BINGLER v. JOHNSON
Term:
- 1960-1969
Facts of the Case
None
Question
None
Argument
Bingler v. Johnson - Oral ArgumentBingler v. Johnson - Oral Argument, Part 1Bingler v. Johnson - Oral Argument, Part 2 Conclusion
Decision: 8 votes for Bingler, 1 vote(s) against
Legal provision: Internal Revenue Code
Legal provision: Internal Revenue Code
None
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Transcript:
Argument of James C. Larrimer
Chief Justice Earl Warren: 473, John H.Bingler, Director of Internal Revenue, petitioner versus Richard E.Johnson et al.
Mr. Larrimer, you may continue with your argument.
Mr. James C. Larrimer: Mr. Chief Justice and may it please the Court.
The issue in this case is essentially whether or not an employer can make a scholarship grant to an employee with that scholarship grant being excludable from gross income under the Internal Revenue Code.
The Government's position is that it cannot because Congress expressly stated that any continuing salary arrangement was not to have attached to it tax exempt consequences.
This statement on behalf of the Government is repeated throughout its brief as though the constant repetition would add some validity to it.
The legislative history however does not support the statement that a scholarship which may in fact be labeled a continuing salary arrangement.
The legislative history does not support that statement.
The 1954 Code in which Section 117 was inserted with respect to scholarships and fellowships was new with the 1954 Code.
There was no specific provision of the Internal Revenue Code previous to that time.
There was acknowledged by --
Justice John M. Harlan: Can I ask you a question.
The Fifth Circuit went the other way in this case, is it not?
Mr. James C. Larrimer: Yes sir.
Justice John M. Harlan: Are there are any circuits about that problem?
Mr. James C. Larrimer: There's another circuit, I think it's the Fourth Circuit if I'm not mistaken.
There are at least two circuits which are in conflict with the decision of the Third Circuit in this case.
The Congress at the time of enacting the Section 117 recognized the state of confusion which existed as to the tax consequences of the scholarship and fellowship grant.
It said about to attempt to provide what it labeled a clear cut method of determining the tax consequences of these grants without the necessity of deciding each case, case-by-case.
It did so under the format of Section 117 in which it set forth specifically that a scholarship at an educational institution shall not be included in gross income.
It also provided that a fellowship shall not be included in gross income.
And then, considering the compensatory possibilities of these grants, it inserted limitations in the code in Section 117.
First, it provided with respect to scholarships and it's recognized by Congress at this point that scholarships must be at an educational institution as it is defined in the Internal Revenue Code.
Now, the Internal Revenue Code specifically defines an educational institution as an education -- as an institution which has a regular faculty and a regular student body and a regular curriculum.
So, Congress intended that a scholarship relate only to a student at an educational institution.
Justice Hugo L. Black: Would you mind telling me precisely, what's the relationship of the student after they give him the scholarship with reference to the company?
Mr. James C. Larrimer: The student is on a leave of absence from a company.
Justice Hugo L. Black: Completely?
Mr. James C. Larrimer: Completely, he's got no duties whatsoever.
He does not report to the company.
They either mail to him his monthly stipend or it's deposited in a bank to his account.
Other than that, he's got no contact whatsoever with the employer.
Justice Hugo L. Black: What's his contract for the future?
Mr. James C. Larrimer: He has no contract except that when he goes on this educational leave, he agrees that he will come back to the employer for a period of at least two years.
Justice Hugo L. Black: Is that a binding contract?
Mr. James C. Larrimer: It is binding, I think so, yes Mr. Justice.
I think it's binding, but I don't think it's enforceable to the extent of requiring him to come back.
Justice Hugo L. Black: A suit could be filed for the briefs?
Mr. James C. Larrimer: Yes.
Justice Hugo L. Black: What's the salary he's agreed to be paid when he gets back?
Mr. James C. Larrimer: At the commensurate salary of other persons with his qualifications.
Justice Hugo L. Black: What about in comparison of what he left?
Mr. James C. Larrimer: The record in this case establishes that they receive the same salary when they returned as they were receiving at the time they left.
Justice Hugo L. Black: Hold it for how long?
Mr. James C. Larrimer: Pardon?
Justice Hugo L. Black: Hold it for how long?
How long do they hold that same salary?
Mr. James C. Larrimer: Well, they are classified.
They have various classifications of engineers.
They have associate engineer and a junior engineer and so forth.
And these are classifications that prevail throughout the company.
And when they reach, when they are elevated into another classification, this is dependent on merit.
And when they reach that classification, then their salary is adjusted accordingly.
Justice Hugo L. Black: And the company get to him for the same salary after he got the two years training in college?
Mr. James C. Larrimer: They get him for the same salary that he was receiving at the time he left.
Justice Hugo L. Black: How long do they hold if it's on that do you say?
Mr. James C. Larrimer: The agreement is for two years.
But that doesn't peg a salary.
The salary is pegged at a -- the contract provides that a salary will be commensurate with the duties --
Justice Hugo L. Black: Will be what?
Mr. James C. Larrimer: Will be commensurate with the duties assigned to him.
In other words, if he's assigned as a junior engineer, he'll be paid as a junior engineer.
If he's assigned as an associate engineer, he'll be paid at that rate.
Justice Hugo L. Black: Well, that's inconsistent isn't it with the other thing you just said, he comes back at the same salary.
Mr. James C. Larrimer: Well, I'm saying the record, the evidence in this case was when a man left, he came back at that same grade because there was no elevation of his classification.
There was no change of his classification.
Justice Hugo L. Black: But how long does he keep it?
Mr. James C. Larrimer: There is no contractual provision as to how long.
He stays in a certain salary.
The agreement is that he'll come back at a salary, commensurate with the duties assigned.
Chief Justice Earl Warren: At the salaries that are being paid at the time he comes back.
Mr. James C. Larrimer: Right.
Chief Justice Earl Warren: Not at the time that he leaves?
Mr. James C. Larrimer: That's right Mr. Chief Justice.
Chief Justice Earl Warren: I thought you'd said the opposite to Justice Black.
I thought you said that he came back at the pay that he left with.
Mr. James C. Larrimer: As a matter of fact, he did, but that was --
Chief Justice Earl Warren: No, but he came back with all seniority rights, didn't he?
Mr. James C. Larrimer: Yes, sir.
Chief Justice Earl Warren: And that would entitle him to whatever pay was being made for people in his grade at the time he comes back.
Mr. James C. Larrimer: That's right.
Chief Justice Earl Warren: May I ask you how did the company treat this expenditure tax-wise?
Mr. James C. Larrimer: Mr. Chief Justice, the evidence in the case established that this amount of money, this living allowance or stipend as we call it was classified under accounting records as indirect labor.
Chief Justice Earl Warren: As indirect labor.
Mr. James C. Larrimer: As indirect labor.
Chief Justice Earl Warren: Yes.
Mr. James C. Larrimer: And the company withheld income tax or withholding the tax from this stipend, but did not withhold the income tax from the tuition that was paid under the same program.
Chief Justice Earl Warren: How does that breakdown in dollars?
Mr. James C. Larrimer: Well, the tuition is very nominal compared to the living allowance paid.
Chief Justice Earl Warren: But most of it, they counted as a business expense?
Mr. James C. Larrimer: Yes, sir.
Chief Justice Earl Warren: And they counted that his service during the interim as indirect labor so they could that.
Mr. James C. Larrimer: That's right.
Chief Justice Earl Warren: If they haven't called it indirect labor, could they have done that?
Could they have taken a deduction for that?
Would it have been (Voice Overlap).
Mr. James C. Larrimer: My opinion is that a company can have a scholarship program or a fellowship program and deduct the cost of it as an ordinary and necessary business expense.
Chief Justice Earl Warren: Even if they call indirect labor then?
Mr. James C. Larrimer: There is no clear answer to that except to the extent that they had no account which they labeled fellowships and scholarships.
Chief Justice Earl Warren: Why shouldn't they if that was an exempt expenditure?
Mr. James C. Larrimer: I don't know why they did not have, except perhaps it may have been because of the contractual relationship between Westinghouse Electric Corporation and the Atomic Energy Commission because these men were employed at Bettis Atomic Power Laboratory which was a government-owned but contractor-operated plant.
This means that the Government owned it paid for all the expense of operation but it was operated by Westinghouse.
And perhaps it was an accounting method which required this to be labeled as indirect labor because --
Chief Justice Earl Warren: Westinghouse was on the cost-plus basis?
Mr. James C. Larrimer: Essentially, yes.
