Earl Warren: Number 49, Local 24 of the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America, AFL-CIO, et al., Petitioners, versus Revel Oliver, et al.
David Previant: The Court please.
Earl Warren: Mr. Previant, is that the way -- you pronounce Previant.
David Previant: That's right Your Honor. Thank you. This is quite another antitrust case, equity case, in quite a different posture. It is here under the -- to the Ohio Supreme Court and the Court of Appeals of the Ninth Judicial District of Ohio, presents the question of whether a State has the jurisdiction to declare illegal under a State Antitrust Act, a provision of a collective bargaining agreement entered into between a union and employers who are engaged in interstate commerce. It is, in short, a preemption case. The petitioners are a local labor union and its officers who have their office in Ohio and whose membership is domicile and principally in Ohio. The respondent's transportation companies are common carriers. They are certificated, both by the State of Ohio and the Interstate Commerce Commission. They are downside in the State of Ohio and they make deliveries in many states outside of that State. And the court below, they were defendants. Here, they are respondents since they have taken any position which is the same as the position of the plaintiff in the court below, the respondent, Revel Oliver, who also is a resident of Ohio. He is a member of the petitioner union. He is engaged in the business of leasing trucking equipment to the respondent carrier. I say, he leases trucking equipment. He himself is not in the transportation business. He occasionally drives his own truck in the service of the carrier. The contract which is involved is a collective bargaining agreement between many unions, many carriers, many employer associations in the Midwest area. It is known as the “Central States Over-the-Road Motor Freight Agreement,” and it covers principally what is known as “Over-the-Road or Inter-City Trucking.” There are some 3500 employers who are parties to this agreement. They were at the time that the litigation started some 45,000 to 50,000 truck drivers who were covered by the terms of the agreement. In Ohio, there are some 500 employers who are parties to the agreement, some 6000 drivers at the start of this litigation who are also covered by the agreement. From 5 to 10% of those drivers own their own equipment and leased that equipment and drive it in the service of a certificated carrier.
Charles E. Whittaker: May I ask this, if the contract (Inaudible) collective bargaining agreement.
David Previant: That's right Your Honor.
Charles E. Whittaker: Now that maybe subsequently, was it not, (Inaudible) of Mr. Oliver's contract with the different carriers involved here under this (Inaudible)
David Previant: Well, they were a series of contracts. I believe the particular contract was negotiated after those leases. There were other similar contracts which were negotiated before the leases. There had been earlier litigation in this matter. This is the latest of that litigation. Mr. Oliver had prior to this instant litigation started, other litigation involving the predecessor contract.
Charles E. Whittaker: I thought it might be important to realize that this (Inaudible) that's the Oliver contract with the union (Inaudible) carriers involved (Inaudible) to which you refer?
David Previant: I -- I can't tell you that directly because I know that there were a series of contracts and we have never been able to enforce this particular contract with respect to the respondent Oliver or with respect to the respondent carrier because of ex parte restraining orders which had been entered against such enforcement which I think puts those leases, those individual contracts in a different situation than they would ordinarily be. The --
William J. Brennan, Jr.: But do I understand Mr. Previant that the -- what do you call it? Kind of a lease, not the actual lease.
David Previant: Well, there are leases.
William J. Brennan, Jr.: Lease?
David Previant: There are -- yes the --
William J. Brennan, Jr.: (Voice Overlap) underway for the use of his -- this equipment as to that.
David Previant: Well, the respondent Oliver owns, I think, six tractors and four trailers. He leases these equipments to carriers who are certificated and are permitted to engage in a transportation business.
William J. Brennan, Jr.: Not all of it for this particular carrier?
David Previant: In this particular case, yes. I think the two respondent carriers were under lease arrangements with the respondent Oliver. He is not necessarily limited. He can enter into that kind of a lease arrangement with any certificated carrier. He needs no certificate to do so.
William J. Brennan, Jr.: Well now, by whom the drivers of a leased equipment employed by this respondent certificated carriers of -- by Oliver?
David Previant: That's -- that's the depth of our argument, Your Honor. The drivers in this case were employed by Revel Oliver contrary to and in violation of the collective bargaining agreement which the carriers had entered into with the union. But the enforcement of which both the carriers and the union had been restrained from. That gave rise to this litigation.
William J. Brennan, Jr.: In other words, when they leased a piece of equipment, the tractors or something, the lessor was -- by the driver, his own employee.
David Previant: In this particular case, that's right. And as we shall show, that is not a common practice.
William J. Brennan, Jr.: And then you said, I think that on occasions or did you say more frequently, Oliver himself drove a piece of equipment?
David Previant: Very rare occasions. On very rare occasions according to this record, he would drive himself a piece of equipment in the service of one of these respondent carriers. The -- I think it is also pertinent to note because of the issues involved in this case that the identical contract provision is found also in a multiemployer, multistate contract, covering some 10 Southern States. It is also found in a multiemployer, multistate contract covering the New England States. It is also found in a multiemployer unit in New York and Pennsylvania, and Virginia. And I think the significance, of course, will demonstrate itself as the points that are involved -- are developed here. It is only one article of this particular contract which is involved. Incidentally the contract has been bodily placed into the record at page 144. The Court will note that it is approximately 100 pages long and at the particular contract provision with which we are here concerned is approximately 7 pages long. Now, the one article that is involved --
Charles E. Whittaker: Define (Inaudible)
David Previant: That is the collective bargaining contract. In order to avoid confusion of -- I will refer to a lease when I refer to the arrangement between the lessor and the carriers, and I'll refer to the contract when I'm referring to this collective bargaining contract or labor contract. The Article 32 which is here involved deals principally with this relationship between the employers and what is known in this industry as an owner-operator. It is sometimes referred to with the contract also as an owner-driver. In other industries, he may be called a vendor or peddler. He may be called a gypsy but it's essentially a man who owns his own piece of trucking equipment and drives it himself. And this Article 32, as I say, deals principally with that kind of employee. And in that regard, as I've said, the respondent Revel Oliver is not typical because he owns more than one piece of equipment and he himself drives infrequently. The owner-operator incidentally has no certificates and no licenses. He cannot engage in the transportation business as such. The only way he can use his vehicle in common carriage is by associating himself by lease with a certificated carrier.
Charles E. Whittaker: Or at least what they call (Inaudible)
David Previant: Yes. This Court has -- has had before a litigation involving the kinds of leases which the Interstate Commerce Commission thinks it ought to have.
Charles E. Whittaker: Actually, as I understand here, this record is (Inaudible) really an independent contract.
David Previant: Yes. That's right.
Charles E. Whittaker: He couldn't be both, wouldn't he? Unless it were a device (Inaudible) all to satisfy the (Inaudible)
David Previant: I think that's right. And that again is one of our problems here. Well anyway, in this particular instance, Revel Oliver brought this action to restrain the labor unions and the employers from enforcing this particular provision, Article 32 of the Labor Union Agreement. It was his complaint that this agreement restrained competition in the leasing of motor vehicle equipment to certificated carriers.
William J. Brennan, Jr.: And was that --
David Previant: And is -- excuse me.
William J. Brennan, Jr.: Was the complaint addressed as a whole of that seven pages or just --
David Previant: No. This complaint was addressed to all of Article 32 and it is all of Article 32 which the Court adjudicated.
