165 February (2,825,790) (16,545,818)
23,699,562 March (16,545,819) (2,949,831)
26,177,876 April (19,495,649) (2,679,342)
29,762,446 May (22,174,991) (4,245,182)
12,026,374 June (4,245,182) (5,029,837)
13,627,894 (9,275,019) (3,160,447) July
13,627,894 (12,435,467) 1,362,346 August
6,093,598 6,041,009 (3,869,397) September
6,093,598 6,042,431 (7,038,289) October
6,093,598 (995,858) (2,663,768) November
(55,197) December 1975
A positive or debit balance in the entries in the above table indicates a net receivable, while a negative or credit balance indicates a net payable. The very small balances shown under the heading for "Short-Term 1960" represent rounding adjustments.
For the taxable year 1974, the Commissioner determined that the increase in the 1950 account receivable balance between Gulf and Gulf Overseas from the beginning balance of $3,734,165 to the ending balance of $13,999,541, or $10,265,376, represented investment in U.S. property within the meaning of section 956(a)(1) and (b)(1)(C). Therefore, the Commissioner determined that Gulf realized additional taxable income under sections 951 and 956 equal to $662,248, an amount not exceeding the earnings and profits of Gulf Overseas.
Shown below are the end of month balances of GS & D for accounts 1950, 1960, and the aggregate end of month balances of accounts 1970 and 1980 as shown on the books of account of GS & D.
GULF SUPPLY AND DISTRIBUTION CO., LTD.
Analysis of Gulf Receivables and Payables in Accounts 1950, 1960 and Aggregate Accounts 1970 and 1980 Balances for the Period FROM 12/31/73 TO 12/31/75
Long-term 1950 Short-term 1960 Short-term 1970 Short-term 1980
December 1973
January
February
March
April
May
June $457,745
July 1,707,739 ($898,514)
August $1,713,817 (30,855) (935,000)
September 1,689,040 862,080 (1,549,636)
October 2,557,198 (105,394) (2,112,737)
November 2,451,804 704,614 (1,747,244)
December 1974 $2,451,804 704,614 (2,746,333)
January 2,451,804 704,614 665,401 (2,583,234)
February 2,451,804 1,370,016 295,780 (2,761,388)
March 3,821,820 295,780 135,438 (2,418,953)
April 3,821,820 431,218 496,513 1,599,001
Long-term Short-term Short-term Short-term
1960 1950 1970 1980
May $3,821,820 $927,731 $705,325 $2,133,940
June 4,749,551 705,325 1,310,256 3,538,694
July 4,749,551 2,015,581 1,917,640 15,005,236
August 4,749,551 3,933,221 1,184,079 15,005,236
September 8,682,772 1,184,079 1,806,164 8,985,405
October 8,682,772 2,990,244 1,638,234 9,271,899
November 8,682,772 4,628,477 940,643 1,991,435
December 1975 9,620,409 1,733,081 243,127
For the taxable year 1974, the Commissioner determined that the increase in the 1950 account receivable balance between Gulf and GS & D equal to the ending balance of $2,451,804 represented investment in U.S. property within the meaning of section 956(a)(1) and (b)(1)(C). Therefore, the Commissioner determined that Gulf realized additional taxable income under sections 951 and 956 equal to $410,084, an amount not exceeding the earnings and profits of GS & D.
OPINION
The Commissioner determined that Gulf received constructive dividends based upon the retroactive adjustment of the charter hire rate between two of its subsidiaries, Afran and Gulftankers, and the increase in the freight rate charged by Gulftankers to Petronor in connection with the sale of La Santa Maria by Marítima, another Gulf subsidiary. The Commissioner also determined that Gulf realized taxable income for the taxable year 1974 under section 956 resulting from the increase in balances of accounts payable to two of its foreign subsidiaries. These determinations by the Commissioner are presumptively correct and petitioner bears the burden of proof. Welch v. Helvering, 290 U.S. 111 (1933); Rule 142(a). For clarity we have divided our opinion into separate sections dealing with the constructive dividends issues and the section 956 issue.
