UNITED STATES оf America, Appellant, v. Gordon P. HAYNES and Essie M. Haynes, Appellees.
No. 15655.
United States Court of Appeals Fifth Circuit.
April 20, 1956.
233 F.2d 413
John H. Hudson, William Ralph Hudson, Atlanta, Ga., Thomas E. Berry, Houston, Tex., for appellees.
Before BORAH, TUTTLE and BROWN, Circuit Judges.
TUTTLE, Circuit Judge.
Taxes are a creature of statute. It is thus the duty of thе Court to look to the statute and if the incidence which makes the tax applicable exists, then the tax follows perforce; but if it does not exist, then it is not within the province of the Commissioner of Internal Revenue, by regulations, or the Courts, by judicial legislation, to bring something within the ambit of a tax that Congress has not placed there. This rule must, of course, work both ways. In devising a scheme of taxation Congress may well discern an area of limited dimensions in which it considers that special relief is indicated. It may then determine that carving out a special exemption will not cut so deeply into anticipated revenues as to cause the favoring of the limited class to bear too heavily on the great bulk of the taxpayers. Congress must then be able to enact a statutory exemption for such limited area with its restricted revenue loss with the assurance that such exemption will not be broadened by judicial fiat into something covering a much larger area and involving manifold greater revenue loss.
Here Congress provided an exemption from gross income of “amounts received * * * through * * * health insurance * * * as compensation for * * * sickness.” The taxpayer seeks to have included in such exemption amounts paid to the employe by the employer which in fact comes to him as a continuation of his regular salary during sick leave.
Both parties, in their briefs, discussed at length the particular terms of the voluntary plan put into effect by the employer, the Southern Bell Telephone & Telegraph Company, under which it provided pay benefits to sick or injured еm-
In the trial court there was evidence to the effect that sickness and health insurance was not ordinarily written for full salary amounts; that the employer here did not make payments on an actuarial basis in relation to the amount of risk or to any other factor of age, state of health, or anything else; that no reserves were set up as is ordinarily done in the case of insurance, and that benefits were voluntarily fixed by a management committee. The importance of this evidence is not to prove that the company‘s plan here was unlike insurance, but it was relevant and of great weight to the proposition that when Congress exempted only such amounts as comе “through health insurance,” it had a clearly defined class in mind, and that this class is readily identified by normally having a bundle of attributes or characteristics associated with the term “insurance.” This class of persons whose payments were exempt were those who, for a definite consideration, having an actuarial relation to the benefits provided, paid by them or on their behalf, obtained insurance coverage under ordinary insurance standards. There was thus an ascertainable amount of gross income involved, from which an estimate of loss of revenue to the government could be made. This loss would obviously be quite different from the loss that would result if the class designated by Congress was made to include every employe who received payments of salary or wages by the voluntаry action of his employer during sick leave.
Our reference to the loss of revenue is not intended to suggest that such loss has any part in enabling the Court to construe a tax statute. The government makes no such argument here and we would not consider it if made. The reference to the differing impacts upon the revenue is cited to indicate that Congress, in adopting an overall scheme of taxation in which the revenue loss of each exemption plays an important part, must choose words of description to set apart those taxpayers or payments within the exemption. In this case the term “through insurance” was the terminology adopted by Congress for this purpose.
We think it clear, without resort to any but the fundamental rule that words are ordinarily to be taken to mean what they usually import to the average person, that Congress meant to give the exemption here only to amounts received through insurance. If it had intended that all payments received as compensation for sickness were to be exempt it would, of course, not have used the words “through insurance” at all. They would clearly have been superfluous and misleading if that had been the intent of the lawmakers.
Appellee here relies on the decision of the Court of Appeals for the Seventh Circuit in Epmeier v. United States, 7 Cir., 199 F.2d 508, 511, by which case the trial court doubtless felt bound. Although there are present in the Epmeier case facts that might warrant our distinguishing it from the case before us, we think that even those facts are unimportant in construing the statute here before us. In Epmeier the employe was working for an insurance company, a company which had the authority to is-
With deference to the views of that distinguished Court, we are of the opinion that the purpose of the statute was to exempt from income tax the proceeds of insurance which had been bought and paid for by the payment of premiums consciously and knowingly mаde for “health insurance.” Whatever the activating motive of Congress may have been in passing the law, its intent was clear that the exemption was to apply only to payments received through insurance. The payments made to the taxpayer here by the Southern Bell Telephone & Telegraph Company during his absence on sick leave were not such payments. They had no relation to health insurance. See Moholy v. United States, D.C.N.D.Cal., 132 F.Supp. 32, pending on appeal C.A.9; Branham v. United States, D.C.Ky., 136 F.Supp. 342; and Herbkersman v. United States, D.C.S.D.Ohio, 133 F.Supp. 495, pending on appeal C.A.6. These cases deal with similar questions, the first two having been decided by the district court in favor of the government, the third in favor of the taxpayer.
