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 RECENT CASES
CONSTTUTIONAL LAW - CONGRESS - FREEDOM OF DEBATE PRIVILEGE
PREVENTS INDICTMENT OF REPRESENTATIVE FOR TAKING BRIBE To
MARE A SPEECH BEFORE CONGRESS. - United States v. Johnson (4 th
Cir. x964).
Defendant Johnson, a United States Representative from Maryland,
was allegedly paid to make a speech before the House defending the
operations of two associates, with the purpose of inducing the Depart-
ment of Justice to drop charges pending against them. Johnson's de-
fense of congressional "Speech or Debate" privilege was rejected by the
trial court; he was then convicted 1 under the general "conspiracy to
defraud the United States" statute, 2 for agreeing "to defraud the United
States of its right to have the [Congressman's] duties performed free
from corruption and uninfluenced by payments of money." On appeal,
held, reversed. The constitutional "Speech or Debate" privilege for
legislators bars investigation into a Congressman's motives for making
a speech, regardless of allegations of bribery. United States v. Johnson,
337 F.2d 18o ( 4 th Cir. 1964), cert. granted, 379 U.S. 988 (1965).
Article I, section 6, provides that "for any Speech or Debate in either
House, they [Senators and Representatives] shall not be questioned in
any other place." Similar legislative privileges are constitutionally
recognized in most commonwealth and civil law countries, and in almost
all American states.3 The privilege developed during the sixteenth and
seventeenth centuries when conflict between the English Parliament and
the King centered upon the proper scope of legislative activity. On oc-
casion, members of Parliament were prosecuted for allegedly improper,4
seditious, or libelous speeches made in the performance of their duties.
It came to be recognized that if Parliament was to be an effective legis-
lative body, its members had to be able to speak freely when engaged in
their official functions. The "Speech or Debate" privilege not only
insulated members of Parliament from criminal prosecutions by the
Crown, but also foreclosed the threat to legislative free speech posed by
civil actions for defamation. Thus, when the English Bill of Rights was
enacted in 1688, the privilege was incorporated in it.5

1 The two coconspirators were also convicted as was a fourth defendant, Rep-

resentative Frank Boykin of Alabama. These same parties were, in addition, con-
victed on seven counts of violation of the federal conflict of interest statute, 62
Stat. 697 (1948) (now x8 U.S.C. § 203 (Supp. V, 2964)), which makes it a crime
for a member of Congress to accept money in return for his influence on any
"matter" pending "before any department, [or] agency" in which the United
States is directly or indirectly interested.
2 x8 U.S.C. § 37, (i958). See Hammerschmidt v. United States, 265 U.S. 182,
188 (1924).
, See Yankwich, The Immunity of Congressional Speech -Its Origin, Meaning
and Scope, 99 U. PA. L. REV. 96o, 96,-70 (1951).
"See generally Wittke, The History of English Parliamentary Privilege, Ohio
State Univ. Bull., Aug. 30, 1921.
z W. & M., c. 2, art. 9 (1688).
1473
11474 HARVARD LAW REVIEW [VOL. 78
The existence of this protection for legislators has remained unques-
tioned since the seventeenth century, but its extent has never been
clear, partially because litigation on the subject has been sparse; the
Johnson case itself seems to be one of first impression in its bribery
aspect. 6 In Coffin v. Coffin,7 the first of the few important cases to
discuss the scope of the privilege, the Massachusetts Supreme Judicial
Court said in dictum that "Speech or Debate" must be construed
liberally, to include voting and "every other act resulting from the
nature, and in the execution, of the office . . . without enquiring
whether the exercise was regular according to the rules of the house, or
irregular and against their rules." The court noted that the privilege is
not intended for the private benefit of legislators, but rather to enable
them to perform their public duties. Then, in Kilbourn v. Thompson,8
the Supreme Court relied on Coffin to hold that the purposes of the
"Speech or Debate" privilege would be best effectuated by a liberal
construction and that voting is therefore within the scope of the protec-
tion. In a recent case on the subject, Tenney v. Brandhove,9 the Court
reiterated its earlier reasoning and held that "the claim of an unworthy
purpose does not destroy the privilege . . . . [It] would be of little
value if. . .[legislators] could be subjected to the cost and inconvenience
and distractions of a trial upon a conclusion of the pleader . ...
The Court further cited Fletcher v. Peck 10 for the proposition that the
courts, in our system of government, may not properly question the
motives of legislators. Although the language of Tenney seems to cover
the Johnson situation, the cases are distinguishable. The issue in
Tenney was whether the content of the speech could be the foundation
of a tort action and not, as in Johnson, whether the reason for making
the speech could be a criminal offense.
The courts' generally liberal construction of the "Speech or Debate"
privilege has probably been influenced to some extent by the notion
that the political nature of the privilege calls for a politically determined
penalty. Even if the privilege is held to bar a legislator's criminal
prosecution in a given case, he will not necessarily go unpunished; Con-
gress has the power to reprimand or expel misbehaving members 1 and2
the electorate can, of course, refuse to return a dishonest legislator.'

6Although three early commonwealth cases indicate that a legislator might be

held criminally liable in this situation, in two of these cases, The King v. Boston,
33 Commw. L.R. 386 (Austl. 1923) and The Queen v. White, 13 Sup. Ct. R. 322
(N.S.W. 1875), the privilege issue was not considered; in the third, Regina v.
Bunting, 7 Ont. 524 (1885), the bribers attempted to plead the privilege of the
legislators. The leading English case, Ex parte Wason, L.R. 4 Q.B. 573 (1869),
contains language which indicates no such liability. Surprisingly, state legislators
indicted under similar state statutes seem never to have pleaded the privilege. See
e.g., People v. Logie, 321 Mich. 303, 32 N.W.2d 458, cert. denied, 335 U.S. 885
(1948).
4 Mass. 1, 27 (1808).
io3 U.S. i68, 20X-05 (1880).
0341 U.S. 367, 377 (I951).
10 io U.S. (6 Cranch) 87, 130 (1810). See also Arizona v. California, 283 U.S.
423, 455 (i93i).
1 U.S. CosTr. art. i, § 5.
12 Johnson, for example, was defeated in his attempt at reelection. Brief for
Appellant, p. 7.
i965] RECENT CASES 1475

Since the privilege does not affect the liability of those who offer bribes, 13
the statute invoked in Johnson will in any event continue to act as a
deterrent to bribe-giving; and the political corrective coupled with the
possibility of public disgrace will probably deter legislators' acceptance
of bribes as effectively as criminal penalties.
The district court in Johnson held that the privilege does not apply
when a bribe is involved because it thought that "immunizing" legislators
who "sold themselves" would ironically subvert the purpose of the
privilege, namely, the promotion of the independence of the legislature. 14
However, the privilege was primarily intended to "immunize" the legis-
lative branch from interference by the executive and judicial branches.
If the district court's reasoning prevailed, the judiciary would investi-
gate legislative motivation whenever bribery was alleged by the execu-
tive. Although the legislature would be protected from interference by
individuals, its independence from the intervention of the other two
governmental branches would be lost.
The court of appeals in Johnson reasoned that any such prosecution
of a legislator for bribery necessitates an inquiry into the nature of the
speech in question, and held that the case fell squarely within the
privilege as developed by Coffin, Kilbourn, and Tenney. In fact, about
one half of the testimony at the trial related directly to the speech 15 and
was inadmissible under these precedents. The court could have ex-
cluded that testimony and still permitted the prosecution to show that
Johnson took money and promised to do an act (here, the delivery of a
speech) in return. In effect, the Government was asking that the
privilege be construed to bar a finding of unlawful conduct only when
the controversy concerns the content of a speech. Under this theory,
the court of appeals could have reversed because of the inadmissible
evidence without holding the indictment itself unconstitutional. Thus,
the court probably erred in assuming there was a necessary connection
between indictment and inquiry into the speech, even though it seems
unlikely that the Government could prove its case with the objectionable
evidence excluded.
The court was probably correct, however, in its conclusion that allow-
ing the Johnson indictment would hamper the legislature in carrying out
its proper functions. The purpose of the privilege is to insure that no
member of Congress - especially no honest member - is deterred from
speaking freely by a possibility of indictment. Unlike members of the
judicial and executive branches,' 6 legislators are frequent recipients of
legitimate donations from various sources. Since legislators must finance
expensive election campaigns, and since financial support is obviously
going to come from those who sympathize with the views of the candi-
date, speeches favorable to previous and potential contributors will often
be made. The accepted definition of bribery - payment to influence
1" See, e.g., Regina v. Bunting, 7 Ont. 524 (1885).
14 United States v. Johnson, 215 F. Supp. 300, 307 (D. Md. 1963).
11 See 337 F.2d at i9o.
'a The Government attempted to analogize the cases of the judge and the legisla-
tor, Petition for Certiorari by the United States, p. 8, but the analogy fails for the
reasons hereafter discussed.
1476 HARVARD LAW REVIEW [V01. 78