William J. Brennan, Jr.: Now, may I ask one other question to you?
David Previant: Surely.
William J. Brennan, Jr.: I notice that this agreement is stated, that is quite collective bargaining agreement executed by the negotiating committee with the carriers. I think it's January 1955 that it became effective later upon gratification by the locals. But like following that at 145 was the Motor Trade Transportation Agreement between A. C. E. and Oliver and that fair state in December of 1954, is that right? Oh, 1953. December 28, 1953, it appears at 149. Now is that the law that we're concerned with at least as the A. C. E.?
David Previant: That is one of them. Now, you will notice that there's a whole series of them Your Honor. There's one following that, that is dated June 20th, 1955.
William J. Brennan, Jr.: Well that seems to be the one with interstate.
David Previant: Interstate.
William J. Brennan, Jr.: Yes.
David Previant: I think that you will find that there are others, well --
Charles E. Whittaker: (Inaudible) in the United States, the collective bargaining agreement?
David Previant: Yes, they do and the record shows that was a series of renewals or substitutions as equipment may have been change or transferred or purchased. That's right. The -- and part of the complaint was that this particular provision of the labor of contract was a price fixing device in violation of the Ohio Antitrust Act. That case was tried before a Court of original jurisdiction which found against the union over the Union's contention that it neither violated the Ohio Act and the principal contention that the lower courts had -- the Ohio Court had no jurisdiction in this matter because it was a matter which is covered solely by the National Labor Relations Act. And on appeal to the intermediate appellate court in Ohio, the determination of the trial court was affirmed and that Court made these findings and they're set forth in the record at pages 256 to 257 and summarized in our brief at page 23. Prior to that, Mr. Oliver was an independent contractor in his relationship to the certificated carrier, that this particular provision of the contract, Article 32, was not protected by Section 7 of the National Labor Relations Act. That Article 32 had violated the Ohio Antitrust Act. That Mr. Oliver would be damage and injured if it were enforced as against him. That he has no remedy under the National Labor Relations Act, that the state court has jurisdiction. And therefore a restraint was entered which restraints the -- both the carriers and the Union from interfering with any of Revel Oliver's leasing arrangements, from interfering with the rates which might be charged for the equipment which is leased and from enforcing Article 32, to fixed rates in any manner. Upon appeal to the Ohio Supreme Court, it was held that there was no debatable constitutional question we're here now. The general background of Article 32, I think, is familiar to this Court because of matters that had been before the Court involving the same kind of a provision. It has been in the -- in this uniform multistate, multiemployer agreement from the inception of multistate negotiations in 1938. It has been amended and modified from time to time to meet the changing of circumstances, but essentially, it was an effort on the part of the unions together with the employers sometimes willingly and sometimes reluctantly to meet and attempt to cure the various evils which were attended upon in owner-operator kind of an operation.
William J. Brennan, Jr.: Tell me Mr. Previant, does any of the state court determinations turn on the existence or not of an employment relationship between Oliver and the respondent?
David Previant: There was a determination in the lower court who thought it was immaterial to the case that Revel Oliver was an independent contractor. The appellate court indicated the same but it is not clear whether they were talking about him as an independent contractor in the leasing of vehicles plus drivers or whether he was -- they were talking of him as an independent contractor when he himself drove the vehicle in the service of one of these certificated carriers.
William J. Brennan, Jr.: Well, I'm thinking for the purposes of the advancement point under the National Labor Relations Act, are we going to -- do we have an issue here to determine whether or not any of Oliver, himself or his employees are employees for the purposes in that fact?
David Previant: I think the issue this Court has to determine is that if there's a debatable question that should have been determined by the National Labor Relations Board and not by the Ohio Court.
Charles E. Whittaker: Now, (Inaudible)
David Previant: The earlier cases in this Court involving the Milk Wagon Drivers and the Bakery Sales Drivers delineates fairly well, the kind of economic problem that has been created by the so-called owner-operator or vendor system. And this Court that far back said that the realities of industrial such strike require that the Court take cognizance of the problem of competition for wages that is created with the owner-operator method of distribution as distinguished from an employee-driver distribution. Similarly, when the American Trucking Association case was before this Court, this Court took judicial knowledge and accepted I should say the findings of the Interstate Commerce Commission and its regulation known as MC-43. That the owner-operator created a very serious safety problem in this industry and this Court affirmed the right of the Interstate Commerce Commission to meet that problem by promulgating regulations with respect to what shall be the contents of those leases and what shall be the method of compensation under those leases and what shall be the requirements for examination and inspection in interchange of equipment if those owner-operators or any person leasing vehicles were to lease them to a certificated carrier. Article 32 generally ensures the employee status of the owner-driver and I will break it down a little bit more in detail. But just to get a general picture, it assures the payment of union wages and the enjoyment of union conditions, the protection of seniority, it requires payment of social security upon these owner-drivers, workmen's compensation, unemployment compensation. They must get their health and welfare benefits, their pension benefits, their vacations, their seniority just as any other driver under the particular provision which is now before the Court. The inquiry of course, now it is whether or not the specific provisions of this article directed to this purposes come within the matrix of collective bargaining which is protected, fostered by the National Labor Relations Act or whether a state may say, “We have an Antitrust Act here, we find this thing to be in violation of Antitrust Act regardless of his repercussions with respect to collective bargaining in this multiemployer, multistate area, regardless of whether the National Labor Relations Board that come to the same conclusion that we have come to. Whether release rates provided for in this agreement there are reasonable relationship to the protection of wages, whether or not the subcontracting clause, there is a reasonable relationship to the purposes for which Labor Unions are formed that we can ignore the National Labor Relations Act. And we can assert the illegality of this particular contract clause because for suits that violates the Antitrust Act of the State of Ohio regardless of whether it maybe legal or illegal in any other state or under the National Labor Relations Act.” It is of course our position that it clearly falls within the area of wages, hours, and working conditions contemplated by the Congress, whether adopted by the National Labor Relations Act.
Charles E. Whittaker: What -- what -- you said (Inaudible) are involved.
David Previant: I refer to Article 32 and I should like to break down Article 32 and its essential provisions so that you may understand why we take the position we do that this is so closely related.
Charles E. Whittaker: May I (Inaudible)
David Previant: Surely.
Charles E. Whittaker: Do you confirm that there is no power in the union (Inaudible) to be contained in independent contracts for requirements of services and the leasing of equipments?
David Previant: Well, I think that if you will permit me to rephrase the question. The union does have a right to negotiate with respect to employees of that employer. If in that negation, it should say, there shall be no subcontracting, it has got to affect a transportation contract with someone else because he could not then subcontract.
Charles E. Whittaker: (Inaudible) with respect with all terms and conditions of employment?
David Previant: That's right.
Charles E. Whittaker: But you have no power, as I understand it, to negotiate in effecting the problem -- that he can say that it is in the contract.
