as to whether any particular payment is a salary payment or a division of surplus. In United States v. Philadelphia Knitting Mills Co., 273 F. 657, 15 A. L. R. 1313, the Circuit Court of Appeals for the Third Circuit construed the Corporation Excise Tax Act of August 5, 1909. In the course of its opinion the court said:

"Confining our inquiry to the statute, it appears that the basis on which a salary may be allowed as a valid deduction is that it was in fact an 'ordinary and necessary expense (of the corporation) actually paid in the maintenance and operation of its business.' To be a necessary expense it must have been paid for services actually rendered. Jacobs & Davies, Inc., v. Anderson, 228 F. 505, 506, 143 C. C. A. 87. Whether services were rendered, and whether also they were commensurate with the salary paid, are matters of judgment and discretion, reposed by general law in the board of directors of the corporation. As the board of directors is charged with the duty and clothed with the discretion of fixing the salaries of the corporation's officers, the government has no right (until expressly granted by statute) to ir quire into and determine whether the amounts thereof are proper, that is, whether they are too much or too little. But, while the amount of salary fixed by a board of directors is presumptively valid, it is not conclusively so, because the government may inquire whether the amount paid is salary or something else. Admittedly the government has a right to collect taxes on net income of a corporation based on profits after all ordinary and necessary expenses, including salaries, are paid. It has a right, therefore, to attack the action of a board of directors and show by evidence, not that a given salary is too much, but that, in the circumstances, the whole or some part of it is not salary at all but its profits diverted to a stockholding officer under the guise of salary and as such is subject to taxation."

[3] In that case the court went on to point out that the question whether the sums paid were not all salaries, but were part profits was a question of fact. Such it undoubt edly is, and, conceding that the action of the board of directors is presumptively valid, and that the amount paid is presumptively paid as all salary, nevertheless this presumption is not conclusive, but is open to rebuttal. The presumption may be overcome by evidence sufficient to justify the inference that some portion of the amount paid was profits and not salary.

[4] In the instant case the court below properly regarded the question, whether the board of directors, in fixing the salary of Becker at 85 per cent. of the profits, was acting in good faith, or intended thereby to distribute to him in addition to the compensation for his services a part of the profits, as a question of fact for the jury. We think there was evidence which justified the submission of the question to the jury. Becker owned 240 of the 250 shares of the stock. It was upon his own suggestion that his salary was fixed at 85 per cent. of the profits, and the resolution so fixing it was adopted without discussion. The action was taken in 1902, and he testified in 1923 that he had at no time drawn all of his salary, and that no dividends had ever been declared by the corporation in the more than 20 years which had elapsed since that resolution was adopted. There was also the evidence of one who had been a piano manufacturer for the last 34 years, who stated that about $6,000 a year would be a reasonable compensation for the services of a general manager of the company; and another piano manufacturer testified that a reasonable compensation for such services ranged from about $8,000 to $10,000 a year. All this evidence was properly submitted to the jury, and, if believed by them, justified the verdict at which they arrived. See Jacobs & Davies v. Anderson, 228 F. 505, 145 C. C. A. 87; English & Mersick Co. v. Eaton (D. C.) 299 F. 646; People ex rel. H. Jaeckel & Sons, Inc., v. Gilchrist, 209 A. D. 120, 204 N. Y. S. 509.

[5] The jury has found as a fact that the resolution adopted by the board of directors in 1902 was a means of distributing both salaries and profits. It has also found the reasonable value of the services Becker rendered to the corporation from 1909 to 1914, inclusive. Those findings are conclusive upon both parties to this litigation, unless this case goes back for a new trial.