action - is, therefore, extremely difficult to apply in this situation, and

a Congressman may well be unsure as to how his legitimate actions will
be interpreted by governmental prosecuting agencies. Moreover, with
the content of the speech and related matters excluded from the evidence,
the judicial problem of ascertaining the presence of bribery becomes
almost impossible. The existence of the alleged conspiracy would, as a
result, be at best unclear and the speech itself would be privileged, so
that permitting indictments in this area would likely have the doubly
deleterious effect of discouraging legitimate speeches by and desirable
contributions to honest Congressmen, while netting few, if any, convic-
tions. Thus, even if there is no necessary connection between indict-
ment and inquiry into the speech, the nature of the legislative process
suggests that there is a necessary relation between indictment and
deterrence of legislative free speech.

FEDERAL CoURnTS - CHOICE OF LAW - PLAINTIFF'S FAILURE To MAKE

DEMAND ON STOCKHOLDERS AS REQUIRED BY STATE LAW DOEs NOT BAR
DERIVATIVE ACTION BROUGHT UNDER INVESTMENT COMPANY ACT.
Levitt v. Johnson (ist Cir. 1964).
Plaintiff brought a shareholder's derivative action on behalf of
Fidelity Capital Fund, Inc. against certain of its directors, alleging that
they had violated sections IO and 36 of the Investment Company Act of
19401 by making improper contracts between the Fund and other
corporations with which they were affiliated. Plaintiff had failed to
make any prior demand for action upon the stockholders. The com-
plaint asserted that such demand would have been futile because the
Fund had more than 48,ooo stockholders scattered throughout the
United States, and that requiring demand would have cast the heavy
financial burden of a proxy fight upon the plaintiff and might have
caused delay sufficient to foreclose the claim by the operation of the
statute of limitations. The district court dismissed the complaint, hold-
ing that Massachusetts law applied and that it generally required a de-
mand on the stockholders as a condition precedent to the bringing of
a derivative action. 2 On appeal, held, reversed. Even if Massachusetts
law would require demand in these circumstances, the policy of the In-
vestment Company Act compels the adoption of a less strict federal rule.
Levitt v. Johnson, 334 F.2d 815 (ist Cir. 1964), cert. denied, 379 U.S.
961 (1965).
Although the Investment Company Act does not explicitly authorize
shareholder enforcement of its provisions, the courts have inferred a
private remedy in the form of derivative actions. 8 In Levitt the issue
was whether the act required a special federal rule as to adequacy of
154 Stat. 789 (1940), as amended, x5 U.S.C. §§ 8oa-i to -52 (1958).
2
Levitt v. Johnson, 222 F. Supp. 8o5 (D. Mass. 1963). The court noted that
if a majority of the stockholders are not disinterested, demand is unnecessary.
'E.g., Brown v. Bullock, 294 F.2d 415 (2d Cir. 1961). Contra, Brouk v.
Managed Funds, Inc., 286 F.2d 9oi (8th Cir. 196i), vacated as moot, 369 U.S. 424
(1962).
x965] RECENT CASES 1477
excuses for failure to make demand on stockholders, or whether the act
could be interpreted as incorporating state demand rules. This choice,
of course, presents a federal question since it involves the interpretation
of a federal statute. Judge Wyzanski, in the lower court, assumed that
absent explicit congressional direction to the contrary it would be "im-
permissible judicial legislation" to ignore the rules of the state of in-
corporation governing derivative actions. He further concluded that
Massachusetts law required a demand upon stockholders in this case.
Writing for the First Circuit, Judge Aldrich pointed out that
the leading Massachusetts case had merely held that an independent
majority of the stockholders could, "acting reasonably and in good
faith," vote not to undertake an action and thereby foreclose a derivative
suit by a minority stockholder.4 The theory of the rule is that a majority
of the corporation's owners should be able to make an independent busi-
ness judgment that no suit should be brought when they feel that the
corporation has more to lose than to gain by asserting its rights. But
the existence of a right to bar suit by a reasonable and independent
judgment does not necessarily mean that Massachusetts would require
demand on the stockholders in all cases. When the evidence indicates
that stockholder failure to support affirmative action would be more a
product of inertia, subservience to management, or lack of information
than of a full and fair consideration of stockholder self-interest, a de-
mand would probably be unnecessary.5
The court did not rest its decision on this view of Massachusetts law;
rather, it went on to confront squarely the choice-of-law issue by hold-
ing that Massachusetts's demand requirement was irrelevant. Judge
Aldrich said that in order to effectuate the policy of the federal act of
protecting "so far as feasible" the interests of stockholders in investment
companies, any "above normal" requirements of demand should be over-
ridden. The state interest, directed to the protection of the majority's
right to bar suit, is insufficient to outweigh the federal interest in uni-
form and effective enforcement of the act, at least when there is evi-
dence that demand upon the stockholders would not result in a reasoned
exercise of their franchise. This argument seems correct, for once it has
been determined that the act's provisions can be enforced by federal
derivative actions, it would be anomalous to make these actions subject
to state rules that tend to insulate abuses that the act was designed to
regulate. Undoubtedly Congress might have drawn up its own demand
rules to apply to private actions under the act; the question is whether
the courts should do so when Congress has remained silent. In holding
that this is a proper judicial function, the First Circuit expressly rejected
the lower court's idea that state restraints on derivative actions must ap-
ply whenever Congress has not given explicit direction to the contrary;
such judicial restraint, said the court, "underestimates the role to be
played by the federal courts in the implementation of national regulatory

' S. Solomont & Sons Trust, Inc. v. New England Theatres Operating Corp.,
326 Mass. 99, 114, 93 N.E.2d 241, 249 (,950).
' See Note, Demand on Directors and Shareholders as a Prerequisite to a
Derhiativp ,5iu/,73 HARv, L. Rav. 746, 754-59 (ig6o).
1478 HARVARD LAW REVIEW [Vol. 78