Chief Justice Earl Warren: And then they took the deduction for this.
Mr. James C. Larrimer: This would be charged to the Atomic Energy Commission.
Chief Justice Earl Warren: So, they actually -- they actually got from the Government 10% more than they put out for this?
Mr. James C. Larrimer: Well, I don't know that Mr. Chief Justice.
Chief Justice Earl Warren: Well, why wouldn't they if it's an operating expense and they're entitled to cost plus -- why wouldn't they get it?
Mr. James C. Larrimer: Assuming that premise is correct that they get 10% of whatever they spend, and that would be true, yes, but I'm not sure that that's true in this case
Chief Justice Earl Warren: That might not be the exact percentage, that's what you mean.
Mr. James C. Larrimer: Right.
Chief Justice Earl Warren: Yes.
Mr. James C. Larrimer: Now, Congress established the tax exempt status for a scholarship and an educational institution and a fellowship.
It then inserted the limitations considering the compensatory aspect of these two grants.
With respect to the scholarship and an educational institution, the House Report states --
Justice Hugo L. Black: What do you mean by assuring?
Mr. James C. Larrimer: Pardon?
Justice Hugo L. Black: What do you mean by assuring the compensatory aspect of these two grants?
Mr. James C. Larrimer: Considering the compensatory aspect of the grant --
Justice Hugo L. Black: What do you mean by compensatory?
Mr. James C. Larrimer: Considering --
Justice Hugo L. Black: -- aspect?
Mr. James C. Larrimer: -- that there maybe a compensatory aspect to the grants, in other words, previous to 1954, the tax consequence of a scholarship or fellowship grant was determined by where not it was gift or compensation.
And you have to eliminate the compensatory -- in order to have a scholarship considered tax free, you have to eliminate that compensatory aspect of it.
Justice Hugo L. Black: How could they do that?
Mr. James C. Larrimer: Well, they couldn't very well do it.
There was only one case which held that a fellowship was a gift, but it's difficult in my way of thinking, you cannot eliminate that compensatory aspect of a scholarship or fellowship because the very nature of the grant requires you to render services, to render to go school, and the fact that those services are not a benefit to the grantor does not eliminate that compensatory aspect of it.
Justice Hugo L. Black: Suppose one of those fellows had decided not to go back with the company, could he be sued?
Mr. James C. Larrimer: He can't be sued Mr. Justice, but I doubt that if there any damages.
Justice Hugo L. Black: Well, why wouldn't he be --
Mr. James C. Larrimer: Because he is not --
Justice Hugo L. Black: He was a capable man and if what more than he had been before (Voice Overlap) to his training.
Mr. James C. Larrimer: Essentially, they can replace him with another employee.
Justice Hugo L. Black: At the same salary?
Mr. James C. Larrimer: At the same salary, they have other employees there.
Justice Hugo L. Black: Suppose it could be establish that they couldn't do that after he'd had that two years training?
Mr. James C. Larrimer: If they can establish damages, yes.He would be liable on damages for not returning.
Justice Hugo L. Black: Isn't that one of the big considerations of it?
Mr. James C. Larrimer: The basic consideration is the allowance of the educational leave in return for the promise to come back to the employer.
Justice Hugo L. Black: And work with them for that salary?
Mr. James C. Larrimer: For that salary commenced with the other employees, yes.
But our position is that Congress specifically provided in the Code the compensatory aspect of a scholarship, once it is determined that a grant is made for the education of an individual, if it's a scholarship at an education institution, there's only one circumstance in which a part of it is taxable, and that is specifically provided under Section 117 and a limitation, and that provision is that if he is required to render services in a nature of part-time employment, then the value of those services is taxable and it's only the balance of the scholarship which is tax free.
And there's a further exception on that as if those services which are required to be rendered are services which are required as part of the curriculum of the university for the grant of the degree, then even they do not result in taxable income.
And this is --
Justice Abe Fortas: Well, take the other way, take the other way around suppose the Westinghouse and the A.E.C. said to one of its employees you go to the university, you're now engage fulltime with us on the development of something rather than widget, let's say.
If you go to the university and you spend all of your time now on that same project than development of the widget and we'll give you what we call a scholarship or a fellowship 90% of your prior salary.
Now, is that payment for services that he's received payment for services to Westinghouse and A.E.C., is it taxable, or is it within the statutory provision for deduction?
Mr. James C. Larrimer: Mr. Justice Fortas, I think the factual circumstance which you've set forth is not possible under the --
Justice Abe Fortas: Or is it possible, I just imagine that, and I put it to you because it hope that it may serve to dramatize or to me is one of the basic problems in this case and that is to some extent here, to some extent Westinghouse and the A.E.C. are keeping control over what this employee does to some extent what the employee does at the university is a thing of value to Westinghouse and the A.E.C.
And I'm asking you to assume a case where that is crystal clear and dramatic, namely where the employee does at the university precisely what he would be doing if he weren't in the university and were working on the plain?
Mr. James C. Larrimer: Mr. Justice Fortas, I have to know one more fact, and that is whether or not this widget that this man is working on is required research or investigation as part of the curriculum of the university for the grant of the degree.
Justice Abe Fortas: I don't know what you mean by required research.
I suppose that most of these people are working in areas where they have a wide choice as to the subject of their thesis.
Your clients were all working on thesis, weren't they?
Mr. James C. Larrimer: Yes.
Justice Abe Fortas: Well, they have wide choices to that and it's permitted who by the university just as it was in your case, so I won't give you that fact.
Mr. James C. Larrimer: I would have to say then that if it is not part of the curriculum that it would not be --
Justice Abe Fortas: Is a doctor's dissertation part of the curriculum?
Mr. James C. Larrimer: Yes (Voice Overlap).
Justice Abe Fortas: It felt that it was a whole spectrum of knowledge and selects from it something of particular interest to him, is that part of the curriculum?
Mr. James C. Larrimer: A thesis topic and the dissertation and the defense of it is part of the curriculum.
Justice Abe Fortas: Alright.
Mr. James C. Larrimer: And it's required for the grant of the degree (Voice Overlap) --
Justice Abe Fortas: If that's what you're talking if you're using curriculum in that sense that the topic of the dissertation is approve, of course it has to be approved by the university authorities.
Does that make any difference?
Mr. James C. Larrimer: It has to be approved and has to be required.
That type of an investigation has to be required for the grant of a degree.
If it's not required for the grant of a degree, then a service is rendered and it would not qualify as a scholarship at an educational institution.
Justice Abe Fortas: Well obviously, in some relationship between that and this situation in which I understand it, the dissertation has to be in some measure to some degree relating to the work of the laboratory.
In any event, and there's a dispute between you and the Government as to precisely what the record shows on that.
In any event, the dissertation subject has to be approved by Westinghouse or the A.E.C. or both of them.
And so that there are some major of service.
I should arguably in a way arguably either some measure of service being rendered by the scholarship recipient to Westinghouse and agency.
Mr. James C. Larrimer: The best response I can make to this Your Honor is what in fact occurred in this case, and one of the students selected a thesis topic which he had investigated during his leave of absence.
It was a -- of course in an engineering field which would have been a value to engineering generally, but after studying and investigating this for his entire leave period, he gave it up because he didn't have enough time, he didn't have enough equipment to really arrive in an answer which would satisfy the requirements that the university for the thesis.
The evidence was then put in the record that Westinghouse was not interested in this particular thesis topic to the extent that they would take it upon themselves to pick it up where this man left it off and get the answer to it, so that the nature of the thesis topic had to be in engineering which is about the limit of the value of a specific topic to Westinghouse itself.
Chief Justice Earl Warren: May I ask you this.
This is what's bothering me.
If it is -- this is justified as a business expense on the basis that it is part-time employment, why shouldn't there be some pro tanto recognition of the part that is employment and the part that is not employment when the tax returns are made?
Mr. James C. Larrimer: The answer must be Mr. Chief Justice as Congress felt that if a student on a scholarship in an educational institution was pursuing the curriculum under or required by that university, then no part of it was should be treated as compensation and taxable.
Chief Justice Earl Warren: Well might it not be one thing that a company just out of a goodness of his heart gave this stipend to a man for this particular period and did not considered it as business expense in this operation from.
On the other hand treating it as a business expense and justifying it because it was part-time employment.
Mr. James C. Larrimer: I don't think there has to be a correlation.
I don't think because deductible by a company it must be taxable to the recipient.
There are other --
Chief Justice Earl Warren: Don't you think one of them should at least pay something by reason of it being part-time employment?
