Warren E. Burger: We will hear arguments next in New York City Transit against Beazer. I think we will defer a moment until two of our colleagues get back Ms. Offner, three colleagues. And I think we will proceed whenever you are ready Ms. Offner.
Joan Offner: Thank you. Mr. Chief Justice and may I please the Court. This case involves a challenge to an employment policy of the New York City Transit Authority, which excludes from employment heroin addicts participating in methadone maintenance programs. The District Court found this policy to be an unconstitutional denial of the equal protection of the laws to methadone patients and found further that the policy had a disparate impact on Blacks and Hispanics in violation of Title VII of the Civil Rights Act of 1964 as amended in 1972 to apply to government agencies. The Second Circuit affirmed the finding of unconstitutionality and declined to rule on the Title VII question finding it unnecessary to do so. Both the constitutional question and the Title VII question are before the Court today. I propose to address myself first to the Equal Protection issue.
William H. Rehnquist: Well, it is conceivable as it is not that if we were to decide that the Court of Appeals have been incorrect on the constitutional issue, we would not have decide the Title VII issue ourselves, but send that back?
Joan Offner: Send the Title VII question back?
William H. Rehnquist: Yeah, under the new statute.
Joan Offner: To the Circuit Court?
William H. Rehnquist: Yes.
Joan Offner: That could be done, that could be done.
Byron R. White: But didn't the Circuit Court say there was a violation of Title VII?
Joan Offner: No, the Circuit Court did not. What happened in this case, Mr. Justice White is that --
Byron R. White: Well, it did for the purposes of attorney's fees, didn't it?
Joan Offner: The District Court found that Title VII violation for the purpose of awarding attorney's fees. At that time The Civil Rights Attorney's Fees Awards Act of 1976 had not yet been enacted. During pendency of the appeal it was enacted and therefore the Circuit Court found it unnecessary to consider the Title VII question.
Byron R. White: Well, did the – did either Court or anybody suggest why the constitutional issue was reached without deciding the statutory issue?
Joan Offner: No, as a matter of fact I think it went just the other way in the District. The District Court found the Equal Protection violation and said it was therefore unnecessary to deal with the Title VII.
Byron R. White: Do you see anything odd about that?
Joan Offner: Do I see anything odd of it, I certainly do, but that is the way the original District Court decision went.
Byron R. White: And the Court of Appeals apparently didn't find anything wrong with that either?
Joan Offner: Apparently they did not. That is expressly stated in the District Court decision. They said toward the end of their decision that having found an Equal Protection violation, there was no need to deal with the Title VII question. The proof that we are dealing with in this case in terms of the Equal Protection issue, consists of heroin addicts, who are participating in methadone maintenance programs. It is the contention of the respondents that this group is entitled to equal consideration for jobs to the same extent as the non-addict job applicant.
Warren E. Burger: For all jobs?
Joan Offner: For all jobs. Well, let me qualify that. To the extent that the District Court established narrower boundaries for consideration of these people for jobs, there is not limitation. The District Court said that in certain, what they regarded as safety sensitive positions, it would not be necessary.
Warren E. Burger: The District Court opinion would not let a drug addict run one of these --
Joan Offner: Well, the District Court specified motorman, conductor, bus operator and positions dealing with power equipment. I suggest however Mr. Chief Justice that the District Court exceeded its boundaries in reaching that decision. In the first place the District Court had to make a finding of unconstitutionality in order to reach the point of addressing itself to what or to be a rational policy for the Transit Authority. The Transit Authority's contention is that its policy has a rational relationship to a legitimate need and that the constitution does not impose on employers an obligation to participate in what amounts to a sociological experiment. The Transit Authority's refusal to employ methadone patients is based on a variety of considerations, all of which are supported by the record in this case. In the first place the Authority is involved in a very difficult and demanding job of providing subway and bus transportation to the people of the city of New York on a vast scale, transporting something like two billion passengers over the course of the year. It is our considered view that the responsibilities involved in that operation require us to employ people in all job categories, who meet at least reasonable standards of reliability and stability. And those considerations, taken together with the uncertainties and the failures of methadone treatment and the difficulties of determining the employability of methadone patients form the basis and the underpinning for the Authority's policy and I think its appropriate to note in this connection that this Court in Marshall against The United States expressed the very same concerns about the state of drug rehabilitation programs, the validity, the uncertainty and interestingly enough Marshall against the United States was decided in the very same year as the trial that was conducted in this case, 1974. The record in this case contains the testimony of a number of medical experts, most of whom were proponents of methadone maintenance. At the same time that they were extolling the virtues of methadone maintenance as the treatment for heroin addiction, they nevertheless were constrained to admit that there was and is substantial drug and alcohol abuse among methadone patients. They testified to the disruptive behavior of many patients at the clinics to the black market that exists in methadone with patients selling their take-home doses on the street, and most importantly to the issue in this case, they testified to the fact that methadone as a treatment for heroin addiction works sometimes. Indeed one of the respondents --
Warren E. Burger: Sometimes what?
Joan Offner: Sometimes for some, for some heroin addicts. It works for some heroin addicts. It stabilizes some of them.
John Paul Stevens: Ms. Offner, before you get too deep into your argument, I would like to ask you a question about the precise class we are talking about. As I understand the Transit Authority's Rule, it's Rule 11 (b) that is challenged as being an improper classification and that talks about people, who are using drugs in one form or another and the challenge is that your treat methadone as a drug?
Joan Offner: Correct.
John Paul Stevens: You say that's but -- now what is the state of the record with respect to persons who formerly used methadone but do not now taking any drugs at all, say someone who had gone on rehabilitation program and claimed he was cured. Is the record clear on what the Transit Authority's policy is there?
Joan Offner: There was very little attention paid during the course of the trail to people who detoxified from methadone, in another words people who were totally drug free. The Transit Authority's Executive Office for Labor Relations testified that the Transit Authority indeed will categorically exclude from employment current methadone users and people who are relatively recent methadone users, but that the Authority would give individual consideration to people, who have been totally drug-free for a period of at least five years and can demonstrate that they are maintaining a stable existence in terms of jobs, in terms of family life, in terms of their social obligations. The District Court's opinion in two places that I can recall indicated that they were sure that the Transit Authority's policy extends as far back as relatively recent methadone users, but that it was not clear as to what the policy was with regard to people who are totally drug-free for a substantial period of time. Now it is our contention that the record is clear because we have the testimony, un-controverted testimony of our Executive Officer with regard to that policy.
John Paul Stevens: So your view would be that the there is no absolute exclusion of those persons who have been free for four, five years?
Joan Offner: Correct.
John Paul Stevens: And certainly the language of 11(b) itself would be consistent with your explanation --
Joan Offner: That is correct Mr. Justice Stevens.
William H. Rehnquist: Three of the four members of the class were presently participating in methadone, were they not?
Joan Offner: Yes, that is right. In terms of the usefulness of methadone as a treatment for heroin addiction for the class as a whole I think its very interesting to note the testimony of one of respondent's own medical experts, who testified that out of the 600 patients in his clinic, only 10 had achieved a sufficient level of stability at the end of two yeas in treatment to qualify for reduction of their mandatory clinic visits down to twice a week.
Warren E. Burger: In how many years?
Joan Offner: Two years in treatment. There was also conflicting testimony from the various experts as to the relative merits of high dose methadone programs as opposed to low-dose methadone program and with regard to methadone programs as such compared with detoxification programs. There has obviously not been any unanimity among the medical experts as to what constitutes an effective tool for dealing with heroin addiction.
William H. Rehnquist: Ms. Offner, if this were a diversity case or the issue had been whether or not methadone participants can be satisfactory employees and the District Court had heard the evidence it did and made the findings it did, would you say that successful argument because it made to a Court of Appeals that its findings were clearly erroneous?
Joan Offner: That is not my contention --
William H. Rehnquist: You don't have to --
Joan Offner: -- Mr. Rehnquist. Excuse me?
William H. Rehnquist: You do not have to go that far here.