legislation." 6 The court did not indicate, however, whether the policy of
the federal act would override a state law to the effect that an informed
and unbiased majority could foreclose a derivative suit by minority
stockholders if the number of stockholders were so small that demand
might reasonably be made. The issue would then be whether the federal
policy against malfeasance in the management of investment companies
was so strong as to give the minority stockholder the right to bring a
derivative action even though a disinterested majority had made a
reasoned determination that the collective interest was better served by
not pursuing the claim.
The Levitt decision, in rejecting state limitations on implied rights of
action, is consistent with previous cases brought under the federal
securities acts. The court relied heavily upon the Supreme Court's re-
cent opinion in J. I. Case Co. v. Borak,7 which was delivered after the
district court's decision and which held that the limited scope of relief
available under state law would not prevent the grant of retrospective
remedies under the Securities Exchange Act of 1934.8 The Court in
Borak went on in dictum to suggest that state-imposed hurdles, such as
requirements of separate suits, compulsory joinder, or security-for-ex-
penses statutes, would be rejected if they proved "insuperable to effective
relief." 9 Other federal cases have specifically held that state security-
for-expenses statutes were not applicable to actions brought under
federal acts. 10 When the implementation of national legislative policy
necessitates the overriding of state rules of decision, the absence of
explicit congressional authorization should not and generally does not
prevent the federal courts from fashioning federal rules of decision from
the policy of federal acts."
Both the First Circuit and the district court assumed that Rule 23 (b)
of the Federal Rules of Civil Procedure 12 only requires that the plaintiff
set forth with particularity his reasons for not making demand; the
question whether these reasons are adequate was treated as a matter of
substantive law whose source was in no way indicated by the rule. This
assumption seems unwarranted since Rule 23 (b) is the codification of a
federal equity rule 23 under which federal courts have treated the
question of adequacy of excuse as a matter of federal law. 14 Although
6 334 F.2d at 8ig.
377 U.S. 426 (1964).
848 Stat. 881 (1934), as amended, x5 U.S.C. §§ 78a to hh-i (x958).
9377 U.S. at 435.
"°McClure v. Borne Chem. Co., 292 F.2d 824 (3rd Cir.), cert. denied, 368
U.S. 939 (ig6i) (Securities Exchange Act of 1934) ; Fielding v. Allen, x81 F.2d 163
(2d Cir.), cert. denied, 340 U.S. 817 (ig5o) (Interstate Commerce Act).
"' See cases cited in 5o VA. L. REv. 365 (1964).
12 28 U.S.C. Rule 23(b) (1958). The relevant portion of the rule states that
"The complaint shall . . . set forth with particularity the efforts of the plaintiff
to secure from the managing directors or trustees and, if necessary, from the share-
holders such action as he desires, and the reasons for his failure to obtain such
action or the reasons for not making such effort."
"Rule 23(b) is based on former Equity Rule 27, 226 U.S. 656 (X912). Equity
Rule 27, in turn, was derived from old Equity Rule 94, 104 U.S. Lx (1882), which
was a codification of the Supreme Court's statement in Hawes v. Oakland, 204 U.S.
450,461 (1882).
"4.g., Delaware & Hudson Co. v. Albany & S.R.R., 213 U.S. 435 (19o9).
i96s] RECENT CASES 1479
it would seem that Erie requires that state law be applied in derivative
suits brought under the diversity jurisdiction, the history of Rule 23 (b)
and the general policy of the Federal Rules in favor of a uniform federal
procedure both suggest that the courts should apply federal concepts of
adequacy in federal question cases. In fact, federal courts in federal
question cases 15 - and even in diversity cases 16 - have continued to
develop their own standards concerning the adequacy of excuses. In the
light of this body of authority establishing the dominance of federal law,
at least in federal question cases, the court might have used Rule 23 (b)
as additional support for its decision.

INcOME TAXEs - DEDUCTIONS: LoSSES- SECTION 269 DOES NOT

DIsALLow POSTACQUISITION OPERATING Loss DEDUCTIONS. -Zanes-
ville Inv. Co. v. Commissioner (6th Cir. 1964).
The taxpayer, Zanesville Investment Company (Zanesville), and its
wholly owned profitable subsidiary, Earl J. Jones Enterprises, Inc. (En-
terprises), were controlled by Earl J. Jones, who also held over 99%
of the Muskingum Coal Company (Muskingum). After earning sub-
stantial amounts from mining operations during 1945-1950, Muskingum
began to lose money, and Jones opened another mine with novel boring
and conveyor equipment obtained with sizable advances from Enter-
prises beginning in 1953. On September i, 1955, on the advice of his
attorney that Enterprises "would have more profits to advance," Jones
transferred his Muskingum stock to Zanesvile, which thereafter de-
ducted Muskingum's current operating losses from Enterprises's profits
on a consolidated return. Zanesville transferred $i16,ooo further from
Enterprises to Muskingum, and Muskingum then invested $250,000 in
physical assets in an undisputed good-faith attempt to restore profitable
operations. Unsuccessful in these efforts, Zanesville sold Muskingum's
assets at a loss of $480,0oo on July io, 1956. The Commissioner's
determination that Zanesville's "principal purpose" in acquiring Mus-
kingum was to deduct its postacquisition operating losses was accepted
by the Tax Court.1 Accordingly, it held that section 269(a) (i) of the
Internal Revenue Code of 1954 required disallowance of both those
losses and the loss on the sale of Muskingum's assets as "deductions
. ..which such ...corporation would not otherwise enjoy." On ap-
peal to the Sixth Circuit, held, reversed. Section 269 does not prevent
deduction of postacquisition operating losses on a consolidated return
made possible by the acquisition. Zanesville Inv. Co. v. Commissioner,
335 F.2d 507 (6th Cir. 1964).
This section 269 holding is significant because means to deduct finan-
cial transfusions between corporations, other than filing of consolidated
returns, are uncertain or impracticable. Deduction of such advances
"6 E.g., Gottesman v. General Motors Corp., 268 F.2d 194 (2d Cir. 1954).
E.g., Haffer v. Voit, 219 F.2d 704 (6th Cir.) (per curiam), cert. denied sub
nom. Ames v. Mengel Co., 350 U.S. 832 (i955). Contra, Pomerantz v. Clark, iox
F. Supp. 341 (D.Mass. ig5i).
'Zanesville Inv. Co., 38 T.C. 406 (1962).
148o HARVARD LAW REVIEW [VOL. 78

as bad debts will be disallowed if they are found to be capital contribu-

tions. Ordinarily, terms must not be less stringent than an arm's-length
lender would demand.2 Although no single factor is conclusive, ad-
vances like Zanesville's, without maturity date or interest obligations,
are suspect, 3 especially when made by one who controls the corpora-
tion 4 or is affiliated with its control. 5 While there appears to be no
requirement that a capital contribution be prudent, it can be deducted
as ordinary rather than capital loss only if it has become totally worth-
less, 6 and if the affiliated corporate advancer owned 95% of each
class of stock (Zanesville held less of Muskingum's preferred 7).
Finally, methods of combination - such as donating Muskingum's
assets to Zanesville or Enterprises's stock to Muskingum, or forming a
corporate partnership of Muskingum and Zanesville - would sub-
ject Enterprises's profitable business to the risk of Muskingum's con-
tinued losses or failure.8 Given these unsatisfactory alternatives, allow-
ing deduction on consolidated returns of losses incurred in good-faith at-
tempts to restore acquired loss corporations to profitable operation seems
desirable to encourage such rehabilitation.
Independently of section 2 69, Libson Shops, Inc. v. Koehler0 held a
loss carryover deductible only from income produced by substantially
the same business that produced the loss. But the tests of continuity of
ownership or type of business which have evolved in applying Libson
Shops 10 seem inapplicable to current operating loss deductions. They
represent dubious policies even for loss carryovers, since redirection or
infusion of new money may be the only practicable alternatives for a
loss corporation.-" The explicit rationale of Libson Shops - that the
carryover and carryback provisions average out the fat and lean periods
of a single business - emphasizes its inapplicability, for this policy
seems inapposite to current operating losses. Even as to carryovers, the
Service has announced that it will not apply Libson Shops to disallow
carryovers from a discontinued corporate activity against profits pro-
duced by new assets acquired for cash, when no major change of stock
ownership has taken place. 12 While this ruling strongly militates against
applying Libson Shops to deny Zanesville deductions for Muskingum's
postaffiliation losses, it is distinguishable because it envisions placing