Do you think if it's part-time employment that the company should take all of it as tax deduction or if it -- if employees being paid partially for the work he does for the company that he shouldn't pay some income tax?
Mr. James C. Larrimer: I think that if it's in fact part-time employment that and it's outside the curriculum requirements that he should pay tax.
Chief Justice Earl Warren: Would you say then that they were wrong in calling this part-time employment?
Mr. James C. Larrimer: You mean Westinghouse was wrong?
Chief Justice Earl Warren: Yes.
Mr. James C. Larrimer: Yes, I think they did it out of an abundance of caution because of the fact that there are other sections of the code which say that if an employer does not withhold tax, and may I answer your question, there's another section of the code which provides a different employer does not withhold tax from something which is taxable, and the employee who receives it does not pay tax on it, then both the employee are responsible, both the employee and the employer are responsible for the same tax.
So out of an abundance of caution, the employer without fail usually withholds tax unless the employee litigate the tax consequences of it.
Chief Justice Earl Warren: Well, does that mean that Westinghouse wanted to hid this case and keep it?
Mr. James C. Larrimer: No, I think Westinghouse was just attempting to protect itself.
Chief Justice Earl Warren: Well, in that respect, in that respect so it could --
Mr. James C. Larrimer: Well --
Chief Justice Earl Warren: -- could the -- could consider it as a business expense.
Mr. James C. Larrimer: Well, I don't -- I'm not sure why Westinghouse did it other than for the protective feature of it.
Justice Potter Stewart: Is there any limitation on the amount in your submission that could be exempt from tax in the scholarship under -- if a person is working toward a degree?
Mr. James C. Larrimer: There's no limitation under amount, so long as the amount is initially determined to be a scholarship, amount to enable the student to pursue his education at a -- in institution.
There's only a limitation on amount as to a fellowship.
Justice Potter Stewart: As to a fellowship, somebody not working toward a degree?
Mr. James C. Larrimer: Right.
Justice Potter Stewart: Is that correct?
Mr. James C. Larrimer: That's right.
Justice Potter Stewart: So this could be a $100,000.00 if you could show it.
Mr. James C. Larrimer: Well, I think there's a rule or reason that when you get beyond.
Justice Potter Stewart: But so far as the statute goes, there's no limitation on all amount, is it?
Mr. James C. Larrimer: There's no limitation specifically in the statute on amount with respect to the scholarship.
Justice Potter Stewart: Working to earn a degree?
Mr. James C. Larrimer: Working to earn a degree.
Justice Potter Stewart: As I understand in this case, the employer did pay the actual tuition and all the fees and so on of the educational institution, and that that's not an issue here that the Government concedes, that part is not income to your clients.
Mr. James C. Larrimer: That concession was not made until this time.
Justice Potter Stewart: Well, it has been made --
Mr. James C. Larrimer: It has been made now and I can't see the significance between the concession on the tuition and a concession on the living allowance paid under the program.
Justice Byron R. White: The Government has some trouble justifying that too, doesn't it?
Mr. James C. Larrimer: Pardon?
Justice Byron R. White: The Government has some trouble justifying that too, doesn't it?
Mr. James C. Larrimer: I think so, yes.
Justice Potter Stewart: Well, the Government put it in terms of arguably, it could be included in income of your clients but then, it would be a deduction for you.
So, it would washout, it would be a deduction then if it would be your client's taxpayers.
Mr. James C. Larrimer: That's right.
Chief Justice Earl Warren: Mr. Weinstein?
Argument of Harris Weinstein
Mr. Harris Weinstein: Mr. Chief Justice, if I may quickly deal with several points particularly once of record and of other decisions.
In response to Mr. Justice Harlan's question, the cases and conflict are in the Fifth and Sixth Circuit and in the Court of Claims, and there are two cases, one in the tenth and a per curiam in the fourth that would be believed conflicting rationale and they're discussed in our brief beginning at page 23.
In terms of the relationship between Westinghouse and the employer during the leave, there's a requirement for periodic progress reports, and this is discussed I believe in the testimony at page 18 of the record at least, it maybe in other places.
In terms of Westinghouse's rights against the employer -- employee who defaults on its obligation to come back, we set out that Pennsylvania cases which we think at least give a right to sue for the actual expenditures made on behalf of the employee during the leave.
In terms of limitations on amount, respondents now say there's a rule of reason.
Congress didn't even think things would go that far because as we pointed out in our brief, Congress expected that this would be relatively small amounts.
If I -- although my time is up, if I may just speak to this question of the relationship of the thesis topic to Westinghouse's program.
At page 104 of the record which is Westinghouse's regulations on this subject, it encourages employees to find topics of technical interest to Bettis.
In the testimony at pages 61 and 62, a Westinghouse official testifies on this question of thesis review.
In the first line of page 62, he uses the word “relevance” in determining the relationship between thesis topic and Westinghouse work.
Pages 74 and 75, the responsible official of the Atomic Energy Commission speaks of job relatedness in terms of the connection with the thesis.
But in closing, I would just like to say that we do not depend just on the fact that the thesis topic is reviewed, but this thesis topic review and the entire program is part of an overall package of compensation the Westinghouse and the A.E.C. have designed to obtain people like the respondents for six or seven years, and the fifth year, they get this leave and this obligates them to return as in the case of one respondent for the sixth year, and the case of the other two for the sixth and seventh years and it is this obligation that to us is the keystone of this case.
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Transcript:
Argument of Harris Weinstein
Chief Justice Earl Warren: Number 473, John H. Bingler, District Director of Internal Revenue, petitioner versus Richard E. Johnson et al.
Mr. Weinstein.
Mr. Harris Weinstein: Mr. Chief Justice and may it please the Court.
This federal income tax case comes to this Court on a writ of certiorari to the United States Court of Appeals for the Third Circuit.
The issue involves the meaning of the words scholarship and fellowship grant which are used in Section 117 of the Internal Revenue Code of 1954.
That section of the code allows the recipient to exclude the amount of scholarships or fellowships from his gross income.
That is it makes scholarships and fellowships tax exempt.
This case typifies a tax problem that seems to have arisen since the 1954 Code was adopted.
At least, Congress in writing Section 117 in the legislative history showed no then awareness of this type of problem.
It is basically this.
It goes to the meaning of the words scholarship and fellowship in a commercial setting.
Do those words encompass the situation where an employer gives his employee leave from his regular duties and continues the employee's regular salary or the greater part of it while the employee is taking a graduate degree on the subject matter of his employment, and at the same time, the employer obligates the employee to return to work for some specified minimum period of time.
The issue comes to the Court because of a split of authority among the lower federal courts.
The Fifth and Sixth Circuits and the Court of Claims have each sustained treasury regulations tending to the view that payments made in this type of commercial setting are not scholarships or fellowships.
The Third Circuit in this case has rejected those regulations has ruled that these payments are scholarship or fellowship and has reversed a jury verdict in favor of the United States.
The precise problem comes out at payments that the Westinghouse Electric Corporation made to the three respondents before this Court at a time when those respondents were on leave, working on doctoral dissertations.
These amounts were paid pursuant to program available to engineers and scientists employed at the Bettis Atomic Power Laboratory at Pittsburg, Pennsylvania.
That is a laboratory owned by the Atomic Energy Commission and most if not all of its activities seemed to be in the design of nuclear reactors for producing electric power.
Westinghouse operates the laboratory under cost-plus contract with the Atomic Energy Commission.
In this particular program that we're concern with here, and I think it's typical of similar programs, is intended as a testimony here shows to meet the needs that Westinghouse and the A.E.C. have for highly trained technical people to help them recruit these people to keep them over a long period of time and to keep them up to date on technical requirements of their job.
The program that we're concerned with is broken into two phases.
The first one which is called the work-study phase has not given rise to any tax dispute, at least up to now.
At last for four years and it begins when the employee is accepted by Westinghouse into this Bettis program.
In the case of two of the respondents, that occurred when they agreed to work for Westinghouse with the third respondent that occurred sometime after he had come to work for Westinghouse.
During this four-year work-study phase, the employee holds down a regular job at the Bettis Laboratory and he attends classes part-time at either the University of Pittsburg or the Carnegie Institute of Technology, which I think since the events in this case, has become the Carnegie-Mellon University.
Westinghouse pays the employee for 40 hours a week, but allows him eight hours weekly up to I think a total of 156 hours each year to go to class.
Westinghouse pays his tuition fees during that period.