Joan Offner: No I don't go that far. The essence of my argument with regard to what the District Court did here is that the District Court misunderstood the rational basis test. For the most part, I'm not challenging what the District Court found. They found no more than that called substantial numbers of heroin addicts are helped to a stable condition by methadone. The essence of my argument is that that is not enough to establish a finding of unconstitutionality under a proper application of the rational basis test. The uncertainties of methadone treatment are compounded by the difficulty of ascertaining the employability of individual methadone patients. The experts were generally in agreement that when a methadone patient applies for job, he presents a special problem to the employer and that the employer needs some assistance in evaluating this individual. The question is where that assistance is to come from. A number of the experts were frankly skeptical about the validity and usefulness of information that the employer might obtain from the personnel at the methadone clinic. On the average there is one doctor for every 200 methadone patients at a public methadone clinic, so that by in large evaluations of the patient's progress in treatment is coming from non-professional counselor personnel of the methadone clinics, who as the experts indicated very considerably in their competence and in their reliability. This problem is further compounded by Federal confidentiality regulations, which provide that even if there is consent by the patient, the methadone clinic cannot disclose information -- specific information about the patient's condition to an employer unless the employer makes a commitment that he will not or that it will not use the information adversely to the patient's interest. It is almost a catch-22 situation where the employer will not be given specific information about the patient unless the employer makes the commitment not to use the information. The idea is that the employer is supposed to use the information to make an effort to rehabilitate the patient, which is all well and good but the employer as we see it has other obligations and that is to keep the subway system running. The classification in this case does not involve any fundamental interest as that term has been defined by this Court nor does it involve any suspect category as enumerated by the Court; race, national origin, alienage, in some instance is wealth, not does it involve immutable characteristics of birth such as those inherent in sex classifications and classifications of illegitimacy. The group characteristic in this case consists of a self-inflicted heroin addiction and methadone maintenance and that being so there is no dispute among the parties that the proper test to be applied in the Equal Protection analysis is the rational basis standard. That standard as clarified by this Court in recent years gives to the Transit Authority policy a presumption of validity, doesn't require individualized consideration, approves the use of broad classifications as long as those classifications are rationally related to legitimate objectives. Contrasted with that standard, of course is the strict scrutiny standard in which there is not a presumption of legitimacy in which broad classifications are not acceptable and in which the government classification must be shown to be based on a compelling need. What happened in this case was that both the District Court and the Circuit Court, thought they were replying or intended to apply rational basis standards, but took their instruction from cases that dealt with the strict scrutiny standard, specifically Sugarman against Dougall and LaFleur against Clevenland School Board. As a result they misunderstood the rational basis standard and in effect viewed the evidence in this case through the wrong end of the telescope. They focused their attention on the minority of methadone patients who become stabilized and did not deal with the fact that the majority of methadone patients do not become stabilized. Influenced by the strict scrutiny standard, both of the lower courts decided that the Transit Authority policy was overly broad and that the Equal Protection Clause required a more individualized approach. We submit that under a proper rational basis analysis, the operative fact in this case is not that some methadone patients may become employable, but that most of them do not; and added to that of course is the difficulty of determining employability in individual situations. We submit therefore that there is ample evidence to support the policy of the Transit Authority and the absence of the invidious discrimination necessary for finding of unconstitutionality under the Equal Protection Clause. I would like to turn now to the Title VII question. Several months after finding an equal protection violation, the district court rendered a supplemental decision in which it found that the policy of the authority had a disparate impact on Blacks and Hispanics, and therefore violated Title VII of the Civil Rights Act. I submit to this Court that the district court decision totally distorts the concept of disparate impact as established in Griggs against Duke Power and as carried forward in Albemarle against Moody and most recently I think in Dothard against Rawlinson.
Potter Stewart: May I ask Ms. Offner, I am correct am I not in my understanding that the Court of Appeals didn't reach the Title VII issue?
Joan Offner: It did not reach the Title VII issue, yes.
Potter Stewart: And since it didn't do so, how or why is that issue now before us?
Joan Offner: It was one of the questions that are posed in the petition for Cert Mr. Justice Stewart and Cert was granted on that issue.
Potter Stewart: That was a question wholly undecided by the Court of Appeals, whose judgment we are now reviewing, isn't that?
Joan Offner: That is quite true. Nevertheless as I say, it was one of the two questions on which this Court granted certiorari.
Potter Stewart: Alright.
Warren E. Burger: That could not be uncommon perhaps with a view to keeping the matter before the Court for possible remand for consideration by it if there were no other basis of disposition?
Joan Offner: I do not disagree with the Chief Justice.
William J. Brennan, Jr.: Ms. Offner, are you going to address the argument of the effect of the Rehabilitation Act?
Joan Offner: Yes, I do intend to do that. I would just like to say very briefly on the Title VII question that as I understand the disparate impact cases which this Court has decided, each of those cases involved an actual absence, significant absence of minorities from the particular employer's workforce. And that absence existing, the court then looked to the particular challenged employment policy to determine whether that policy was where the fault lay. In our case, no such absence exists. In fact, the Transit Authority's employment pattern includes 46% Blacks and Hispanics against a profile in the relevant labor pool of 20% Blacks and Hispanics. So we have more than double the percentage of minorities in the Authority's workforce, then are represented in the Metropolitan area workforce. And the respondents have suggested that this Court should dismiss this case on the basis of a newly enacted amendment to the Rehabilitation Act. This new amendment provides in general terms for inclusion of rehabilitated drug addicts and alcoholics as handicap persons under the Rehabilitation Act. The amendment does not expressly apply to methadone patients. It is our contention that any attempts to include methadone patients within the category of protected persons would be certain to result in litigation. As a practical matter what the respondents are asking this Court to do is to interpret the scope of this new statute which has not yet began to be implemented and applied retroactively to the Transit Authority. They are asking the Court to sanction the enormous equitable and monetary liability imposed on the Transit Authority in this case on the basis of the statute which was not enacted until four years after the trial of this action and as I say which has not yet even began to the be implemented. Finally and perhaps most important, they are asking this Court to interpret the scope of this new statute and to establish a precedent in this case which will undoubtedly have a compelling influence on the shape of any future litigation under the Rehabilitation Act.
William H. Rehnquist: There were judgments for back pay here?
Joan Offner: There were judgments for back pay for the members of the class. There is a very substantial Attorney's Fee Award and there is very extensive equitable relief demanded in terms of evaluating and hiring anybody who was turned down in the past by reason of being a methadone patient.
Potter Stewart: Ms. Offner, I gather that you do not concede far from it that the statute, even as amended this past October, requires you to hire these people?
Joan Offner: That is exactly right Mr. Justice Stewart and that is our position, yes. And we do believe that this is not a proper case for interpretation of that provision and that the Court should decline to interpret it, until a proper case is presented on a full record. I would like to reserve the balance of my time for rebuttal.
Warren E. Burger: We'll resume at this point at 1'o clock. Mrs. Greenberg, I think you may proceed.
Deborah M. Greenberg: Mr. Chief Justice and may it please the Court. I would first like to respond to a question asked of counsel for petitioners about the proprietary of the lower court having addressed the constitutional issue before Title VII issue. It may be that the Title VII issue, that Title VII would not provide full relief to all members of the class, some of whom are white. However if this Court should hold that the Transit Authority's policy does violate Title VII, there is no decision of this Court which forecloses its ordering equitable relief, including back pay and seniority credit.
Byron R. White: But isn't it possible that the district court thought that it might as well reach it, titles of the equal protection issue first because the Title VII issue also had a constitutional issue in it?
Deborah M. Greenberg: I do not know why the district court decided this.
Byron R. White: But there was, wasn't there?
Deborah M. Greenberg: Yes.
Byron R. White: And furthermore, the constitutional issue in the Title VII question involved the constitutionality as an act of Congress?
Deborah M. Greenberg: Yes, Your Honor.
Byron R. White: But in any of that, that is possible?
Deborah M. Greenberg: I was just trying to recall whether the Transit Authority raised the constitutional issue relating to Title VII at the time that --
Byron R. White: Well, it certainly had it at the time of the district court ruled?
Deborah M. Greenberg: Yes it had at that time.
Byron R. White: Yes.
Deborah M. Greenberg: Counsel for petitioners has overdrawn the scope of respondent's argument and of the decisions of the courts below. We are not concerned with some abstract question of whether there would ever be a rational basis for discriminating against methadone patients. The narrow constitutional issue before the Court is whether the Transit Authority's unwritten rule of flatly excluding successful methadone patients, the overwhelming majority of whom are fully employable, from even consideration for any of its 47,000 jobs, while giving individualized consideration to every other applicant whether this constitutes a denial of equal protection?
William H. Rehnquist: Mrs. Greenberg, you lay some stress on the fact that the rule is unwritten, do you feel that helps you or hinders you or is it a neutral fact?
Deborah M. Greenberg: I think that it helps us in the sense that it goes to the degree of deference which this Court should afford to the Transit Authority's rule.
William H. Rehnquist: Haven't we said that a Municipal Corporation's rule is -- when it is challenged constitutionally just as if the New York Legislature enacted a statute to that effect?
Deborah M. Greenberg: That may be so, but even when this Court is evaluating a legislative rule as it did in Murgia, it paid a great deal of attention to the legislative -- the basis for the legislature's action.
William H. Rehnquist: And that would [Inaudible] whether it is written or unwritten?
Deborah M. Greenberg: Yes Your Honor.
John Paul Stevens: Mrs. Greenberg, isn't it correct that the issue isn't a classification of methadone users, but rather the question is whether Rule 11 (b) as interpreted to include methadone users is too broad, that is irrational because it is too broad?