Constructive Dividends
Under section 61(a)(7), gross income includes dividends. The term "dividend" is defined in section 316(a) as a distribution of property by a corporation to its shareholders out of its earnings and profits. There is no requirement that the dividend be formally declared or even intended by the corporation. See, e.g., Sachs v. Commissioner, 277 F.2d 879 (8th Cir. 1960), affg. 32 T.C. 815 (1959). Distributions by a corporation will be treated as dividends to the shareholder if the distributions are made for the shareholder's personal benefit; the funds need not be distributed directly to the shareholder. Rushing v. Commissioner, 441 F.2d 593 (5th Cir. 1971), affg. 52 T.C. 888, 893 (1969); Rapid Electric Co. v. Commissioner, 61 T.C. 232, 239 (1973). It is also clear that a transfer of property from one corporation to another corporation can constitute a constructive dividend to their common shareholder. Sammons v. Commissioner, 472 F.2d 449 (5th Cir. 1972), affg. in part, revg. in part, and remanding a Memorandum Opinion of this Court.
Before we will characterize a transfer of property from one corporation to another as a constructive dividend to a common owner, we must first examine the transfer under a two-part test. The first, or objective, part of the test asks: "did the transfer cause funds or other property to leave the control of the transferor corporation and did it allow the stockholder to exercise control over such funds or property either directly or indirectly through some instrumentality other than the transferor corporation." Sammons v. Commissioner, supra at 451. The second, or subjective, test requires that we determine whether the transfer was prompted primarily by a business purpose of the transferring corporation or rather a shareholder purpose of the common owner. Sammons v. Commissioner, supra at 451.
Retroactive Change in Charter Hire Rates Between Afran and Gulftankers
We have no difficulty finding that the agreement by Afran to accept retroactive reduction in the charter hire rate for the vessels chartered to Gulftankers under 1-year time charter agreements represents a transfer of property from one corporation to another corporation, both of which were under the common control of Gulf. Afran had a right to receive charter income at the higher rate negotiated at the beginning of 1975 and, by acceding to the charter hire rate reduction, gave up property equal in value to the amount of the aggregate charter hire rate adjustment. We need say no more about the objective test; the more critical inquiry in this instance is whether the primary purpose of the transfer was for the benefit of the common owner, Gulf.
Petitioner argues that the adjustment to the charter hire rates was in keeping with its practice of setting those rates at fair market value. We are not persuaded that this was the purpose of the adjustment. The 1-year time charter agreements, which are not in the record, require that the charter hire rate be set at the beginning of the year. In accordance with the charter agreements and with the assistance of Gulfs marine charter department, the rates were set at the beginning of the year 1975 at an estimate of the rate that would be charged for 1-year time charters in an arm's-length transaction. This was the same procedure that had been followed since 1971 when the arrangement between Afran and Gulftankers began. In January 1975, the rate was set based upon recently published worldscale rates, which were converted to a per-dead-weight-ton figure, and upon information obtained from professional tanker brokers. The rate thus established was a reasonable estimate of the rate that would be charged in an arm's-length transaction at the beginning of 1975. The adjustment in the 1975 charter hire rates represented the first time such an adjustment was made. Such retroactive adjustments to 1-year time charters were, virtually unknown in the industry. Furthermore, the use of a composite rate strongly weighted in favor of the spot charter rate was not a method used in the industry to set short-term time charters. Perhaps even more telling is the fact that the adjustment was made at the direction of Gulf's tax department and without consultation with the marine chartering department.