At the end of this four-year period, employees are supposed to have met his preliminary requirements for the doctoral degree in engineering or science.
When all his course work, his language studies are finished and he's pass the qualification examinations for the doctoral degree, he applies for a leave of absence to work on his dissertation.
He receives a leave of absence if Westinghouse and the A.E.C. each approve the applicant, not all are approved, and if Westinghouse and the A.E.C. each approve his thesis topic which in the first instance approved by the University.
If he is granted leave, he then agrees to come back to Westinghouse for some --
Justice Abe Fortas: I beg your pardon.
Is it clearly understood that they will approve his dissertation subject only if it is connected with the work of this particular plant?
I think your brief indicates that.
Mr. Harris Weinstein: I believe Justice Fortas that the testimony which is our call on this topic was of a representative of the A.E.C. was that they wanted the topic to be work connected.
Now, I think that has a broad scope and it certainly does not mean a topic of current use or of current concern to the laboratory, but I would suppose that it rather means a topic that by its nature helps the man learn better how to work on the problems at the laboratory.
Justice Abe Fortas: But may I -- may I take it for granted and take it as not disputed that the dissertation topic is a topic that is of commercial interest to Westinghouse and official interest to A.E.C. in terms of its governmental assignment.
Mr. Harris Weinstein: I think Justice Fortas, I'll go too far if I said that it was of immediate commercial value at the time that is was performed.
It may or may not be, and I think that work connected was used in the somewhat more general sense.
Of the topics here were chosen by in this case were chosen by the respondents.
They were generally related to the area of interest which I think were the areas were the respondents had worked generally speaking before taking their leave.
The topics were approved by the A.E.C. and Westinghouse.
There is apparently precedent for disapproval but it did not happened with any of these three respondents.
Now in return for the this leave, the respondent agrees to return for a -- to Westinghouse at that is for a minimum period --
Justice Abe Fortas: Let's say on page -- excuse me, but on page 3 of your brief and this is what it caught my eye.
You say each applicant must be approved then the topic of his proposed thesis.
It is reviewed to ensure that it is relevant to the work program of the laboratory, relevant to the work program of the laboratory.
Mr. Harris Weinstein: I think Justice Fortas that if there is a vagueness there; it is a vagueness that reflects the record.
This record did not involve any topics that had been disapproved, denied beyond inquiring whether there was approved or whether there had ever been any instances of disapproval.
I do not believe there was any inquiry into what might leave the A.E.C. and Westinghouse to disapprove a particular contract.
And I don't want to suggest that the topics were viewed for immediate commercial benefit at that point.
This minimum period of obligation after the leave was in the case of two respondents here, two years, and the case of the third, who came under an earlier version of the same program, he was committed to return to Westinghouse for one year after his leave.
During the leave, Westinghouse pays all tuition and fees, and those amounts are not in dispute here.
They have not been taxed and there is no contention that they should be taxed.
The dispute goes to an amount that is paid calculated on the basis of prior salary and family size, and it ranges from 70% to 90% of prior salary, depending the low end, a single man at the high end demand with the wife and two or more children.
Justice Byron R. White: Is there any indication of why it's less than his full salary?
Mr. Harris Weinstein: No, the record doesn't go into that.
I suppose Justice White there could be a variety of reasons.
It might just be an inducement to be done with his work and come back as soon as possible.
Justice Byron R. White: You suppose that reflects any anticipated tax savings here right now?
Mr. Harris Weinstein: The record bears on that indirectly and showing that Westinghouse on advice of their tax counsel withheld taxes from this portion of the benefits.
No one asked --
Justice Byron R. White: So far as their conduct's concern, the answer is to comfort?
Mr. Harris Weinstein: Well, certainly, the record doesn't show that it was an anticipation of tax consequences.
Now, this program is typical, yet the payments might not be.
For example, the federal government sends a good number of civilian and military employees to school, many of whom study for degrees, and these people received their full salaries.
Now, I think it rather hard to distinguish and defining a scholarship or fellowship between whether a man gets a 100% of his salary or 90% of one of the respondent -- as one of the respondents did here.
Justice Byron R. White: But I suppose if some foundation had made these grants to these people in the same amounts, you wouldn't be here?
Mr. Harris Weinstein: No, because as I come to the statute, it's very specific on that and would -- if they are a degree candidate, it would be excluded.
If they are not a degree candidate, it would be excluded up to 300 a month for 36 months.
Justice Byron R. White: Well, for a degree candidate, the statute is nothing more specific about this and -- about a grant from the foundation and from a commercial source.
Mr. Harris Weinstein: I think the legislative history bears on this subject --
Justice Byron R. White: (Voice Overlap) statute.
Mr. Harris Weinstein: No, the statute is completely neutral I would say on the -- what is --
Justice Byron R. White: But you would draw a distinction --
Mr. Harris Weinstein: -- definittion.
Justice Byron R. White: -- between a grant from a foundation and a grant from a company like this?
Mr. Harris Weinstein: Yes, I would and I would say that that supported by the expressions of opinion in the Committee Reports that Congress did not want to exempt.
They didn't think it was exempting from tax what it call a continuing salary payments to an employee who was on leave from his regular job.
And I really think that that legislative history is the basic support for the regulations that we are relying on here.
Three respondents here were on leave at varying times between 1960 and 1962.
Two of them for nine months, they receive $630.00 a month which was 80% of their prior salaries.
The third one was on leave for a full year.
He was -- he received during that period just under $9,700.00 and that was 90% of the salary he had been receiving before beginning the leave.
Justice Potter Stewart: Do they actually move to the campuses of Carnegie Tech or the University of Pittsburgh or actually these are local universities, I suppose they continue to live at home, do they?
Mr. Harris Weinstein: Again Justice Stewart, I would suppose so these questions weren't ask.
The laboratory is in Pittsburgh.
They are restricted to the choice of these two universities to participate --
Justice Potter Stewart: Both of which are local?
Mr. Harris Weinstein: And they are both local and of course, they've been going to classes there for four years at least before they take their leave.
Justice Potter Stewart: And I understood you to say that the employer company paid the all the tuition and fees and that you concede.
You can say that that was not taxable income (Voice Overlap)?
Mr. Harris Weinstein: Yes.
I think that technically Justice Stewart, that might be includable in gross income, but at the same time they've been given a deduction for it under the educational expense provision, so it would be a wash there's been no dispute about that part of the case.
Justice Potter Stewart: Was this -- as I understood your brief, you don't make any real distinction between or at least you don't make the distinction made by the respondent between a scholarship and a fellowship.
Mr. Harris Weinstein: As we say in our reply brief, we understand that distinction bet -- to rest on the idea that scholarship means degree candidate and fellowship means nondegree candidate, and we've just found no support for that kind of distinction (Voice Overlap).
Justice Potter Stewart: Well the scholarship might be no candidate of any kind.
It might be a man now traveling around because he got a nice type hand from the forth foundation.
Mr. Harris Weinstein: It might be, although --
Justice Potter Stewart: It might be a former candidate --
Mr. Harris Weinstein: I think --
Justice Potter Stewart: -- repeated candidate.
Mr. Harris Weinstein: I think it would come down to this.
I would think that it would come down to this, and a grant to a -- an undergraduate I think is always called a scholarship.
A grant to somebody who is not seeking any kind of degree is I think generally called a fellowship.
When you go to graduate students, they could be either.
The only definition that we found was in the catalog of M.I.T. which says that a scholarship in to a graduate student means something that just covers tuition, and the fellowship to a graduate student means something that covers tuition plus other things.
Justice Potter Stewart: I thought that perhaps Congress meant the two generically to be different, that a scholarship was something that was given to somebody who was in school at any level, undergraduate or graduate level, or even high school, and that a fellowship grant, a fellowship grant was and could be given to somebody not -- not could immediate people -- might or might not be an academic person but did not have anything to do with school as such.
That's the respondent's --
Mr. Harris Weinstein: That is their argument --
Justice Potter Stewart: -- submission as I understand it.
Mr. Harris Weinstein: -- and I think our answer to what is two things.
First, that we don't understand that that's ever been the any -- be accepted understanding of those words in any place, which would lead us to think that if Congress had meant that rather unusual distinction it would've been more direct than saying so.
And the -- I think the other answer really comes down to why these regulations exist and perhaps I ought to turn to those because this case I think focuses on the validity of these regulations.
The statute really has no definition, the statute.
You're left on the statute I think to infer from why the statute was adopted and what Congress said about it how this sort of case ought to be resolve, and the treasury which has general rule in making power.