The judgment of the trial court erroneously construed the exemption statute as covering payments which were not, in fact, received through health insurance. It must be reversed and judgmеnt rendered for the appellant.
Reversed and rendered.
BROWN, Circuit Judge (dissenting).
Admonished as we are, and almost invariably at the behest of the Tax Collector that “Questions of taxation must be determined by viewing what was actually done * * * and when applying the provisions of the Sixteenth Amendment and income laws enacted thereunder we must regard matters of substance and not mere form * * * “, Weiss v. Stearn, 265 U.S. 242, 254, 44 S.Ct. 490, 492, 68 L.Ed. 1001; “The incidence of taxation depends upon the substance of a transaction * * * ” Commissioner of Internal Revenue v. Court Holding Co., 324 U.S. 331, 334, 65 S.Ct. 707, 708, 89 L.Ed. 981, the result here is difficult to comprehend. For it is the triumph of form over substance. Form is the absolute monarch here not only in requiring a contract, but in specifying the type of contract, the nature of the considerations which business men must have applied, and the specific guaranties required.
To be more specific, in the Court‘s eye, it must be a contract of insurance, named as such, issued by one having unquestioned legal authority to underwrite, calling for the payment of premiums and specifying ascertainable, legally enforceable obligations. The Court states it several ways, but it always adds up the same:
“We think the details of the plan are relatively unimportant, since it cannot be disputed that there is no separate contract or agreement of insurance covering an obligation to pay any amounts to the company‘s employees. * * * ”
And, again, the Congressional concept of the phrase “amounts received through health insurance” is stated to be, “amounts the payment of which was definitely and with binding force fixed by an insurance contract between the employe and an insurer or between the еmployer and an insurer for the specific benefit of the employe. * * * ” The Congressional concept of the type of contract is expanded then into a concept as to the class of persons affected. But as to the class and as to the type, it is the paper which counts: “This class of persons whose payments were exempt were those who, for a definite consideration, having an actuarial relation to the benefits provided, paid by them or on their behalf,
I can find no basis for these conclusions either in the inquiry concerning the intent and purpose of Congress as it acted in its dual capacity of creator and defender of the public Treasure, or in the analysis of the factors underlying the nature of insurance. On this latter phase I feel that the Government‘s contention, essentially adopted by the Court, suffers from two underlying defects: first, it is not for the Government to decide what free men ought to consider a fair bargain, and second, the record and contention that this arrangement lacks the qualities of insurance evidences a surprising lack of understanding of the nature of modern insurance.
As to the Congressional motivation, I accept, of course, the Court‘s statement that it is not entering into the field of legislative wisdom. I do not for a moment think that the Court bases its conclusion upon the prospective loss of revenue. This supposed concern of Congress is, however, put forward as a likely or probable explanation for thе use of the terminology “through insurance.” I am unable either to see any basis for the argument or where it gets us.
I do not know how Congress, in 1939, could keep its legislative grace “within bounds” for succeeding years by knowing then the extent to which health and accident insurance had become a part of the contemporary social-economic life. Perhaps there is the thought that the situation was automatically, albeit somewhat unconsciously and certainly informally, reviewed from session to session as Congress met, impliedly reapproved the 1939 concept, and then adjourned without amendment. But, finally, since Congress in 1939 could not possibly know the amounts which would be paid in 1949 either as insurance under contracts of insurance or as benefits under employer plans, I hardly see how thе proper legislative concern with impact on probable revenues aids us at all.
When it comes to the analysis of the Telephone Company‘s arrangement here, I must confess that I am confused as to just what the Court does with it. After detailing briefly the supposed deficiencies as an insurance contract, the Court first states, “The importance of this evidence is not to prove that the company‘s plan here was unlike insurance * * * ” But while disavowing such purpose, apparently out of regard to the view this Court has always taken that it is not for Government to intrude itself upon the reasonableness of business agreements made between free men, it arrives at the same result, for instead of saying that the arrangement was “unlike insurance,” it merely holds that the beneficiaries of this plan are not within the class of persons who have rights under an insurance contract; for the Court says, “* * * but it was relevant and of great weight to the proposition that when Congress exempted only such amounts as come ‘through health insurance‘, it had a clearly defined class in mind, and that this class is readily identified by normally having a bundle of attributes or characteristics associated with the term ‘insurance.‘”
I would think that if the plan was sufficiently “like” insurance as to be “insurance” then the beneficiaries of the plan would be within the class of persons covered by “insurance.” In this respect it seems to be another argument advanced as proof but then withdrawn.