We doubt that such adjustments were called for in the agreements between Afran and Gulftankers. We have found as fact that the tanker market experienced a severe decline in 1975; however, petitioner has not demonstrated that there was any hardship to either Afran or Gulftankers caused by the decline in the tanker market. In the absence of a specific provision pegging the contract price to some floating market rate, it seems to us that market fluctuations are one of the risks accepted by the parties to any continuing agreement whether the contract is long-term or only for 1 year as in this case. When an agreement calls for the price or rate to be fixed at the beginning of the period of the agreement, the reasonableness of the rate viewed with the clarity of hindsight is not generally relevant. Even if the rates as adjusted were equal to fair market value for the taxable year 1975 and Afran had a business purpose for reducing the charter hire rate without any consideration, which we doubt, we find that the very real and direct benefit accruing to the common shareholder, Gulf, constitutes the primary purpose for the adjustment.
In contemplation of its liquidation, Gulftankers transferred all of its assets, including the time charter agreements with Afran, to Afran. To reflect this transaction Gulftankers recorded in its books of account a very large amount receivable from Afran. This receivable was distributed to Gulf in liquidation of Gulftankers. As a result of the charter hire rate adjustment, the amount of charter fees Gulftankers owed Afran under the 1975 time charters was reduced by approximately $8.8 million. This adjustment caused a corresponding increase in the net payable from Afran to Gulftankers arising out of the preliquidation transfer of assets of $8.8 million. The net effect of the sale of Gulftankers' assets, its subsequent liquidation into Gulf, and the charter hire rate adjustment was that Gulf received $8.8 million as a tax-free repayment of debt. If the charter hire rates had not been adjusted, Afran would have recognized an additional $8.8 million in gross income. If the $8.8 million were paid by Afran to Gulf as a distribution of earnings and profits, it would have resulted in a taxable dividend to Gulf for which no dividends received deduction would have been allowable. Secs. 243, 301(c), 316.
Petitioner argues that any benefit received by Gulf was indirect. In this regard petitioner contends that the rate adjustment and the liquidation of Gulftankers were unrelated events and that we should ignore the latter. We refuse to do so. Although there was a business purpose for consolidating Gulfs foreign shipping operations, we cannot ignore the fact that the decision to liquidate Gulftankers provided petitioner with what it must have thought were inviting tax planning opportunities. For whatever reason, Gulftankers was liquidated near the end of the taxable year 1975. As a result, petitioner directly benefited from a transaction, the charter hire rate adjustment, nominally carried out by two affiliated corporations. We uphold the Commissioner's determination on this issue.
Sale of La Santa Maria
We are quite satisfied that the diversion of part of the purchase price of La Santa Maria from the seller, Marítima, to another Gulf subsidiary, Gulftankers, via an increase in freight rates charged to the purchaser constitutes a transfer of property between two corporations under common ownership. Petitioner concedes as much on brief. Again the critical inquiry is whether the principal purpose of the transfer was to confer a benefit upon the transferring corporation or upon the common shareholder. Petitioner contends that the primary purpose of the freight rate increase was the desire by Marítima to expatriate part of the purchase price by legal means. Petitioner claims that Marítima had no business use for pesetas and that there was, therefore, a valid business purpose for the arrangement with Petronor to pay higher freight rates to Gulftankers.
Although respondent does not contest the uncontroverted testimony offered by petitioner that the $7 million profit could not be converted from pesetas to dollars, we can certainly find no business purpose of Marítima served by allowing its profit from the sale of La Santa Maria to be deflected to Gulftankers without any consideration in return. We believe a more likely conclusion to be drawn from this record is that the arrangement whereby Gulftankers received Marítima's profit from the sale of La Santa Maria primarily served a shareholder purpose. Following the results of this arrangement, we see that the diverted profit from the sale of La Santa Maria first appeared as a "deferred revenue" account on the books of Gulftankers in the amount of $6,611,844. This asset, along with the remainder of the assets of Gulftankers, was conveyed to Afran prior to the liquidation of Gulftankers. The profit from La Santa Maria thus appeared as an increase in the amount receivable obtained by Gulftankers in exchange for all of its assets, including the "deferred revenue" account. Finally, after the liquidation of Gulftankers, Gulf received the profit from the sale of La Santa Maria in the form of tax-free repayment of debt when Afran satisfied this obligation the following year. As can be seen, Gulf, and not Marítima, received a very real benefit from the arrangement to divert the profit from the sale of La Santa Maria away from Marítima.