It sought to use that power to fill what is really an interstice in the statute.
And these regulations that the treasury has adopted were accepted by the controlling legal theory as a controlling legal theory by the district judge.
They form the basis for instructions, for rulings on evidence and they -- and for that reason, I think that the basis for the regulations is the heart really of this case, and if those regulations are reasonable, if they're rational interpretations of the statute, then we would suggest that the treasury has properly exercise its power and drawing or rather hard line in what we would agree as a rather hard case of statutory interpretation.
And if I -- these regulations if I can turn to their language, start out with a general definition that says generally speaking that a scholarship is an amount paid to allow student to pursue studies, a fellowship, to allow a student to pursue studies or research.
And if the regulations stop there, this case wouldn't have arisen because these payments would have qualified.
But the dispute focuses on two exceptions that are in these regulations and that --
Justice Potter Stewart: As I looked at these regulations, they do seem to me, superficially at least to make very close to this distinction made by the respondent for whatever its worth, 17 –- 1.117-3 says scholarship is something which is given to a student, whether an undergraduate or a graduate, and dash, and fellowship, a fellowship grant generally means an amount paid or allowed to an individual to aid him under pursuit.
Mr. Harris Weinstein: Of study or --
Justice Potter Stewart: One student and the others any --
Mr. Harris Weinstein: But individual I would suggest --
Justice Potter Stewart: It must be some reason for the difference in language.
Mr. Harris Weinstein: Oh!
I think the reason is that an individual could be either; it could be a student or a non-student.
I don't believe that these regulations were intended in that subparagraph C to not apply to a student but rather the word individual was used to encompass student as well as somebody who is not.
And I think that that would agree with the general understanding of fellowship which might be to a graduate student or might not be.
The exceptions which are also set out in our appendix to these general definitions are twofold.
One says that a scholarship or fellowship does not include amounts that represent compensation for past, present, or future employment services.
And the second says that a scholarship or fellowship does not encompass amounts that are paid to finance study or research undertaken and the words are primarily for the benefit of the grantor.
Now, both of these exceptions represent generalizations of concerns or the Congress evidence or things that Congress did when it was drafting this part of the revenue code.
This part of the code was a direct response to some very specific problems that the treasury had in years preceding 1954.
And these were how to treat amounts of paid research and teaching assistance and how to treat foundation grants to the nonstudent, often a -- an established research or a professional who wanted to continue his area of activity.
The only way of doing this before 1954 was to apply concepts of gift, and 39 Code is now if a gift was intended, the amount was not taxable.
Now, the difficulty with this was that it was a rather anomalous approach.
As things worked out, the foundation grant to an established professional which is of reasonably substantial amount of proceeds from what could be called the disinterested generosity, so, it is a gift.
The small amounts paid graduate students who are required to teach or do research are pay to an employee, so those are taxed.
This is a sensible interpretation of gift, but in terms of tax policy in terms of what one might want to exempt or not exempt is questionable whether this make sense.
It was against this background at Section 117 was adopted.
It has in its first sections, 117 (a), a general exclusion to amounts paid as scholarships or fellowships.
Then Section 117 (b) expressly deals with these two problems, 117 (b) (1) deals with the research assistant or teaching assistant, and it expressly provides that amounts paid to that type of person are to be taxed unless that person is performing duties for example practice teaching that it require of all candidates for the degree including those of course who would not have fellowships or scholarships.
Now, in drafting these provisions, Congress set two things, and the parts of the regulations that we're concerned with here represent generalizations of what Congress set.
In dealing with the nondegree candidates in establishing this $300.00 per month exclusion, both houses of Congress in their Committee Reports said that they did not intend to grant exclusions for amounts that could fairly be called continuing payments of salary during a period when the recipient is on leave from his regular job.
That's the language of the House Report; it is essentially repeated in the Senate Report.
And the House did this on the context of a -- an objective formula which have would have excluded fellowships only if the fellowship grant and the employee's compensation from a prior employer were less than 75% of its prior salary.
The Senate changed the formula, but expressed the same general idea.
And the reason the Senate changed the formula does not bear on this case.
It's because it was called to the Senate's attention that certain people for example, people who just got a medical degree and we're giving -- being given a fellowship would under the House formula had been taxed because they had no real income before they started on their research or post-doctoral fellowship.
Now, the part of the regulation, this -- excludes from the fellowship or scholarship compensation for past, present or future services, we suggest has its direct antecedent in this aspect of the legislative history.
Congress was quite clear that it did not want to exempt payments of salary while the recipient is on leave from his regular job, and we suggest that in this part of the regulation, the treasury is quite directly implemented that expression of congressional concern.
The second part of the regulation which speaks of the primary purpose of the grant comes out of the legislative history of Section 117 (b) (1) which taxes amounts pay to teaching and research assistance.
Now, that exemption does not apply if the teaching or research is required of everybody who is a candidate for the degree, even if he doesn't have a scholarship.
In Congress in explaining that dichotomy said that it was drafting the statute so that it would not tax a grant which involves research or teaching services perform primarily for the training and education of the recipient, so that the second exclusion of the regulations finds its direct antecedent and not portion of the legislative history.
So what we have is a treasury attempt to synthesize and give expression to the general concerns that Congress showed in drafting this statute.
There are several arguments made against this, both by respondent and by the court below which I'd like to deal with very briefly.
Congress said that it was trying to avoid a case-by-case inquiry into the existence of gift, and from this, it's been suggested and argued that Congress was trying to avoid a case-by-case inquiry into anything, even compensation.
We find no support for that in the legislative history, none has ever been cited.
Congress on rather make clear that it did not want to let compensatory or bargain for arrangement escape tax, and this is the effect of the treasury regulations as to support that purpose.
The second point which I think is really at the basis of the Third Circuit opinion here is the view that Congress in Section 117 wanted to do everything it could to encourage education, and that the interpretation rendered below encourages education.
What is true that Congress wanted to encourage education through certain tax incentives, but that is not the function of Section 117.
Congress has attempts to encourage education are in other parts of the code in Section 501 which establishes tax -- allows tax-free foundations in educational institutions, and in Section 117 which allows deductions for donations to that sort of organization.
Neither of these bear on this case which is a commercial enterprise arises in a commercial setting in a bargain for arrangement.
Justice Abe Fortas: May I ask you --
Mr. Harris Weinstein: Yes.
Justice Abe Fortas: -- this question?
Suppose an employee of Westinghouse went to his superiors and he said, “I want to take a year off to work on my doctoral thesis.”
And they said, “Well, that's fine.
Westinghouse likes to encourage its young people and we'll give you scholarship, let's say $10,000.00.”
And so, they just give him $10,000.00, nothing more, those are the total facts.
How would that be treated?
Mr. Harris Weinstein: With no quid pro quo.
Justice Abe Fortas: No quid pro quo.
Mr. Harris Weinstein: He wasn't promised that one he first came to work.
Justice Abe Fortas: No.
Mr. Harris Weinstein: He was not obligated to come back.
Justice Abe Fortas: No, Westinghouse says we --
Mr. Harris Weinstein: I do not think --
Justice Abe Fortas: (Voice Overlap) thing we'd give you a scholarship of $10,000.00.
Mr. Harris Weinstein: I don't think that we would assert that that is compensation --
Justice Abe Fortas: But really what you settle down to hear are the -- is the intimate time between the terms and conditions of employment in Westinghouse business interest and the payments made here on the one hand and the time between the payments made here and the usual or ordinary compensation or the personal on the other.
Mr. Harris Weinstein: Yes.
We rely on that bundle of facts and I think that bundle is typical of a case as we've been litigating.
Thank you.
Chief Justice Earl Warren: Mr. Larrimer.
Argument of James C. Larrimer
Mr. James C. Larrimer: May it please the Court.
If I may, I would like to direct my initial comments to the question which was told by Mr. Justice Fortas along the selection of the thesis topic.
The selection of the topic itself is confined to the area in which the scholarship was granted, and this is the requirement of Westinghouse that it be in engineering field.
That's the broad limit of the topic itself.
The selection of the thesis --
Justice Abe Fortas: Well, the Government says some quite a lot more specific than that, the Government says something much more specific than that.
Mr. James C. Larrimer: They say it Your Honor, yes.
Justice Abe Fortas: Well, I haven't got a chance to check into the record, but the Government says it's got to be connected with the -- it has to be relevant to the work program of the laboratory, and do you say the record does not support that?
Mr. James C. Larrimer: The record does not support that.
