Earl Warren: Number 257, Gordon P. Haynes and Essie M. Haynes, Petitioners versus United States of America. Mr. Hudson.
John H. Hudson: Mr. Chief Justice, associate justices, may it please the Court. It is my hope in presentation the case for the petitioners that we will give the Court a rest from some of these abstruse and profound principles. This case comes to this on a report by which of the fact that a man by the name of Gordon P. Haynes during the year 1949 was an employee of the Southern Bell Telephone Company under what is called here a plan case. I'm sorry Your Honor, I'm really not able to carry on but it's a proposition where one has to so I do the best I can. This plan is incorporated in the record. It has a schedule of payments to its employees fixed on the length of service. Mr. Haynes suffered an accident prior to the time he become ill with what is known as causalgia or balloon nerve. During this 1949, he did not perform any service for the Southern Bell Telephone Company. He was home sick so the record in the evidence show. Did not so much as go to the office because of his disability. When the time came for passing upon the question of whether or not the $2100 which he earned that year or which came to him by virtue of the fact that he was home sick, was taxable as income -- gross income or was exempt under Section 22, the fact the Telephone Company itself was not certain about it so they went ahead and turned $318.44 to the tax Commissioner. Then the case of Epmeier came along and the question rolled as to whether or not this entire fund was what is called under this exemption or under the law, income law whether or not it was income or whether or not it was upon receive because of illness, sickness or was benefit upon received from this plan as such that it was not proceeds from capital on the part of Haynes, that it was not earnings on the part of Haynes and therefore the entire $2100 was exempt from taxation. And the question before the court is at this time whether or not this is income, gross income and is taxable or whether or not it is fund received from sickness and disability benefits and therefore is exempt. Now we think and may it please the Court, that we are dealing here with the exemption not so much of the tax statute as funds which are exempt under the 22 (b) (5) that are not taxable. Our contention is that this cannot be what is known as income from labor because under the plan and Haynes had served under this plan more than the 25-year period and was entitled to what is known under the plan as full compensation or full payment. Now, the Government takes this view of this entire proposition that the payments which went to Mr. Haynes while he was sick and totally disabled was simply a continuation of salary plan and that it was taxable.
William O. Douglas: What was it? The amount of the salary?
John H. Hudson: The amount of the salary, the total he earned in 1949, may it please the Court was $2100. Now that, may it please Your Honor was the sum which he would have received if he had been on the job the full 52 weeks of 1949. That is one point which the Government contends that this is income and it is taxable. It is not sick and disability benefits which are exempt under the statute involved. We think among some other contention that it must the intent and purpose of this plan, it really in substance is insurance, although it is not marked or labeled insurance and the Government points out that that is one of the weaknesses of our contention then it is not issued by a commercial insurance company. No objection that the government has to our contention is that this plan and this -- what we call for petitioners, sick benefit do not require and the company does not require that its employees pay a cash premium for this protection. Now we don't think that that really makes any difference. The services which he rendered to the Telephone Company as an employee for more than 25 years, we think is ample payment of what we may term premium. Now there are several -- there are several other marks of similarities and marks of dissimilarity in -- on both sides of this question. If I could bring myself to conceive of a person who does not qualify either under receiving something from capitals such as interest or grants on an investment or not receiving something for the labor that he performed. If I could bring myself to the conclusion that nevertheless that sort of income is taxable then I wouldn't be here before this honorable Court but I just cannot conceive of that. We get income from two sources mainly. One of them is from capital investing. The other one is from our labor. Haynes had neither. This came to him straight because he was protected or because he came under this plan and because he was sick and could not perform any service. Now on capital -- look at this pamphlet which is the heart of our record, you will find that there are graduated scales. One reason or one point made by the Government and I'm trying to be as brief as I can and -- but I do want to be clear. I don't know that I shall be that at all but I want to be. Since Haynes had neither capital nor labor and since this benefit fund came to him by reason of the fact of the length of his employment with the Telephone Company and by reason of the provisions of the plan of the Telephone Company which has given to each employee as the employee starts to work for the Telephone Company. And the employee has to do two years work for the Telephone Company without the provisions or any benefit at all, sickness or disability or accident before he begins to receive any benefit from the plan. Now we say in our contention is that this is obliged to be insurance because we don't pay people for being sick. We can't afford to pay people for being sick. It is their sickness and not their services that brings this benefit to the employee. If we could say as it's sometimes contended that well the Telephone Company then has a plan which makes sickness and accident profitable, then we should reverse our philosophy with reference to those -- to disadvantages and arrange some way to have as many accidents and as much sickness as possible in order to profit by that, but that's inconsistent. That's an inconsistency. That is not the way human affairs ran and that is not the way business is ran.