David Previant: I think that -- that is the entire question if I may say you Mr. Justice Whittaker. Because if we are right in a particular provision that it does relate -- relate itself directly to wages, hours, and conditions of employment, any other agreement must have necessity yield although we are not trying to inject ourselves into an area in which we don't belong. And again I say this. Supposing we say that there shall be no subcontracting, there shall be no use of other equipment until all of the equipment of this particular employer is put in service which is a provision found in this contract. Now, that of necessity is going to restrict somebody else who wants to lease a piece of equipment to this carrier, from leasing it at anytime when there's unused equipment. We say in this contract that if equipment is leased we want that equipment to be driven by an employee of the carrier. Now this affects Revel Oliver because he wants to lease the equipment with a driver. Now he may do it to anybody he wants, he can enter into that lease. But if we have an agreement with a particular carrier and this is a legitimate labor agreement, it's legitimate, (Inaudible) clause. He is going to be inhibited from exercising a privilege of having a lease which has a different term. And we don't say we have the right to rewrite those leases. But we say if we have a right which the Act gives us and we insist it does have, to negotiate in the area of wages, hours and conditions of employment, we will on necessity from time to time infringe upon other relationships which our employer may have with other persons.
Charles E. Whittaker: (Inaudible) wages, hours and conditions (Inaudible) enforces upon any collateral independent contractors, you have a right to do that?
David Previant: I think we're getting into an area of balance at that particular point. In other words, we wouldn't say that in order to protect our wages, we're going to keep everybody from Baltimore from working in the District of Columbia. Now that may have a direct effect upon us and it might, under reasonable circumstances be a negotiable matter. But that -- but again it's a matter of balance if in doing that, other conflicting social or economic interest are involved, that I think the job is for the National Labor Relations Board. And ultimately I suppose this Court to determine whether or not we are confining ourselves to wages, hours and working conditions in a reasonable and in a contemplated matter or whether under the guise of that kind of negotiation, we have extended ourselves into areas in which we do not properly belong.
Charles E. Whittaker: (Inaudible)
David Previant: It has -- it has one further jurisdiction in that regard or perhaps two. There's a provision of the Act which makes it an unfair labor practice for -- in every Union to coerce an employer or an independent contractor into membership in the labor union. So, we'd have at least that. I think you would then --
Charles E. Whittaker: The first provision in the Act now --
David Previant: Relating to independent contractors.
Charles E. Whittaker: (Inaudible)
David Previant: Well, I think this raise -- it might, within jurisdiction of the board. It says to the union or it says to the independent contractor. Should any union try to force you in, this is an unfair labor practice and we'll adjudicate it.
Charles E. Whittaker: In other words they are independent contractors?
David Previant: Independent contractors and not employees for the purpose of the Act and they -- as they have defined in the Act. But there are many places in which activities of an independent contractor or matters relating to an independent contractor will come within the jurisdiction of the -- of the Act.
Charles E. Whittaker: In the Ohio Court, you were (Inaudible) Oliver under these contracts that antedated the collective bargaining agreement (Inaudible) contracting relationship (Inaudible)
David Previant: Yes, that's right.
Charles E. Whittaker: (Inaudible)
David Previant: Well, it's difficult for me frankly to say on what basis with it. We -- we don't quarrel about it, that Revel Oliver being an independent contractor and so far he is in the leasing business. But that's not incompatible with his being an employee when he drives a truck. And that's not incompatible with our saying, we don't care if he leases the equipment but when you do, we want our employees to be driving that equipment and not strangers from the outside because we want to preserve our work for the people who are right here at this plant, working for this carrier. In other words, if we've got 10 people who are employed by this particular carrier, we wouldn't want that carrier to hire 10 pieces of equipment driven by persons who are stranger to the carrier with our people who are employed. Now that's a matter for negotiation. We have negotiated that kind of a provision. Now insofar as the negotiation of that kind of a provision may do some damage to Mr. Oliver, then we plead guilty. But we say this is a matter which we have a right to do and we can't conceive of any economic negotiation that it was not going to in some ways embarrass or injure in some way some similar or competing economic interest. That is what collective bargaining is.
Hugo L. Black: Is that the kind of controversy that we held with the labor dispute within the Norris-LaGuardia Act?
David Previant: Precisely so.
Hugo L. Black: (Voice Overlap) union against the Meadowbrook Carrier.
David Previant: Meadowbrook Carrier, precisely so. You also held so in the (Inaudible) cases involving the bakeries. You also held so in the -- I think it was another bakery case.
William J. Brennan, Jr.: Do I understand that on the pleadings, actually this bargaining, the collective bargaining agreement (Inaudible) negotiated on behalf of the fact that the actual employees (Inaudible) under the unit --
David Previant: No.
William J. Brennan, Jr.: -- of which you were bargaining. And that you were insisting upon this provision to protect the wages, hours and other conditions that you would obtained for those who are in the unit for which you bargained, namely, the members of the employees of the certificated carriers. Is that it?
David Previant: That is precisely our position, Mr. Justice Brennan.
William J. Brennan, Jr.: And you insist that that was the kind of issue that would get into controversy which is properly for this position by National Labor Relations Board under the statute.
David Previant: That -- that is our position and that has been our position throughout this litigation. Section 4 which we have been talking about at least obliquely and perhaps directly of Article 32, deals with this problem of who shall drive leased equipment. Now that -- that Section provides that all leased equipment shall be operated by an employee of the carrier. And it also provides, the language which the National Labor Relations Board in this Court has used. That the carrier reserves the right to control the manner, means and details often by which the owner-operator performs the services as well as the ends to be accomplished. In other words, we wanted to make perfectly sure that this man on a piece of leased equipment, usually the fellow who owns just that single piece of equipment. When he enters the service of a carrier with whom we have a contract will become an employee of that carrier. Will be subject to and get the benefits of the labor agreement which we have negotiated with that character -- with that carrier. And so we wrote the right of control test into that particular section so that there could be no doubt that we were talking and not what we wanted and what we negotiated was the fact that only employees of the carrier would be driving leased equipment. Section 5, incidentally has the other requirement of which I have already spoken that the carrier must use his own available equipment before he goes to the outside and use the equipment.
William J. Brennan, Jr.: (Inaudible)
David Previant: There is a union shop provision, I believe it's Article 2, Mr. Justice Brennan.
William J. Brennan, Jr.: (Inaudible)
David Previant: It -- well, it so happens that Revel Oliver has been a member of the union for a number of years. But it would apply to him if under the language of the contract and under the Taft-Hartley Act, if he drove in the service of the carrier for 30 days or more, he would then --
William J. Brennan, Jr.: (Inaudible)
David Previant: Yes.
William J. Brennan, Jr.: (Inaudible)
David Previant: Yes, it does. And -- and only however in his situation as a driver of equipment and apparently we were unsuccessful in selling this concept to the Ohio Courts. They kept on looking at Mr. Oliver as a lessor of equipment. The -- in our opinion ignored the aspect of his relationship in which he's a driver, driving like everybody else on the highway subject to all of the terms and conditions. And who -- if we have no right to negotiate his wages and conditions could very well destroy the very wages and conditions we have negotiated for every driver who sits on the same truck and drives on the same highway and is subject to the same environmental problems of stresses and strains, and economic stresses and strains as any other driver.
William J. Brennan, Jr.: (Inaudible)
David Previant: They would become -- yes, because they would become employees of the carrier. They are not his employees.
William J. Brennan, Jr.: Yes. But they're not by reason of the agreement, in the collective bargaining agreement (Inaudible)
David Previant: No.
William J. Brennan, Jr.: By reason of this.