The record -- the testimony of the witness was that it must be of general interest and very general in nature, I think for the exact terms that were used by the witness.
The thesis topic is essentially a learning process or a teaching process.
The university as a condition of granting the degree of a doctor of philosophy must be satisfied that these men have the ability to undertake what they call original research.
They must first select the topic, and in selecting the topic, they must make a search of the records in order to ascertain that this particular topic has not been researched before.
And this selection must be made and submitted to the faculty and the university for approval.
And after the selection is approved as constituting original research, then the individual student is permitted to pursue his research in order to secure an answer to the problem he has selected.
Chief Justice Earl Warren: Well, the company does have the right to determine whether or not the proposal of the employee for a thesis is to be permitted.
Mr. James C. Larrimer: The program, yes Your Honor.
The program under which the scholarship is granted states that the topic should be of interest to Bettis Atomic Energy and it should be submitted to them for approval.
So that they do have --
Chief Justice Earl Warren: In other words, he isn't entirely a free agent to acquire a doctorate without regard to his work.
Suppose from atomic energy, he wanted to write a thesis on English.
Mr. James C. Larrimer: It would not be approved --
Chief Justice Earl Warren: Would not be approved at all?
Mr. James C. Larrimer: -- because -- that's true Your Honor.
Chief Justice Earl Warren: Because there is no specific interest to the company in that?
Mr. James C. Larrimer: Well, not for that reason, but for different reason, and that is this, that when these individuals, when these students are accepted under this scholarship program, they are accepted as a candidate for a degree in the Department of Engineering and Science, and necessarily, their thesis topic must be involved with a topic which is in that department.
Chief Justice Earl Warren: Well, does that interest only as general as science, anything in science whether it reflect to do work or not would be approve?
Mr. James C. Larrimer: Yes.
Chief Justice Earl Warren: Of necessity, they have to approve it.
Mr. James C. Larrimer: No, the program does not say that.
The program can be terminated at any time by Westinghouse for any reason.
There's no vested interest in the student and continuation of the program.
Westinghouse has a right to continue or to discontinue it at anytime for whatever reason they choose, but the testimony of the -- in that court below was that it had to be an engineering and it could be a very general nature related to the Westinghouse or Bettis Atomic Laboratory which of course was involved with the engineering principles, scientific principles.
Now, the Government's premise which is stated throughout his brief and stated unequivocally is that Congress plainly intended that the view that the exclusion would not apply to grants that our in affect merely famous of a salary during a period or the recipient is on leave from his regular job.
Now, this statement is repeated again and again.
As repeated again on page 9 of their brief, has repeated again on page 12, repeated again on page 18, on page 21, on page 30, and on page 4 and 8 of the reply brief.
Now, I suggest to this Court that the statement is not supported by the legislative history and directing my argument to that aspect of it.
In the backdrop of this case --
Chief Justice Earl Warren: We'll let you start that in the morning.
We'll recess now Mr. Larrimer.
Mr. James C. Larrimer: Very well, sir.
Print this transcript
Transcript:
Argument of James C. Larrimer
Chief Justice Earl Warren: 473, John H.Bingler, Director of Internal Revenue, petitioner versus Richard E.Johnson et al.
Mr. Larrimer, you may continue with your argument.
Mr. James C. Larrimer: Mr. Chief Justice and may it please the Court.
The issue in this case is essentially whether or not an employer can make a scholarship grant to an employee with that scholarship grant being excludable from gross income under the Internal Revenue Code.
The Government's position is that it cannot because Congress expressly stated that any continuing salary arrangement was not to have attached to it tax exempt consequences.
This statement on behalf of the Government is repeated throughout its brief as though the constant repetition would add some validity to it.
The legislative history however does not support the statement that a scholarship which may in fact be labeled a continuing salary arrangement.
The legislative history does not support that statement.
The 1954 Code in which Section 117 was inserted with respect to scholarships and fellowships was new with the 1954 Code.
There was no specific provision of the Internal Revenue Code previous to that time.
There was acknowledged by --
Justice John M. Harlan: Can I ask you a question.
The Fifth Circuit went the other way in this case, is it not?
Mr. James C. Larrimer: Yes sir.
Justice John M. Harlan: Are there are any circuits about that problem?
Mr. James C. Larrimer: There's another circuit, I think it's the Fourth Circuit if I'm not mistaken.
There are at least two circuits which are in conflict with the decision of the Third Circuit in this case.
The Congress at the time of enacting the Section 117 recognized the state of confusion which existed as to the tax consequences of the scholarship and fellowship grant.
It said about to attempt to provide what it labeled a clear cut method of determining the tax consequences of these grants without the necessity of deciding each case, case-by-case.
It did so under the format of Section 117 in which it set forth specifically that a scholarship at an educational institution shall not be included in gross income.
It also provided that a fellowship shall not be included in gross income.
And then, considering the compensatory possibilities of these grants, it inserted limitations in the code in Section 117.
First, it provided with respect to scholarships and it's recognized by Congress at this point that scholarships must be at an educational institution as it is defined in the Internal Revenue Code.
Now, the Internal Revenue Code specifically defines an educational institution as an education -- as an institution which has a regular faculty and a regular student body and a regular curriculum.
So, Congress intended that a scholarship relate only to a student at an educational institution.
Justice Hugo L. Black: Would you mind telling me precisely, what's the relationship of the student after they give him the scholarship with reference to the company?
Mr. James C. Larrimer: The student is on a leave of absence from a company.
Justice Hugo L. Black: Completely?
Mr. James C. Larrimer: Completely, he's got no duties whatsoever.
He does not report to the company.
They either mail to him his monthly stipend or it's deposited in a bank to his account.
Other than that, he's got no contact whatsoever with the employer.
Justice Hugo L. Black: What's his contract for the future?
Mr. James C. Larrimer: He has no contract except that when he goes on this educational leave, he agrees that he will come back to the employer for a period of at least two years.
Justice Hugo L. Black: Is that a binding contract?
Mr. James C. Larrimer: It is binding, I think so, yes Mr. Justice.
I think it's binding, but I don't think it's enforceable to the extent of requiring him to come back.
Justice Hugo L. Black: A suit could be filed for the briefs?
Mr. James C. Larrimer: Yes.
Justice Hugo L. Black: What's the salary he's agreed to be paid when he gets back?
Mr. James C. Larrimer: At the commensurate salary of other persons with his qualifications.
Justice Hugo L. Black: What about in comparison of what he left?
Mr. James C. Larrimer: The record in this case establishes that they receive the same salary when they returned as they were receiving at the time they left.
Justice Hugo L. Black: Hold it for how long?
Mr. James C. Larrimer: Pardon?
Justice Hugo L. Black: Hold it for how long?
How long do they hold that same salary?
Mr. James C. Larrimer: Well, they are classified.
They have various classifications of engineers.
They have associate engineer and a junior engineer and so forth.
And these are classifications that prevail throughout the company.
And when they reach, when they are elevated into another classification, this is dependent on merit.
And when they reach that classification, then their salary is adjusted accordingly.
Justice Hugo L. Black: And the company get to him for the same salary after he got the two years training in college?
Mr. James C. Larrimer: They get him for the same salary that he was receiving at the time he left.
Justice Hugo L. Black: How long do they hold if it's on that do you say?
Mr. James C. Larrimer: The agreement is for two years.
But that doesn't peg a salary.
The salary is pegged at a -- the contract provides that a salary will be commensurate with the duties --
Justice Hugo L. Black: Will be what?
Mr. James C. Larrimer: Will be commensurate with the duties assigned to him.
In other words, if he's assigned as a junior engineer, he'll be paid as a junior engineer.
If he's assigned as an associate engineer, he'll be paid at that rate.
Justice Hugo L. Black: Well, that's inconsistent isn't it with the other thing you just said, he comes back at the same salary.
Mr. James C. Larrimer: Well, I'm saying the record, the evidence in this case was when a man left, he came back at that same grade because there was no elevation of his classification.
There was no change of his classification.
Justice Hugo L. Black: But how long does he keep it?
Mr. James C. Larrimer: There is no contractual provision as to how long.
He stays in a certain salary.
The agreement is that he'll come back at a salary, commensurate with the duties assigned.
Chief Justice Earl Warren: At the salaries that are being paid at the time he comes back.
Mr. James C. Larrimer: Right.
Chief Justice Earl Warren: Not at the time that he leaves?
Mr. James C. Larrimer: That's right Mr. Chief Justice.
Chief Justice Earl Warren: I thought you'd said the opposite to Justice Black.