Speaker: If this man has been absent for work for a week, he can sick leave wouldn't he?
John H. Hudson: Not under this plan.
Speaker: No? You get it under the ordinary operations of the company? What I want you to get -- will you draw a distinction between in relation to sick leave and the payments he gets during the period and the relationship between the period he gets to an extended period.
John H. Hudson: There are no sickness benefits paid to employees under the plan for the first week he is absent from his job.
Speaker: He just continues to draw his pay?
John H. Hudson: No. He draws nothing under the plan the first week because of his illness. He doesn't get anything.
Speaker: And there is no sick leave.
John H. Hudson: The original sick leave, he gets nothing the first seven days that is described in the plan. Another point of distinction if I may proceed is that the Southern Bell Telephone Company is not licensed in the State of Georgia to rate sickness and disability insurance. It is in the record that the Southern Bell Telephone Company in the State of Georgia under the Workmen's Compensation Act is a self-insurer. Now we do not contend and we think that we are not compelled to contend the logical argument that that of itself weren't authorized the Southern Bell Telephone Company to write or issue, sickness and accident benefit insurance. We do contend that this plan has been in effect, it's in the record since 1913. There have been instances since the inauguration of this plan in 1913 where in many instances, the benefits received by employees of the Telephone Company have been held to be exempt. I have one of those instances here a moment ago. Back in 1918, may it please the Court, this question came up before the tax commissioner. The Supreme Court under the date of May the 20th, 1918 and in other cases where in reference has made to case of Stratton's Independence against Howbert, 231 U.S.399 to page 415. It was stated that income maybe define as gain derived from capital, from labor, or from both. It is therefore held that the amounts received by an employee or his personal representative from a benefit fund which represents payment on account of death, sickness or injury of an employee is not income within the meaning of the Act.
Speaker: I suppose the basic question is the sentence in which Congress used the term health insurance whether commercial health insurance or whether a plan like yours it has all the features of an insurance program.
John H. Hudson: Form of the very grave issues, Mr. Justice Harlan, in this case is what Congress intended. Frankly --
Speaker: That's the issue, isn't it?
John H. Hudson: I beg your pardon?
Speaker: That's the issue.
John H. Hudson: It is. Whether the Congress intended that this type of benefit is taxable or not taxable.
Speaker: But is the legislative history show on it, is there any?
John H. Hudson: It is so voluminous Mr. Justice as I simply haven't a time nor the physical strength --
Speaker: I see.
John H. Hudson: We've got set out and partially set out in our brief.
Speaker: I got it in the brief --
John H. Hudson: Now, may it please Your Honor, the Government starts back with the history of this particular matter as taxation or taxation viewpoint and a taxation question and it comes on down and the Government has certainly prepared and we appreciate a brilliant brief on this – will you pardon me if I say a little question? On up to 1954, the amendment which Congress enacted specifically in exempting this type of benefit. Now the Government takes this view and we appreciate that the only thing that Congress did in 1954 when they put on the amendment which specifically exempted compensation or benefits received under the plan or benefits received in the nature of sickness and accident benefits. The Government takes a view of it that that is not to be interpreted as broadening the exemption, that this to be taken, that is to be viewed in a limited sense and simply applies to the exemption and is to be construed in a restricted sense. Now the Government begins with the history of this taxation and comes all up to that particular point and it didn't appear brilliant and a very skillful manner we think. Now we start right, if it please the Court, and we go back down to the same trail that the Government comes up. It is our opinion and it is our contention in this case that what they did, what Congress did in 1954 was illustrated of the intent of Congress at the time they made that amendment, that all the time, these questions were coming up from 1913, 1918, 1924 and questions arose that the tax commissioner was referenced to some claims, was in doubt that's in the case of American Telephone and Telegraph Company, December 24, 1918 when they rule that this kind of compensation or this kind of income was not taxable. And then we drew along a little bit further in the history of this taxation when the tax commissioners in various places held that it was gross income and that it was taxable. Now taking the 1954 amendment which was put through by Congress as indicating or a circumstance which may indicate an Act which -- from which we might infer that all the time, all these years from 1913 to 1954, it was the intention of Congress to exempt funds received from this type of benefit. In other words, this particular kind of insurance. Now that is exactly we know, contract to the contention of the Government. Now here, we have