If so, then premise and conclusion stand alike in terms: Congress said “amounts received through accident or health insurance“; therefore, Congress meant payments made under health insurance contracts.
But the exact mechanism of the Court‘s process of reasoning is not, in my judgment, significant because, basically, the attack made by the Government, sustained by the Court, that because of certain supposed deficiencies the arrangement lacks the quality of an insurance contract simply will not bear analysis.
There is, first, no magic about an insurance contract. Like any other, it is merely an agreement to pay ascertain-
But the Court, obsessed with its conviction that the contract of insurance must be in a partiсular form issued by a particular company, waves all of this to one side because, “the details of the plan are relatively unimportant“. The synoptic analysis set forth in Appendix I amply demonstrates that this arrangement satisfied the requirements of a contract3 of insurance.
The attack on the plan for its intrinsic deficiencies from an insurance standpoint fares no better.
At the outset this should be recognized for what it is: it is the intrusion again of the Commissioner into the business affairs of citizens. He has the right, of course, to impose and collect the taxes incident to the performance of the contract. But he does not have the right to say what contract shall be made nor what consideration shall be followed, nor what may be considered a good bargain. He cannot do this directly, nor can he do it by the favorite ad-
But granting the Commissioner the right to supervise contracts, to assay them from the standpoint of inherent business reasonableness or unreasonableness, to give him an over-the-shoulder gentle guidance to business transactions, his objections here are quite inadequate.
It is contended that since the plan calls for the payment of the full weekly salary for the stated periods, there is no incentive upon the part of the employee to return to work, and this stands in contrast to the ordinary commercial poliсy limiting weekly indemnity to 75 to 80%.4 Likewise, it is said that since the Company, in its intracompany accounting, charged payments under the disability plan to operating expense; carried them as one of the specified items under the general category of salaries and wages rather than as plan benefits similar to the way they did for payments into the pension fund; maintained no special reserve account; payments were based on salary only not on some actuarial standards; benefits were available to all employees without a specific medical examination; and the company was not obliged to pay premiums over and above the cost of the actual weekly benefits paid kept this from being insurance. Similarly, complaint is made that the administration of the plan is finally in the hands of Company executives whose decision is stated to be final. This proves, it is claimed, that the plan is a gratuitous arrangement only with no contractual obligations and which is further borne out by the fact that no suit has ever been filed under it.
But all of these contentions ignore the real nature of the insurance business.
One thing stands out in the long history of the development of insurance: it came into being out of the business necessity of hedging and protecting against contingent hazards. It is the business man then who determines in the first instance what is needed and the nature and extent of the protection sought. The underwriter lays down the terms most generally by adjusting the cost of the insurance upwards or downwards. In this way underwriters will literally insure anything. If a business, therefore, such as the Telephone Company, determined, as it in its judgment saw fit, that good business called for an insurance policy awarding weekly benefits equivalent to this plan, it is certain that it could, and would, be quickly underwritten. The fact that the required insurance called for the payment of 100% of the employees’ salary instead of 75 to 80% would, if material at all, be adjusted in the rate. The same would be true concerning the supposed moral risk as payment of the equivalent of full weekly wage is thought to destroy the incentive to return to work. The element cannot be a big one because for the first five years of employment, the full wage benefit is payable only for four weeks and, on a graduated scale, it finally works up to a maximum of fifty-two weeks after twenty-five years. An underwriter might well consider that the personnel standards of the insured company were such as to likely attract and hold conscientious people of high moral responsibility who would not be beguiled into malingering by the lure of these limited payments. The underwriter would undoubtedly take into account also the counter incentive to remain on the job to assure advancement in pay and position with its cumulative effect of increasing future disability benefits and pension and retirement advantages.
Health and accident insuranсe is not normally written upon a prior health examination and even the so-called expert conceded this. Nor is there any basis in the industry for the Government‘s contention that payments are based upon some actuarial standard. On the contrary, they invariably call for the payment of fixed weekly indemnities.