[6] There remains another question which must now be considered. In ascertaining the net income upon which the tax is to be paid, the corporation is entitled to deduct any of the losses incurred in carrying on its trade or business, and not compensated for by insurance or otherwise. The right to this deduction was denied to defendant both by the United States and by the court below, for an absolute and considerable loss which defendant sustained in the year 1914, and for which it received no compensation. It appears that on September 9, 1914, a judgment was entered against Becker Bros. for

$36,541.15 for the infringement of a design patent for a piano case. (D. C.) 209 F. 233. An appeal was taken to this court. 222 F. 902. At the time the appeal was taken, and to obtain a stay of execution an agreement was made between the parties in accordance with which the amount of the judgment was deposited in escrow with a trust company awaiting the result of the appeal and to pay the judgment in case the appeal was unsuccessful. The judgment was sustained on the appeal as to the infringement, but reversed as to the amount of the damages allowed, and the judgment as finally entered, and paid, amounted to $19,248.91. It is true this payment was made in the year 1916, but a deposit sufficiently large to pay the judgment had been deposited in escrow with a trust company in 1914 to await the result of the appeal. It should have been deducted when the assessment was made in June, 1921, for the tax for the year 1914. At the time that assessment was made the government perfectly well understood that the defendant berein had in 1914 set aside that sum and parted with its control of that amount to pay the judgment rendered against it in that year. The tax could only be levied upon net income, and, in ascertaining what the net income, for that year was the defendant was entitled to have deducted the $19,248.91 due on the judgment of 1914, the money to pay which the defendant had in that year deposited in trust and over which it had at that time lost possession and control. That this was a loss actually sustained by the defendant in carrying on its business is too eviIdent to be denied.

The evidence discloses that the defendant never has been allowed to charge this loss off, either in the year 1914, when it parted with the possession of the fund, or in any other year. This certainly was error. The defendant is entitled to have the tax for the year 1914 recomputed and in so doing the amount of $19,248.91 must be deducted from the defendant's net income for that year.

The question was not raised at the argument of this case that the loss which the defendant suffered in being compelled to pay this judgment for $19,248.91, because of the infringement of a patent, was a loss arising in an illegal transaction and therefore was not deductible. In Holmes on Federal Taxes (6th Ed.) he stated that "losses in illegal transactions have been ruled not to be deductible, but it has been ruled in the case of corporations that losses sustained in ultra vires or illegal (in a sense limited to

transactions which are merely void and unenforceable and not contrary to law) transactions are deductible." He then goes on to point out that losses have been held to be deductible in the case of (1) an amount paid pursuant to a judgment as damages for misrepresentation in a land sale; (2) an amount paid in compromise of a judgment against a taxpayer on account of dereliction and neglect of duty while acting as director of a bank; (3) an amount paid by a taxpayer in compromise of a judgment against him on account of secret profits made by him in connection with the purchase of land for a corporation formed by him and others. The rulings which have been made in all these instances have been made by the department, and not by the courts, who cannot be concluded by them. But we think it proper to say that, in our opinion, a loss incurred because of an infringement of a patent is regarded by us as a deductible loss, and not as a loss in such an illegal transaction as should prevent its deduction. A party acting throughout in entire good faith may ultimately find that he has infringed a patent, and must turn over his profits and pay damages in addition to the patentee. To say that he has acted illegally, and so cannot have the losses he has suffered thereby deducted, in order to ascertain the net income upon which his tax is to be computed, is not required by any provision of the statute or upon grounds of public policy.

[7,8] In order to correct this error it does not necessarily follow that this case should be sent back for a new trial. The court is without power to reduce a verdict and render judgment for a less amount, unless the prevailing party consents to the reduction. But a court may give to a prevailing party the option of accepting a less sum or submitting to a new trial. As was said in Kennon v. Gilmer, 131 U. S. 22, 9 S. Ct. 696, 33 L. Ed. 110, the court "may order that a new trial be had unless the plaintiff elects to remit a certain part of the verdict, and that, if he does so remit, judgment be entered for the rest. Hopkins v. Orr, 124 U. S. 510 [8 S. Ct. 590, 31 L. Ed. 523]; Arkansas Cattle Co. v. Mann, 130 U. S. 69 [9 S. Ct. 458, 32 L. Ed. 854]. And if the pleadings and the verdict afforded the means of distinguishing part of the plaintiff's claim from the rest, this court might affirm the judgment upon the plaintiff's now remitting that part. Bank of Kentucky v. Ashley, 2 Pet. 32 [7 L. Ed. 440]." The practice of permitting a remittitur is not an impairment