a -- we have live, we have a vital issue not affecting compensation received under this plan or any other employer-employee plan but affecting a large number of claims now pending in the various Circuit Courts of this country under this plan and similar plans as to their earnings up to and during 1939. Now we say very frankly, candidly that if this honorable Court takes our view of it, makes a ruling in favor of the taxpayer, it follows on necessity that the Government will lose some revenue. But we also take this viewpoint, it's our contention that this nontaxable income is correct, then the withholding of these funds -- pardon me please -- from these taxpayers in the various Circuit Courts did not give the Government a title to these funds or this particular fund as they're sticking straight to this case. And in as much as it did not, in as much as the Government as we contend collected it illegally, it never had the title to it. It was not entitled under the law if our contention is correct, to receive these funds or hold these funds. Therefore, in the estimate, advised by the Government and we got no right to dispute it. It isn't -- we've got no way of disputing it successfully even if it is a mere estimate that approximately $6 million are involved. We say that our position is direct if we are right, then all of the funds that are being held now by the tax commission since 1949 and even prior of that time up to the statute of limitation. It is holding -- it is withholding those funds from the taxpayers illegally, therefore an order requiring the commissioner to make these various refunds in whatever amount is perfectly all right because the Government is not really losing anything that it was entitled to. Now there is another side of course to this argument. While some $6 million in funds probably more, probably less are involved in actual dollars and cents. There is a large number of employees of the various companies through the years have founded beneficial to inaugurate or establish a plan although no cash premiums are required in order to receive the benefits under the plan. Thank you. I meant to divide my --
Earl Warren: You -- you have five minutes more.
John H. Hudson: Thank you. I intended to divide my argument but it is very difficult to put logical, concise argument within the 30 minutes period. I'm just a country boy and I'm rather slow. What about the large number of employees who may I say have a vested interest in these benefits? They have done the work. They have earned it. They have satisfied the employees. They are entitled to the benefits under this plan. Now to cut them off and say that this is taxable income when they started out under the idea that it is nontaxable income, we say that is a very widespread injury that is going to and necessary result to a lot of people that involves probably is going to fall on employees who are least able to withstand that motion. Gentlemen, may I thank you for the time and the privilege to appear -- appearing before this Court and presenting a few scattered ideas on a very important question.
Earl Warren: Mr. Zarky.
Hilbert P. Zarky: Mr. Chief Justice, may it please the Court. I think it's quite clear from Mr. Hudson's remark what this Court has a narrow little question of statutory construction. These are the statute in question which was governing during the years here in controversy. Here are some of the appendix to our brief beginning at the bottom of page 40 up to page 41 that being code Section 22 (b) (5). It creates an exemption from tax -- I'll skip the opening part of the sentence which has no relation to our problem here. It exempts amounts received through accident or health insurance or under Workmen's Compensation Act, compensation for personal injuries or sickness. Those are the amounts which are exempt from tax. At the beginning of the page appears old Section 22 (a) with which this Court has had much familiarity where Congress has defined in the broadest terms possible, its concepts of what is taxable income. And of course included in Section 22 (a) is compensation for personal services. So the definitional section includes compensation for personal services and the exclusion section exempts amounts received for sickness under health insurance. And so the question here really is this, where an employer either voluntarily or pursuant to a plan as it's true in this case, undertakes to tell its employees that we will continue to pay you in whole or in part some part of your salary during some periods that you maybe ill. Is that compensation for personal services as the Government contends? Or is that amounts received for illness under health insurance which Congress has exempted under Section 22 --
Felix Frankfurter: What's the first alternative you're proposing?
Hilbert P. Zarky: That this is compensation for personal services.
Speaker: Mr. Zarky, do you remember I asked Mr. Hudson what the difference was between what I call during the first seven days that a man might be out in his payment, and here applies that there would be no payment during the first seven days. No brief has a statement because I like to have explained. It says although employees with conflict offenses continue to receive their regular salary during the first seven days of illness, a benefit not provided by the plan. These payments which are maybe recognizable taxable sick leave payments are indistinguishable under the plan.