Deborah M. Greenberg: Rule 11 (b) is directed only to practices by incumbents, that is persons already employed by the Transit Authority. It is not directed to applicants for Transit Authority employment. So it is not merely Rule 11 (b) that we are concerned with. It is that Transit Authority's overall rule of not considering for employment anyone -- and of as well as of terminating from employment anyone who it discovers to be in methadone treatment, to ever have been in methadone treatment --
John Paul Stevens: It begins -- more precise to say anyone who falls within the terms -- who would fall within the terms of 11 (b) if an employee and then they construe 11 (b) to include methadone users?
Deborah M. Greenberg: Yes, that is certainly part of our argument that is irrational to do so, particularly in view of the consideration that is given to all other employees and applicants, some of whom may violate rules. For example, the --
John Paul Stevens: But you would not consider 11 (b) irrational if they did not define methadone users as persons who use drugs within the meaning of the rule or would you?
Deborah M. Greenberg: Well we are of course representing methadone users. If you are asking whether it would be -- we would consider it irrational for the Transit Authority to have a rule against the present use of narcotics by its employees, our answer would be that it certainly would be irrational rule for the Transit Authority, but I might point out that --
John Paul Stevens: Well, they do have such a rule?
Deborah M. Greenberg: Pardon?
John Paul Stevens: They do have such a rule, which is quoted on page 5 of petitioners' brief, yeah that's what we are talking about and you don't contend that, that rule would be irrational if the definition did not encompass methadone users as I understand?
Deborah M. Greenberg: If it did not encompass present methadone users and only encompassed present narcotics users who did not have the permission of the medical director, we would not consider it irrational. The rule is not an absolute -- as written, it is not an absolute rule. It is a rule that no one may use certain kinds of drugs without permission, written permission of the Medical Director. The Transit Authority does not exclude from employment or terminate from employment persons who use other drugs that are encompassed within that rule, for example amphetamines or tranquilizers. In that case, it makes an investigation to see whether there is some reason why the person should be using those drugs.
John Paul Stevens: Just like Mr. Justice Rehnquist asked about the statute, cannot we look at the rule as thought it were somewhat like a statute and we have to determine its meaning by the way it has been construed and it has been construed in some of these fringe areas to require individualized treatment, and in other areas, it includes methadone users. It seems to me the basic classification you are challenging, is this classification made by the rule as interpreted by the Transit Authority. You are saying it is too broad a rule?
Deborah M. Greenberg: Yes, it is too broad a rule. We are challenging it because the Transit Authority -- it is only in the case of person who use narcotics that the Transit Authority does not give individualizes consideration. Not at issue here is the Transit Authority's right to exclude methadone patients from any position, which impinges on the safe operation of the Transit Authority. The district court did not designate which jobs the Transit Authority could consider safety-sensitive. It gave some examples of jobs such as motormen, conductor.
Warren E. Burger: Does that become a business of the court?
Deborah M. Greenberg: No, it does not become the business of the court. The court left it to the discretion of the Transit Authority to determine which of its jobs were safety-sensitive.
William H. Rehnquist: But then it went on -- it is going to review that determination, is it not?
Deborah M. Greenberg: I should think that if the Transit Authority abused its discretion in and designated a job that was obviously not safety-sensitive such as file clerk job --
Warren E. Burger: But the accountants would handle a lot of money. Revenue people -- their money comes in an small bits and pieces. It is not an unknown that heavy embezzlements in the aggregate have been arranged by people at that level. Would you say that a sensitive position or is it rational to say that there is a risk that the methadone user either getting on with methadone or trying to get more of black market methadone is going to embezzle money to support $100 a day habit?
Deborah M. Greenberg: There is nothing in the record to support the proposition that a successful methadone patient who has been rehabilitated, who has been identified as employable --
Warren E. Burger: So who has been, if you --
Deborah M. Greenberg: Pardon --
Warren E. Burger: If we accept the idea who has been rehabilitated, that's one thing, but how do you identify a rehabilitated one and what does the record show about the success of rehabilitation?
Deborah M. Greenberg: The record shows that after an initial period of adjustment which can last from a few weeks up to at most a year, that after that period has passed, the vast majority of methadone patients are employable and at that group, the group that has been in treatment for a year or more, is directly comparable to any group of applicants for positions in the Transit Authority.
Byron R. White: If that is so, why did the district court put aside the sensitive positions?
Deborah M. Greenberg: The district court acting out of an abundance of caution, wanting to adopt the least intrusive of rule that it could, allowed the Transit Authority to set aside certain jobs to fit within the --
Byron R. White: I know what it did, but I wonder why?
Deborah M. Greenberg: Well, I think again it is difficult to know why the district court did what it did. There is no basis in the record for its distinguishing between a sensitive statement --
Byron R. White: I would suppose based on what you just said a moment ago that you would think that, that reservation of those positions would also violate the Equal Protection Clause?
Deborah M. Greenberg: I think it is a more difficult case because the Transit Authority already has a structure for -- it in fact already does designate certain jobs as sensitive or non-sensitive.
Byron R. White: I know but whatever the job is, you just said that these people who have been running the program successfully for a year are just like the general population, and yet the district court did not think so obviously?
Deborah M. Greenberg: They are just like the general population, some of whom may -- the Transit Authority will employ and some of whom it won't. The Transit Authority --
Byron R. White: Yes but the district court let the Transit Authority as a -- just on a per se basis exclude any methadone -- the district court let the Transit Authority apply its rule to any sensitive position?
Deborah M. Greenberg: Yes it did and we --
Byron R. White: Without individualizing anything?
Deborah M. Greenberg: Yes and it is our position that there was no basis in the record for doing so.
Warren E. Burger: Which you have not challenge that here?
Deborah M. Greenberg: We did not challenge that.
Warren E. Burger: What about the figures that --
Byron R. White: But it is some indication that the district court thought there was a difference?
Deborah M. Greenberg: It is only an indication I think Your Honor that the district court was proceeding very cautiously.
John Paul Stevens: Was the proceeding irrational?
Deborah M. Greenberg: Was the district court proceeding irrational?
John Paul Stevens: Yes, in drawing that distinction?
Deborah M. Greenberg: Perhaps.
Thurgood Marshall: Now there is a difference between motormen driving the train at 80 miles an hour and a porter pushing the broom at one mile a year, isn't it?
Deborah M. Greenberg: Yes, there is. [Attempt to Laughter]
Warren E. Burger: What about the figure that your friend gave us that out of 600 patients, only 10 are found free of the addiction after two years of therapy, was that figure wrong or is it supported by the record?
Deborah M. Greenberg: That figure is I would say an aberration; the context from which that was drawn is the following. One of the class members was trying to getting a job with the Transit Authority. His Treatment Director wrote an affidavit -- signed an affidavit in which trying to show what an exceptional and eminently employable person this Mr. Wright was, said, he is so good, he has been allowed to take home his dosage, so he only has to come in two or three times a week and I run a very tight ship. Most of the patients in my program have to report every day. The great weight of the expert opinion was that after one year, at least two-thirds in the testimony -- it was roughly from two-thirds to 80 or 85% of patients in treatment are fully employable.
William H. Rehnquist: When you say the great weight of expert opinion, you do admit, I take it, that there was conflict in the district court that different views were presented and he chose to believe the one that he thought was more persuasive?
Deborah M. Greenberg: Not really. There was difference in the numbers that we are talked about One person said, two-thirds are employable and other person said, 80% are employable. One difference is that there are different kinds of programs. For example, Irving Lukoff testified about employability at one program called Addiction Research Treatment Corporation and which by his testimony, employees, pardon me, has its patients the hardest core addicts, people who have been incarcerated for an average of seven years with long criminal records, very long addiction histories. In that program, after one year two-thirds are employable. In some of the other programs which have a different population, 80 or 85% are employable. That is the only difference.
William H. Rehnquist: What if instead of all this testimony being presented to the district court first, it had been have presented to the New York Transit Authority and after giving exactly the same testimony, the Transit Authority had adopted the rule, it did. Do you think you could then have gone into the district court on that record and said, this is an irrational conclusion?
Deborah M. Greenberg: I think we could have gone in on that record. Indeed a lot of this -- the few persons the Transit Authority ever had contact with, who were methadone treatment experts, all told the Transit Authority that methadone patients were employable. I think we could have gone, that given the fact that through these normal, ordinary personal screening procedures of the Transit Authority, it could readily identify those methadone patients who were employable. And that conclusion is based on solid, unchallenged, uncontroverted findings of fact by the district court. We could have gone in and challenged the Transit Authority's policy as irrational.
Warren E. Burger: [Inaudible] determined employable, did anyone define or did they agree on a definition of employability?
Deborah M. Greenberg: Everyone was talking about people who were free of drug use, of illicit drug use, free of alcohol abuse, people who had in fact employment records. One-third of the persons going into methadone treatment are already employed at the time they enter treatment and people who are generally evaluated by the treatment personal as being people who would make reliable employees.