The premium cost might, in commercial insurance companies, be determined on a so-called actuarial basis, but no underwriter could hope to have a better experience upon which to calculate his premium than that of the Southern Bell Telephone Company whose plan has been in operation since 1913. This leads to the very curious argument that it cannot be insurance because it only costs the Telephone Company what it pays out, and if it were insurance, they would either pay less or pay more. We have progressed far beyond the naive idea that loss is not sustained merely because it is insured. Business knows now that ultimately it bears its own losses, so that insurance is more and more a catastrophe-stop loss and an efficient claims adjusting service. So, while for one year or so, the premium cost to the Telephone Company might be much less than the total payments made to employees, it would not be long until there was a reliable ratio between known probable income and outgo. One of the interesting manifestations of the new business point of view toward the real loss is the growth of retrospective rating plans of one kind or another. In this system the ultimate premium paid is dependent upon the particular assured‘s own loss experience. There are infinite variations in these plans, but in the main they call for the payment of a premium equivalent to losses plus an added arbitrary percentage for claims handling and overhead with or without, at added cost, catastrophic-stop losses. It then becomes a matter of pure business judgment whether any real purpose is to be served by the entry of an insurance company and its policy. Frequently, this is required by external statutory provisions, such as Workmen‘s Compensation, Motortruck Carrier, Cargo and Public Liability Insurance, Compulsory Automobile Insurance, or the like. But where external conditions do not require the entry of an insurance company, it is but an ordinary business problem to determine the probable cost by self-insurance as opposed to outside insurance.
This leads naturally to another demonstration that the requirement of an insurance company contract is artificial indeed. Whatever the corporate power under Georgia Law of the Telephone Company to write insurance, it could easily have organized its own health and accident insurance affiliate. The Company would not have to worry about losses, reserves, or the like because whatever the subsidiary paid out, it would know that it would have paid the same to the employees under the plan. Likewise, being a part of a large family of integrated Telephone Companies, it could easily have organized with other company members of AT&T a mutual insurance compаny or a Reciprocal Exchange. The essence of each is that the insured is also insurer. Since the exposures would be consistent and uniform, the losses ultimately would fall substantially on each participating member company. The cost then would be what it has always been.
Of course, it is a little absurd to elaborate on what must be such an obvious economic fact: if experience over the years by Southern Bell Telephone Company shows the payment of stated sums as plan benefits, it is obvious that the cost through insurance policies would have to be at least as much and likely more. There is nothing in Section 22(b) (5) to require that an employer discard his own business judgment in apprais-
That there has not been a suit for 30 years over the plan does not prove it lacks legal enforceability. And, again, just what kind of a contract would satisfy the Commissioner? Suppose the employee belongs to a Fraternal lodge which issues a policy or a certificate? Suppose, as is quite common, it is his labor union that provides a specific benefit against specific premium contributions? Is it any less “amounts received through * * * insurance” if, as is so common, the bylaws of the lodge or union vest absolute power in the officers and presumably prohibit claim or suit? Nor is there any assurance that courts would not protect these beneficiaries if, under the terms of the plan, certain weekly benefits had accrued by prior service but were arbitrarily denied by the Telephone Company.
I have discussed these contentions in some detail because I think it important that in this situation it is imperative that substance be the rule of reason.
This plan has all of the attributes of insurance. It is not necessary to satisfy the statute that the plan adhere to the underwriting principles of any one particular health and accident insurer. Viewed from the standpoint of its reasonableness as an insurable undertaking, the plan is one which would find great acceptance at a premium cost which сould soon be calculated. Since it is the Telephone Company‘s money which will be spent in either case, it has determined in its wisdom that it is better as a business proposition for them to bear the direct and full costs of this, rather than resort to an external third party. By this means, the Telephone Company is able to transfer from the shoulders of its employees the risks of loss of essential income during periods of illness or injury. The employees have paid a valuable consideration for the risk which the employer has taken on. Their “premium” payment has been made through the services performed for the Company under the employment contract which includes, as a part, this plan.
The statute requires, of course, insurance payments. I would certainly agree that merе generosity on the part of an employer in continuing wages would not qualify. But where the employer‘s plan, carefully integrated and long maintained, makes definite provisions for the payment of specified sums over and above and beyond the wages or salary for work done, the plan and the payments under it should be treated as insurance since that is what it is in fact.
With much deference, I must, therefore, dissent.