David Previant: By reason of our agreement with the carrier that anybody who drives equipment in his service shall be his employee and shall receive the full benefit of the union contract. Now, as I say this is a subcontracting clause and we have cited in our brief the Board's decisions on the right of the union to negotiate subcontracting clauses, the Court decisions, the arbitration, decisions, I don't think at this date, there can be any argument about it. Nevertheless, the Ohio Court in voiding Article 32 in toto also voided Article 4 and said that we could not negotiate the employee status of drivers of leased equipment who are operating in the service of an employer with whom we have a contract. Now the other provisions of this contract and instead of going into detail, we have them analyzed in the brief. Eliminate a lot of common evils which had grown up in connection with this and we have the record on it. We have the -- one of the chief employer negotiators who testified section by section as to the origin of the Article. How it came about. Why the union wanted it? What was the specific condition which they were seeking to meet? All of that is set forth in our brief and I won't burden the Court with it. I want to get to Section 12 which is the key provision and which we feel the Ohio Courts were so obsessed with that they lost complete cite of the general picture and perhaps this is our fault and not the Ohio Court's fault, perhaps we didn't present it properly. But Section 12 of this agreement -- of Article 32 sets forth minimum lease rates for a certain described and defined types of equipment. I want to emphasize that this has no application to any equipment which is not driven by the owner. When Revel Oliver leases six pieces of equipment to a carrier, he can lease it for any rate he wants. The only way this contract infringes upon that is we say that the driver of that equipment must be an employee and receive the benefits of this contract. But he is free to negotiate any kind of a lease rate he wants for the use of his equipment. But when he drives his own equipment, this minimum lease rate applies just as it applies to the more typical owner-operator who owns only one piece of equipment and comes to the service of the carrier who has a contract with us and starts to drive that piece of equipment in the service of that carrier. And I -- and I think the reason is so simple perhaps that's why we -- we haven't persuaded the Ohio Courts. And let me give you -- we have the exact example in the brief with the exact rates which are set forth in the brief. But in the interest of simplicity, let me give you a simple example. In this kind of operation generally, the rate of pay is per mile. Over the road long distance drivers and they get paid per mile as to the total number of miles which they may have driven during the course rule. Now let's assume that this particular driver's rate is 10 cents a mile. Now he has leased his equipment to the carrier, and understand this again, it is only when he is driving his own equipment that this particular Article 5 Section applies. Now, he has leased his equipment to the carrier, too and he has leased this equipment to the carrier for 5 cents per mile. Now he's getting a total of 15 cents a mile for every mile he is driving in the service of carrier. But lo and behold after several weeks he finds out that it is costing him 8 cents a mile to operate his equipment. In other words, he is taking a beating in his equipment pocket for 3 cents a mile. Where does it come from? Now, the 10 cents a mile driver's rate is no longer a 10 cents a mile driver's rate. It's a 7 cents a mile driver's rate. Because he has had to take that 3 cents subtracted from his driver's rate and put into his equipment pocket so that he comes out on the equipment. This kind of a thing is what this contract was designed to prevent and only that.
Speaker: (Inaudible) there was no power (Inaudible) of a truck.
David Previant: That's right.
Speaker: Therefore those (Inaudible) for other trucks not driven by Oliver did violate the Ohio law.
David Previant: Yes, you're right Your Honor but they didn't decide that. We -- we would not have complained if they had said that because we haven't tried to fix the rates on the other trucks. We haven't tried to fix the rates on any truck belonging to Revel Oliver except the truck which he himself drives.
Speaker: (Inaudible)
David Previant: I -- I doubt that that is sufficient but I say it is not because again, if we are right in our basic premise, that what we have done here is negotiated wages, hours, and working conditions, the fact that one person maybe an employee only occasionally would not mean that we were wrong in principle or that the National Labor Relations Board has lost its jurisdiction because he's only a sometime employee as compared to a full-time employee. And that's all that -- that's happened here and he was a sometime employee. But he was no different than any other employee who might drive occasionally. We want to make sure that he does not undercut the contractual provision whether he's an owner-operator or whether he's a driver himself. If we're right in our basic theory and believe we are that we've got a right to protect these wages and that what we have done here is not negotiated a profit for anybody. But have merely established a minimum lease rate to assure the payment of wages and incidentally owner-operators can go out and negotiate anything about the minimum they pleased. There is no inhibition on that. The record shows that this minimum lease rate is set so low that as a matter of practical effect, most carriers are paying more than the minimum lease rate. And the one carrier who testified is one of the largest carriers in the country. He said that he could not operate his equipment for what we establish as a minimum lease rate in order to protect wages. In other words, we may not actually be giving those drivers all of the protection that we try to give them. We may have set a lower rate than is required by the circumstances. But in setting that rate and the record shows this, intensive studies were made of the various factors which entered into determining how much it does cost to operate trucks of various sizes over their normal life span. The carriers did most of the work I believe and the union did some on their own. We -- we have to find out the cost of the equipment and depreciate it. The gas, the oil, the tires, the maintenance, everything that enters into the cost of operation of the piece of equipment was considered when we set the minimum lease rate and we tried to fix it right there.
Charles E. Whittaker: (Inaudible)
David Previant: Well, he's not an independent contractor Mr. Justice Whittaker because under our contract he becomes an employee.
Felix Frankfurter: (Inaudible) by a subsequent contract, dealing with his employment would abdicate that he is an independent contractor.
David Previant: I think the answer is that we were in the very unfortunate position of not being able to enforce the contract that made him an employee so the Court said that he's an independent contractor. But the very courts that said we can't make him an employee, the courts have found he was an independent contractor. In other words, and it's in the record, but for the restraining orders that had been entered in this case, the carriers, and they so testified, would have complied fully with the provisions of our contract. Have they complied fully with the provisions of our contract? It would have been no doubt that Revel Oliver when he drove his own truck was an employee and we had established a minimum lease rate only for that piece of equipment. And again, I beg to emphasize just as strenuously as I can, we have no interest in any other piece of equipment which Revel Oliver may own or lease to anybody except the piece he drives and then we are interested in the rates. The only other interest we have is that when he leases that equipment to somebody else, that equipment be driven by an employee of that one and that Mr. Revel Oliver, not the brokery, human services, as well as equipment. That's our interest.
Hugo L. Black: Your -- your argument is based on the act of preemption, is all you are arguing.
David Previant: We -- we have another argument here on -- I see preemption but it's preemption of one form or the other, that's right.
Hugo L. Black: Preemption, what do you claim as preempted? What could the board do?
David Previant: Well, first let me say that I don't believe that whether the board could do something or not is necessarily pertinent because as I read the decisions of this Court, it makes no difference whether there's a remedy.
Hugo L. Black: Suppose he did something. Suppose --
David Previant: Well, there are many things -- there are many things --
Hugo L. Black: As a whole that this contract is a kind that's not protected by the Act, what would be the result then? Should it do that?
David Previant: I think -- I think the board can do that.
Hugo L. Black: And suppose it did?
David Previant: If -- if the Board did that, we would have to find some other way in which we could afford protection through this particular kind of thing.
Hugo L. Black: Then what you are saying is as I understand it, the sum total of what you're saying and the consequence of what you're saying would be that the board has the right to pass on this rather than the State of Ohio --
David Previant: That's right.