Warren E. Burger: Would it be extraordinary to at least have a rebuttable presumption that the people then employed who in some capacity, who went into a methadone program had not yet shown such objective symptoms as to alert their employers, in other words that they were performing?
Deborah M. Greenberg: Exactly.
Warren E. Burger: There are degrees, there are degrees of addiction and they will certainly know that, don't they?
Deborah M. Greenberg: Two of our named plaintiffs were employed by the Transit Authority were fired solely because they were in methadone treatment. And as in the case of Carl Beazer, who had worked for the Transit Authority for eleven-and-half-years and worked his way up from a job as a car cleaner to a conductor to a towerman, the Transit Authority's own Impartial Disciplinary Review Board found that his performance was satisfactory throughout the term of his employment.
Warren E. Burger: You mean in the tower?
Deborah M. Greenberg: Yes.
Warren E. Burger: In his control?
Deborah M. Greenberg: Yes.
Warren E. Burger: But suppose they had a tragic accident and it could be traced to some aberration of this man, naturally exposing, that would expose some rather difficult liability questions, wouldn't it, perhaps they knowingly retained a person who is an addict?
Deborah M. Greenberg: I think it -- perhaps it could expose them to some. If indeed the -- I don't know we are talking about if he was on methadone; there is nothing in the record to indicate that his performance would be in anyway affected. In fact, there is much in the record to show that methadone does not affect people's ability to perform any jobs involving quick reactions, alertness, but the fact was the Transit Authority fired this person solely because he was in a methadone program. One other thing that is not an issue here is the Transit Authority's right -- first of all, its right to refuse to hire any methadone patient who has not completed a year of successful treatment. It can also refuse to hire anyone who does not meet its normal objective employment standards. If the transitive authority required so many years of relevant employment experience, it can require that of the class. The persons whom the Transit Authority refuses to consider for even the most ordinary menial jobs, are socially responsible citizens who have valiantly struggled and have succeeded in their efforts to overcome their drug habits. They are free from drug and alcohol abuse and they are employable by any relevant selection criteria.
Byron R. White: Did you agree with the one year test?
Deborah M. Greenberg: Yes, we did agree with the one year test.
Byron R. White: But that wasn't your proposal or was it?
Deborah M. Greenberg: I think, by the time we put in a proposal, we did agree that --
Byron R. White: How did you arrive at that, just based on the --
Deborah M. Greenberg: Based on the evidence, which was that it takes a little time for -- first of all, it takes a little time for a methadone patient to become stabilized on his dosage, go in there and build up to a certain dosage. Secondly, it is conceded that a number of persons who enter into methadone treatment are not appropriate patients, those are the people who are going there just to get a, I guess it might be called a free fix, those are the people who cause disruption outside of the methadone clinics, those are the people who either drop out of the program or are terminated by treatment personal. The longest period that was mentioned as in the adjustment period by anyone was one year.
Thurgood Marshall: You mean after the one year, he is off of drug forever?
Deborah M. Greenberg: After one year --
Byron R. White: If he is on methadone drug?
Deborah M. Greenberg: In a methadone treatment program, the patient is still taking methadone --
Potter Stewart: But he is stabilized --
Deborah M. Greenberg: -- but he is stabilized and he is as employable as anyone else.
Thurgood Marshall: As long as he takes methadone?
Deborah M. Greenberg: He is employable as long as he --
Byron R. White: Except where it might make a difference in the safety position, isn't it?
Deborah M. Greenberg: We would certainly not concede that exception.
John Paul Stevens: No, but the judge conceded that that there is exception?
Deborah M. Greenberg: Yes. I would --
Warren E. Burger: You are not really suggesting that a person who has been one year -- that this generalization that doesn't probe into what the degree of the habit was before the methadone treatment, how much methadone they took, but then when they are stabilized on whatever the dosage is which might be very high, medium or low, is that person is employable as an airline pilot, for example?
Deborah M. Greenberg: I don't know what the standards or performance required of Airline Pilots are. All of the tests that were testified to in this case about performance showed that the reaction time, the alertness of methadone patients was well within the normal range of reaction time, alertness, intellectual functioning. There may be different -- it is clearly within the range required for people who are going to be porters or clerks. There may be very different standards for airline clerks and I just don't know the -- but I mean pardon me for airline pilots, and I just don't know the answer. I would like to address myself to what the judge found about the ability of the employer of the Transit Authority to screen out or screen in employable methadone patients. First of all, it is undisputed that there is no class of persons other than methadone patients and others with the history of narcotic addiction to whom the Transit Authority denies individualized consideration for employment. The Transit Authority has no blanket prohibition against the hiring of persons with potentially disabling physical conditions, such as diabetics or epilepsy or cardiac disease. It has no blanket prohibition against the hiring of persons with histories of alcoholism. It has no blanket prohibition against the hiring of persons with criminal records, or person taking tranquilizers or amphetamines or persons who have been confined to mental hospitals.
John Paul Stevens: How does this advance your argument? I mean, the question is whether the one blanket exclusion they have is rational or not. Maybe they could have had a whole bunch of other irrational exclusions, but how does that affect the argument?
Deborah M. Greenberg: The argument is that there is no --
John Paul Stevens: This is an irrational classification?
Deborah M. Greenberg: It is an irrational classification --
John Paul Stevens: It would be equally irrational I suppose if they excluded alcoholics on a blanket basis, wouldn't it?
Deborah M. Greenberg: Not necessarily, because under the Transit Authority's procedures, screening procedures, they can tell who would make a good employee, whether he is a methadone patient or whether he is a former alcoholic, there is no -- the classification here is between persons whom the Transit Authority will not even give individualized consideration to.
John Paul Stevens: That is the people to find in Rule 11 (b) as construed onto methadone users, so it is rational or it is irrational?
Deborah M. Greenberg: So the methadone patients and people with histories of drug abuse, 11 (b) does not talk about histories of drug abuse but there is no question that the Transit Authority does --
John Paul Stevens: It is so construed to cover them. Can I ask you because your time is going -- is expiring, with your Title VII case, does the record tell us the relative number of Black and Hispanic employee persons actually employed by the Transit Authority?
Deborah M. Greenberg: Yes, the record tells us that 46% of the employees of Transit Authority are Black or Hispanic. However the record does not tell us what proportion of applicants for Transit Authority positions are Black or Hispanic, so that the 46% figure is irrelevant. It may be that 60% or 70% of the applicants in the New York City to these jobs are Black or Hispanic.
Warren E. Burger: Do you really mean it is irrelevant?
Deborah M. Greenberg: Yes.
John Paul Stevens: Then how do we know that the exclusion of the methadone users has a disparate impact on Blacks and Hispanics? Perhaps they are all been replaced by the people who are Black or Hispanic, non-methadone users?
Deborah M. Greenberg: We would not contend that it has a discouraging effect on all Blacks or Hispanics.
John Paul Stevens: Then how does it violate Title VII?
Deborah M. Greenberg: Because it -- the individuals who are affected by it, a Black --
John Paul Stevens: Would you say it was unlawful, even if every person rejected for this reason, was replaced by a person of the same race?
Deborah M. Greenberg: Yes Your Honor, because the individuals who are rejected are entitled to be considered on their merits and not on the basis of a criterion which has the effect of excluding disproportionately large numbers of Blacks and Hispanics and does not the meet the business necessity test.
William H. Rehnquist: Where do you get your disproportionate? What is your numerator and what is your denominator?
Deborah M. Greenberg: I am not sure, I'll enter into that proposal definitely. The disproportion is that, while 20% of the labor force in which the Transit Authority draws its employees is Black or Hispanic, 60-65% of methadone patients are Black or Hispanic, it may be higher than that.
William H. Rehnquist: So percent of Black or Hispanic methadone users is higher than the percentage of Black or Hispanic members of the population as a whole?
Deborah M. Greenberg: Yes and the fact that the Transit Authority has even arguably reached some kind of racial balance in its workforce does not immunize otherwise discriminatory non-job related practices from scrutiny under Title VII.
Warren E. Burger: I still don't understand why then you say 46% is irrelevant to this whole picture Mrs. Greenberg.
Deborah M. Greenberg: I am saying it is irrelevant for two reasons. First --
Warren E. Burger: What if it was 86%, will it make any difference?
Deborah M. Greenberg: First of all, we would have to know it would not make a difference if --
Warren E. Burger: One of the claims here is that this – the impact is discriminatory on Negroes and Hispanics?
Deborah M. Greenberg: Yes. What I am saying is that the Transit Authority has claimed that they are immunized, that their methadone policy cannot be a violation of Title VII, because 46% of their employees are Black or Hispanic. That claim does not make sense because first of all, we do not know what percentage of all applicants to the Transit Authority are Black or Hispanic, it may be there is as many as 60-70%.