2 Nassau Lens Co. v. Commissioner, 308 F.2d 39 (2d Cir. 1962) ; see Hoguet Real
Estate Corp., 3o T.C. 58o, 6oi-o2 (1958).
'O. H. Kruse Grain & Milling v. Commissioner, 279 F.2d 123 (9th Cir. 196o).
4 Jewell Ridge Coal Corp. v. Commissioner, 318 F.2d 695 (4th Cir. 1963).
5 Zephyr Mills, Inc., i8 CCH Tax Ct. Mem. 794 (i959), aff'd per curiam, 279
F.2d 494 (3d Cir. 196o).
Byerlyte Corp. v. Williams, 17o F. Supp. 48, 58-6o (N.D. Ohio igg), rev'd
on other grounds, 286 F.2d 285 (6th Cir. i96o).
7 Brief for Petitioner, p. 52.
s Cf. Hagendorf, Zanesville Allows Tax Avoidance Through Use of Post-Ac-
quisition Operating Losses, 21 J. TAxATioN 262 (1964).
9353 U.S. 382 (1957).
'°E.g., Julius Garfinckel & Co. v. Commissioner, 335 F.2d 744 (2d Cir. 1964),
cert. denied, 379 U.S. 962 (1965); Commissioner v. Virginia Metal Prods., Inc.,
290 F.2d 675 (3d Cir.), cert. denied, 368 U.S. 889 (i96i).
"ISee Surrey, Income Tax Problems of Corporationsand Shareholders, 14 TAx
L. Ray.
2 X,36
Rev. Rul.(z958).
63-4o, 1963-I Cum. BuLL. 46.
1965] RECENT CASES 1481
Enterprises's profitable assets within Muskingum's corporate structure,
a riskier transfer than Jones hazarded.
Although control of Muskingum did shift from Jones to Zanesville
within the meaning of section 269(a) (1),13 it has been argued that
denying a deduction would be inequitable because real control and risk
of economic loss of both corporations remained in Jones throughout. 4
Both section 382, covering carryovers after corporate stock acquisitions
and reorganizations, and section 269 (a) (2), covering intercorporate
transfers of assets, specifically exempt transfers leaving corporate con-
trol more or less substantially unchanged. While a similar policy ex-
empting such transfers might be inferred for section 269 (a) (1),15 its
language, juxtaposed with the contemporaneous section 269(a)(2),
points strongly to the contrary. Moreover, Jones had previously decided
not to mingle the corporations into a common pool of economic risk and
tax liability,' 6 and for loss carryovers under section 269, at least, it seems
7
fair to make that prior decision determinative.
The Zanesville holding that section 269 is generally inapplicable to
postaffiliation operating losses on consolidated returns seems consistent
with the policy of the consolidated return provisions and the purp6se of
section 269. Its predecessor section, passed in 1943, was intended to
supplement a judicial doctrine that transactions complying with the
statutory requirements but having no business purpose and outside the
plain intent of the tax statute should be given no effect for tax pur-
poses.' 8 It was passed primarily to end a brisk trade in corporations
with loss carryovers or assets whose substituted basis substantially
exceeded their fair market value, and has been applied with increasing
frequency and success to such transactions during the past decade.' 9
Although there was no clear congressional purpose to prevent deduction
of postacquisition operating losses, 20 section 269 has been given
broad effect, like the judicial doctrine it supplemented, for example to
refuse recognition to multiplication of corporate entities primarily to
accumulate surtax exemptions. 21 Thus the silence of the legislative
history with respect to current operating losses does not alone invalidate
the Tax Court's holding that current loss deductions can be denied if
the tax motive satisfies the section 269 requirement of being the "prin-
cipal purpose" of the acquisition. When acquisition has changed the

13 See Rudick, Acquisitions to Avoid Income or Excess Profits Tax, 58 HARV. L.

REV. 196, 207-09 (1944).
Bean, Section 269 and PostacquisitionLosses,
14 49 A.B.A.J. 907, 908-o9 (1963).
" See SuRREY & WARREN, FEDERAL INcOmE TAxATrIoN 1602 (1962). The at-
tribution rules of § 318 apply only to subchapter C, while § 269 is in subchapter B.
"6See Libson Shops, Inc. v. Koehler, 353 U.S. 382, 388 (1957) ; Harris, Libson
Shops and Related Cases, N.Y.U. 21ST INsT. ON FED. TAX. 1307, 1317-20 (1963).
1"Thomas E. Snyder Sons Co. v. Commissioner, 288 F.2d 36 (7th Cir.), cert.
denied, 368 U.S. 823 (1961).
18 Gregory v. Helvering, 293 U.S. 465 (1935) ; see S. REP. No. 627, 78th Cong.,
ist Sess. 59 (1943).
19 See generally Note, Net Operating Loss Carryovers and Corporate Adjust-
inents, 69 YALE L.J. 1201, 1232-38 (I96O).
20 The committee reports spoke generally of "current, past, or prospective losses
or deductions." S. REP. No. 627, 78th Cong., 1st Sess. 58 (I943).
2 E.g., James Realty Co. v. United States, 280 F.2d 394 (8th Cir. 196o).
1482 HARVARD LAW REVIEW [Vol. 78
controlling beneficial interest, the tax purpose has been held dominant
only if the acquiring corporation has failed to establish good-faith,
reasonable expectations of restoring profitable operations. 22 When, as in
Zanesville, acquisition did not change beneficial ownership, the Tax
Court has more easily found the tax purpose predominant, 23 although
in one case it found business purposes in24more direct management con-
trol and a more favorable credit picture.
In Zanesville, the Commissioner argued that, absent such ancillary
business purposes, there was strong support for the Tax Court's finding
of a principal purpose of tax avoidance, while Zanesville argued that re-
habilitation was itself the underlying principal purpose. The court
seems correct in rendering this business-purpose controversy academic
by holding application of section 269 to postaffiliation operating losses
inconsistent with the tax policy underlying consolidation. Allowing the
offsetting of postaffiliation losses against affiliates' profits promotes the
consolidated-return purpose of taxing the gains of actual, not formal
corporate, units. 25 However, the withdrawal in 1928 of the consolidated
return privilege of "brother-sister" corporations affiliated only through
common stock ownership might evidence a contrary policy, despite the
silence of the legislative history.26 When there is no business purpose
other than rehabilitation, losses on disposition of transferred assets
should perhaps be disallowed to the extent of reductions in value before
transfer.2 7 But rehabilitation of loss corporations does not ordinarily
involve the factors of tax immorality, or windfall gain caused by unequal
bargaining, believed to characterize trade in loss carryovers.2 Finally,
section 269 covers only acquisitions of corporate control or corporate
assets. Thus, while fitted to disallow all loss carryovers acquired with
the principal purpose of tax avoidance, it reaches only some current
operating losses during corporate rehabilitations. If similar physical
assets are acquired by a profit corporation from individuals and result
in equivalent initial losses, section 269 does not apply. Nor does it
reach other means of offsetting current losses against profits, such as
corporate partnership. 29 In the face of these anomalies and opposing
policies, so broad a provision as section 269 should not be applied to
postacquisition operating losses.
22 Collins v. United States, 193 F. Supp. 602 (D. Mass. i96i), aff'd, 303 F.2d
142 (ist Cir. 1962) ; Elko Realty Co., 29 T.C. 1012, 1020-27, aff'd per curiam, 260
F.2d2 949 (3d Cir. 1958).
1Cf. Temple Square Mfg. Co., 36 T.C. 88 (ig6I).
24 Naeter Bros. Publishing Co., 42 T.C. No. x (April 2, 1964).
2 See, e.g., H. R. REP. No. 7o4, 73d Cong., 2d Sess., pt. i, at x7 (1934).
26
See generally S. REP. No. 960, 7oth Cong., Ist Sess. 13-14, 29 (r928).
27 Dominianni, Zanesville Decision Places Much-Needed Brake on IRS' Mis-
application of Section 269, 22 J. TAXATION 88, 89 (i965).
28 See Surrey, supra note ii, at 32-33. But see Tarleau, Difficulties Faced by
Taxpayer Trying to Take Tax Advantage of a Loss Carryover,4 J.'TAXATION 91,
94-95 (956). Perhaps when postacquisition losses do partake of tax immorality
- as when a profit corporation acquires a loss corporation and, trying to simulate
a principal business purpose, accumulates operating losses before utilizing a built-in
capital loss, to the detriment of creditors in bankruptcy - operating loss deductions
should be disallowed. See R. P. Collins & Co. v. United States, 303 F.2d 142 (1st
Cir. i962).
29 INT. R V. CODE Or 1954 §§ 702-o8.
1965] RECENT CASES 1483
INSANE PERSONS - PROPERTY AND CONVEYANCES - GIFTS FROM
ESTATE OF INCOMPETENT WILL BE DISAPPROVED UNLESS THERE Is
FACTUAL PROOF THAT WARD WOULD HAVE MADE GIFTS IF SANE. - In
re Trusteeship of Kenan (N.C. 1964).
Sarah Graham Kenan, an 87-year-old widow, was adjudged in-
competent in 1962. One year later, her court-appointed trustee sought
judicial approval of certain gifts from Mrs. Kenan's estate to charities.'
The proposed donations consisted of $731,6oo from the income of the
ward, $ioo,ooo from the principal of her estate, and a life interest of
$3oo,ooo per year in a revocable trust which she had created in 1956.
The contribution from Mrs. Kenan's income represented a charitable
gift financed to a large extent by the resulting deduction in federal and
state income taxes. It was contended, however, that the donations of
principal and trust would produce positive benefits to her and her heirs.
The trustee proposed to make the gift of principal in preferred and non-
voting common stock of a closely held family corporation. This stock,
it was argued, was apt to be of a marketable worth far below its evalua-
tion for estate tax purposes. As a result of the gift, the nonmarketable
securities would be removed from the estate, and remaining liquid assets
would be sufficient to meet the eventual burden of death taxes without
a forced sale of the voting common stock. Kenan family control over
the corporation would thus be ensured.
The gift of the trust was to be accompanied by a declaration of
irrevocability as provided in the applicable statute. 2 The trust re-
maindermen, who were also the residuary legatees under Mrs. Kenan's
two wills, would receive a gift when their interests were declared ir-
revocable. This would result in a profit to them, because unless the gift
were held to be in contemplation of death, the sum given would be taxed
at gift tax rates rather than at the higher rates imposed for estate taxes.
Moreover, even if the gift were held to be in contemplation of death,
the money spent to pay the gift taxes would be both removed from Mrs.
Kenan's holdings for estate tax purposes and credited, dollar for dollar,
against the estate taxes payable.3 Because of this combination of ex-
clusion and credit, the remaindermen-legatees necessarily stood to
benefit, at the very least, by the amount of the eventual estate tax on
a sum equal to that presently paid in gift taxes.
Although informed prior to her incompetency of the benefits that
contributions would procure for her and her heirs, Mrs. Kenan had
habitually given very little to charity. 4 There was assurance, however,
that the proposed transactions would not affect her support, since
adequate funds would remain in her multimillion dollar estate after the
donations and the payment of appropriate gift taxes. A jury found that
I The petitions were brought pursuant to three newly enacted North Carolina
statutes. N.C. GEN. STAT. §§ 35-29.1 to-.i6 (Supp. x963).
2
N.C. GEN. STAT. § 35-29.11 (Supp. r963).
' See INT. RaV. CODE OF 1954, § 2035 (gift in contemplation of death, but not
gift tax paid, included in gross estate) ; § 2053 (deduction for unpaid gift tax as a
"claim against the estate"); § 2012 (credit of gift tax against estate tax).
4 Although Mrs. Kenan's annual income for the five years prior to her in-
competency exceeded $2,ooo,ooo, her gifts to charity during that period came to
only slightly more than $8,000 per year. 261 N.C. at 14, 134 S.E.2d at 95.
1484 HARVARD LAW REVIEW [Vol. 78