Hugo L. Black: -- in the first inference, at least.
David Previant: That's right Mr. Justice Black. And if the board disagrees with that, then we're subject to the Antitrust Act in Ohio and every place else. If the board disagrees with us that, number one, we've got a right to get the subcontracting clause. Number two, that these minimum lease rates, if the board disagrees, says that these minimum lease rates do not in its opinion, have a reasonable and direct relationship to this entire matrix of collective bargaining which has been confided to them by the Congress then we're through with this kind of provision in any State unless the State has more than an Antitrust Act.
William O. Douglas: How about the Interstate Commerce Act?
David Previant: Unless we have the other preemption trial in which we have raised here and we think that there's great merit because of the fact that we do have this detailed regulation of leases at least up to this point made by the Interstate Commerce Commission and MC-43.
William O. Douglas: But getting back to the (Inaudible) do I gather, what you're telling us is, your primary interest on these lease rates (Inaudible) You don't care how much Oliver to get for the lease (Inaudible) of the equipment --
David Previant: Excuse me.
William O. Douglas: -- operated by other drivers because all of the other drivers had to be paid the regular employee rate that the (Inaudible) contract driver, is that right?
David Previant: That's our sole interest.
William J. Brennan, Jr.: But in the case of Oliver (Inaudible) he gets no rights than any driver (Inaudible) There's a threat to the wage structure --
David Previant: That's right. Because if you multiply Revel Oliver by many hundreds or thousands in this area then we have of course lost the protection of the contract because each one of those fellows driving his own equipment, taking a beating on the equipment then, has got to take a beating on the wage end and he's undercutting our wages and he does that. We're not getting the benefits of our agreement. Now, to show that there is some reasonable relationship to what we're doing into collective bargaining, we only point out that the Board has said that items like stock ownership options are vulnerable. The cost of meals in company-owned cafeteria, the rent paid for company-owned homes, group insurance, pension, all of these things while they are not stated in terms of 8 cents an hour or 8 cents a week have a direct relationship to the wage structure at a particular place, and we say that this too has that direct relationship. And this Court has said in this seniority case involving the Ford Motor Company that the union has a wide discretion in dealing with both exceptional and typical employment conditions. And this is one of the unusual employment conditions which -- at least it's an -- it's unusual in industry generally. It's peculiar to the trucking industry. It's a matter which as I've said, the unions have been negotiating on and had tried to protect the employees and the owner-operators on for some 20 years already under this contract.
William J. Brennan, Jr.: (Inaudible)
David Previant: Well -- and I -- I would not want to have my answer considered in agreement that a charge is necessary because there -- there are many areas --
William J. Brennan, Jr.: What you're arguing is --
David Previant: Yes.
William J. Brennan, Jr.: -- that is properly exclusive to the jurisdiction of the Board.
David Previant: Well, yes.
William J. Brennan, Jr.: (Inaudible)
David Previant: I think that's true but we also argued that whether or not there's a remedy is not important because just like picketing and striking is within the jurisdiction of the board. But where the board or this Court has had --
William J. Brennan, Jr.: Protected activity.
David Previant: Yes. And they're not to be -- need not be remedied. But -- and we have set this forth I believe more extensively in our reply brief, Revel Oliver could have complained that when we went up on a strike in 1955, we were trying to compel him, an independent contractor to join a union under the provision of the statute which I referred to. He could have filed a petition for an election trying to establish a unit of his own trucks and the people who drove his own trucks. The employers might have filed a charge of unfair labor practice saying that this was not a bargain of the matter to begin with. We went on strike among other things to get this. Now, the employers at that point might have -- might have gone to the board and said, “Wait a minute, these fellows are striking to get us to violate the Ohio Antitrust Act. We want to file an unfair labor practice charged against them.” This is not bargaining matter that's why they're not bargaining collectively in good faith. They could have done that. There were and are remedies available that that becomes important. We don't believe it is. I think what is important is what was the intent? Is there a reasonable relationship to that intent and have we gone about our business in such a manner although we may have violated a state law. That state law should not be part of us, a right which the Federal Act gives to us.
Charles E. Whittaker: What significance would that (Inaudible)
David Previant: I think initially it has some significance that he might had been bound by the contract that was made. It was never seriously urged and -- but I don't believe it has -- has any significance except that it may very well be so that in other relationships in past years under this contract, he did become an employee and became a member of the union. The -- I suppose the thing that I or I should keep on emphasizing because again I -- I'm afraid that we didn't do it hard enough, is that we don't care what Revel Oliver gets for his equipment. If he is an owner-operator like every other owner-operator, he is driving his own piece of equipment. We want to be sure he gets the wages. And we believe we have a right to say that when he leases his equipment to somebody under contract with us and he doesn't have to but when he does, then the people who drive those trucks shall be employees of the carrier and come under this contract. And at that point, of course we don't care what the -- what Revel Oliver is getting for the piece of equipment they drive. Again, we're interested principally in the man who owns and drives his own single piece of equipment and that's all that this contract is about. And we don't know if it's immaterial, whether the state property in terms of this Antitrust Act. It's immaterial whether the State was right or wrong under its law, as to whether or not this man is an independent contract. The inquiry didn't have a jurisdiction to make those determinations and come to that result without impinging upon rights which we have under the Federal Act or which the Federal Government has said shall be adjudicated solely in the federal process.
Hugo L. Black: Is anything unique in the holding, if there should be a holding that in the labor appeal that a man specified as an independent contractor by state law is an employee under this Act?
David Previant: Oh no. It happens in all fields and especially in the labor dispute. I mean it's cited in our brief. Cases in which the National Labor Relations Board has said, “This man can be a lessor when he leases his equipment but he can also be an employee when he drives it.” And --
Hugo L. Black: I'm not talking merely about drivers but is there anything unique in holding in other types of activity?
David Previant: I don't believe so --
Hugo L. Black: I think we have some cases on that a number of times.
David Previant: Well, I'm sure. This Court has -- has always said that what maybe an employee under the Internal Revenue Act may not be an employee under the Wagner Act or vice-versa. I think this Court has always looked upon the -- that question in the context of the particular law which is before of the Court and what was the purpose and the intent of the Congress when that law was drafted? Who did they intend to encompass within the reach of that law? And it can depend also upon the different facts but surely it should not depend upon the different adjudications in 48 different states which is what we would get into if we say here Ohio is going to make the adjudication under its Antitrust Act. And then per chance New York at a later date and per chance Kansas at a later date and per chance Mississippi at a later date.And we think --
Hugo L. Black: If it be true that -- there has to be a review of a -- of the decision as to whether or not a man is an employee or an independent contractor, should we decide that before the board act upon it?