I thought you said that he came back at the pay that he left with.
Mr. James C. Larrimer: As a matter of fact, he did, but that was --
Chief Justice Earl Warren: No, but he came back with all seniority rights, didn't he?
Mr. James C. Larrimer: Yes, sir.
Chief Justice Earl Warren: And that would entitle him to whatever pay was being made for people in his grade at the time he comes back.
Mr. James C. Larrimer: That's right.
Chief Justice Earl Warren: May I ask you how did the company treat this expenditure tax-wise?
Mr. James C. Larrimer: Mr. Chief Justice, the evidence in the case established that this amount of money, this living allowance or stipend as we call it was classified under accounting records as indirect labor.
Chief Justice Earl Warren: As indirect labor.
Mr. James C. Larrimer: As indirect labor.
Chief Justice Earl Warren: Yes.
Mr. James C. Larrimer: And the company withheld income tax or withholding the tax from this stipend, but did not withhold the income tax from the tuition that was paid under the same program.
Chief Justice Earl Warren: How does that breakdown in dollars?
Mr. James C. Larrimer: Well, the tuition is very nominal compared to the living allowance paid.
Chief Justice Earl Warren: But most of it, they counted as a business expense?
Mr. James C. Larrimer: Yes, sir.
Chief Justice Earl Warren: And they counted that his service during the interim as indirect labor so they could that.
Mr. James C. Larrimer: That's right.
Chief Justice Earl Warren: If they haven't called it indirect labor, could they have done that?
Could they have taken a deduction for that?
Would it have been (Voice Overlap).
Mr. James C. Larrimer: My opinion is that a company can have a scholarship program or a fellowship program and deduct the cost of it as an ordinary and necessary business expense.
Chief Justice Earl Warren: Even if they call indirect labor then?
Mr. James C. Larrimer: There is no clear answer to that except to the extent that they had no account which they labeled fellowships and scholarships.
Chief Justice Earl Warren: Why shouldn't they if that was an exempt expenditure?
Mr. James C. Larrimer: I don't know why they did not have, except perhaps it may have been because of the contractual relationship between Westinghouse Electric Corporation and the Atomic Energy Commission because these men were employed at Bettis Atomic Power Laboratory which was a government-owned but contractor-operated plant.
This means that the Government owned it paid for all the expense of operation but it was operated by Westinghouse.
And perhaps it was an accounting method which required this to be labeled as indirect labor because --
Chief Justice Earl Warren: Westinghouse was on the cost-plus basis?
Mr. James C. Larrimer: Essentially, yes.
Chief Justice Earl Warren: And then they took the deduction for this.
Mr. James C. Larrimer: This would be charged to the Atomic Energy Commission.
Chief Justice Earl Warren: So, they actually -- they actually got from the Government 10% more than they put out for this?
Mr. James C. Larrimer: Well, I don't know that Mr. Chief Justice.
Chief Justice Earl Warren: Well, why wouldn't they if it's an operating expense and they're entitled to cost plus -- why wouldn't they get it?
Mr. James C. Larrimer: Assuming that premise is correct that they get 10% of whatever they spend, and that would be true, yes, but I'm not sure that that's true in this case
Chief Justice Earl Warren: That might not be the exact percentage, that's what you mean.
Mr. James C. Larrimer: Right.
Chief Justice Earl Warren: Yes.
Mr. James C. Larrimer: Now, Congress established the tax exempt status for a scholarship and an educational institution and a fellowship.
It then inserted the limitations considering the compensatory aspect of these two grants.
With respect to the scholarship and an educational institution, the House Report states --
Justice Hugo L. Black: What do you mean by assuring?
Mr. James C. Larrimer: Pardon?
Justice Hugo L. Black: What do you mean by assuring the compensatory aspect of these two grants?
Mr. James C. Larrimer: Considering the compensatory aspect of the grant --
Justice Hugo L. Black: What do you mean by compensatory?
Mr. James C. Larrimer: Considering --
Justice Hugo L. Black: -- aspect?
Mr. James C. Larrimer: -- that there maybe a compensatory aspect to the grants, in other words, previous to 1954, the tax consequence of a scholarship or fellowship grant was determined by where not it was gift or compensation.
And you have to eliminate the compensatory -- in order to have a scholarship considered tax free, you have to eliminate that compensatory aspect of it.
Justice Hugo L. Black: How could they do that?
Mr. James C. Larrimer: Well, they couldn't very well do it.
There was only one case which held that a fellowship was a gift, but it's difficult in my way of thinking, you cannot eliminate that compensatory aspect of a scholarship or fellowship because the very nature of the grant requires you to render services, to render to go school, and the fact that those services are not a benefit to the grantor does not eliminate that compensatory aspect of it.
Justice Hugo L. Black: Suppose one of those fellows had decided not to go back with the company, could he be sued?
Mr. James C. Larrimer: He can't be sued Mr. Justice, but I doubt that if there any damages.
Justice Hugo L. Black: Well, why wouldn't he be --
Mr. James C. Larrimer: Because he is not --
Justice Hugo L. Black: He was a capable man and if what more than he had been before (Voice Overlap) to his training.
Mr. James C. Larrimer: Essentially, they can replace him with another employee.
Justice Hugo L. Black: At the same salary?
Mr. James C. Larrimer: At the same salary, they have other employees there.
Justice Hugo L. Black: Suppose it could be establish that they couldn't do that after he'd had that two years training?
Mr. James C. Larrimer: If they can establish damages, yes.He would be liable on damages for not returning.
Justice Hugo L. Black: Isn't that one of the big considerations of it?
Mr. James C. Larrimer: The basic consideration is the allowance of the educational leave in return for the promise to come back to the employer.
Justice Hugo L. Black: And work with them for that salary?
Mr. James C. Larrimer: For that salary commenced with the other employees, yes.
But our position is that Congress specifically provided in the Code the compensatory aspect of a scholarship, once it is determined that a grant is made for the education of an individual, if it's a scholarship at an education institution, there's only one circumstance in which a part of it is taxable, and that is specifically provided under Section 117 and a limitation, and that provision is that if he is required to render services in a nature of part-time employment, then the value of those services is taxable and it's only the balance of the scholarship which is tax free.
And there's a further exception on that as if those services which are required to be rendered are services which are required as part of the curriculum of the university for the grant of the degree, then even they do not result in taxable income.
And this is --
Justice Abe Fortas: Well, take the other way, take the other way around suppose the Westinghouse and the A.E.C. said to one of its employees you go to the university, you're now engage fulltime with us on the development of something rather than widget, let's say.
If you go to the university and you spend all of your time now on that same project than development of the widget and we'll give you what we call a scholarship or a fellowship 90% of your prior salary.
Now, is that payment for services that he's received payment for services to Westinghouse and A.E.C., is it taxable, or is it within the statutory provision for deduction?
Mr. James C. Larrimer: Mr. Justice Fortas, I think the factual circumstance which you've set forth is not possible under the --
Justice Abe Fortas: Or is it possible, I just imagine that, and I put it to you because it hope that it may serve to dramatize or to me is one of the basic problems in this case and that is to some extent here, to some extent Westinghouse and the A.E.C. are keeping control over what this employee does to some extent what the employee does at the university is a thing of value to Westinghouse and the A.E.C.
And I'm asking you to assume a case where that is crystal clear and dramatic, namely where the employee does at the university precisely what he would be doing if he weren't in the university and were working on the plain?
Mr. James C. Larrimer: Mr. Justice Fortas, I have to know one more fact, and that is whether or not this widget that this man is working on is required research or investigation as part of the curriculum of the university for the grant of the degree.
Justice Abe Fortas: I don't know what you mean by required research.
I suppose that most of these people are working in areas where they have a wide choice as to the subject of their thesis.
Your clients were all working on thesis, weren't they?
Mr. James C. Larrimer: Yes.
Justice Abe Fortas: Well, they have wide choices to that and it's permitted who by the university just as it was in your case, so I won't give you that fact.
Mr. James C. Larrimer: I would have to say then that if it is not part of the curriculum that it would not be --
Justice Abe Fortas: Is a doctor's dissertation part of the curriculum?
Mr. James C. Larrimer: Yes (Voice Overlap).
Justice Abe Fortas: It felt that it was a whole spectrum of knowledge and selects from it something of particular interest to him, is that part of the curriculum?
Mr. James C. Larrimer: A thesis topic and the dissertation and the defense of it is part of the curriculum.
Justice Abe Fortas: Alright.