recovery by the incompetent was improbable, and the court then

allowed the contributions. On appeal, held, reversed. Without an allega-
tion or finding as a matter of fact that Mrs. Kenan would have made the
gifts if sane, the proposed donations would be a taking of property
without due process of law. In re Trusteeship of Kenan, 261 N.C. x,
134 S.E.2d 85 (1964).5
In light of the traditional judicial avoidance of constitutional issues,
it is surprising that the court placed its holding on due process grounds.
Court approval was a statutory prerequisite to making the gifts, and a
denial of such approval could easily have rested on the court's concept of
equitable principles. Especially in the foggy area of social welfare,
courts should strive to avoid placing unnecessary constitutional fetters
upon the power of the legislature to alter rules that the judiciary evolves.
Although the gamut of conceivable dispositions of an incompetent's
property ranges from state seizure to total disregard of the fact that the
property owner's legal status has changed, American law has consist-
ently eschewed the extreme possibilities. It may be argued that the
average citizen would lack security in a legal system in which a relatively
common event such as incompetency would leave him at the mercy of the
state or wholly dependent upon the vicissitudes of his own lunacy.0
Arbitrary governmental conduct affecting property in one context might
cast a shadow upon the entire institution of property. Thus, the goal
in managing an incompetent's estate has been to assure property owners
that, should they become incompetent, their property will be treated
in a sensible manner, "as they would have done if sane."
It is only against the backdrop of such a standard that the property
owner can intelligently plan the disposition of his property. In a state
that confiscated the possessions of an incompetent except in the event
of specific planning, the majority of the citizenry might hasten to set
forth such plans and thus gain a measure of security. The penalties
upon those who failed to express themselves, however, and the burden
upon those of modest means would render such a system almost as un-
bearable as one in which confiscation was the sole rule. Similar objec-
tions might be proffered against a state that refused, except in the case of
prior estate planning, to knock down the castles made of silver dollars
that the incompetent wished to build.7 Somewhere between these ex-
tremes, however, lies a system containing a reasonable alternative to
the burden of undertaking specific estate planning while sane. The
alternative might be to put the incompetent's possessions under lock and
key until the time of recovery or death; it might be to distribute the
'In a second trial the lower court found that Mrs. Kenan would, in fact, have
made the contributions if sane, and its approval of the gifts was affirmed by the
Supreme Court of North Carolina. In re Trusteeship of Kenan, 138 S.E.2d 547
(N.C. 1964).
6 Cf. BENTHAm,Principlesof the C(vil Code, in I WORKS 297, 308-09 (Bowring
ed. i859).
'Although the law does not normally require a reasonable use of property, it
is usually assumed that the present wishes of the ward are beyond the limits of
legal consideration. Perhaps, under a system more enlightened than the present
one, the desires of an incompetent would be accorded some weight, depending
upon the degree of the ward's mental impairment and the rationality of his
specific desires.
1965] RECENT CASES 1485
property immediately to the ward's heirs, perhaps with a requirement
of restitution in the event of recovery. But in any event, the aim of
the alternative should be to approximate the probable desires of the
majority of the populace. As in the case of intestacy statutes, the so-
called "poor man's will," the rule should be "... analogous to the
affections of the human heart, to the habitual inclinations which arise
from the social relations .... ,8
The usual judicial standard, "what the incompetent would do if sane,"
fails in at least two respects to fulfill the property owner's need for
security. First, the formula is hopelessly speculative if taken literally;
it leaves a court virtually without basis for the formulation of a judg-
ment. Second, and perhaps because of the impasse to which a literal
view leads, the standard lends itself in practice to many disparate,
figurative interpretations. A court may presume that the ward, if sane,
would act as a "reasonable man" would act under the circumstances; it
may attempt to make an empathetic judgment based upon an overall
examination of the ward's past life; or it may approve a gift only if it
is supported by specific acts in the ward's prior history. This lastap-
proach has prevailed in most American courts, 9 but from the standpoint
of fulfilling the probable desires of individuals, it represents a policy
of unnecessary conservatism. Judges have fretted under a doctrine that
refuses aid to needy brothers and sisters, adult children, and mothers of
the ward. 10 In the typical case, the incompetent's relations were never
in straits until long after the inception of his illness, nor was his income
then adequate to permit a gift of the amount now contemplated by the
trustee. Although a narrow interpretation of "what the incompetent
would do if sane" may discourage judicial speculation, it does so only
by imposing a policy of unrealism.
Of course a less narrow approach to the problem of assessing the
ward's hypothetical desires is possible. In Kenan, the North Carolina
court seemed to invite a free-for-all plunge into the labyrinth of a
ward's personal history. It gave no indication of what use a tribunal
should make of the data thus collected. Gifts might be approved be-
cause the ward habitually made such gifts, because she favored charities
in general, because she was friendly with the proposed donees, or per-
haps because she always made a point of engaging in eccentric conduct
on Thursdays and the day of the trial happens to be a Thursday. When
the Kenan case came to a second trial, the petitioner sought to prove
that Mrs. Kenan always followed the advice of her elder brother. The
brother then testified that, had she been sane, he would have counseled
her to make the proposed gifts." This story satisfied the appellate court's
search for an element of voluntariness upon which to fasten its approval,
but one may wonder to what literal extremes the court would have ex-
tended its approach. A witness might have testified that Mrs. Kenan
always responded to physical coercion and that he would supply such
8 BENTHAM, op. cit. supra note 6, at 336.
o See Comment, Insane Persons: Allowances Out of Surplus Income of In-
cornpetents, 17 CAIIr. L. REv. 175, 181 (1929).
'°E.g., In re Beilstein, 145 Ohio St. 397, 62 N.E.2d 205 (945).
"In re Trusteeship of Kenan, 138 S.E.2d 547, 551 (N.C. 1964).
1486 HARVARD LAW REVIEW IVol. 78
coercion if she were sane. That the standard "what the incompetent would
do if sane" permits of such a chaotic interpretation is a strong argument
against its acceptability. The property owner can derive little security
from a law that haphazardly ferrets out of his biography a justification
for the approval or disapproval of gifts.
Some courts have merely paid lipservice to the question "what the in-
competent would do if sane," reaching their answer as a conclusion of
law without examining the facts of the ward's past life.12 Under this
approach, the court presumes that the incompetent ". . . would act, if
sane, as any ordinary woman would under the circumstances here pre-
sented . . . . , 3 This standard of reasonableness occasionally allows a
court to overlook conduct in the ward's past that may demonstrate lack
of donative spirit. 14 However, if the law neglects to take account of
"unreasonable" behavior in which people indulged for years before be-
coming incompetent, 15 it consciously deviates from the best approxima-
tion of their wishes. In the case of intestacy statutes, the increased
certainty and judicial economy gained by disregarding individual case
histories probably warrants this deviation. But in the case of a rule
for incompetency, both the possibility of recovery and the necessity of
maintaining the ward preclude a mechanical distribution of the estate.
Since the court must engage in continual supervision of the ward's
property, the chief advantages of a uniform rule such as that for intestacy
are unavailable. Moreover, a rule for incompetency will apply to, and
be considered by, fewer people than an intestacy statute, so that the law
may not depend upon each person to formulate his own estate plan if
dissatisfied. The administration of an incompetent's estate should
therefore depend at the very least upon an assessment of the reasonable-
ness of each proposed transaction, but perhaps the law should take a
further step, tempering its rule of reason by some narrowly defined
deference to the ward's unequivocal past conduct. Although the standard
of reasonableness comes close to mirroring the wishes of the average
property owner before incompetency, a qualification looking toward
personal idiosyncracies would approximate his desires even more closely.
Moreover, it would have the merit of preserving an element of indi-
vidualism and diversity in the disposition of property.
The basic rule of reason should be accompanied insofar as possible
by frank judicial explication of the factors that comprise the court's
concept of reasonableness. At the very least, courts should weigh the
12 Although the court in Kenan believed that a factual approach to "what the in-
competent would do if sane" was founded upon venerable common law doctrine,
the rule as originally enunciated by Lord Eldon comprised consideration of both
"what the Lunatic would probably do" and "what it would be beneficial to him
should be done." Ex parte Whitbread, 2 Mer. 99, 102, 35 Eng. Rep. 878, 879 (Ch.
1816). See also Recent Developments, 9 VniL. L. REv. 522 (x964).
1" Matter of Flagler, 130 Misc. 554, 556, 224 N.Y. Supp. 27, 29 (Sup. Ct. 1926),
modified, 223 App. Div. i, 227 N.Y. Supp. 318, modified, 248 N.Y. 415, z62 N.E.
47X (1928).
14 See, e.g., Sheneman v. Manring, 152 Kan. 78o, 107 P.2d 741 (1940).
I5A problem arises from the fact that the ward may have been of unsound
mind for a substantial period before he was declared incompetent. The judiciary
could discount acts that appear to demonstrate declining faculties, or it could
create an irrebuttable presumption of competency prior to a formal declaration
to the contrary.
19651 RECENT CASES 1487