David Previant: Well, this Court has in some cases made the ultimate determination and in some cases it has said it is not for this Court to make a determination but for the Labor Board. It would seem to me that in these kinds of cases where you -- you do have a lot of room for expertise because the question of what is directly related to negotiable matters, it would be well for the board to make the initial determination rather than for this Court to do so. But I would not presume to say to this Court that it has to be one way or the other because I believe this Court in preemption cases has in some instances made the determination without the matter as going to the National Labor Relations Board. That this was a protected activity or this was in a preempted field and therefore the States had no jurisdiction. In other instances, this Court has said, “Well, we don't know what the board will do when it gets to it. When the particular matter gets to the board but we do know that the State can't do anything about it. That it is a matter for board adjudication." They say what the -- what the Court feels might be appropriate and in this case -- well, it doesn't matter what the Court feels because just reading the Court's decisions, you -- you would then adjust to that in -- in different types of situations. In the short work stoppages, you -- you said no, you called a halt right there. In the strike situations, in the public utility situations, you said no right there. In some of the secondary boycott situations, you said, “Well, we don't know what the board will do but surely the State has no right to do anything about it. We will let the board make the final decision in these kinds of matters.”
William J. Brennan, Jr.: Bringing out that, how far would it cover? Are you suggesting (Inaudible) will subcontract to -- any subcontracts in Ohio or unless the employee or that firm should pay (Inaudible)
David Previant: Well, I don't think we've done this Mr. Justice Brennan. I think that the automobile workers like any other union can go to their employer and say, “We've got a machine shop. We've got confident help. Don't you find this workout? We want it here.” I think they've got a right to do it. They do it particularly, I think you'll find it in most major contracts in the country. We haven't tried to set a price for anybody. We could -- I believe that we had wanted to. I believe that we might have forced a nationwide strike and said that we'd do it in under any circumstances on any carrier under contract with us to ever use an owner-operator. I think that is a legitimate marketing demand. It always has been. Now, we affected the compromise.
Earl Warren: We'll recess now, Mr. --


Earl Warren: United States, Petitioner, versus John Catto Jr. et al. Mr. Gregory you may continue with your argument.
Claiborne B. Gregory: Thank you sir. Mr. Chief Justice in behalf of the respondents I would first I would like to ask permission of the Court to file an answer to the reply brief of the petitioner in as much as we received it only a matter of hours before this hearing began.
Earl Warren: Well, is it necessary to file that response to the reply brief, that isn't normally done?
Claiborne B. Gregory: We would like to Your Honor but -- the reason we'd like to is we feel there was a change of position which I --
Earl Warren: Well, if there's a change of position you may send us a memorandum but I suggest you get it to us within the next two days --
Claiborne B. Gregory: Two days.
Earl Warren: You can -- you can type or have it typewritten (Voice Overlap) --
Claiborne B. Gregory: Thank you sir. In the three minutes I have left, I would like to make two brief points prompted by a question asked yesterday by Mr. Justice Fortas. First point, in 1952 the Secretary of the Treasury stated that the way the Commissioner was administering Regulation 162-12 by requiring an accrual method farmer to capitalize the cost of raising his breeding animals and permitting a cash method farmer to expense the same item “discriminated heavily” against the accrual method farmer. The petitioner is now as in this Court to sanction and approve that discrimination. And to strike from the books a 45-year old regulation which states categorically that raising costs of breeding animals constitutes an expense and therefore cannot be capitalized. My second point, the petitioner argues that by electing the accrual method of accounting, a farmer binds himself to capitalize the cost of raising his breeding animals. This is simply not true. It is fundamental in tax law and tax accounting that a person does not by adopting the accrual method of accounting or any other method elect or agree to capitalize any item of his ordinary and necessary business expenses such as the cost of raising his breeding animals. It is only when he decides to put his breeders into inventory that the mechanics of the inventory method of accounting picks up these expenses and capitalizes them. It is true that the farmers in the Wardlaw case did elect to put their breeders in inventory. But they did so years ago, some as far back as 1913 long before such inclusion had any significance tax wise. And when it did become significant tax wise, the Commissioner ruled under Regulation 471 that they could not take their breeders out. When the Lewis case came along it overruled the Commissioner. The respondents in the Wardlaw case promptly filed a claim for refund. I thank the Court.
Earl Warren: Mr. Hawn.
Gordon G. Hawn: Mr. Chief Justice, may it please the Court. This case involves a question of discrimination and that is the Commissioner's discrimination against these accrual basis ranch payers who use the unit-livestock-price method to value their inventory. Now, the problem in this case and a great danger is that we get so involved in these Treasury Regulations, the statutes, these Treasury decisions that we will lose sight on the fundamental issue. Now, that issue, what is it? We submit the issue is, can the Commissioner by Regulation deny these taxpayers the full benefits of a statute which was intended as a relief measure applicable alike to all taxpayers? Now, the statute clearly says that livestock -- breeding livestock are properly used in trade or business. The statute also says that it if it's property used in trade or business, it's not properly includable in the inventory. The Regulation however, 1.471-6 (f) requires the taxpayers to include this livestock in the inventory. Now the question is, does the Regulation contravene the statute? Now historically, the Commissioner's continually attempted to defeat --
Potter Stewart: Well, not only it requires you to include it but to take it out again, doesn't it?
Gordon G. Hawn: Yes sir, when you --
Potter Stewart: Which is different from any other inventory items?
Gordon G. Hawn: Yes sir. To my knowledge it is. Historically the Commissioner has attempted to deny the benefits of the statute to the livestock industry. The statute was originally passed in 1942. It authorized capital gains on property used in trade or business. Now livestock weren't specifically mentioned.But since they had all the characteristics of property used in the trade or business, when the farmer or rancher began to sell them, they claim capital gains. Now the first case, the Albright case was decided in March of 1949. In that case, the Commissioner attempts to deny it to the cash-basis taxpayer. The Court of Appeals for the Eighth Circuit rejected that. Then, the tax court followed within the Fawn Lake case where the Commissioner attempted to deny it to the accrual-basis taxpayer. Finally, in the Bennett case decided in June of 1951, the Commissioner in that case was ordering that all livestock are held primarily for sale, they never can qualify for capital gain treatment. The Fifth Circuit rejected the Commissioner's argument. Thereafter, the Commissioner issued a Mimeograph 6660, and he said he would follow Albright and Bennett. But for the first time he says that he is going to deny the benefits of the section to young animals. Well, at this point Congress had to intervene, they amended the statute, they said it specifically to define, to draft dairy and breeding livestock regardless of age. Yet in -- subsequently, in 1954, we find the Commissioner in the McDonald case trying to impose new standards of age and reproductivity on young animals and this was rejected by the Second Circuit. Now, as counsel for the respondent in the Wardlaw case as pointed out, the Commissioner has continually shifted his position in this case and in all of this historical development. According to the Government's theory now the Regulation had apparently changed from the time it was -- that the case was in the Court of Appeals until when it reached the Supreme Court. And the Court of Appeals -- the Regulation required the inclusion of all these raise breeding animals in the inventory. But in brief, in oral argument before this Court, the Government says, “No. All that's required is the taxpayer has to accumulate the cost of raising animals.” This is the Government's ultimate position. I submit that it must fail. As Mr. Gregory has pointed out, then Regulation 471-6 (f) conflicts with Regulation 162-12 which was promulgated back in the early 20's. And through this document statutory enactment has achieved the force of law. Now, I submit though that the Regulation thus require the inclusions of breeding animals in the inventory. In the first place, the Government stipulated in this case in the trial court that the taxpayers were required to include these animals in the inventory in accordance with this Treasury Regulation. Now if the taxpayers were required to do this they didn't do it voluntarily. Also, every Court of Appeals that has considered the question, Lewis, Ekberg, Catto and Wardlaw has concluded that the Regulation makes this requirement. Now, to really understand the problem involved it's necessary to consider fundamentals of federal income taxation of ranchers. Now, we must distinguish I think between fundamentals of income taxation and general principles of accounting, that these are not the same. For example, taxpayer in the oil and gas business is permitted by election to expense or capitalize intangible drilling cost. Clearly, from an accounting standpoint these are capital expenditures. They are costs of acquiring an asset. But for income tax purposes, the taxpayer had his election, can treat them as an expense. Now, suppose the Commissioner would now pass a Regulation and say that accrual-basis oil and gas operators are required to include all wells in the inventory, in other words the Section 1231 asset, property used in the trade or business in the inventory. Now, I don't believe this Court would have any difficulty reaching their conclusion that that Regulation is invalid.