Hilbert P. Zarky: Your Honor, we'll turn to page 89 of the record. You have defendant's exhibit number one which starts at page 88. As I recall, this is part of the, one of the annual statements of Southern Bell Telephone Company. And toward the bottom of page 89, there is paragraph dealing with sickness and accidents and it says at the second line, a total of $1,700,000 is paid as sickness disability benefits under the plan and $1,090,000 for sickness pay during the first seven days of absence was charged a departmental expense. You'll immediately see that the amounts paid during his first seven days are not substantially less than the amount paid under the plan. The only difference as I understand it is, that under the plan which the company of course had the right to change it anytime. But under the plan, precisely what you would receive was set forth while during the first seven days, it was discretionary for the company to pay or not to pay. But I would guess from these figures that the company exercises discretion mostly to pay and that's the only difference that I can see between what was paid during the first seven days and what would be paid after, inclusion of the first week of illness and yet the contention here of that is that what's paid under the first seven days is not exempt and what's paid after the first seven days is exempt. In our view, both payments as I shall develop I hope is compensation for services rendered or to be rendered by the employee and it's nothing more or less than that.
Felix Frankfurter: Mr. Zarky, Haynes -- what was Haynes -- was employed by the Southern Bell Telephone in what evidence he was a subordinate capacity judging from his salary, what was he actually doing?
Hilbert P. Zarky: I don't think the record shows.
Felix Frankfurter: There must have been one of -- I don't know what, lineman or something like that. Well now, he is actually wasn't rendering during his years of illness personal services and the only fair way of saying he was considered compensation for personal services is to treat him the way clients treat a lawyer who is on the retainers so that whenever they want, they can qualify, is that it?
Hilbert P. Zarky: No. I think it goes deep in that Justice Frankfurter.
Felix Frankfurter: He certainly didn't render any services except that he rendered in the past when they were looking forward to his service in the future, but this money was not compensation for service in any colloquial sense of the English language was it?
Hilbert P. Zarky: I think it is. I may develop that Justice Frankfurter.
Felix Frankfurter: But would you say that a fellow who is sick a whole year and didn't -- couldn't lift to figure for getting compensation for services if you're talking, forgetting all about your duty here, would you talk that way?
Hilbert P. Zarky: Absent is showing that this was a gratuity or benevolence, then I say that's all it could be. That's all an employer can pay his employees, is compensation for services rendered in the past and had a reward or an inducement for future services and a plan like this --
Felix Frankfurter: Well but he -- there might be -- there might be this alternative. Why not you say either compensation or an ordinary insurance policy? It certainly to say this is compensation for service is taking some liberty with the English language, isn't it?
Hilbert P. Zarky: I think not in my own (Voice Overlap) --
Felix Frankfurter: I'm not saying it isn't with tax language. I'm saying with the English.
Hilbert P. Zarky: No, I think in economic language.
Felix Frankfurter: In economic? You talk economics when you're not engaged in practicing law?
Hilbert P. Zarky: Well, let me develop my point if I may Justice Frankfurter. I think that our economy as long as the time when we think of compensation as being paid pro rata, per hour of services rendered. The whole American economy has developed a system whereby private industry is really implementing what the Government had try to do to Social Security programs, of leveling out salaries, of keeping labor turnover down to a minimum and the Southern Bell Telephone plan here is one of the ways on which it has done. For example, set this is not the only benefit pay. Payments are made on debt. Payments are made on debt depending on length service. Payments are made for accidental injury, not attributable to employment or covered by Workmen's Compensation, the Christmas bonus, it's not on this plan, is a well known measure of compensation in American industry. In recent years, stock option plans, pension funds, profit sharing, a whole (Inaudible) of methods of compensation which cannot be related to precise hours of work has taken its place in the picture of compensation in the American economy. A pension which is played on retirement is not a gratuity, it's not a benevolence, the employee is paying -- employer is paying that because he hopes that by offering this inducement, his employee will stay in employment for a long period of time.
Felix Frankfurter: That's like a Christmas bonus, that's a compounding of an extra which is calculated at the end of what he has done and all that --
Hilbert P. Zarky: The design to induce him to stay in employment and not to go to somebody else.
Felix Frankfurter: I understand that but you really -- you make heavy demands on one full creature. I have much more sympathy with Mr. Hudson's testing this is a small case, but you want me to decide this in the light of the American economy, is that it?