need of the donee; the relationship and intimacy of the ward and donee;
the possibility of prejudice to creditors, heirs, and beneficiaries; the
present and future financial requirements of the incompetent; and the
possibility of recovery. There should be a strong presumption that
gifts which produce a benefit, either to the ward directly or to her
estate, should be approved. The question of what is a "benefit" should
be determined through judicial assessment of community values. Al-
though a taxpayer in high brackets may save money by the donation
of appreciated securities to charity,16 it is far from clear that the court
in Kenan would have allowed such a gift without the testimony of Mrs.
Kenan's brother. Finally, an explicit plan for incompetency - the
most articulate form of unequivocal past conduct - should supersede
the application of the court's modified test of reasonableness. Although
planning for incompetency is probably not carried on to any appreciable
extent today, the specificity of such planning would seem17 desirable at
least in the case of a wealthy man with many dependents.
There is no indication in either of the Kenan opinions that the court
evaluated the effects of the proposed transactions. The temptation for
a court to avoid a careful and independent scrutiny of proposals lurks
in the generality of any standard for the administration of incompe-
tents' estates. In Kenan, the donation of the ward's surplus income
would involve no benefit to the incompetent other than the satisfaction that
the average property owner derives from charitable contributions. Mrs.
Kenan's past history of refusal to make comparable contributions may
constitute behavior sufficiently unequivocal to preclude allowance of the
gift. The transaction concerning the principal of Mrs. Kenan's estate
would allegedly produce a more palpable boon to her and her heirs, but it
represents a mere cautionary tactic on the part of her trustee. His brief
reveals that, unless the Government were to value the incompetent's
corporate holdings at more than 150 per cent of their estimated worth, any
worries about liquidity would be unjustified.' 8 Perhaps the asserted
benefit could be less expensively obtained through a sale of the stock,
even at a loss. Finally, in regard to the third gift, there is in the trust
instrument itself a clause providing that ". . . in the event any bene-
ficiary shall be 'incompetent,' . . . the income . . . may be paid to the
guardian .....19 That provision, however, might be construed as a
means of ensuring that payment would not cease altogether in case of in-
competency, rather than as an exclusive plan for such an eventuality.
If the court is satisfied that there is no more advantageous means of
procuring the enormous benefit that a declaration of irrevocability would
secure for the remaindermen, then the trust contributions should be
approved 2 0
10 See Seidman, Save by Giving, 30 TAXEs 338, 341 (1952).
17 It is estimated that one person in ten will be hospitalized for mental illness
during his lifetime. See Hearings on S.755 and 756 Before the Subcommittee on
Health of the Senate Committee on Labor and Public Welfare, 88th Cong., ist Sess.
231 (1963).
18 Brief for Appellee, p. 33, In re Trusteeship of Kenan, 138 S.E.2d 547 (N.C.
1964).
10 261 N.C. at 6, X34 S.E.2d at 89.
20
Although it is essential that the life interest be surrendered if the remainder-
1488 HARVARD LAW REVIEW [Vo1. 78
LABOR LAw - NATIONAL LABOR RELATIONS ACT - REFUSAL To
REHIRE EMPLOYEES UNWILLING To CROSS PICKET LINE Is NOT AN
UNFAIR LABOR PRACTICE WHEN EMPLOYER DISCHARGED THE EM-
PLOYEES To CONTINUE DELIVERIES. - NLRB v. L. G. Everist, Inc.
(8th Cir. 1964).
L. G. Everist assigned nine of its truck drivers to make deliveries to
the prime contractor on a construction site at which one of the sub-
contractors was being picketed by another union. When four of the
drivers, upon instruction from their union representative, refused to
cross the picket line, Everist discharged them. Before Everist had
permanently replaced them and while their deliveries were being made
by three supervisors and a temporary employee, the company refused
their unconditional application for reinstatement. Thereupon, the drivers
filed a complaint with the NLRB asserting that Everist's refusal to re-
instate them violated section 8(a) (I) of the National Labor Relations
Act.' The Board ordered their reinstatement, with two members dis-
senting on the ground that the employees' activity was not protected
by the National Labor Relations Act. 2 On petition for enforcement,
held, denied. An employer who from business necessity rather than anti-
union bias has discharged employees is not guilty of an unfair labor
practice for refusing to rehire them upon their application even though
he has not found permanent replacements. NLRB v. L. G. Everist, Inc.,
334 F.2d 312 (8th Cir. 1964).
The court accepted, "without deciding," the Board's contention that
the drivers' refusal qualified for protection under section 7 3 as an
exercise of the "right to . . . assist labor organizations . . . and to
engage in other concerted activities for the purpose of . . . mutual aid
or protection . . . ...The behavior of these employees may be dis-
tinguished from activities that courts have viewed as reprehensible and
accordingly deemed unprotected. The employees did not intend to sub-
vert their employer's interest,4 but rather to aid fellow laborers in a dis-
pute not directly affecting themselves. Picketing is a traditional weapon
of strikers that is effective only when picket lines are respected.6 Yet
men are to enjoy the tax benefits they seek, see LT. REV. CODE OF 1954, § 2036,
it is obvious that they gain even greater benefits if the life interest is surrendered to
them. In donating Mrs. Kenan's life interest in the trust, the trustee chose to bring
his proposal within the terms of the North Carolina statute governing gifts to
charity, rather than to rely on the court's somewhat hazy common law power to
administer the estates of incompetents. Compare Lewis v. Moody, 149 Tenn. 687,
26x S.W. 673 (1924), with Guardianship of Hudelson, z8 Cal. 2d 401, 115 P.2d 8o5
(1941). The benefit to the remaindermen, however, would seem irrelevant to the
apparent purpose of the statute. The court should probably grant approval of the
third gift to charity only if it considers the gift to the remaindermen desirable, and
furthermore believes that the statutory language expresses the limits of its power
in this situation.
16i Stat. 140 (947), 29 U.S.C. § x58 (a) (i) (x958).
2
L. G. Everist, Inc., 142 N.L.R.B. 193 (1963).
361 Stat. 140 (1947), 29 U.S.C. § 157 (1958).
" Compare NLRB v. Montgomery Ward & Co., I57 F.2d 486, 496 (8th Cir.
X946) ; C. G. Conn, Ltd. v. NLRB, 1o8 F.2d 390, 397-98 (7th Cir. 1939).
The Taft-Hartley Act added to the NLRA § 8(b) (4) (B) which outlaws sec-
ondary boycotts. 61 Stat. 141 (1947), 29 U.S.C. § i58(b)(4)(B) (1958). But a
proviso to that section stated that the section should not be interpreted to make
 1965] RECENT CASES 1489
the court held that Everist could refuse to reinstate the employees for
respecting the picket line. Giving the employer discretion to discharge
a recalcitrant employee would seem to negate the idea of protection
afforded by the act, but the court considered the question of reinstate-
ment as not entirely dependent upon the characterization of the em-
ployees' activity." It approached this issue by weighing the interests
that the parties had in their actions against the obligations each owed
to the other.
The NLRB ruled that the truck drivers should be treated as economic
strikers, entitled to reinstatement upon request until permanently re-
placed.7 But the interests of these employees were less than those of
economic strikers. They had no dispute with their employer, nor did
the pickets have any dispute with Everist or with the contractor to
whom the deliveries were directed.8 Their refusal was merely sympa-
thetic - "no more and no less than a refusal to work." 9 Because of the
negligible employee interest, one may quarrel with the court's premise
that the refusal was protected activity. The Board in Redwing Carriers,
Inc.10 only hesitantly applied section 7 to a refusal to make deliveries
to the employer being picketed. But even in that situation, the Board
held that the employer could properly discharge those who disobeyed
his work orders."' Although it is uncertain whether the employees in
Redwing asked to be rehired before they were replaced, the Board's
statement that the employer could terminate the employment relation-
ship implies that there was no obligation to rehire.
In support of its holding, the court asserted that the employees had
violated their duty of loyalty to Everist. In NLRB v. Rockaway News
Supply Co.,12 the Supreme Court held that employees could be discharged
when their refusal to cross a picket line to make deliveries violated an
explicit term in the employment contract. No such explicit term existed
here, but the court reasoned that the drivers had broken an equivalent
implied term of employment by refusing to complete deliveries that
they knew were essential to Everist. It may be argued that the fact that
employees are free to bargain away statutory protection does not sup-
port a conclusion that they may lose the protection merely by becoming
employees. Such a conclusion would render the concept of protection
unlawful any express refusal to cross the picket line of another union. It does not
seem that this was intended or should be taken as in any way affecting the protec-
tion afforded to the individual under § 7. See S. REP. No. 1o5, 8oth Cong., ist
Sess. 23 (I947). But see NLRB v. Rockaway News Supply Co., 345 U.S. 71, 81-82
('953) (Black, J., dissenting).
Cf. NLRB v. Thayer Co., 213 F.2d 748 (xst Cir.), cert. denied, 348 U.S. 883
(X954).
'See NLRB v. -Mackay Radio & Tel. Co., 304 U.S. 333, 346 (1938).
8The signs clearly indicated that the picketing was directed solely at the sub-
contractor. 334 F.2d at 314.
0
1 334 F.2d at 317-18.
137 N.L.R.B. 1545, 1547 (1962), enforced sub nom. Teamsters Union v.
NLRB, 325 F.2d iori (D.C. Cir. x963), cert. denied, 377 U.S. 9o5 (1964). The
Board had originally found the activity unprotected. 13o N.L.R.B. X2o8, 1211
(196i). Upon rehearing, evidence indicated that within a few days after being dis-
charged the employees were permanently replaced. Although not emphasized by the
Board, this fact alone might have precluded reinstatement.
11 See also Auto Parts Co., 107 N.L.R.B. 242 (1953).
12 345 U.S. 71 (1953).
1490 HARVARD LAW REVIEW [Vol. 78