Warren E. Burger: My question is just about irrelevancy, you cannot really say that it is irrelevant in making these evaluations?
Deborah M. Greenberg: I am saying that is irrelevant in the absence of any data about what -- even if all of their policies did not result in a -- it's irrelevant because we don't know what the racial composition of their applicants were. If 80% of their applicants were Black or Hispanic, the fact that 46% of their employees were Black or Hispanic would just mean that their selection policy as a whole was discriminating against Blacks and Hispanics.
William H. Rehnquist: But would not you say that if 100% of the applicants were Black or Hispanic, and 100% of their employees were Black or Hispanic, it still violate Title VII, because the ratio of methadone users to the population in general?
Deborah M. Greenberg: I would say that it would still violate the Title VII, yes Your Honor, because the individuals who would be affected and those individuals are -- it is to individuals that the act is directed, would still being unlawfully discriminated against.
Warren E. Burger: Do you have anything further counsel?
Deborah M. Greenberg: I have no further comments, Mr. Chief Justice.
Warren E. Burger: Thank you ladies, the case is submitted.


Earl Warren: Number 130, Fidelity-Philadelphia Trust Company and Robert B. Haines, III, Executors of the Will of Mary H. Haines, Deceased versus Francis R. Smith, Collector of Internal Revenue. Mr. McCracken.
Robert T. McCracken: If the Court please. This case comes here from -- on certiorari in the Court of Appeals for the Third Circuit which reversed the District Court, the Eastern District of Pennsylvania and it brings before the Court a question which has been before several Courts of Appeals, and undoubtedly that's the reason that this Court granted certiorari, they have not all agreed upon the inclusion of an insurance policy in a testator's estate. The facts of the case are these, this old lady, Mrs. Robert Haines, a resident of Philadelphia at the age of -- in somewhere in the 70s, in 1934 was persuaded to make an investment or rather three investments totalling $350,000 in the face value of insurance. The beneficiaries of which were her four children. At her age, she could not have obtained this policy without a medical examination, had she not taken out at the same time annuities from the same companies which issued the insurance policies payable to her and non-refundable at her death. The mathematics of the transaction were such as carefully worked out for the insurance company that the company couldn't lose. She paid not quite the face value of the policy for the policy but a considerable sum for the annuity which added to the premium that she had for the policy, exceeded the face value of the policy by a substantial amount. A similar case came before this Court some 17 years ago, 1941, called Helvering against Le Gierse, and in that case, the sole question presented was, was this insurance of such a nature that it could be deducted to the extent of $40,000 from -- there's a taxable state. Your Honors, will recall that up to a certain time, the insurance made out to beneficiaries other than the estate was deductible up to the extent of $40,000. This Court -- that was the only question presented in that case so stated. This Court decided that it was not insurance and Your Honors so decided because you said there was no risk for the very reason that I have just stated, the company saw to it that it got enough money that the time that these two premiums were paid, so that no matter what happens, whether this woman died the day after she took out the policy and they paid the face value of the policy which was more than the face value of the premium on the policy but considerably less than the agreed regular premiums or whether she lived for 20 years. And the surrender value, the cruel value grew all the time on the policy. The company just couldn't lose and that additional amount which ran above the face value of the policy was of course to take care of the so-called loaning charges, the agent's commission, the expenses of the -- of the underwriting and the profit of the company. Now that's what, Your Honors, decided in that case and that's all that was decided and so stated. Other cases have since arisen including this one in which what you said there has been taken and reached out to control a situation that was not before you then. What you said there was this is not insurance, it is a form of investment using the insurance policy as a medium of investment and as such form of investment, it is subject only to the risks that the ordinary investment is. Every case has been decided since has repeated that statement and has stated it to be the law and there's no doubt about it being the law that this is not insurance, yet anything but nomenclature. His insurance went out of the case of these series of cases when, Your Honors, decided the Le Gierse case. Now, let us take that position totally and I'll go on, what happened in this case was that this old lady, as soon as she took out the insurance policies, assigned them towards her four children, absolutely, irrevocably and they were -- they took possession. And that time on, they received the dividends of the policy which are not large as Your Honors know but there are dividends paid on policies. They also enjoyed the annual accretion of value in the -- the surrender value which is made up in part of dividends. She had nothing whatever to do with that. She couldn't have touched the policies. They could've taken those policies out in any year up to the time of her death and surrendered them, and gotten the surrender value, and invested it, and according to a recent case which the tax court has decided from which no appeal was taken and which that exactly happened, the tax court said, why of course this isn't taxable, there's nothing to tax. These people have -- have converted this asset and there's nothing to tax. They may have spent it to any event. That was the reasoning of the tax court. Now she could have -- they could have done that but they didn't do it. They left the policies there until her death. I represented the executors. I represented her for many years and I wish I'd represent too and they brought these policies to her, I wouldn't have let her sign them because I don't like this kind of an investment, I would have demonstrated to, Your Honors in a few moments that it is not a wise investment. But we -- I advised the executors not to include this in the tax return, the state tax. They did not. The Commissioner assessed the deficiency of I think it's a $106,000 and we paid the tax and brought suit for the -- for the refund. The District Court decided in our favor. The Court of Appeals following a decision of the Second Court -- Second Circuit that decided against us and we're here on this conflict of courts below. Now, let us take the position, may I please the Court, which of course we must take that this is not in any sense an insurance question. Your Honors, took that out of the case in 1941 and it's never been there since. That this is a question in which an insurance company was used as a medium or machinery of investment, that's all it is. Now, let me just give Your Honors one or two analogies which occurred to me, always remembering that we're talking about investments. Let us suppose that this old lady had gone to a trust wanting to give this $350,000 to her children irrevocably and frankly wanting to get it out of her estate, so that it wouldn't be includable in the -- in the tax which is a very usual and common thing to do, it is not evasion, it's following the rules, she had 12 years so there was no question to that. And I may say that there's no question here on the part of the Government of contemplation of death or something to take effect of death. The Government puts -- bases its claim entirely on the section of the Act that says that she retain the income. She retained an income and interest in the -- in the property, in the policy. Now, let us suppose, of course she didn't, I'll explain that to Your Honors, she didn't declare at all in this policy, all that she had retained was the annuity which she bought at the same time and which she could have bought at the same price without the policy. No question about that, that's in the record. Now, let us suppose she'd come to me and said, "I want to supply $350,000 for my children. I want to do it now while I'm alive." And suppose I had said to her and she had accepted the advise, go to a trust company and set up a trust for the benefit of your children for life or for your life, the income to be paid to them for your life but giving them the power if you please, by unanimous memorial to the trustee to terminate the trust at any time and get the money which is equivalent to the surrender value of the insurance company. And then I have said, she accepted the trust company. Well, I want them to take this there myself too and here is some more money and I'd like to buy or set up a trust for myself for life, all the income to come to me and on my death to go to my children. Now, I take it, Your Honors that of course the second of those trusts would be taxable. She retains the income, nobody disproves that. But I take it, Your Honors, that in that set of circumstances, even the Government would not have tried to tax the first of those two trusts and I say that with assurance because I tried exactly such a case, a number of years ago in which a woman who had been -- who curiously enough also had four children and this lady have been giving each of her children their allowance for about $5000 to $6000 a year and she got all the time to pay the taxes on her own income in the high brackets because it cost her $12,000 to $15,000 a piece to pay those children this $5000. And somebody advised her, why don't you set up a trust for them and let them pay the tax on their own income from the trust and that's exactly what she did, set up the irrevocable trust. They began to get the income, pay the taxes on it, she lived seven or eight years, or nine years, I forgotten which and died. And they attempted -- the Government attempted to tax that -- include that in the estate.
Hugo L. Black: (Inaudible)
Robert T. McCracken: Sir?
Hugo L. Black: The Government have (Inaudible)
Robert T. McCracken: Yes, yes. The Government have to do that. They of course couldn't do it on this section of the Act because she didn't retain the income. Here, they're doing it only on the retention of income, alleged detention of income. They did it on the ground that it was a gift and contemplation death. Well, I tried that case before the tax court. I asked Your Honors, pardon me, a personal illusion but it's exactly this situation. I tried that case before the tax court and I was able to persuade the tax court, not that it was -- that there were -- that it was not delivered in contemplation of death but it was delivered in contemplation of continued life that she got, she wanted to lessen her income tax payments and still give this -- her children a needful amount of money to live on and the tax court decided in my favor and the Government threw up its hands never even appealed. Now, therefore, I say with some assurance that in the analogy that I just attempted to give to Your Honors, if she had set up this trust fund, these two funds with the same trust company, on the same day through a one check for the -- if you please for the total amount of money with the both of them or deposit to secure it. If she set those up, of course the second of the trust funds in which she retained the income would have been taxable and of course the first would not. Now, I say that there isn't an iota of difference between that first type of fund and this insurance policy which was irrevocably assigned to the children and which the children could have taken out any day at all and surrender it for less than its face value but for a very substantial part of its face value and just before her death for almost its exact face value. It was their property. Yes, sir?