We are also satisfied that the benefit obtained by Gulf was sufficiently direct and was the primary purpose for this transaction. Again we refuse to ignore the fortuitous timing of the liquidation of Gulftankers in determining whether Gulf received a direct, rather than indirect, benefit. The consolidation by Gulf of its foreign marine operations was an independent event, but its occurrence allowed Gulf to receive income from one of its foreign subsidiaries free from U.S. tax, which, if not for the arrangement between Marítima, Petronor, and Gulftankers, would likely have been repatriated only as a taxable dividend. Our conclusion is confirmed by our finding that petitioner contemplated as late as July 1974, that the profit from the sale of La Santa Maria would be paid via increased freight rates paid by Petronor to Marítima. Only later did petitioner decide to insert Gulftankers into this transaction.
Because the diverted profit from the sale of La Santa Maria came into the hands of Gulf, this case is distinguishable from those cases cited by petitioner wherein it was determined that the benefit conferred upon the common shareholder was too indirect to support the determination of a constructive dividend. See White Tool & Machine Co. v. Commissioner, 677 F.2d 528 (6th Cir. 1982), cert. denied 459 U.S. 907 (1982), affg. a Memorandum Opinion of this Court; Rushing v. Commissioner, 441 F.2d 593 (5th Cir. 1971), affg. 52 T.C. 888 (1969); R.T. French Co. v. Commissioner, 60 T.C. 836, 854-856 (1973).
We uphold the Commissioner's determination on this issue.
Section 956
We now turn to the question of whether Gulf realized taxable income from two wholly owned foreign subsidiaries due to large payable balances remaining in Gulf's centralized cash management accounting system at the end of the taxable year 1974. The Commissioner based his determination that Gulf received taxable income from Gulf Overseas and GS & D for the taxable year 1974 in the amounts of $662,248 and $410,084, respectively, by virtue of sections 951 and 956 of Subpart F of the Internal Revenue Code. The resolution of this issue requires that we decide whether increases in the balances of account 1950 of Gulf's cash management system, reflecting long-term payables from Gulf to Gulf Overseas and GS & D, represent an increase in the earnings of controlled foreign corporations invested in U.S. property. Sec. 951(a)(1)(B); sec. 956.
Section 951 provides:
SEC. 951. AMOUNTS INCLUDED IN GROSS INCOME OF UNITED STATES SHAREHOLDERS.
(a) Amounts Included.—
(I) IN GENERAL. — If a foreign corporation is a controlled foreign corporation for an uninterrupted period of 30 days or more during any taxable year, every person who is a United States shareholder of such corporation and who owns stock in such corporation on the last day, in such year, on which such corporation is a controlled foreign corporation shall include in his gross income, for his taxable year in which or with which such taxable year of the corporation ends—
(A) the sum of—
; and
(B) his pro rata share of the corporation's increase in earnings invested in United States property for such year (but only to the extent not excluded from gross income under section 959(a)(2)).
Section 956 provides:
SEC. 956. INVESTMENT OF EARNINGS IN UNITED STATES PROPERTY.
(a) GENERAL Rules. — For purposes of this subpart—
(1) AMOUNT OF INVESTMENT. — The amount of earnings of a controlled foreign corporation invested in United States property at the close of any taxable year is the aggregate amount of such property held, directly or indirectly, by the controlled foreign corporation at the close of the taxable year, to the extent such amount would have constituted a dividend (determined after the application of section 955(a)) if it had been distributed.