meaningless. Nonetheless, in deciding whether a refusal to cross a picket

line may constitute cause for discharge it is relevant that the union can
insist that the collective bargaining agreement leave certain things out-
side the employer's control. Unions have felt it necessary to provide
that "it shall not be cause for discharge or disciplinary action in the
event an employee. . . refuses to go through or work behind any picket
line . .. ," 13 The decision in Everist places an affirmative duty on the
union to define explicitly the prerogatives of the employees. In the
circumstances of this case, where the employees had no direct interest
in respecting the picket line and the deliveries were essential to Everist,
placing a burden on the union to reserve the right not to cross a picket
line appears justifiable.
Although agreeing that Everist had sufficient justification to discharge
the employees, the dissenting judge argued that if the employer had not
yet replaced the employees, he had no economic reason to deny rein-
statement. But compelling the employer to rehire the drivers may give
them potential leverage to disrupt the employer's efforts to get replace-
ments. It may be difficult to find replacements, and the employer may
occasionally be discouraged from expending time and money if he knows
that he must accept a timely request for reinstatement. And if the em-
ployees are reinstated, there is no assurance that they will not act
similarly again. 14 In this case the employer's major customers were
located at large construction sites. If subcontractors were frequently
picketed, this could cause repeated interruptions in Everist's scheduled
deliveries that Everist would be unable to avoid.
The court emphasized that because of the duty resting upon the em-
ployees in these circumstances, Everist had an "absolute" right to dis-
charge the recalcitrant employees as long as it was not motivated by
bias against the union. But it may be inferred that the court intended
the employer's discretion to be limited to those circumstances in which
the employees' refusal was both unrelated to their own immediate
economic aims and a substantial interference with the maintenance
of the employer's business. This limitation would introduce an element
of uncertainty for employers, but when the employer's normal business
operations are not seriously disrupted, the justification for allowing him
discretion loses force. Under this suggested formulation the employer
would have the burden of proving that he discharged the employees in
order to continue deliveries. When the discharge was discriminatory
against union members, the existence of an otherwise valid business
reason for the discharge would not justify refusal to reinstate. 15 But to
require, as the Board did in this case, that the employer hold himself
ready to take back the discharged employees until permanent re-
"3 Truck Drivers Union v. NLRB, 334 F.2d 539 (D.C. Cir.), Cert. denied, 379
U.S. 916 (1964). The court reversed the NLRB's holding that the clause was a "hot
cargo" agreement under § 8(e) of the NLRA.
'4The employer may insist that a no-strike clause covering this sort of situa-
tion be inserted in any new contract of employment. But this would probably
require negotiations with the union and perhaps some reciprocal concession by the
employer.
15 See NLRB v. Cone Bros. Contracting Co., 317 F.2d 3, 8 (5th Cir.), cert.
denied, 375 U.S. 945 (1963).
ig6s] RECENT CASES '49'
placements are obtained imposes a great burden upon him not warranted
by the employees' insignificant interest and the marginal relation of
their unsolicited involvement in another union's dispute to the purposes
of the NLRA.