Mr. James C. Larrimer: And it's required for the grant of the degree (Voice Overlap) --
Justice Abe Fortas: If that's what you're talking if you're using curriculum in that sense that the topic of the dissertation is approve, of course it has to be approved by the university authorities.
Does that make any difference?
Mr. James C. Larrimer: It has to be approved and has to be required.
That type of an investigation has to be required for the grant of a degree.
If it's not required for the grant of a degree, then a service is rendered and it would not qualify as a scholarship at an educational institution.
Justice Abe Fortas: Well obviously, in some relationship between that and this situation in which I understand it, the dissertation has to be in some measure to some degree relating to the work of the laboratory.
In any event, and there's a dispute between you and the Government as to precisely what the record shows on that.
In any event, the dissertation subject has to be approved by Westinghouse or the A.E.C. or both of them.
And so that there are some major of service.
I should arguably in a way arguably either some measure of service being rendered by the scholarship recipient to Westinghouse and agency.
Mr. James C. Larrimer: The best response I can make to this Your Honor is what in fact occurred in this case, and one of the students selected a thesis topic which he had investigated during his leave of absence.
It was a -- of course in an engineering field which would have been a value to engineering generally, but after studying and investigating this for his entire leave period, he gave it up because he didn't have enough time, he didn't have enough equipment to really arrive in an answer which would satisfy the requirements that the university for the thesis.
The evidence was then put in the record that Westinghouse was not interested in this particular thesis topic to the extent that they would take it upon themselves to pick it up where this man left it off and get the answer to it, so that the nature of the thesis topic had to be in engineering which is about the limit of the value of a specific topic to Westinghouse itself.
Chief Justice Earl Warren: May I ask you this.
This is what's bothering me.
If it is -- this is justified as a business expense on the basis that it is part-time employment, why shouldn't there be some pro tanto recognition of the part that is employment and the part that is not employment when the tax returns are made?
Mr. James C. Larrimer: The answer must be Mr. Chief Justice as Congress felt that if a student on a scholarship in an educational institution was pursuing the curriculum under or required by that university, then no part of it was should be treated as compensation and taxable.
Chief Justice Earl Warren: Well might it not be one thing that a company just out of a goodness of his heart gave this stipend to a man for this particular period and did not considered it as business expense in this operation from.
On the other hand treating it as a business expense and justifying it because it was part-time employment.
Mr. James C. Larrimer: I don't think there has to be a correlation.
I don't think because deductible by a company it must be taxable to the recipient.
There are other --
Chief Justice Earl Warren: Don't you think one of them should at least pay something by reason of it being part-time employment?
Do you think if it's part-time employment that the company should take all of it as tax deduction or if it -- if employees being paid partially for the work he does for the company that he shouldn't pay some income tax?
Mr. James C. Larrimer: I think that if it's in fact part-time employment that and it's outside the curriculum requirements that he should pay tax.
Chief Justice Earl Warren: Would you say then that they were wrong in calling this part-time employment?
Mr. James C. Larrimer: You mean Westinghouse was wrong?
Chief Justice Earl Warren: Yes.
Mr. James C. Larrimer: Yes, I think they did it out of an abundance of caution because of the fact that there are other sections of the code which say that if an employer does not withhold tax, and may I answer your question, there's another section of the code which provides a different employer does not withhold tax from something which is taxable, and the employee who receives it does not pay tax on it, then both the employee are responsible, both the employee and the employer are responsible for the same tax.
So out of an abundance of caution, the employer without fail usually withholds tax unless the employee litigate the tax consequences of it.
Chief Justice Earl Warren: Well, does that mean that Westinghouse wanted to hid this case and keep it?
Mr. James C. Larrimer: No, I think Westinghouse was just attempting to protect itself.
Chief Justice Earl Warren: Well, in that respect, in that respect so it could --
Mr. James C. Larrimer: Well --
Chief Justice Earl Warren: -- could the -- could consider it as a business expense.
Mr. James C. Larrimer: Well, I don't -- I'm not sure why Westinghouse did it other than for the protective feature of it.
Justice Potter Stewart: Is there any limitation on the amount in your submission that could be exempt from tax in the scholarship under -- if a person is working toward a degree?
Mr. James C. Larrimer: There's no limitation under amount, so long as the amount is initially determined to be a scholarship, amount to enable the student to pursue his education at a -- in institution.
There's only a limitation on amount as to a fellowship.
Justice Potter Stewart: As to a fellowship, somebody not working toward a degree?
Mr. James C. Larrimer: Right.
Justice Potter Stewart: Is that correct?
Mr. James C. Larrimer: That's right.
Justice Potter Stewart: So this could be a $100,000.00 if you could show it.
Mr. James C. Larrimer: Well, I think there's a rule or reason that when you get beyond.
Justice Potter Stewart: But so far as the statute goes, there's no limitation on all amount, is it?
Mr. James C. Larrimer: There's no limitation specifically in the statute on amount with respect to the scholarship.
Justice Potter Stewart: Working to earn a degree?
Mr. James C. Larrimer: Working to earn a degree.
Justice Potter Stewart: As I understand in this case, the employer did pay the actual tuition and all the fees and so on of the educational institution, and that that's not an issue here that the Government concedes, that part is not income to your clients.
Mr. James C. Larrimer: That concession was not made until this time.
Justice Potter Stewart: Well, it has been made --
Mr. James C. Larrimer: It has been made now and I can't see the significance between the concession on the tuition and a concession on the living allowance paid under the program.
Justice Byron R. White: The Government has some trouble justifying that too, doesn't it?
Mr. James C. Larrimer: Pardon?
Justice Byron R. White: The Government has some trouble justifying that too, doesn't it?
Mr. James C. Larrimer: I think so, yes.
Justice Potter Stewart: Well, the Government put it in terms of arguably, it could be included in income of your clients but then, it would be a deduction for you.
So, it would washout, it would be a deduction then if it would be your client's taxpayers.
Mr. James C. Larrimer: That's right.
Chief Justice Earl Warren: Mr. Weinstein?
Argument of Harris Weinstein
Mr. Harris Weinstein: Mr. Chief Justice, if I may quickly deal with several points particularly once of record and of other decisions.
In response to Mr. Justice Harlan's question, the cases and conflict are in the Fifth and Sixth Circuit and in the Court of Claims, and there are two cases, one in the tenth and a per curiam in the fourth that would be believed conflicting rationale and they're discussed in our brief beginning at page 23.
In terms of the relationship between Westinghouse and the employer during the leave, there's a requirement for periodic progress reports, and this is discussed I believe in the testimony at page 18 of the record at least, it maybe in other places.
In terms of Westinghouse's rights against the employer -- employee who defaults on its obligation to come back, we set out that Pennsylvania cases which we think at least give a right to sue for the actual expenditures made on behalf of the employee during the leave.
In terms of limitations on amount, respondents now say there's a rule of reason.
Congress didn't even think things would go that far because as we pointed out in our brief, Congress expected that this would be relatively small amounts.
If I -- although my time is up, if I may just speak to this question of the relationship of the thesis topic to Westinghouse's program.
At page 104 of the record which is Westinghouse's regulations on this subject, it encourages employees to find topics of technical interest to Bettis.
In the testimony at pages 61 and 62, a Westinghouse official testifies on this question of thesis review.
In the first line of page 62, he uses the word “relevance” in determining the relationship between thesis topic and Westinghouse work.
Pages 74 and 75, the responsible official of the Atomic Energy Commission speaks of job relatedness in terms of the connection with the thesis.
But in closing, I would just like to say that we do not depend just on the fact that the thesis topic is reviewed, but this thesis topic review and the entire program is part of an overall package of compensation the Westinghouse and the A.E.C. have designed to obtain people like the respondents for six or seven years, and the fifth year, they get this leave and this obligates them to return as in the case of one respondent for the sixth year, and the case of the other two for the sixth and seventh years and it is this obligation that to us is the keystone of this case.
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BINGLER v. JOHNSON. The Oyez Project at IIT Chicago-Kent College of Law. 26 April 2013. <http://www.oyez.org/cases/1960-1969/1968/1968_473>.
BINGLER v. JOHNSON, The Oyez Project at IIT Chicago-Kent College of Law, http://www.oyez.org/cases/1960-1969/1968/1968_473 (last visited April 26, 2013).
"BINGLER v. JOHNSON," The Oyez Project at IIT Chicago-Kent College of Law, accessed April 26, 2013, http://www.oyez.org/cases/1960-1969/1968/1968_473.