Hilbert P. Zarky: Well, no. I want Your Honor to see that you can't equate compensation with hours of service and pay for each hour of service.
Felix Frankfurter: I wouldn't be doing it if I didn't have the exemption in file.
Hilbert P. Zarky: Yes. I want to get the exact -- I want us first to get the -- across my idea that this is compensation which is not at all, does not all leaving (Inaudible) prior from my opinion.
Felix Frankfurter: But if you're going to stretch the compensation part, I will scratch -- stretch the insurance part.
Hilbert P. Zarky: Well, I'll get to that when -- as to what Congress had in mind but I would first like to show why this must be compensation because a corporation doesn't give its money away. It's in place that the employees for what they perform in a way of services. It could not -- it could not make gratuity.
Felix Frankfurter: Neither does an insurance company if it's a money --
Hilbert P. Zarky: Except an insurance company gets paid. And why I say that the employer here is paying, he's paying for services rendered in the past or induced to be rendered in the future. For example a plan here is one where for the first two years of employment, nothing has paid during the time you're ill and as your length in service increases, the amount of benefits you receive are increased.
Felix Frankfurter: That's during the insurance policy. They're sometimes a nonpaying period.
Hilbert P. Zarky: Not with -- not with -- with accident --
Felix Frankfurter: There are some insurance though.
Hilbert P. Zarky: Yes.
Felix Frankfurter: Hospital insurance is a period of non-benefit.
Hilbert P. Zarky: But it would not increase --
Felix Frankfurter: Or Workmen's Compensation Act as a period of non-benefits?
Hilbert P. Zarky: But here was -- what we're dealing with is the employer and the employee and the fact that the period of employment when increasing, increases the benefits received by the employee is only suggesting that compensation is intended.
Hugo L. Black: Increases, what did you say?
Hilbert P. Zarky: I said the benefit which the employee received.
Hugo L. Black: Why did you use the word benefit?
Hilbert P. Zarky: Payments received. I'm not trying to prejudge the case by a poor choice of language.
Hugo L. Black: Well, that's a pretty good choice isn't it? That's what you have in all the insurance policy, sick benefits isn't it?
Hilbert P. Zarky: That would be called benefits. That would be called --
Hugo L. Black: That's what they always call in private insurance companies, isn't it?
Hilbert P. Zarky: Or insurance proceeds?
Hugo L. Black: But what do they call it here? Sickness disability benefit?
Hilbert P. Zarky: I believe that's the word used.
Hugo L. Black: Did they use payment anywhere in the plan?
Hilbert P. Zarky: Well I think that (Inaudible) that do I found words of payment --
Hugo L. Black: Precisely.
Hilbert P. Zarky: -- payments to be made here.
Hugo L. Black: I've looked at it and I can see very little difference in the kind of contract they made here.
Hilbert P. Zarky: I -- I think --
Hugo L. Black: -- contract for sick benefits?
Hilbert P. Zarky: I think the Court would realize that the case can't turn on a small bits or nuisance of language used in the plan. What I like to get to is the question of congressional intent, but my preliminary point Justice Frankfurter is I don't think I'm misusing English language in saying that what flows to employer to be employee is normally compensatory for services rendered.
Felix Frankfurter: I'm not suggesting that if you had no exemption and you had to construe that, you wouldn't be saying, you use it with utmost breadth, but I'd be aware of the fact that I'm doing something like that and I wouldn't be building a great big vast (Inaudible) the American economy and then say therefore, the American economy requires that we satisfy as ordinary human beings without going into congressional intent. The first second and third manifestation of intent for me is the language of the statute.
Hilbert P. Zarky: Yes. Well I have -- I haven't reached Section 22 (b). I was merely saying that this is included in the broad concept of 22 (a) and now we passed the question, "Does 22 (b) (5) taken out of interest by granting an exclusion.
Felix Frankfurter: It would be just as broad when you come to that?
Hilbert P. Zarky: Sir?
Felix Frankfurter: Be just as broad take into account all these impractical appealing factors that you did on the compensation.
Hilbert P. Zarky: If Congress so intended, of course and it has done so in the 1954 code where it made its intention clear that payments made by employers during absence from work are exempt, but Congress put in a very limited exception in 1954, only $100 a week no matter what the salary of the employee is and nothing during the first week of illness, so that well under the taxpayer's argument --
Felix Frankfurter: What period of illness?