PUUBLIC CONTRACTS- UNITED STATES Is NOT LIABLE FOR "SOVEREIGN

ACTS" THAT BURDEN THE PERFORMANCE OF A GOVERNMENT CON-
TRACT.- Air Terminal Services, Inc. v. United States (Ct. Cl. 1964).
Air Terminal Services operated parking lots at an airport owned by
the United States. Air Terminal had not been informed when its park-
ing concession was negotiated that airport authorities were considering
plans to reduce traffic congestion in front of the airport terminal. Pur-
suant to these plans, the authorities installed 122 metered parking
spaces. Air Terminal's previously rising revenues then began to decline
sharply, and never recovered. The company sued the United States
for damages, claiming that the meters had interfered with Air Terminal's
rights under the contract. Held, petition dismissed. The contract did
not require the United States to preserve the existing competitive situ-
ation. Moreover, the installation of parking meters to regulate traffic
was a public and general act of sovereignty for which the United States
cannot be held liable. Air Terminal Services, Inc. v. United States, 330
F.2d 974 (Ct. Cl.), cert. denied, 379 U.S. 829 (1964).
The doctrine that the United States is not liable in contract for the
consequences of its "sovereign acts" is not based on the concept of
2
sovereign immunity.' The doctrine originated in Jones v. United States,
in which the Court of Claims emphasized that the United States should
bear the same contractual responsibilities as a private party. In that
case a group of surveyors claimed that the removal of federal troops
from a territory occupied by Indians had made the performance of
their government contract more burdensome. The court responded that,
had the contract been with a private person, withdrawal of troops
by the government would not have provided a right of action for breach
of contract, and the surveyors ought to "gain nothing by having
the United States as their defendants [sic] ." 3 The court's hypothetical
is not directly in point, however, because in Jones the government was
responsible for both the contract and the removal of the troops.
The court in Jones ascribed two distinct personalities to the govern-
ment - contractor and sovereign - with the former assuming no re-
sponsibility for the acts of the latter. This decision may have been
fortified by the notion that the government performs many diversified
functions and should not be bound in one sphere by its actions in an-
other. Whether government activity is compartmentalized in terms of
2 It is, however, analogous and a few recent cases have referred to "the im-
munity of a sovereign" in discussing the doctrine. E.g., Derecktor v. United
States, 129 Ct. CI. 103, 114, 128 F. Supp. 136, 142 (1954) (dissenting opinion),
cert. granted, 348 U.S. 926, cert. dismissed per stipulation, 350 U.S. 802 (1955).
2 1 Ct. Cl. 383 (i865).
3
id. at 385.
1492 HARVARD LAW REVIEW [Vol. 78
sovereign and contractual aspects, as in Jones,4 or according to the
particular agency involved, as in later cases,5 the underlying rationale
for denying recovery to government contractors has been the informal
"equal protection" reasoning that had the contract been with a private
party no relief would be available. Such an explanation, however,
would not seem to extend to cases in which a similar contract could
not have been made with a private party or in which no comparable
private contract could have been frustrated by similar governmental
action. 6
In the search for a more general justification of the sovereign act
doctrine, courts have also suggested that the United States should not
be hampered in formulating basic policy by potential conflicts with
existing public contracts.7 It might be argued that since the United
States purports to act in the general interest, it commits no wrong in
disregarding private commitments. However, fear of impinging upon
the exercise of sovereign power seems inconsistent with holdings that
the United States may assume responsibility for its sovereign acts if it
does so by the terms of the contract. 8 The sovereign act doctrine may
be more aptly viewed as a device for allocation of risks under a govern-
ment contract than as a general limitation on the Government's power
to inhibit its acts. With this approach, the doctrine would be useful to
simplify decision when the contract is silent, to promote judicial
economy, and to increase the certainty of the parties as to their legal
relations. In practice, however, the difficulty of determining what is a
sovereign act has caused the doctrine to fail in all these respects.0 Al-
though the concept may be responsive to valid notions of policy, its
present form seems to be a hindrance rather than an aid to judicial
thinking.
The confusion wrought by the sovereign act doctrine is well illustrated
by the Air Terminal decision. The court first concluded that the com-
pany's contract did not grant it freedom from competition and then de-
clared, as an alternative holding, that the installation of parking meters
was a sovereign act. It was thus implied that the United States would
have escaped liability even if it had expressly granted Air Terminal an
exclusive parking franchise. It seems, however, that had the United
States granted an exclusive franchise, it would have thereby assumed
4 Id. at 384-85.
E.g., Bateson-Stolte, Inc. v. United States, x58 Ct. Cl. 455, 305 F.2d 386 (1962).
6 In cases arising under the Federal Tort Claims Act, the Supreme Court has
rejected simplistic comparisons between the United States and a private party as
a basis for precluding Government liability. See Indian Towing Co. v. United
States, 350 U.S. 6x ('955).
I See, e.g., Derecktor v. United States, 129 Ct. Cl. 103, 113, 128 F. Supp. 136,
142 (954), cert. granted, 348 U.S. 926, cert. dismissed per stipulation, 350 U.S. 802
(1955); Ottinger v. United States, xx6 Ct. Cl. 282, 285, 88 F. Supp. 88x, 883
(I950), 64 HARV. L. REV. 679 (195).
' See, e.g., Gerhardt F. Meyne Co. v. United States, 11o Ct. CI. 527, 550, 76 F.
Supp. 811, 815 (948). But see Derecktor v. United States, 129 Ct. Cl. 103, 228
F. Supp. 136 (1954), cert. granted, 348 U.S. 926, cert. dismissed per stipulation, 350
U.S. 802 (I955).
9 In a dissenting opinion in Air Terminal, Chief judge Jones described the
sovereign act doctrine as producing both a no-man's land and a war in which
everyone loses. 330 F.2d at 984.
19651 RECENT CASES 1493
responsibility for subsequent installation of the parking meters even if
that act qualified as "sovereign." To hold that Government could as-
sume responsibility for the "consequences of its sovereign acts" only
by uttering those precise words would represent an unnecessarily rigid
requirement. It is doubtful that the court meant to imply that condition,
especially since prior cases had ruled that an express assumption of
liability is not needed.' 0 However, it is unclear what the court's asser-
tion of the sovereign act doctrine as an alternative holding means if it
is not a suggestion of the proper rule for a case involving an exclusive
franchise. At best, the doctrine supplies a second approach to the same
problem that the court considered in the first branch of its opinion.
Perhaps the United States should not ordinarily be held liable for the
consequences of a basic policy decision; yet a court does not further its
analysis by setting forth that general proposition and then asking
whether a particular act is "sovereign." The problem should be ap-
proached directly, by asking how responsibility for a particular decision
of the Government is best allocated under a particular contract. Since
this inquiry is similar to the approach followed under the first ground
of the Air Terminal decision, the excursion into the sovereign act doc-
trine appears to be unnecessary. Consideration of the doctrine is, more-
over, misleading, for it diverts a court's attention from the terms of the
contract before it. By shunning the deceptively absolute aura of im-
munity which pervades the Air Terminal decision, a court would be able
to evolve narrower, more carefully defined rules of construction."
10 See, e.g., Sunswick Corp. v. United States, iog Ct. Cl. 772, 798-99, 75 F.
Supp. 221, 228-29, cert. denied, 334 U.S. 827 (1948).
R A desirable rule might be, for example, that the United States should bear
responsibility for any arbitrary or capricious governmental action, whether caused
by the same agency that entered the contract or another. See Ottinger v. United
States, 1i6 Ct. Cl. 282, 285, 88 F. Supp. 881, 883 (,95o), 64 HARv. L. REV. 679
(195').