*
(b) United States Property Defined.—
(1) In general. — For purposes of subsection (a), the term "United States property" means any property acquired after December 31, 1962, which is—
*
(C) an obligation of a United States person;
Sections 951(a)(1)(B) and 956 were enacted as part of Subpart F by the Revenue Act of 1962 (Pub. L. 87-834, 76 Stat. 960) in response to perceived abuses by U.S. taxpayers through the use of controlled foreign corporations. These particular sections were aimed at preventing the repatriation of income to the United States in such a way that the income is not subject to U.S. taxation. H. Rept. 1447, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 405, 462. By taxing U.S. shareholders on the increased investment of their controlled foreign corporations in the United States, Subpart F treats the amount of the increased investment much like a constructive dividend to the U.S. shareholders. See H. Rept. 1447, supra; S. Rept. 1881, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 707, 794; Dougherty v. Commissioner, 60 T.C. 917, 926, 929 (1973).
The parties are in apparent agreement that Gulf Overseas and GS & D are foreign corporations controlled, within the meaning of section 958, by a U.S. shareholder, Gulf. The parties also agree that the balances in account 1950 represent legitimate obligations of Gulf. The point upon which petitioner and respondent part company is whether a balance in a 1950 account is "an obligation of a United States person" within the meaning of the regulations promulgated under section 956.
Section 1.956-2(d)(2), Income Tax Regs., provides that "the term 'obligation' includes any bond, note, debenture, certificate, bill receivable, account receivable, note receiv able, open account, or other indebtedness, whether or not issued at a discount and whether or not bearing interest." However, the regulation also excepts from its broad definition of "obligation"
(ii) Any indebtedness (other than an indebtedness arising in connection with the sale or processing of property) which—
(a) Is collected within one year from the time it is incurred.
[Sec. 1.956-2(d)(2)(ii), Income Tax Regs.]
Petitioner contends that although there were balances in its accounts 1950 payable from Gulf to Gulf Overseas and GS & D throughout the relevant years, because of the many offsetting transactions reflected in account 1950, all of the obligations arising from the individual transactions were collected within 1 year from the time they were incurred. According to petitioner, this result is achieved by offsetting the amount of each new receivable against the oldest payable obligation by way of analogy to the first-in, first-out (FIFO) method of inventory identification and valuation.
Respondent, on the other hand, contends that the payable balances in account 1950 represent one indivisible, although fluctuating, payment obligation to an affiliated corporation. Accordingly, respondent contends that because there were outstanding balances in the Gulf Overseas and GS & D 1950 accounts throughout the relevant times, the obligation represented therein was not collected within 1 year. Furthermore, because the balances in the pertinent accounts 1950 increased from the beginning of the taxable year 1974, to yearend, respondent contends that Gulf must report those increases as taxable income under the nearly mechanical provisions of section 951 and 956(a). We find respondent's arguments to be persuasive.
The cash management system instituted by Gulf decreases inefficient movements of cash in two ways. First, in transactions with unrelated parties, Gulf receives and disburses cash on behalf of its subsidiaries. Payments and receipts of cash by Gulf are then reflected as a payable or receivable in account 1950 on the books of Gulf and its affiliates. Second, the cash management system serves as a clearinghouse to offset intercompany receivables and payables, thereby preventing unnecessary cash movements between related companies. Under the system, intercompany obligations reflected in accounts 1970 and 1980 are moved to account 1960 where they are reduced to single payable or receivable balances between each affiliate and Gulf before they are ultimately recorded in account 1960. Regardless of which path a transaction follows before it is reflected in account 1950, the end result is a single balance representing an obligation between Gulf and one of its affiliates. If an account 1950 shows a negative or credit balance on Gulfs books of account (reflected as a positive or debit balance on the books of the affiliate), this indicates that Gulf owes that affiliate an amount of money equal to the balance of the account. This is nothing more than a single open account loan.