of the constitutional right of trial by jury (Arkansas Valley Land & Cattle Co. v. Mann, 130 U. S. 69, 9 S. Ct. 458, 32 L. Ed. 854); and that the appellate court, as well as a trial court may permit a remittitur, see Washington & Georgetown Railroad Co. v. Harmon, 147 U. S. 571, 590, 13 S. Ct. 557, 37 L. Ed. 284.

Ordered that, if the United States, within the next 30 days, shall produce and file

in the office of the clerk in this court a certified copy of a remittitur, filed in the office of the clerk of the District Court of the United States for the Southern District of New York, which remittitur shall be of so much of the tax as was in excess of the tax

that would have been imposed for the year 1914, if the sum of $19,248.91 had been deducted from the amount upon which the tax for that year was computed, the judgment, less the amount so relinquished, will be affirmed; but, if this is not done, judgment will be reversed, and a new trial granted.

In re MCALLISTER.

(Circuit Court of Appeals, Second Circuit. April 13, 1925.)

No. 316.

I. Bankruptcy 200 (4) - Execution 409 -Title in receiver in supplementary proceedings held to relate back; receiver's title held to relate back to time more than four months before petition in bankruptcy.

Under Civil Practice Act N. Y. §§ 809, 810, while property of debtor, for whom receiver in supplementary proceeding has been appointed, vests in receiver only on filing in county of

debtor's residence of copy of order appointing receiver, his title then relates back to date of giving notice of application for his appointment, which in practice is date of serving order for examination; so that, that date being more than four months before filing of petition in bankruptcy against said debtor, and the filing, in county of debtor's residence, of copy of order appointing receiver having been before filing of petition in bankruptcy, receiver, notwithstanding Bankruptcy Act, § 67f (Comp. St. § 9651), is entitled to the fund reached by supplementary proceedings, as against trustee in bankruptcy, for the benefit of judgment creditor for whom receiver was appointed, and judgment creditors to whose judgments receivership was extended, so far as those judgments were obtained more than four months before filing of petition in bankruptcy.

Petition to Revise Order of, and Appeal from, the District Court of the United States for the Eastern District of New York.

In the matter of James A. McAllister, bankrupt. Maurice Block, receiver in supplementary proceedings, was ordered to pay over a fund to the trustee in bankruptcy, and brings a petition to revise the order. Reversed, with directions.

At all the times hereinafter mentioned it seems that McAllister had a valid claim

against the Community Fuel Corporation, and a lien upon a certain fund realized from a sale of property belonging to said corporation, which fund was in the custody of the court below, being held by an equity receiver appointed by said court.

On November 19, 1923, one Hughes obtained judgment against McAllister in the City Court of New York, and execution issued to the sheriff of New York county, where McAllister maintained his place of business. He resided in Kings county. On January 16, 1924, McAllister was personally served with an order for examination in supplementary proceedings, to be held in New York county, and we assume that the usual notice of motion for appointment of a receiver was contemporaneously given. On May 13, 1924, a receiver was appointed for McAllister in New York county and by the City Court, and on May 14th the order of appointment was filed in the office of the clerk of New York county, at which time the receiver also duly qualified. On May 19, 1924, a certified copy of the order appointing receiver was filed in the office of the clerk of Kings county.

On May 28, 1924, McAllister was duly adjudicated a voluntary bankrupt in the court below, but no trustee was elected until September following. Meanwhile, and in July, 1924, the receiver in supplementary proceedings obtained from the court below sitting in equity an order directing the receivers of Community Fuel Corporation to pay him the amount of McAllister's claim secured by lien as above set forth, and this was done. When the trustee in bankruptcy learned of the foregoing, he moved that the receiver be ordered to pay over to him the fund so obtained, and the lower court granted the motion, whereupon the receiver brought this petition to revise.