Abe Fortas: Is there a special statute covering the oil well example?
Gordon G. Hawn: A statute and a regulation. The statute -- it's granted generally in the regulations (Inaudible).
Abe Fortas: Is it your contention that there is a statute of comparable clarity and specificity that applies here.
Gordon G. Hawn: Well, 1231 we contend grants us capital gain.
Abe Fortas: Yes, but it doesn't relate to whether you can expense the item amount, does it?
Gordon G. Hawn: No sir, that -- that's not involved in connection with that but the Regulation 1.162-12 says that all farmers -- it doesn't say that cash basis can or an accrual basis can. It says all farmers can deduct the cost of raising their animals. Now briefly, let us consider the cash-basis taxpayer and the accrual-basis taxpayer insofar as the ranchers. Now cash-basis taxpayer, he reports his income as he receives it and he deducts his expenses as he pays them. Now he is permitted to deduct the cost of raising his livestock. And he is not required to maintain any inventory. He is not required to include in his ordinary income the value of his livestock. And when he sells his 1231 assets, breeding livestock, he gets capital gains on the entire sales price.
Byron R. White: Of course you find that the provision in the statute says that -- and not only that cattle or capital assets but that they had no basis?
Gordon G. Hawn: Well, they do (Voice Overlap) --
Byron R. White: Because all of the cost of raising them are to be written off. I don't find anything like that in the code itself, do you?
Gordon G. Hawn: Well, that's not specifically but I believe that follows --
Byron R. White: From that --
Gordon G. Hawn: -- from Section 162-12 where you're permitted to deduct the expense. If you deduct the expense you would have a zero basis.
Byron R. White: But the argument really is whether or not is simply -- this is simply whether or not the cost of raising a calf turning into a cow is a -- is an expense instead of a capital item, that's all that's involved, isn't it?
Gordon G. Hawn: Well, that is the Government's position and I believe the respondents --
Byron R. White: Well, what else was involved in your view?
Gordon G. Hawn: Well, my view is --
Byron R. White: That's what the argument is about whether you've got any --
Gordon G. Hawn: That the statute says that this is not property includible in an inventory and the Regulation requires you to include it in the inventory.
Byron R. White: Well, of course you -- you wouldn't -- if the Commissioner excluded it from the inventory, at least the same result in some other -- that he could reach the same result in some other way.
Gordon G. Hawn: I wouldn't (Voice Overlap) --
Byron R. White: Isn't that saying that it's not (Voice Overlap) --
Gordon G. Hawn: -- you are not to give --
Byron R. White: It's not in the expense item.
Gordon G. Hawn: Well, if you're going to give effect to Section 162-12, he would be permitted to deduct the expenses.
Byron R. White: But it seems to me what is in -- included in the inventory or not is sort of beside the point, the real question is if you say whether the Commissioner can properly deny as an expense, the cost that this man has incurred in raising his calves. That's the question here, isn't it?
Gordon G. Hawn: Not as we look at it Your Honor. We still --
Byron R. White: Well, what is the question then?
Gordon G. Hawn: The question -- as far as we're concerned is the statute says this property is not includable on the inventory. And the Regulation requires us to include it in the inventory.
Byron R. White: Well, what if he said that they get --
Gordon G. Hawn: And that's the --
Byron R. White: What if he said the Regulation was invalid? And it is -- that this property is not includable in the inventory --
Gordon G. Hawn: Then we're --
Byron R. White: -- because it's a 1231 asset?
Gordon G. Hawn: Well, then --
Byron R. White: Well, it would still come to the question of what to do -- whether it has any basis or whether all these items are expendable.
Gordon G. Hawn: Well, if it was removed from the inventory it would have a zero basis.
Byron R. White: Well, it would be that if -- it would unless the -- unless the Commissioner decided that that other -- that those cost were not deductible as expenses.
Gordon G. Hawn: Well, that -- I don't see how it can do that at this point.
Byron R. White: Well, how about trucks? It's the example we used the other day, what about the trucks?
Gordon G. Hawn: You're entitled to deduct the cost of operating them.
Byron R. White: Oh, you mean -- exactly, in the -- but your -- but you certainly have to include as capital item, your cost of building the trucks if you built them.
Gordon G. Hawn: Well, that -- well, it goes back to -- we're dealing with the statute here which is similar.
Byron R. White: Including your labor -- daily labor cost, (Voice Overlap) --
Gordon G. Hawn: It's similar to these (Voice Overlap) --
Byron R. White: -- construction of the trucks. It's similar to the --
Byron R. White: -- of the trucks.
Gordon G. Hawn: -- situation where the statute and the Regulations who granted the oil and gas operator their -- the right to expense these things. Now, from accounting standpoint that's not proper. But from an income tax standpoint, it is proper, I --
Byron R. White: I understand that. I understand your argument but the question still remains whether this -- whether the costs of feeding calves are to the expense -- is to be expensed.
Gordon G. Hawn: Well, under the Regulation which has been in existence for 45 years, it doesn't say that the cash can and the accrual can't. It says all livestock raisers can. Now, the Government -- insofar as the accrual-basis taxpayers are concerned, he reports his income as it's earned and deducts the expenses as they are incurred. And we submit -- it's our argument, our position that he can deduct these expenses under this Regulation. He is required to include -- maintain an inventory and he's required to include in his inventory, the value of his livestock which produces ordinary income. The Government argues that this doesn't increase the taxpayers' ordinary income and my answer to that is -- is at page 4 of the record, paragraph 7, the stipulation. And it clearly says there as a result of including these animals an inventory, it increased taxpayer's ordinary income. A part of 1942 there was no difference between cattle held primarily for sale and cattle held for draft, breeding or dairy purposes. And all the gains which were realized from the sale of these animals was treated as ordinary income. But as a result to the enactment of 117 (j) in 1942 all that was changed. And at the outset, the benefits of this action were either limited or denied in full to the livestock industry. And even after the Albright case and the Bennett decision since 1949 to 1951 was necessary for Congress to amend Section 117 (j) making it specifically applicable to the livestock industry. Now in the meantime, the Commissioner in 1944 had issued this unit-livestock-price method Regulation. And through this process he commenced -- discriminated against the accrual-basis taxpayers by requiring them to include their raised breeding animals in the inventory. And while the Regulation permitting both the cash and the accrual-basis taxpayers to deduct the cost of expenses, permit -- continued to remain in effect, this device of compelling the raised breeding animals in the inventory thus became the tool by which that the Commissioner attempted to deny the benefits of the Section to these taxpayers. And the discriminatory effect of the Regulation was first brought to the attention of the Courts in the Lewis case. And the Court of Appeals for the Fifth Circuit there held that the Regulation was invalid. The Court there concluded that under the 1951 amendment to Section 117 (j) the taxpayers were not required to include the raised breeding animals in the inventory. And that's the Treasury Regulation which compelled the taxpayer to include breeding animals in the inventory contravened the statute and was therefore invalid. Undaunted, the Commission had succeeded in the Ekberg case and in drafting onto the Lewis case the doctrine of knowledgeable choice. Now under the theory of the Ekberg case, if the taxpayer elect to the accrual basis after the issuance of this I.T. in 1945, he was bound by the advantages and disadvantages under the accrual method. The Government here seeks to employ the Ekberg doctrine I believe against the respondents Catto. The difficulty for the Government however is that a knowledgeable choice presupposes a full knowledge of all material facts. Now the Catto's had the choice -- their choice to elect the cash or accrual method of accounting and select the method of evaluating the inventory. When they commenced their ranching operations in 1938, that time a rancher could not get capital gains on breeding livestock under any circumstances. Thus, the consequences, the options available were not known. Therefore, the taxpayer should not be charged with accepting a disadvantage which was non-existent at the time.