| Elements Of A Contract Of Insurance, 44 C.J.S., Insurance, § 226, p. 940 | Provisions Of Plan In Instant Case Which Satisfy The Elements Of An Insurance Contract: |
|---|---|
| Subject Matter | “The Southern Bell Telephone and Telegraph Company undertakes in accordance with these Regulations, to provide for the payment of definite amounts to its employees when they are disabled by accident or sickness or when they are retired from service, or, in the event of death, to their dependent relatives.” (Pltf. Ex. 1, p. 5.) |
| Risk Or Contingency Insured Against | Loss of income because of employee‘s inability to work due to sickness. (Pltf. Ex. 1, p. 5, Sec. 1; p. 12.) |
| The Duration Of The Risk Or Contingency |
Schedule, Pltf. Ex. 1, p. 6, Sec. 6, Para. 2:—
Benefits begin on eighth calendar day of absence on account of disability. (Pltf. Ex. 1, p. 12, Sec. 6, Para. 3; also R/40.) Benefits terminate when disability ceases, or period set out in Para. 2 ends. (Pltf. Ex. 1, p. 12, Sec. 6, Para. 1.) |
| A Promise To Pay Or To Indemnify In A Fixed Or Ascertainable Amount | Schedule of amounts set out in Sec. 6, Para. 2 of the Plan, page 12, Pltf. Ex. 1. |
| A Premium |
Services rendered by the employee:— Epmeier v. United States, 7 Cir., 199 F.2d 508:
Herbkersman v. United States, D.C., 133 F.Supp. 495, at page 496:
44 C.J.S., Insurance, § 349, p. 1323:
I. T. 4015, C.B., 1950-1, 23, at p. 25:
|
| |
| The Period Of Payment Of The Premium | Employee must work two years in order to be eligible for benefits. Pltf. Ex. 1, p. 12, Sec. 6, Para. 1; also R/22, 24. |
| An Agreement Of The Parties On All The Essential Elements |
Plan is a part of employment contract between employer and employee. “Each employee on entering the service of the Company will be given a copy of this pamphlet. * * *” (Pltf. Ex. 1, p. 4.) |
The following chart shows some additional elements of insurance as set out in the case of Epmeier v. United States, 7 Cir., 199 F.2d 508:
| Additional Elements Of Insurance Discussed In Epmeier Case: | Under Plan In Instant Case: |
|---|---|
| A Shifting Of The Incident Of Risk From One To Another. |
From employee to employer. Pltf. Ex. 1, p. 5, Sec. 1, Para. 1. Herbkersman v. United States, 133 F.Supp. 495, at page 496:
|
| “Contractual” Security |
Part of contract of employment. Epmeier v. United States, 7 Cir., 199 F.2d 508:
44 C.J.S., Insurance, § 249, p. 1018:
|
| Medical Examination Prior To Employment | Not required here. |
| Treatment By Physician During Disability |
Pltf. Ex. 1, p. 19, Para. 11, 12:—
Epmeier v. United States, 7 Cir., 199 F.2d 508:
|
| Contract May Be Revised |
Pltf. Ex. 1, page 23, Sec. 10:
Epmeier v. United States, 7 Cir., 199 F.2d 508:
44 C.J.S., Insurance, § 255, p. 1031:
|
| HAYNES (Southern Bell Telephone & Telegraph Company Plan) | EPMEIER (Lincoln National Life Insurance Co. Plan) | HERBKERSMAN (American Telephone & Telegraph Company Plan) | |
|---|---|---|---|
| 1. Plan stated in written document or booklet distributed to employees. | Yes. | Yes. | Yes. |
| 2. Employee consideration found in employment services rendered—no separate contribution by employees. | Yes. | Yes. | Yes. |
| 3. Duration of benefits based upon length of employment. | Yes. | Yes. | Yes. |
| 4. Amount of benefits (a) based upon salary (b) equivalent to full salary. | (a) Yes. (b) Yes as applicable to Haynes—not determinable as applicable to all employees. | (a) Yes. (b) Not determinable. | (a) Yes. (b) Not determinable. |
| 5. Applicable to all regular employees who have passed a medical examination as an incident to employment. | Yes (medical examination not required.) | Yes. | Yes (does not appear in that employees take medical examination before hired). |
| 6. Benefits commence with first day of illness. | Generally on eighth day of illness, but first day in some cases; regular salary paid during first week and chargеd as sickness benefits on company records. | Inferable but not definitely determinable. | No payments made for first seven days of absence. |
| 7. Employee while ill required to follow instructions of his or company physician. | Yes. | Yes. | Inferably yes since confirmation of illness by own or company physician required. |
| 8. No benefits for illness or injury due to alcohol, immoralities, brawling, etc. | Not determinable. | Not determinable. | Not determinable. |
| 9. Administration of plan. | Committee of 5 appointed by directors from heads of operating departments approves payments. | Office Administration Department. Right to cancel if fullest cooperation not given. | Not determinable. |
| 10. Plan benefits and salary in single check. | Yes. | Not determinable. | Yes, if absence occurs in same pay period as regular payment for actual service. |
| 11. Costs of benefits not determinable |
| under actuarial tables, and no funded reserve. | Yes. | Not determinable. | Not determinable. |
| 12. Plan subject to termination not to affect rights accrued prior thereto. | Yes. | Yes. | Yes. |