Hughes was not the only judgment creditor of McAllister, and the receivership was extended to several other judgments, but the foregoing fully states the facts giving rise to the legal question at bar.

Andrew J. Ewald, of New York City (Macklin, Brown & Van Wyck, and Paul

Bankruptcy Act (Comp. St. § 9651), which does declare, inter alia, that "all liens obtained through legal proceedings at any time within four months [of petition filed] shall be null

HOUGH, Circuit Judge (after stating the facts as above). Sections 809 and 810, Civil Practice Act, are but copies of Code Civ. Proc. §§ 2468 and 2469, with one immaterial omission; the Code sections stood unchanged from 1892 until their re-enactment in and by the Practice Act. Consequently there is a long train of judicial comments on the statute, of which it is enough to cite Matter of Ward, 186 App. Div. 652, 175 N. Y. S. 66, holding that the title of a receiver in supplementary proceedings extends back to the date of the service of the order for the debtor's examination. This is

the rule generally stated, and it naturally results from the well-known doctrine that such a receivership is a substitute for a judgment creditor's bill (Underwood v. Sutcliffee, 77 N. Y. 587), and dovetails with the ruling that by the filing of a creditors' bill the successful plaintiff acquires a lien from his filing date (Metcalfe v. Barker, 187 U. S. 165, 23 S. Ct. 67, 47 L. Ed. 122).

The statute starts to give the rule generally in the opening sentence of section 809; i. e., that the debtor's property vests in a duly qualified receiver "from the time of filing the order appointing him," which corresponds to the filing of a creditors' bill. But, continues the section, if the debtor lives in a county of the state other than that in which the order is filed, the receiver is vested with title to his personal property "only from the time" when a certified copy of the appointing order is filed in the clerk's office of the county of residence. Section 810 completes the rule as stated summarily by the courts, for, the moment the debtor's property vests in the receiver by filing the certified order in the county of residence, his title extends or relates back to the date of giving "notice of application for" appointment of receiver, which in practice is the date of serving order for examination.

Under the circumstances of this case, what was done by the receiver for McAllister is said to run counter to section 67f of the

son we perceive no conflict. McAllister was served with notice of examination more than four months before petition. His property vested in his receiver nine days before petition. Non constat there ever would be a petition, therefore there was no reason why the vesting should not occur; but, the moment vesting happened, title related back to a period more than four months anterior to the date when petition was filed. In short, the state law regulated vesting and title of McAllister's property on May 19th, and that bankruptcy supervened on May 28th is immaterial; title was then in the receiver as of January 16, 1924.

If filing the copy order in Kings county had been delayed until after May 28th, In re Tyler (D. C.) 104 F. 778, would have applied, because any trustee's title would have vested at a time before under the state law any resting could occur. Finding no legal reason for denying Hughes, the judgment creditor, the fruits of his diligence, we agree with Wrede v. Gilley, 132 App. Div. 293, 117 N. Y. S. 5, which is flat authority for appellant.

Order reversed, with costs.

Memorandum on Settlement of Order for Mandate.

The fact that the judgment in favor of Cleary Bros. fell within four months before the filing of the petition in bankruptcy was not overlooked. But until the receiver's accounts have been settled, and his compensation and expenses provided for, it cannot be determined what he will hold as receiver on behalf of Cleary Bros. His accounts and compensation can be settled only by the court which appointed him. After such settlement and payment of the Hughes and O'Boyle judgments, anything which remains in his hands should be turned over to the trustee in bankruptcy.

The order will provide for a reversal of the order of the District Court, with a provision to take further proceedings in accordance with the opinion of this court and this supplemental memorandum.

1. Sales

May 4, 1925.)

No. 338.

457-Transaction held to constitute a "conditional sale," notwithstanding use of phrase "on consignment" on a subsequent informal memorandum of delivery.