Abe Fortas: Well, do the Catto's now seek to change to a cash method?
Gordon G. Hawn: At this time, Your Honor?
Abe Fortas: Yes.
Gordon G. Hawn: Well, up until recently -- we learned yesterday --
Abe Fortas: No, I mean to say that --
Gordon G. Hawn: If they were permitted to, they would. But the (Voice Overlap) --
Abe Fortas: As I understood it -- as I understood it at least with respect to the Wardlaw case, it's my understanding that the taxpayer did not seek to change to a cash method totally. But the taxpayer wanted to be treated with respect to breeding cattle as if it were on the cash basis for that purpose.
Gordon G. Hawn: Right.
Abe Fortas: Now, (Voice Overlap) --
Gordon G. Hawn: Well, here we have not sought --
Abe Fortas: Now, what about your claim?
Gordon G. Hawn: No sir. Here we have not sought to change to the cash basis for the reason that the Government says that if we're going to change to the cash basis, we -- the Commissioner's consent is required. And during these years involved in the litigation, it was stipulated the Commissioner wouldn't even consider a request. So --
Abe Fortas: Yes.
Gordon G. Hawn: -- from a practical matter we were in this box and we couldn't get out.
Abe Fortas: I understand that and that it bothers me. But I also want to ask you whether Catto seeks to change -- would like to change to a cash basis overall for its entire operations?
Gordon G. Hawn: If he was permitted the choice, he would.
Abe Fortas: But you've never asked for permission to change?
Gordon G. Hawn: No sir, we have never submitted an application because it would have been a useless thing because they wouldn't even -- to have considered it for a period of approximately 10 or 15 years. As a practical matter, the law did not become clear until the law -- until the statute was codified and (Inaudible) -- and cast in unequivocable terms in 1951. Now, even though at that time Albright had been decided in 1949 the Commissioner did not accept this as the law as he continued to litigate the matter. As late as 1951 in the Bennett case, he was still contending that all livestock were held primarily for sale as a matter of law. And that no rancher was entitled to capital gains on any of the proceeds of the sale. Now, the Government in its reply brief and in the oral argument raised the point that a taxpayer can't revoke an election merely because there's been a change in the law. And they cite this Court's decision in Wilshire Oil Company. Now I submit that that case is distinguishable on several grounds. One, the statute there was not a relief statute. It was merely a statute dealing with the computation of depletion. Two, after the statute was passed in that case the Commissioner by regulation afforded taxpayers a new option, six months period in which to make a new election. In that case, the taxpayer did not exercise that option. We in this case have never been afforded an option to make any such election. But the Government argues here that the doctrine of statutory reenactment applies. They go on to say that Congress was aware of the situation, discrimination between the cash and accrual-basis taxpayer. And in any event the -- that they were prevented from changing the regulation because the Secretary of Treasury wrote a letter to the Senate Finance Committee chairman. Since the code was reenacted, the provision was reenacted in the 1954 Code verbatim that it's been frozen in the law. My first answer to that in which I -- I'm somewhat embarrassed to admit, is not included in the brief because I just quite overlooked it until this weekend, is the letter itself. The letter is dated June 27, 1952 and it says and I quote, “My Dear Senator, the Commissioner of Internal Revenue has called to my attention the tax situation which deserves serious legislative consideration. The problem is of such importance that I feel it should promptly be brought to the attention of congressional committees concerned with taxation.” In 1952, in June of 1952, the Secretary of Treasury first learned about the problem and at that time he said he thought it ought to be brought to the Committee's attention. There are several other reasons the doctrine doesn't apply. One is that there's not a line from any congressional hearing, any committee report, or any floor debate, to show that Congress was ever aware of the situation much less that it intended to improve it. Finally, the Government argues that the removal of these animals from the inventory constitutes the change of accounting method. And since that the Commissioner's position was not obtained, the removal was illegal, and our cause of action must fail. Our reply here is again two-fold. In the first place, no change of accounting method is involved. The animals were erroneously included in the inventory in compliance with the invalid regulation and in violation of the statute. Therefore, the taxpayers are simply corrected and they're caused by an invalid regulation and in complying with the expressed terms of the statute. Hence, no change of accounting method is involved and the taxpayers were not required to obtain the Commissioner's consent. But even if we assume that it -- the change of accounting method is involved, the Commissioner's consent would not be required here. As I pointed out, it was stipulated in this case that the Commissioner would have refused to consider and as a consequence to act upon an application during the years in question and this is precisely the same situation which existed during the years involved in the Lewis case. Now, conceding the statute gives the Commission the power to pass on application for change of accounting method, and conceded also that the Commission is vested with the discretion to refuse these applications, we submit however that the Commission is not vested with the power or authority to arbitrarily refuse to even consider application. In our brief, there are several opinions by this Court that stand. We submit that the proposition that a public official vested with discretionary power must exercise that discretion and may not arbitrarily determine the issues without even considering the merits. I'm specifically referring to United States v. Shaughnessy, a decision by Justice Clark in Yellin versus United States was -- the decision was by Chief Justice Warren.
Abe Fortas: Is there any precedent or what I take it is your position that you'd -- don't have to apply with the Commissioner if there's a reason what -- aside to -- suppose that the application would be denied?
Gordon G. Hawn: Well, we think under this general proposition of law that it is.
Abe Fortas: What proposition of law?
Gordon G. Hawn: That a taxpayer is not required to do a useless thing. If the Commissioner is refusing to even consider this thing, there is no reason --
Abe Fortas: You don't have (Voice Overlap) --
Gordon G. Hawn: -- for him to have it apply.
Abe Fortas: You don't have any specific authority?
Gordon G. Hawn: No, other than the Lewis case itself. Now this point has been raised in the -- it was raised in the Lewis case and it was not answered by the Government. And this point was raised in the District Court in this case and it wasn't answered by the Government. It was raised in the Court of Appeals. It's been raised here in our brief, and if we still haven't received an answer by the Government -- why? We submit that there's no answer other than the Commissioner has abused his discretion. Thank you sir.