Charles E. Whittaker: I want to make sure, that's why I understood you correctly. What were -- was the insurance assignment an irrevocable one?
Robert T. McCracken: Yes, sir and they -- they possessed the policies and they got the income from it. The dividends were paid to them by the company and the company recognized it and uses an irrevocable assignment and they collected the insurance. We didn't collect insurance. The -- the executors had nothing to do with that insurance.
Charles E. Whittaker: Gift taxes were paid to the donor?
Robert T. McCracken: Sir?
Charles E. Whittaker: And gift taxes were paid --
Robert T. McCracken: Oh, yes, gift tax were paid. Oh, yes, yes. I think she was entirely comfortable in her mind that the whole thing have been handled that way. Now, the Government will come back and say this, all they may say but the trouble is that this woman couldn't get the policy of insurance without taking out the annuity, therefore it was bound to be one investment. Now, let me just stretch my analogy a little further. Let us suppose in going to this trust company, she had attempted to set up a small trust first for her children and in my experience, trustees won't always take small trusts. They will say to you, no, this -- this -- this doesn't pay. We won't take a trust of $10,000 or $5000 or whatnot. They -- they have refused and then she had said, "Will you take it if I take out a trust there -- put out -- create a trust of a half million dollars for myself?" And they will of course would've said yes. Now, they would -- there would have been one transaction in which she could not have gotten the first without supplying the second, just as she can -- couldn't get the first here without supplying the annuity although she could get the annuity without taking out the policy.
Felix Frankfurter: Did I hear you say, Mr. McCracken, that the premium on the annuity wasn't reduced because of the insurance?
Robert T. McCracken: No, sir. The pre -- the record shows that the premium on the annuity was exactly what she or anybody else (Voice Overlap) --
Felix Frankfurter: And there's no -- there has been no insurance (Voice Overlap) --
Robert T. McCracken: Of her age and the premium on the policy was exactly what she or anybody else would have paid for that policy, had she taken a medical examination and passed it. The premiums were calculated on the actuaries or rate just exactly as if this curious crossing transaction. That's all the record and that's it with it. So that what we have here is not one transaction, although it took place on the same day but we have two transactions just as I've tried to point out to, Your Honors, with respect to the trust -- trust company. We have two transactions, one for the children, the insurance policy and the other for herself, the annuity. All she ever got after she paid that money or all she ever could get was what the annuity gave her. All of the children got or ever could get was what the life insurance policy gave them. She couldn't touch that. They couldn't touch the annuity. The moment she walked out of that place assigning the policies to these children irrevocably, the whole thing was split wide open with two winners, absolute winners, one on each side. Now, it's inconceivable to me that the -- there was -- the section upon which they base this, namely that she retained the income for life on that insurance policy, it is inconceivable to me that that can prevail. If the Government -- if she lived 12 years, I may say she's an extremely vigorous old lady, she was a director of a large steel company and attended all the director's meetings up to about a year of her death. She lived 12 years after this. There's no question that Government doesn't suggest that this was in contemplation of death or anything of that kind. So that's out of the case or something to take effect to the death, that's all out of the case. There's nothing in this case if you -- even look at the Government's brief, their citation of the -- of the statute under which it acts is the retention of income section of the statute.
Speaker: Were these two policy -- were these two policies tied together in any --
Robert T. McCracken: No, sir.
Speaker: -- contract with the insurance company?
Robert T. McCracken: There were really three policies. The insurance -- there was a very clever salesman that (Inaudible) this woman, he first sold her a $200,000 policy in the Mutual Life of New York and then he sold her a $100,000 policy a day or two later in the same company. And then he showed her the $50,000 to John Hancock Life Insurance Company. That policy differs in a slight degree because there the assignment was not to the children direct or to a trustee, the Fidelity-Philadelphia for the children but absolute -- absolute irrevocable and they were just to get (Inaudible) children instead of giving it to the children direct. But at that time, she thought perhaps she gave them enough, but she gave them the 300, so she thought she better put something in trust for it. But it's absolute and that company has just the same -- had just the same right to surrender value as the children themselves. Now, I mentioned just the word and I'm merely through sir. I mentioned the cases, the fact that there had been certain cases. There is a conflict to the cases. The -- there was one other case that came here before Your Honors, the Goldstone case and that was a very similar case.
William O. Douglas: What case was that?
Robert T. McCracken: A case called United States against Goldstone. It's in 325 U.S. It's on the brief sir. There, the situation was different in this respect. It wasn't an absolute assignment as to Goldstone reserve, the reserve -- the reversionary right in the policy into his estate. And Justice Murphy's opinion starts out by saying that the one determining factor in this case is the reservation of this reversionary right. Now, that's only other case that's been before Your Honors, except --
William O. Douglas: The litigation of the Seventh Circuit.
Robert T. McCracken: Sir?
William O. Douglas: Litigation of the Seventh Circuit.
Robert T. McCracken: That's the one I just said. The -- the one case has been out of my side is the Bohnen case, decided in the Seventh Circuit.
William O. Douglas: (Inaudible)
Robert T. McCracken: B-O-H-N-E-N, Bohnen, Bohnen. And it came here and was decided -- was affirmed on a four to four court holding, Mr. Justice Jackson being ill at the time. And when Justice Jackson took the seat of the bench, an application was made for a rehearing and, Your Honors, refused the rehearing. Now, whether that refusal means anything at all or whether it means that, Your Honors, were satisfied with the decision, I don't know and nobody -- nobody else on this side of the bar does. But that's the only other case, the -- that -- that's the only chance this Court has had at the exact question that's here. The Bohnen case was identical with this case. There was in case in the -- in the Second Circuit called Burr, that was the first case and then two others had followed it, one of the two being -- being this case of ours and they were just following the Burr case. Our contention is that the difficulty with those cases that while they start out by reciting, Your Honors holding that there's no insurance in this picture, it's a pure and simple investment. When they get down to the decision, they start to talk about all the provisions of insurance policies and they drag the insurance back into the case in order to reach and they got to, in order to reach the decision that they did reach. But I submit, sir that you can't so drag it in to take this out of the field of investment which this Court has said it is and I've tried to argue this case honestly on the theory that it's an investment and nothing else.
Earl Warren: Mr. Baum.
Myron C. Baum: If the Court please. I think it might help a little bit if we talked about some concrete facts here in terms of the premiums that were paid. There were three insurance policies and three contemporaneous annuity contracts. I think it would be easier if we consider that as one insurance policy totalling $350,000 and an annuity which yielded $8000 and some odd dollars per year. There is no substantial difference between the -- among the three policies, we do not contest the -- any question as to the revocability of the assignments. The formula for issuing these contracts was that the combined premiums for the insurance and the annuity must equal eleven-tenths of the face value of the insurance policy. This decedent pay for $350,000 worth of insurance, $384,000 -- strictly speaking that should be $385,000, there's a discrepancy of $1000 in one of the policy but we will assume since it makes no substantial difference that it was eleven-tenths. She was not required to take any medical examination but the premium for the insurance policy was charged at the regular insurance rates, namely the same rates that would have been charged had she been found medically to be in good health. That premium was a combined total of $314,000. The balance of the total required, namely $384,000, was the total allocable to the annuity and by that I mean as the District Court found that she did not have any choice in how much of an annuity she wanted. She had to purchase an annuity which cost $70,000. She couldn't say I want an annuity that would yield me only $5000 a year. The transaction worked the other way. It worked from the premium end. She had to purchase a $70,000 premium annuity, whatever the yield might be and that is exactly what she did. The reason for this is obvious and in fact it is stated expressly in the findings below. The company required this in order to protect itself in case she died a short time after the policy issue. If that should happen, the company would always have in hand a sum sufficient to pay the insurance. That -- the 10% extra was for loaning charges and commissions as counsel state but even after that, the company always had $350,000 in its possession and was obligated to pay this annuity of $8000 which comes to approximately 2.5% on the investment. That leads us squarely to Helvering versus Le Gierse, which counsel mentioned. I would like to state at the outset that this Court in Helvering versus Le Gierse did not solely decide that this was not insurance. At the last page of Mr. Justice Murphy's opinion, after having reached the conclusion that this was not insurance, he states, we now must consider whether it is taxable and he then said it is taxable under Section 302 (c) of a prior Revenue Act which is the predecessor of Section 811 (c) which is the Section we are now dealing with today. So this Court in Le Gierse said that this transaction was taxable under the very same Section we are presently concerned. But it went much further --
William O. Douglas: Was that the same section that we have here?
Myron C. Baum: It -- well in that -- at that time it was Section 302.
William O. Douglas: In substance?
Myron C. Baum: It's in substance the same, yes, Your Honor. There have been various modifications there since.