Transaction by which machinery was sold to buyer, payment to be made in installments, and machinery to belong to seller as sole owner, and denying buyer right to sell or remove it

without written consent of seller until last payment was made, constituted a "conditional sale," within Conditional Sales Act of New York, notwithstanding use of phrase "on consignment" on a subsequent informal memorandum of delivery.

[Ed. Note. For other definitions, see Words and Phrases, First and Second Series, Conditional Sale.]

2. Sales 450-Conditional sale never raises a question of lien, but one of title.

A conditional sale never raises a question of lien, but one of title.

3. Bankruptcy 140(1) New York Sales Act, making conditional sale absolute in favor of any creditor who acquires by attachment or levy a lien before contract is filed, held applicable to trustee in bankruptcy of buyer.

Conditional Sales Act N. Y. § 65, making

a conditional sale absolute in favor of any creditor who acquires by attachment or levy a lien before contract is filed, held applicable to trustee in bankruptcy of buyer, in view of provision of Bankruptcy Act (Comp. St. § 9585 et seq.) that a trustee may, as to all property in custody (of the court), be deemed vested with all the rights, remedies, and powers of a creditor holding a lien thereon.

4. Bankruptcy 212-Vendor held to have burden of proving that no creditor of bankrupt was without notice of unrecorded conditional sales contract, in order to recover property from trustee.

In proceedings by vendor to recover from trustee property sold to bankrupt under unrecorded conditional sales contract, bankrupt having defaulted in payment of the full purchase price, vendor, in order to recover, had burden of proving that no creditor of bankrupt was without notice of the contract.

Hand, Circuit Judge, dissenting in part.

Petition to Revise Order of the District Court of the United States for the Southern District of New York.

In the matter of the Master Knitting Corporation, bankrupt, wherein one Benerofe filed reclamation proceedings. To review an order allowing the claim, Emil Zoirin, trustee, petitions to revise. Order reversed.

One Benerofe, being the owner of certain machinery suitable for bankrupt's business, agreed to deliver the same at its factory at

an agreed price, and the parties to the transaction executed a written agreement, of which the material parts are these:

"Payment for this machinery shall be made monthly, to be divided in ten equal payments, plus interest at the rate of 6 per cent. per annum. Payment to start January 15, 1924. This machinery shall belong to said Benerofe as sole owner, and shall not and cannot be sold by [bankrupt] nor removed from their premises, 4077 Park avenue, without the written consent by said Benerofe until last payment is made."

On the day following execution and delivery of this written agreement, Benerofe sent the machinery to the Park avenue factory, with a written description of what was sent, and underneath said description was written the words: "On consignment from S. Benerofe." Thereupon bankrupt signed the description (it is not in terms of a receipt) beneath the quoted phrase. All these transactions took place in New York, and none of the documents mentioned were filed in any public office.

Some six months later, the Master, etc., Corporation was adjudicated bankrupt, and the trustee, whereupon Benerofe filed a petithe machinery passed into the possession of tion in reclamation, alleging that he had made a conditional sale, and that bankrupt had defaulted after having paid threetenths of the purchase price, wherefore he demanded delivery to him of the machinery. In the court below Benerofe prevailed, whereupon the trustee filed this petition.

Harold R. Lhowe, of New York City (Morris K. Bauer, of Brooklyn, N. Y., and E. A. Obstfeld, of New York City, of counsel), for trustee.

Hyman Podell, of New York City (Samuel Sumner Goldberg, of New York City, on the brief), for respondent Benerofe.

Before HOUGH, MANTON, and HAND, Circuit Judges.

HOUGH, Circuit Judge (after stating the facts as above). [1,2] This transaction was a conditional sale, which never raises a question of lien, but one of title. In re Fitzhugh, etc., Co., 230 F. 811, 813, 145 C. C. A. 121. That title is defined by the Conditional Sales Act of New York in force when the transaction occurred (chapter 642, p. 1766, Laws N. Y. 1922), which declares that "conditional sale" means "any contract for the sale of goods under which possession is delivered to the buyer and the property in the goods is to vest in the buyer at a