Hilbert P. Zarky: The first week of his period of illness.
Felix Frankfurter: Well I know, but that -- that shows that they want to take care of the great body of workmen -- of employees, $100 a week means $5000 a year which takes care of a lot of these.
Hilbert P. Zarky: Yes. The only difference is that on the taxpayer's destruction of 1939 Code, the president of the company, doing a salary of $75,000 and ill for a year would have $75,000 exempt. Well Congress when it spoke on the matter after study included that only a $100 a week should be exempt. So that when we get to what Congress intended, it speaks -- it seems to be with clarity in 1954 and we think it's a piece of clarity before 1954 in the opposite direction. The origin of the statute itself indicates to us that Congress was thinking in terms of ordinary commercial policies of insurance. There is nothing in the statute in its origin which would indicate that Congress was speaking in terms of an employer's plan to continue paying compensation, wages or it might during the period when an employee was absent from work.
Felix Frankfurter: How about trade union, you're in an insurance schemes.
Hilbert P. Zarky: If there were --
Felix Frankfurter: When you said commercial, would they be excluded? A number of the powerful unions have their own insurance system.
Hilbert P. Zarky: Yes, yes. There's a fund set up to which the employee has made contributions together with the employer and if it was not related to length of service, it has been considered to be insurance within 22 (b) (5), but --
Speaker: These are not a funded plan, is it not?
Hilbert P. Zarky: This is not a funded plan.
Speaker: Where does the money come from that they pay out these general?
Hilbert P. Zarky: General expenses, discharged by the company the general expense. And as a matter of fact, when Congress put the 1954 Code provisions into effect, the legislative history indicated its understanding that under the 1939 Code, the language you here have to construe only a funded plan met the narrow exclusion which Congress intended to create when it put in this exemption.
Felix Frankfurter: Who -- who made that interpretation?
Hilbert P. Zarky: Sir?
Felix Frankfurter: Who did that? That must be a funded plan?
Hilbert P. Zarky: That's the report of the committee of the House.
Felix Frankfurter: I don't see why don't you turn on that if a great big enterprise says we don't have to have a separate fund. We ensure you that we'll sort of make a rough calculation. Is that -- your calculations have often turned out to be very loose and undependable?
Hilbert P. Zarky: Well, I won't argue the wisdom of whether it should or shouldn't be. I'm merely stating that was congressional understanding of what --
Felix Frankfurter: They say that?
Hilbert P. Zarky: That's what the committee report indicates when it states --
Speaker: Where is that?
Hilbert P. Zarky: We quote excerpts from it and on page 23 of our brief beginning with the paragraph that's numbered 1 there.
Hugo L. Black: Which year was that?
Hilbert P. Zarky: This was in 1954 when a new code was adopted and when this $100 a week exclusion was specifically put in so that today this kind of problem would not arise. It would be clear that only up to $100 a week could be excluded and that anything over that amount would be taxable.
Felix Frankfurter: Did you say 23 Mr. Zarky?
Hilbert P. Zarky: Yes. Page 23 of the Government's brief.
William J. Brennan, Jr.: You say 23 Mr. Zarky?
Hilbert P. Zarky: Yes, of the -- of the Government's brief.
William J. Brennan, Jr.: And what particularly were you just --
Hilbert P. Zarky: The excerpts there from the committee report on the 1954 Code --
William J. Brennan, Jr.: You suggest that this an exemption for the first time for plans of this kind?
Hilbert P. Zarky: Yes sir.
William J. Brennan, Jr.: Not really -- not merely limits to $100, the amount deductible under such plan?
Hilbert P. Zarky: Well it dealt with the whole question of insurance comprehensibly and so far as the statute relates to the kind of problem presented by this case where the employer makes payments, not to any insurance company. Then what the employee receive is up to $100 a week but only after $100 a week is exempt while the contention being made by the taxpayer here is under the 1939 Code, everything was exempt no matter what the amount and our dealing of the legislative history of 1954 Code probably show that Congress was not cutting down an exemption that it thought existed on the 1939 Code. Congress thought it was creating something which wasn't in existence under the 1939 Code.
William J. Brennan, Jr.: Is this all you rely on for that proposition?