William O. Douglas: Does that involve (Inaudible)?
Myron C. Baum: No, sir. The only difference factually between this case and Le Gierse, and we may straighten that out right now, is that in Le Gierse the decedent still owned the policies at her death, the insurance policy. She had not assigned. That question was -- was manifested throughout, she still held it. I'm not saying that Le Gierse has decided this case but I -- I would like to say what it did decide. It did decide under those facts without an assignment that this transaction was taxable and in doing so --
Felix Frankfurter: The interest of the beneficiary -- the interest of the beneficiary in Le Gierse did not arrive, did not come into being until that the testator is dead, isn't that right?
Myron C. Baum: That's correct, Your Honor.
Felix Frankfurter: And here, is that true here?
Myron C. Baum: Well, it's a question of what you mean by their interest. They have an interest during the decedent's lifetime, here they have the privilege of surrendering the policy --
Felix Frankfurter: Could she -- could she affect the interest of the beneficiaries and the policy?
Myron C. Baum: In this case, no, Your Honor.
Felix Frankfurter: What?
Myron C. Baum: No, Your Honor. In --
Felix Frankfurter: The opposite was the fact in Le Gierse, is that right?
Myron C. Baum: The opposite was the fact in Le Gierse.
Felix Frankfurter: All right.
Myron C. Baum: I think I -- I will come to why I think that is not a difference.
Felix Frankfurter: I'm not reaching that. I just want to know what the different facts are.
Myron C. Baum: That's right. In Le Gierse, this Court examined it, examined this transaction and said, as counsel stated, that this was an investment, a single investment. It expressly said that although these policies are separate and neither refers to the other and in answer to Mr. Justice Harlan's question, there was no contract with the insurance company which reference was made to both. They were handled with separate application, separate premium payments, separate all the way through and so was it in Le Gierse, that even though these were completely separate -- separate and as Mr. Justice Murphy stated, studiously avoided any reference to each other. Nevertheless, this Court held that they represented a single investment because the policies counteract each other. Why do they counteract each other is a very simple reason. When the insurance is purchased from the company's point of view, the company is -- if we may use the word betting that the insured will live a long time. When it issues an annuity policy it is betting the opposite. It is betting that the annuitant will live a short time. The two counterbalance. If the Court is interested in the appendix to Mr. Justice -- to Judge Clark's opinion in the Third Circuit in Commissioner versus Keller's Estate which was later affirmed by this Court. He has set forth the algebraic computations which prove that the discounted sum necessary to pay the face value of the insurance, plus the discounted sum necessary to pay the annuity always -- always equal to the face value of the policy or as he puts it in terms of a $100. He has set that forth in his opinion and he has the computation.
Felix Frankfurter: Would it interrupt you to state it exactly what it is the Government is seeking to tax here?
Myron C. Baum: The Government is seeking to tax this as a single investment, Your Honor, from which the income is retained. The insurance is entirely dependent upon the annuity. It could not exist without the annuity. Therefore, the whole thing must be taken together as one unit. The -- the income comes from the entire fund, not merely from the annuity portion. It comes from the entire fund and necessarily so because otherwise the company would be gambling with its policy holder's money in attempting to issue insurance in this manner.
Felix Frankfurter: What you're -- you're trying to tax -- would you please correct the inaccuracy of what I'm about to say, you're trying to tax an interest which came into being not at all in contemplation of death long before death but of subsisting living interest with dollars and cents which were wholly unaffected by the death of the testator, is that correct?
Myron C. Baum: That's correct, Your Honor. It is an interest which -- for which the rights of the beneficiaries vary from time to time in substantial respects.
Felix Frankfurter: But whatever they are, the variation is wholly independent of the creator of the interest?
Myron C. Baum: Yes, Your Honor. But what this -- what this decedent did as counsel frankly stated was he wanted to transfer $350,000 to -- she wanted to transfer $350,000 to her children. If shecpo did not do so outright and never do in her lifetime were those children entitled to $350,000. If they had surrendered the policy, they would received almost at all times not only less than the face value but less than the premium which she paid for the policy and because --
Felix Frankfurter: But none of that -- none of those interest would have been taxable except to the beneficiaries themselves, is that right?
Myron C. Baum: If they had surrendered it, then we would have an entirely different relationship.
Felix Frankfurter: But every -- all the money value of the interest that this woman created was there after tax -- an interest as much in the complete dominion of those beneficiaries as a book that you may own?
Myron C. Baum: But the fact --
Felix Frankfurter: Is that right?
Myron C. Baum: That is right, Your Honor. With this exception, the fact is that the statute says that it taxes income which is retained -- a transfer of property from which income is retained for any period which does not in fact end before death. The fact is here, Your Honor, that the assignees of the policies and beneficiaries at the same time did not surrender these policies. They fulfilled to manifest intention of this decedent to receive the $350,000. The only way they could do that was not to exercise their rights as owners of the policies.We have to take, I think, a realistic view of this transaction. If they had exercised their rights at any time, there would have been a severe penalty upon them financially.
Felix Frankfurter: Why won't they tax as interest in contemplation of death? I could understand that, I mean I could understand that argument much more earlier than in this one.
Myron C. Baum: Well, an interesting point --
Felix Frankfurter: Because as you rightly indicated a minute ago, the size of what they were getting was contingent absolutely and was created to be contingent upon her death. So I could understand an argument that this was in contemplation of death. Why -- why -- why didn't the Court -- the Government take that route?
Myron C. Baum: The contemplation of death theory, Your Honor, I think -- does, Your Honor, mean to take that effect in possession or enjoyment at death?
Felix Frankfurter: This, yes.
Myron C. Baum: But the reason we could not take that position, Your Honor, is that the subsection of Section 811, which includes those says that such a transfer is taxable only if the decedent held incidence of ownership at the time of her death. She had admittedly no incidence of ownership in this insurance policy.
Felix Frankfurter: Well you could interpret that I think with as much justice that she had an incident of ownerships since the quality of the ownership was dependent upon her death and she so created it that the fulfillment of what she was going to do was all through her actions and was dependent upon the continuity of her life. She didn't -- ownership in the ordinary sense had an estate in it as it was.
Myron C. Baum: Well as, Your Honor, said --
Felix Frankfurter: But you said -- your whole argument is that there was a nexus between her -- between her death and the enjoyment as to which these people came, is that right?
Myron C. Baum: That's right, Your Honor. But if we had argued the other way, then Your Honor would have possibly asked me where are the incidents of ownership which she held --
Felix Frankfurter: But you might be wrong all the time.
Myron C. Baum: -- and I would had to say none.
Felix Frankfurter: You might be right --
Myron C. Baum: We might be.
Felix Frankfurter: -- all the time.
Myron C. Baum: Yes, Your Honor, I'm fully aware of that and the previous decision of this Court clearly so indicates. Le Gierse not only considered the facts as they existed where the policies had not been assigned but it was expressly stated in Le Gierse that no matter who holds these two contracts, they still operate to counteract each other and this is so because the insurance company could not have undertaken to agree, to pay $350,000 for a premium of $314,000 when it had no assurance even if the decedent was in good health. The Bohnen case which leads to the conflict here, we have three circuits which have ruled in the Court with the Government's view, namely the Second, the Third and the Sixth. But the Seventh Circuit in Bohnen said that the fact that the two contracts were issued at the same time and that the policy could have not been obtained without the annuities of no legal significance and that seems to be the basis of its holding. Yet in Le Gierse, this Court fastened upon that very point to show that that was a single investment. And I failed to see how this case differs from a straight trust where the decedent reserves to herself the income for life and hasn't created a con -- a vested remainder in her children. That life can -- as the court below appropriately noted, has no rights, or title, or legal interest in the remainder created in favor of the children. The life tenant merely has the income but the two are still interrelated and that certainly is the classic example of the retention of income for life situation which this Court has held taxable. It is interesting also to note that in two states under similar statutes, the same result have been reached similar to those that the Government is now contending. Those states are the States of Connecticut and New Jersey where similar combination policies were presented to the Court and a question of a state taxation at both courts held that the two were related, that this was a transfer with the retention of income. I might say also in reference to the Goldstone case that in Goldstone, counsel correctly noted that this Court decided the case upon the ground that the decedent had retained a reversionary interest in the policy. The Court at the end of its opinion states that because of this decision, we need not pass upon the Government's alternative contention, that this is taxable as a transfer with income retained for life. I would like to point out that we run into a furious situation as a result of this Court's decision in Le Gierse. It is not taxable as insurance because this Court has said in Le Gierse that these combination contracts are not insurance and if this Court reverses the judgment below, it is not taxable in any other fashion. Therefore, we have a perfect device for avoidance of any tax with a -- by a bootstrap of lifting up based upon this Court's decision in Le Gierse which was originally designed to prevent the taxpayer from taking advantage of an insurance exemption. Now, as to the surrender value, I would like to add one word. I think I have partially covered it when I said that the statute is directed to a period which does not in fact end before death and in fact these policies were never surrendered. In addition to that, however, we need not speculate as to what the situation would be. Counsel has afforded us I think a very good analogy for our purposes in his brief, where he compares the situation to that of a savings bond which you purchase for $900, which -- that reaches its full value of $1000 in 10 or 12 years. And he says, suppose that have been transferred to the children, the children can cash that in at any time. But the difference between that case and this case is that in that case, the donor has given only $900 for that bond and the donee never receives less than $900. Here, if we take the premium, the decedent paid $314,000 for these three insurance policies. If the children had sought to cash them in shortly after their issuance, they would have received $25,000 less than that amount, and $61,000 less than the face value of the policy. And even in 1938, they would have received $14,000 less than the premium and $50,000 less than the face value. The cash surrender value never did reach, I must correct counsel on that, never did reach the face value. Its higher figure was $326,000 which was still $24,000 below the face value of the policy. So that as the court below noted and has quoted from the New Jersey decision in Bank of New York, it is fantastic to assume that what this decedent really meant to do was an out and out transfer of this insurance policy to her children as a present gift. What she intended and what everybody to the transaction obviously understood was that this would be held until her death that she would continue to enjoy the income. And as the Court noted in Le Gierse, and coming back to this interrelation, the Court said in Le Gierse that the only risk the insurance company assumes is an investment risk that the funds which it holds will not earn as much as it has agreed to pay to the annuity. In speaking of that, the Court was referring not to the annuity alone but to the entire fund held at its disposal.