The fact that the individual transactions that give rise to the upward and downward movements in account 1950 lose their individual identity under the cash management system is shown by petitioner's inability to trace individual transactions through the cash management system. The cash management account system was not designed to trace individual transactions on a FIFO basis or otherwise. One of petitioner's witnesses, the director of general administrative accounting in the office of the comptroller for Gulf, testified that he, in the course of his job, had traced only one transaction from account 1950 to its origin; the witness also added that this was the only transaction in that account during the month. In any other circumstances, the tracing required by the FIFO method petitioner alleged to be implicit in its cash management system could only be done through the use of substantial time, money, and manpower. Such theoretical ability to trace the many individual transactions recorded in the cash management system does not make such tracing a part of the system in actuality. Petitioner has failed in its burden of proof on this issue. Rule 142(a).
The cash management system of Gulf and its affiliates apparently satisfied its avowed purposes of avoiding inefficient movements of cash and centralizing cash assets to take advantage of investment opportunities. Nevertheless, this does not alter the fact that the payable balances of the cash management system create one of the situations at which section 956 was aimed. Gulfs foreign affiliates have earned income free from U.S. taxation. Gulf has then repatriated those earnings by way of the large payable balances maintained in its cash management system. Absent the provisions of Subpart F, Gulf has complete and indefinite control over those earnings while the earnings escape U.S. taxation.
So long as there is a credit balance in an account 1950 on the books of account of Gulf, there exists an obligation within the meaning of section 1.956-2(d)(2), Income Tax Regs. In this regard, we are focusing on the existence of a balance and not the fluctuations in that balance. The fluctuations in the balance simply reflect the nature of a loan in the form of an "open account." Sec. 1.956-2(d)(2), Income Tax Regs.
Conclusion
We have found in favor of respondent on the constructive dividend issues and the issue on the application of section 956 to the payable balances in petitioner's cash management system. Although we have found for respondent on all the above issues, there are many other issues in this case and a Rule 155 computation will be necessary. We again point out that this opinion resolves certain severed issues only, and that all other issues not previously decided in this case are still before the Court.
Unless otherwise noted, all section references are to the Internal Revenue Code of 1954 as amended and in effect during the taxable years in issue, and all Rule references are to this Court's Rules of Practice and Procedure.
We do not agree with petitioner that an allocation by the Commissioner under sec. 482 is a prerequisite to a determination that a constructive dividend has been made because of intercompany transfers. Application of sec. 482 lies within the discretion of the Commissioner, and the taxpayer cannot require its use. Sec. 1.482-l(b)(3), Income Tax Regs. In its brief, petitioner cites no authority for its position and merely argues that the failure of the Commissioner to use sec. 482 denies it the opportunity to avail itself of certain relief provisions available only after a sec. 482 allocation is made. See, e.g., Rev. Proc. 65-17, 1965-1 C.B. 833; Rev. Rui. 82-80, 1982-1 C.B. 89. Petitioner's argument relies solely on vague notions of fairness. Even if the relief provisions referred to by petitioner would have been available in the event of a sec. 482 allocation, a requirement that the Commissioner use sec. 482 before determining that a constructive dividend has been paid would improperly impinge on the discretion of the Commissioner.
Other issues in this docket have been decided as follows: the "Intangible Drilling and Development Costs" issue was decided by this Court in Gulf Oil Corp. v. Commissioner, 87 T.C. 324 (1986); the "Worthless Properties" issue was decided by this Court in Gulf Oil Corp. v. Commissioner, 87 T.C. 135 (1986); the "Kuwait Nationalization" issue was decided by this Court in Gulf Oil Corp. v. Commissioner, 86 T.C. 937 (1986); the "Iranian Foreign Tax Credit" issue was decided by this Court in Gulf Oil Corp. v. Commissioner, 86 T.C. 115 (1986); the "North Sea Farmout" issue was decided by this Court in Gulf Oil Corp. v. Commissioner, 84 T.C. 447 (1985).
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361 U.S. 880
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C. A. 10th Cir. Certiorari granted.
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546 U.S. 804
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C. A. Fed. Cir. Motion of petitioner for leave to proceed in forma pauperis denied, and certiorari dismissed. See this Court's Rule 39.8.
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