Hilbert P. Zarky: Yes. The general tenor, what's said and what's not said and we have a succinct illusion here of a several pages of comment by the committee, but what we have here we think is still the thought that you get from the entire report that Congress was changing a law and changing it in this limited respect. The fact that Congress had a definite notion of what is insurance and what is not insurance, we think is also evident by another amendments that took place in related areas between 1918 and 1954. For example, from the very beginning, amounts received as life insurance had been exempt for income tax. Now then the question would arise paralleling this case where under a plan of the employer and its part of the plan to which this employer had certain lump sum payments are made to a widow or other beneficiaries when an employee dies, is that insurance? Now it seems to me that if the taxpayer's argument here that payments during illness is insurance, by wide token and payments on death or to be regarded as life insurance. And yet, it was not until 1951 that Congress put in a special exemption where amounts paid by an employer to an employees beneficiaries on death and then put in a limited exemption, limited amount so that from this I would draw some conclusions. The first that when Congress spoke about insurance, it had a very definite concept in mind and it didn't think that in payments made by an employer to an employee or to an employee's beneficiary were insurance. Secondly, that when Congress with the social objective in mind has created this kind of an exemption is done limited in amount. In other words, I think lurking in there is the feeling that companies cannot create large reserves for their favorite officers and get a tax exemption that was never intended to encompass that. In other words, if the president of the company is sick, Congress didn't intend that his entire salary during illness should be exempt and the president of the company will receive several hundred thousand dollars on his death from the company. Congress didn't intend that that should be exempted as life insurance.
Hugo L. Black: Is there any indication that that was the belief of Congress in the 1944 Act when they limited the amount of 1956?
Hilbert P. Zarky: 1954 Act? I think that is evident from that what's done in all -- the whole area fringe benefits.
Hugo L. Black: Is there anything said about that in the report?
Hilbert P. Zarky: Not precisely, Your Honor but if you --
Hugo L. Black: Any hearing?
Hilbert P. Zarky: There were some hearings, yes.
Hugo L. Black: Was there anything said about that desire to keep the president?
Hilbert P. Zarky: I don't think so.
Hugo L. Black: (Inaudible) can do that now.
Hilbert P. Zarky: I don't think so particularly Justice Black.
Hugo L. Black: Is there anything said in any of the trial reports with reference to this bill, this exemption?
Hilbert P. Zarky: This -- this particular exemption? I think not but if you --
Hugo L. Black: When was its first day?
Hilbert P. Zarky: In 1918.
Hugo L. Black: Was there any reason given by the committee why he wanted to exempt?
Hilbert P. Zarky: Insurance?
Hugo L. Black: A disability, sickness of that form?
Hilbert P. Zarky: Yes. But actually the statute had a very limited and interesting history because --
Hugo L. Black: What -- what reason did they give for wanting to pay?
Hilbert P. Zarky: The Treasury -- may I take just a moment because I can't answer two succinctly. The Treasury had originally ruled before the 1918 statute that amounts received under acts of insurance was taxable income. Then the question reached Attorney General Gregory and taking some decisions of this Court like Lynch against Hornby I believe, Southern Pacific against Lowe, classic decisions of where the Court use broad pronouncement of what is income. He distilled from that the idea not only that acts and insurance couldn't be income but because the human body was regarded by Attorney General Gregory as capital which was not being replaced, he thought this couldn't constitutionally be taxed as income. It was a notion which under prevalent concepts of income which scarcely withstand analysis, but anyway, it was within that background that the 1918 enactment was made and Congress specifically said in the committee report that it was doubtful under the present law whether amounts received to acts and/or health insurance or under Workmen's Compensation, et cetera are required to be included in gross income. In other words, they thought there was a constitutional inability --
Hugo L. Black: Was there any indication and I presume you've read those reports hearing? Were there any indication and that some of them thought that it is just bad policy to tax people or income received on account of sick benefits? Is the record wholly absent of such a purpose on the (Inaudible)
Hilbert P. Zarky: No. I think there is no committee report indicate no more than an attempt to have (Voice Overlap) --
Hugo L. Black: Do -- do any of the others indicate that just -- they want to do it because they think it's a pretty good policy to give an exemption to people?
Hilbert P. Zarky: The 1954 Code shows it's a good idea to give an exemption in a limited amount.
Hugo L. Black: To what? What shows that?
Hilbert P. Zarky: The 1954 Code, the 1954 --
Hugo L. Black: Up to that time, has there been anything attributed to simply decide -- simply desire that the man get an exemption because --