Earl Warren: Would you state me out on this --
Myron C. Baum: Yes, Your Honor.
Earl Warren: -- please. I'd like to know what difference it makes for the purposes of this case whether her heirs got as a much as she expected that they would get out of this insurance policy or whether they got less provided she had divested herself of her entire interest in it.
Myron C. Baum: The difference --
Earl Warren: I -- that -- that isn't clear in my mind. I like to --
Myron C. Baum: If I may, Your Honor, I'd be glad to try and clarify it. The difference is, the petitioner asserts this is an out and out gift. n fact he goes so far as to say it's an out and out gift of the cash surrender value. This Court, I might note, has held in Guggenheim versus Rasquin that the cash surrender value is not even the measure of the value of this type of policy.
Charles E. Whittaker: (Inaudible)
Myron C. Baum: The policy, not the cash surrender value, Your Honor.
Charles E. Whittaker: The policy.
Myron C. Baum: The policy was given but they say it was an out and out gift of the cash surrender value and of its subsequent accretions, and that it was up to the assignees alone to decide whether it should continue to exist or not. What I say now, the reason that that becomes important therefore, Your Honor, is that what I'm trying to point out to the Court is that it was never intended that they should exercise any present dominion over this policy, that they -- if they did, it would have cost a severe penalty. This was a strange way to make a gift, where you -- you transfer to your donees property which will net them say $50,000 less than what you had put into it at the same time with no investment laws involved and that is exactly what would have happened here. If they had attempted to realize on their -- on -- on this policy during her lifetime, she would have been penalized by having just contributed to the insurance company, the difference between the cash surrender value and the face value of this policy.
Felix Frankfurter: But there was nothing as a matter of law that would have prevented one of the eager beneficiaries who'd lost a lot of money and who needed cash getting even blasted, getting $50,000, let us say less, wouldn't it, as a matter of law?
Myron C. Baum: It would have taken all the beneficiaries but certainly not, Your Honor. All the beneficiaries would have had to act together, there were four.
Felix Frankfurter: Yes.
Myron C. Baum: And they were joint beneficiaries.
Felix Frankfurter: Well suppose they --
Myron C. Baum: All four of them -- yes, certainly not. There was nothing as a matter of law from taking the cash if they had wished to do so --
Felix Frankfurter: If they sometimes --
Myron C. Baum: And I make --
Felix Frankfurter: -- sometimes people take less cash because they're under pressure or whatnot or the spare of the old lady living, people live and come down to a hundred.
Myron C. Baum: That could be so, Your Honor. But as this Court said in Goldstone, we must look at the facts as they exist at the time of death, and at the time of death this policy had not been surrendered, and whether these speculative possibilities might have arisen, the fact is that they did not arise.
Felix Frankfurter: You mean the legal transaction in this case must be judged as to what took place rather than the legal consequences when the -- when the transactions were consummated?
Myron C. Baum: No, I was referring, Your Honor, to the language about which does not in fact end before his death in the -- in the statute.
Earl Warren: Well, may I ask this, Mr. Baum --
Myron C. Baum: Yes, sir.
Earl Warren: Supposed -- suppose that they did turn these policies in and take the face value before she died, would there been any tax due?
Myron C. Baum: That would have created a wholly new relationship, Your Honor, and I think if I may express my opinion, they would -- the -- the insurance policy is gone, the -- the beneficiaries or assignees have received the cash. The annuity would then become a true annuity in the usual sense, namely, an annuity which has of this -- as its objective the use of income and part of corpus, and possibly speaking there would have been no tax. I say possibly for this reason, the Commissioner has taken the position in one case as counsel noted before the tax court that this made no difference. The tax court ruled against him. That case was not appealed and we don't have that problem here since the surrender was not made here.
Charles E. Whittaker: Now Mr. --
Myron C. Baum: Yes, sir.
Charles E. Whittaker: -- Baum, though it may have been a bad business for this decedent to have purchased at Y dollars a policy or an annuity worth less money instantly after than she had paid for it, still legally proper for her to do it and to make a convenes of it isn't it?
Myron C. Baum: Legally proper, there is no doubt, Your Honor.
Charles E. Whittaker: Yes, now isn't that what she did or isn't?
Myron C. Baum: She did it and what she did was legally proper.
Charles E. Whittaker: All right. Then didn't that vest complete title, all its elements and property and incidence of ownership in the trustee here or in a -- in one case in the children and the other?
Myron C. Baum: It did, Your Honor.
Charles E. Whittaker: Now, then she had no right to any income for her life from that portion of that property thereafter, did she?
Myron C. Baum: That, Your Honor, depends on where the income is paid from and what I've tried to urge upon, Your Honor, is that this Court itself held in Le Gierse and quite correctly that that is an income upon the whole sum invested, namely, the amount invested in the insurance and in the -- and in the annuity. The company is holding that combined fund. That's how it is enabled to be whole at all times and without laws.
Speaker: (Inaudible)
Charles E. Whittaker: Is the policy a separate chattel? A monument of title to all it represents?
Myron C. Baum: It is in form, Your Honor, but as this Court said in Le Gierse, we must look through the forms of the substance of this transaction and this is all one.
Felix Frankfurter: But there, the substance was different because the -- the decedent held on. That's certainly a great difference, isn't it?
Myron C. Baum: It certainly is and I would say it was even greater, Your Honor, had not this Court said that no matter who held the policy the result would be the same and that is I think the effect of your language, not of yours, I'm sorry --
Felix Frankfurter: That was (Inaudible)
Myron C. Baum: -- the Court language in -- in Le Gierse. That --
Earl Warren: Looking through form to substance, wouldn't you say that the substance here is that she divested herself, all of her right and interest in this transaction, in this -- in this fund and at the time she died, she was possessed with none of it?
Myron C. Baum: No, Your Honor. I must respectfully disagree. I would say that the substance is that she put this money away, as if she had put it in a bank and said to the bank, "Pay me the income from this during my lifetime. Pay my beneficiaries the principal at my death." Now, I -- in fact in my brief I thought of another analogy which is an analogy where you create a trust with a life income to yourself and a remainder to your children, with the privilege in your children to discount the remainder in advance by withdrawing a lesser amount. If the children do not withdraw that amount but leave it there until death, then this is squarely a remainder with a life estate which is the classic situation, that this Section 811 (c) is designed to tax. I failed to see that there's any substantial difference here and that coming again to Your Honors prior question is that what this transaction -- and that was why I was talking about the difference in value that this shows that this decedent intended that this money stay there during her life and that the children would leave it there during her life.
Felix Frankfurter: But she put no string on it?
Myron C. Baum: She put no legal string on it. No, Your Honor, that is quite true. For the reasons which I have stated, I respectfully submit judgment should be affirmed.Thank you.
Earl Warren: Mr. McCracken.
Robert T. McCracken: May I just say one thing if, Your Honors, please.
Earl Warren: Yes.
Robert T. McCracken: I don't think I used quite all my time as to counsel's analogy of the single trust with reservation of income to the settler remainder to the children being this exact situation. I submit that it could not be the situation -- exact situation unless in the trustee's instrument the children were given the right to take out three quarters of the -- of the principal of the trust and what could have become of her income if that was so. The statute says that it's only taxable if she retains the income upon that part which is attempted to be included and she didn't retain any income on the part that is intended to be included in this case.